When obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of internal controls primarily to:
A)identify areas of relatively high risk of misstatement and plan the audit accordingly.
B)provide suggestions for improvement to the company.
C)serve as a basis for setting audit risk and materiality.
D)decide whether to perform an audit for the company.

Question

Quizplus · Accepted Answer

The primary purpose of obtaining an understanding of internal controls is to identify areas of higher risk of misstatement in the financial statements so that the auditor can plan the audit accordingly. This helps the auditor to assess the risks of material misstatement and design appropriate audit procedures to address those risks. While internal controls may also provide suggestions for improvement to the company, this is not the primary objective of the auditor's evaluation. Similarly, understanding internal controls serves as a basis for setting audit risk and materiality, but again, this is not the primary objective of the evaluation. Finally, the auditor's decision of whether to perform an audit for the company is based on a number of factors, including whether the company meets the auditor's independence requirements, whether there are conflicts of interest, etc.

When Obtaining an Understanding of the Entity and Its Environment