Question

Identify 7 reasons why an auditor is required by CAS 315 to understand the entity and its environment.

Answer 1

Auditor is required to obtain understanding of the entity and its environment because :

• It helps in identifying the risk of material misstatement
• it helps in identifying what all controls have been taken to reduce the risk
• it helps it analysing the magnitude of the risk. In simple word whether the whole financial statement is at risk or some parts of it
• it helps in considering the likelihood of misstatement and possibility that a potential misstatement may lead into a material misstatement.
• it helps in identifying risks which may require special consideration
• it helps in identifying risks for which auditor may have surpass the regular substantive procedures as it was not enough to obtain sufficient appropriate audit evidence
• it helps in analysing whether the management and employees have honest and ethical practices.
• it enable the auditor to understand the classes of transactions, account balances, and disclosures to be expected in the financial statements