Understanding the Entity and Its Environment

ACCA F8考試：Understanding the Entity and Its Environment

Steps

The relevant standard is ISA 315 Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment.

The steps required to understand the entity and its environment, including its internal control, are:

1. Understand the entity and identify potential risks.

2. Understand internal control by considering the design and implementation of relevant internal controls to assess the potential risk of material misstatements (Session 9).

3. Consider whether the risks are of the type and magnitude that could result in a material misstatement of the financial statements.

4. Consider the likelihood that the risks could result in a material misstatement of the financial statements.

5. Relate the risks that have been identified to what can go wrong:

at the assertion level (e.g. occurrence, completeness, accuracy, cut-off and classification of transactions and events); and

at the overall financial statement level (e.g. when many assertions are affected and thus when risk is pervasive throughout the financial statements).

6. Plan, design and perform appropriate audit procedures in response to those identified risks.

Methods

Obtaining an understanding of the entity and its environment, including its internal control, is a continuous, dynamic process of gathering, updating and analysing information throughout the audit cycle.

Risk-assessment procedures to obtain the necessary level of understanding include inquiry; observations; review, inspection and analysis; analytical procedures and benchmarks; and other procedures.

Prior year information (e.g. organisational structures, control environment, management attitude and actions to control breaches) can be used as long as it is up-to-date (i.e. check and update as required).

Information obtained from client acceptance procedures and other client engagements (e.g. review of interim financial statements) may also be relevant in obtaining an understanding of the entity.