In performing an audit on the financial statements, the auditor should have or obtain knowledge of the business sufficient to enable him to identify and understand events, transactions and practices that in the auditor’s judgment may have significant effect on the financial statements or on the audit report. Prior to accepting an engagement, the auditor would obtain a preliminary knowledge of the industry and of the ownership, management and operations of the entity to be audited. After accepting to act as the company’s auditor, further and more detailed information would be obtained. Obtaining the required knowledge of the business is a continuous and cumulative process. The auditor can obtain knowledge of the industry and the client from a number of sources;
- Previous experience with the entity and the industry;
- Discussion with people within the entity e.g. directors and employees;
- Discussion with internal audit personnel and review of internal audit reports;
- Discussion with other auditors and with legal and other advisors who have provided services to the entity;
- Publications related to the industry e.g. journals;
- Visits to the entity’s place of business and plant facilities
- Documents such as minutes of meetings, annual financial reports, operations & systems manuals, budgets, marketing and sales plans.
Using the knowledge
Knowledge on the nature of clients business assists the auditor in;
- Assessing risks and identifying problems that could affect the audit;
- Coming with a good plan as to how the audit will be carried out effectively and efficiently;
- Evaluating audit evidence obtained;
- Providing better service to the client.
The auditor should ensure that assistants to an audit engagement obtain sufficient knowledge of the business to enable them to carry the audit work delegated to them.