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 client.
C) Serve as a basis for setting audit risk and materiality.
D) Decide whether to perform an audit for the client.

Question

Quizplus · Accepted Answer

Obtaining an understanding of internal controls is primarily done to identify areas of relatively high risk of misstatement and plan the audit accordingly. This helps the auditor to design suitable audit procedures for those high-risk areas and ensure that the financial statements are not materially misstated. While internal controls can also provide suggestions for improvement and serve as a basis for setting audit risk and materiality, identifying areas of high risk is the primary purpose. Deciding whether to perform an audit is based on other factors such as auditor independence, client acceptance, and assessing engagement risks.

When Obtaining an Understanding of the Entity and Its Environment,the