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an orditor needs to obtain an understanding of the client’s business,this is the key to an effective and efficient audit. It enables one not only to tailor our work to meet the individual facts and circumstances of each client, but also to carry out that work and to evaluate our findings in an informed manner. the knowledge of the client’s business also helps an auditor to develop and maintain a positive professional relationship with the client.
International Standards on Auditing (ISA) 315 states that the auditor should obtain an understanding of the entity and its environment, including its internal control, sufficient to identify and assess the risks of material misstatement of the financial statements whether due to fraud or error, and sufficient to design and perform further audit procedures.
Understanding the entity is an iterative process, continuing throughout the entire duration of the audit.
Prior the accepting an audit engagement, the auditor should obtain a preliminary knowledge of the industry and of the ownership, management and operations of the entity to be audited.
Detailed information is required at the planning stage of the audit to enable auditors to plan their work adequately. one needs to understand the nature of client’s business, its organization, its method of operation and the industry in which it is involved. This understanding enables us to appreciate which events and transactions are likely to have a significant effect on the financial statements.
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