Question

Identify 7 reasons why an auditor is required by CAS 315 to understand the entity and its environment.

Answer 1

The auditor's understanding of an entity and its environment is the basis for risk assessment and designing auditing procedures that respond to identified risks. Obtaining an understanding of the entity and its environment is an essential aspect of performing an audit in accordance with CAS 315. Reasons why an auditor is required to understand the entity and its environment are:

1) It establishes a frame of reference within which the auditor plans and exercises professional judgement.

2) Establishing materiality and evaluating whether the judgement about materiality remains appropriate as the audit progresses.

3) Identifying areas where special audit consideration may be necessary, for example, related party transactions, considering the business purpose of transactions or the appropriateness of management's use of going concern assumption.

4) Understanding internal controls relevant to the audit and evaluating the design of those controls to determine whether they have been properly implemented.

5) Considering the appropriateness of the selection and application of accounting policies, and the adequacy of financial statement disclosures.

6) Developing expectations for use when performing analytical procedures.

7) Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the appropriateness of assumptions and of management's oral and written representations.