AUD SU 3.4: Understanding the entity and its environment

The auditor should also consider:

1. Industry conditions and the economic and regulatory environment 2. Operation characteristics and financial stability of the organization, including its nature and complexity, transactions, financial conditions, and profitability

Inquiries within the entity

1. Those responsible or financial reporting 2. Those charged with governance 3. To evaluate accounting policies, employees involved in complex or unusual transactions 4. Legal counsel 5. Marketing, sales, and production managers 6. The risk management function 7. Information systems personnel 8. Other at different levels of authority who may have information about the RMM

The auditor obtains an understanding of the entity and its environment

Including: 1. Its internal control 2. Identify and assess the risks of material misstatements of the financial statements

Inquiries of management

Inquires can be used to: 1. Obtain management's understanding about the risk of fraud. 2. Determine whether management knows of fraud perpetrated or within the organization.

Risk assessment procedures are performed to obtain the understanding

The include 1. inquiries of management, appropriate individuals in the internal audit function 2. Analytical procedures 3. Observation and inspection

Reasons for understanding the entity

a. Determining materiality for planning the audit and evaluating it during the audit b. Considering accounting policies and disclosures c. Identifying areas for special audit consideration d. Setting expectations for results of analytical procedures e. Designing further audit procedures f. Evaluating audit evidence that related to management's assumptions and representations

Observation and inspection

provide support for inquiries and direct evidence about the entity and its environment.