Question

Sarah​ O'Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester​ break, she and her father discussed the class and it was clear that he​ didn't really understand the nature of the audit process as he asked the following​ questions:

Given the CPA firm is auditing financial​ statements, why would they need to understand anything about the​ client's business?

A. Each entity faces a number of risks unique to the nature of its business and industry. The types of​ operations, the extent of​ regulation, how the organization obtains capital to fund its business​ model, and the nature of accounts in the financial​ statements, among other​ factors, each trigger different types of risks that could lead to material misstatements.

B. There are unique accounting standards for certain industries that impact how​ transactions, accounts, and disclosures are reported in financial statements.​ Thus, a thorough understanding of the​ client's business is critical to assessing the risk of material misstatements in the financial statements when planning the audit.

C. The only way to detect fraud is to have a thorough understanding of the​ client's business and all of the internal controls and processes. This also lowers the risk of material misstatements in the financial statements.

D. All of the above.

E. Both A and B.

F. Both B and C.

Answer 1

while conducting audit of a company an auditor needs to understand nature and business in which the company is involved because every industry has unique set of accounting standards that needs to be followed in preparation and presentation of financial statements and through proper understanding of clients business auditor can assess the risk and find out reasons for material misstatements.

so, in the given case option all of the above is correct