Understanding the entity and its environment
• The effective application of our audit methodology needs a thorough understanding of the clients business including its accounting systems.
• We first gain a detailed knowledge of the clients industry business and organisation and the factors that will affect individual financial statement areas.
• We then focus on the business and the key forces externally and internally which drive its behaviour.
• We perform procedures that enable us to gain an understanding of each of the five components of internal control - the control environment the client’s own risk assessment procedures control activities information and communication and monitoring. As we do so we also gain an understanding of how the client uses IT to manage and control its business.
• Our general understanding of internal control forms the foundation for a detailed understanding of the client’s controls and assists us in designing the most effective and efficient audit procedures. We use this information as we understand evaluate and test the components of internal control at a transaction stream/application level.
• These activities enable us to identify the risks that the business faces and the controls in place across the business allowing effective planning of the audit approach. These risks and controls may be general or specific.
• Based on our findings and assessments we determine whether we need to modify the nature timing or extent of our audit procedures to mitigate the risks identified.