After you develop a preliminary audit strategy, you will perform risk assessment procedures to gather information to gain an understanding of your client. Some of the information you need to understand your client may be carried forward from your previous experience or from other procedures, such as the process you follow to decide on client acceptance or continuance.
Information About the Entity and Its Environment
You will gather information about a wide range of matters relating to your client. Some of these matters relate directly to the financial reporting process, but many of them relate to the broader business issues, such as the current status of the client’s industry and its business objectives and strategies.
Information About Internal Control
Your client’s internal control is an integral part of its business. On every audit, you will gain an understanding of internal control that allows you to evaluate its design and determine whether controls are being used at the entity.
Using Your Understanding of the Client, Its Environment, and Its Internal Control
As you gather information, you will begin to form an understanding of the client and how the specific conditions and circumstances pertaining to their business may affect the preparation of the client’s financial statements.
Ultimately, the information you gather and the understanding you gain about the client at this phase of the process provides audit evidence to support your assessment of the risk of material misstatement and, ultimately, your opinion on the financial statements. As you become knowledgeable about your client, you typically will discover you need additional information to gain an understanding that is sufficient enough to enab ...