Prior to acceptance of an engagement, the auditors should obtain a preliminary knowledge of the industry and ownership, management and operations of the prospective client, sufficient to enable them consider their ability and willingness to undertake the audit.
Following acceptance of an engagement, the auditors should obtain more detailed knowledge and information sufficient to enable them plan the audit, develop effective audit approach and understand the events and practices that have significant effect on the financial statement or their audit work.
What should be known about the client company include:
– general economic factors and industry conditions affecting the entity’s
business
– important characteristics of the entity, its business, its financial performance, and its reporting requirements; including changes since the date of the last audit exercise
– the general level of competence of management and recent management changes
– the accounting policies adopted by the entity and changes in those policies
– the effect of new legislation, accounting or auditing pronouncements
– the regulatory framework, if any
– the auditors‟ cumulative knowledge of the accounting and internal control systems and any expected changes.
In succeeding periods, the auditors should consider the information gathered previously and should perform procedures designed to identify significant changes that have taken place since the last audit.
Sources of Knowledge
Auditor should obtain an understanding of the supply chain information system, including the related business processes, relevant to procurement reporting. In performing an audit on procurement records, the auditor should have or obtain knowledge of client’s business sufficient to enable him identify and understand events, transactions and practices that in the auditor’s judgment may have significant effect on the procurement records or the audit report. Prior to accepting an engagement, the auditor should obtain a preliminary knowledge of the industry and of ownership, management and operations of the entity to be audited. After accepting to act as the company’s auditor, further and more detailed information would be obtained. Obtaining the required knowledge of the business is a continuous and cumulative process. The following may be used as sources for that information. The auditors can obtain knowledge of the industry and the entity from a number of sources, for example
– previous experience with the entity and of its industry
– discussion with people within the entity (for example the junior and senior managers)
– discussion with internal audit personnel and review of internal audit reports
– discussion with auditors (including predecessor auditors) and with legal and other advisors who have provided services for the entity or within the industry
– discussion with knowledgeable people outside the entity, (for example industry economists, industry regulators, customers, suppliers, competitors)
– publications related to the industry (from government, banks and regulators, financial newspapers) etc.
– legislations and regulations that significantly affect the entity
– visits to the entity’s premises and plant facilities
– internal documents produced by the entity (for example minutes of meetings, materials sent to shareholders, promotional literature, prior- years’ annual and financial reports, budgets, management reports, interim financial reports, management policies, accounts, job descriptions, marketing and sales plans
– Industry-specific guidance.
Using the Knowledge
Understanding the business and using this information appropriately assist the auditors in;
– Assessing risks and identifying problems
– Planning and performing the audit effectively and efficiently
– Evaluation audit evidence
– The auditors make judgements about many matters throughout the course of the audit where knowledge of the business is important, for example:
– Assessing inherent and control risks
– Considering business risks and management’s response thereto
– Developing the overall audit plan and the audit programme
– Determining a materiality level and assessing whether the materiality level chosen remains appropriate
– Assessing audit evidence to establish its appropriateness and the validity of the related financial statement assertions
– Evaluating accounting estimates and management representations
– Identifying areas where special audit considerations and skill may be necessary
– Identifying related parties and related party transactions
– Recognizing conflicting information (for example contradictory representations)
– Making informed inquiries and assessing the reasonableness of answers
– Considering the appropriateness of accounting policies and financial statement disclosures.
The audit engagement partner should ensure that assistants assigned to an audit engagement obtain sufficient knowledge of the business of the entity being audited to enable them to carry out audit work delegated to them. Such knowledge may be passed to assistants initially by means of the audit planning memorandum or an audit-briefing meeting and subsequently during the course of the audit. In addition, the audit engagement partner must ensure that audit assistants understand the need to be aware of and to share additional information.
