(a) The auditor obtains an understanding of the entity, its control environment and its detailed internal controls:
(i) to identify and assess the risks of material misstatements, whether due to fraud or error, at the financial statement and assertion levels. Risks would include inherent risk and control risk. An important objective would be to determine the extent to which the auditor would rely on the internal control system.
(ii) to provide a basis for designing and implementing responses to the assessed risks of material misstatement in the financial statements. This would involve the design and performance of the audit procedures required to form an opinion on the truth and fairness of the financial statements. An important objective would be to determine the extent and nature of audit procedures to reduce detection risk, and therefore audit risk, to an acceptable level.
(iii) to set the scene for identifying assertions and collecting sufficient appropriate evidence to prove that the assertions are reasonable.
(Tutorial note: Marks would also be available for additional points such as:
– To assess the adequacy of the accounting system as a basis for preparing financial statements
– To assess whether competent to perform the audit
– To understand relevant law and regulations impacting the entity
– To consider the reliability of various evidence sources.)
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