Question

QUESTION 2) (18 pts) What are the three reasons for obtaining a good understanding of the client’s

industry? Briefly explain each. (Each reason 50 words)

Answer 1

Solution:

Three reasons for obtaining a good understanding of the client's business explained as follows

1. Identifying and assessing the risk of material misstatements: Understanding the industry provide the basis for identifying and assessing the level of risk of material misstatements. After this Auditor can draft a holistic audit plan which covers the required aspects of the audit. Information about the industry can be obtained from multiple sources like Industry trade publication and regulatory requirements.

2. General trade practices of the industry: With the help of understanding the client's business industry auditor can identify the trade practices which are different for different industries. Auditors can perform an audit in an effective and efficient after understanding the trade practices Like the normal credit period allowed by companies in the industry or normal level return etc.

3. Nature of Client products: The auditor can assess the nature of inventory that the client deal with and the likelihood of any technology obsolescence in the future. Gaining knowledge of the industry in which the client works helps the auditor to determine the correct value of client inventory like whether the inventory is obsolete or has any market value so that absolute item does not get reported in closing inventory.