An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

Question

Quizplus · Accepted Answer

Choice "B" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "A" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies in internal control. Also, such deficiencies are typically identified during the fieldwork stage of the audit, while obtaining an understanding of the entity's business typically occurs during planning. Choice "C" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc. Choice "D" is incorrect. Analytical procedures are always required in an audit, during the planning and overall review stages.

An Auditor Is Required to Obtain an Understanding of the Entity's