Understanding how the entity earns and recognizes revenue assists the auditor in ________.
A)determining control risk related to accounts payable
B)discussing the audit with the predecessor auditor
C)developing an expectation of total revenues by understanding the client's capacity, market place, and customers
D)developing an expectation of total revenues by understanding the capacities of the client's key competitors

Question

Quizplus · Accepted Answer

Understanding how the entity earns and recognizes revenue is important for the auditor in developing an expectation of total revenues by understanding the client's capacity, market place, and customers. This will help the auditor to assess the reasonableness of the revenue reported in the financial statements, identify potential fraud risks, and plan the audit procedures accordingly. Options A, B, and D are not directly related to understanding how the entity earns and recognizes revenue.

Understanding How the Entity Earns and Recognizes Revenue Assists the Auditor