Factors to consider in relation to knowledge of the client’s business

Procurement and Audit notes revision

The following matters are to be considered in relation to knowledge of the client’s
business.
a) General Economic Factors
• General level of economic activity (for example growth, recession etc.)
• Interest rate and availability of financing
• Inflation
• Government’s monetary, fiscal, taxation and trade restriction policies
• Foreign currency rates and control

b) The Industrial Conditions Affecting the Clients’ Business
• The market and competition
• Cyclical and seasonal activity
• Changes in product technology
• Business risk (for example high technology, high fashion, ease of entry for competition)
• Declining or expanding operations
• Adverse conditions (for example declining demand, excess capacity, serious price competition)
• Key ratios and operating statistics
• Specific accounting practices and problems
• Environmental requirements and problems
• Regulatory framework
• Energy supply and cost
• Specific or unique practices (for example reacting to labour contracts, financing methods, accounting methods)
• Management and Ownership of the Entity
• Corporate structure – private, public, government
• Beneficial owners and related parties (local, foreign, business reputation and experience)
• The relationship between owners, directors and management
• Capital structure (including any recent or planned changes)
• Organization structure
• Management objectives, philosophy and strategic plans
• Acquisitions, mergers or disposals of business activities planned or recently executed
• Sources of methods of financing (current, historical)
• Board of directors (composition, business reputation and experience, independence from and control over operating management, frequency of meetings, existence of audit committee and scope of its activities, existence of policy on corporate conduct, changes in professional advisors)
• Operating management (experience and reputation, turnover, key financial personnel and other status in the organization, staffing of accounting department, incentive or bonus plans as part of remuneration, use of forecasts and budgets, pressures on management, management information systems)
• Internal Audit function (existence, quality etc.)

• Attitude to internal control environment
c) The Entity’s Business
1) Nature of business (for example manufacturer, wholesaler, financial services, imports/exports)
2) Location of production facilities, warehouses, offices etc.
3) Employment (for example location, supply, wage levels, union contracts, pension commitments, government regulations)
4) Products or services and markets (for example major customers and contracts, terms of payments, profit margins, reputation of products warranties, order book, trends, marketing strategy and objectives, manufacturing processes)
5) Important suppliers of goods and services (for example long term contracts, stability of supply, terms of payment, imports, methods of delivery)
6) Inventories (for example location, quantities)
7) Franchises, licenses, patents
8) Important expense categories
9) Research and development
10) Foreign currency assets, liabilities and transactions currency, hedging
11) Legislation and regulations that significantly affect the entity
12) Information systems (including computerized information systems) –
current plans to change
13) Debt structure, including covenants and restrictions.

d) Financial Performance
Factors concerning the entity’s financial conditions and profitability
• Accounting policies
• Earnings and cash-flow trends
• Leasing and other financial commitments
• Availability of lines of credit
• Off balance sheet finance issues
• Foreign exchange and interest rate exposures
• Comparison with industrial trends

e) Reporting Environment
External influences which affect the directors in the preparation of the financial statements
• Legislation
• Regulatory environment and requirements

• Taxation
• Accounting requirements
• Measurement and disclosure issues peculiar to the business
• Audit reporting requirements
• Users of the financial statements
• Communication of Knowledge about the Business
Knowledge of the client’s business becomes useful to the auditors if it is made known to the audit team members. The audit engagement partner should therefore ensure that the audit team obtains such knowledge of the business of the entity being audited as may reasonably be expected to be sufficient to enable it to carry out the audit work effectively.

Procurement and Audit notes revision

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