Knowledge of Clients Business
dPrudent auditing
practices require that before performing an audit of financial
statements, the auditor should have or obtain knowledge of the business
of the client to enable the auditor to identify and understand the
sequence of events, transactions and practices that, in the
auditor’s judgment, may have a significant effect on the
financial statements or on the examinations or audit report. Such
knowledge is used by the auditor in assessing the inherent risks and in
determining the nature, timings and extent of auditing procedures. The
level of knowledge for an engagement would include a general knowledge
of the economy and the industry within which the entity operates and
more particularly how the entity or similar entities operate.
Prior to accepting any engagement, the auditor would normally obtain a
first hand preliminary knowledge of the industry, nature of ownership,
management and operations of the entity to be audited and then would
consider whether the level of knowledge he has about the business is
adequate for conducting the audit or can be acquired if required.
Following the acceptance of the auditing assignment, further and more
detailed information would be obtained form the client. To the extent
practical, the auditor must obtain the required knowledge at the start
of the engagement and from independent source if possible. As the work
of auditing progresses, that information and knowledge is assessed,
reviewed and upgraded as more information flows is.
For a continuous assignment the auditor would update and re-evaluate
his knowledge on a continuous basis by employing auditing procedures
designed to identify significant changes that have take place since the
last audit.
To make effective knowledge of about the clients business, the auditor
should consider how it affects the financial statements taken as a
whole and whether the assertions in the financials statements are
consistent with the auditor’s knowledge of the business.