Understanding The Entity and Its Environment

UNDERSTANDING
THE ENTITY AND ENOY, CIRILEN
ITS ENVIRONMENT TIRATIRA. KATE LORIE

VILLANUEVA, CLARISSA MICAH
PRESENTED BY
GROUP 5
PSA 315 requires the auditor to obtain sufficient
understanding of the entity and its environment
including internal control.
Such understanding involves obtaining knowledge about the
entity’s :
Industry, regulatory, and other external factors, including
financial reporting framework.
Nature of the entity, including entity’s selection and
application of accounting policies.
Objectives and strategies and the related business risks that
may result in a material misstatement of the financial
statements.
Measurement and review of the entity’s performance
Internal Control
A. INDUSTRY, REGULATORY,
AND OTHER EXTERNAL
FACTORS
a. Industry Factors
market and competition, seasonal
activity, product technology, and
energy supply and cost
b. Regulatory Factors
accounting principles and
practices, regulatory framework,
legislation and regulation, taxation,
government policies, and
environmental requirements
Note: Industry may give rise to specific risks of material misstatement
c. Other External Factors

general economic conditions, interest rates and availability of financing,
and inflation
B. NATURE OF THE ENTITY
a. Operations - revenue sources, geographic dispersion, key
customers
and suppliers, and research and development activities
b. Ownership and Governance Structures
c. Investment Plans - acquisitions or divestitures and capital
investment
d. Structuring and Financing - subsidiaries and associates, debt
structure, and related parties
e. Financial Reporting
C. OBJECTIVES AND
STRATEGIES
a. Objectives- overall plans for the
entity to conduct its business
b. Strategies - approaches by which

management intends to achieve its
objectives
Understanding Objectives, Strategies

and related business risks include
matters, such as
Industry developments
New products and services
Expansion of business
New reporting requirements
D. FINANCIAL
PERFORMANCE EXAMPLE OF MEASURE AND
REVIEW FACTORS
key performance indicators and
key ratios, trends and operating
"Understanding of the entity's statistics
performance measures assists the period-on-period financial
auditor in considering whether performance analysis
pressures to achieve performance budgets, forecasts, variance
targets may result it management analysis, and segment reports
employee performance measures
actions that increase the risk of
and incentive compensation
material misstatements" policies
comparison of an entity's
performance with that of
competitors
E. ACCOUNTING POLICIES
Evaluate whether these policies are appropriate and consistent

with the applicable financial reporting framework
a. Method of accounting significant and unusual transactions

b. Effect of significant accounting policies in controversial or
emerging areas
c. Changes in accounting policies
d. Financial reporting standards and laws and regulations that are
new to the entity
For the audit to be carried out
effectively and efficiently, the
auditor should obtain a sufficient
level of knowledge of the
Understanding entity's business to identify and
understand the events, transactions
the entity and and practices that may have a
significant effect on the financial
its statements.
environment The better

understands
the
the
auditor
client's
operations, the more efficient
the examination is likely to be,
and the greater the value to the
client of the auditor's services.
If the auditor understands the
operations of the client, the auditor
is often able to evaluate the
reasonableness of the client's
estimates. In addition, procedures
can be selected with more
assurance, or perhaps uniquely
applicable procedures can be
designed.
Understand the entity's
objectives and strategies, and
the related business risks.
Understand the entity's

An auditor's understanding of measurement of
business risks encountered by the performance.
entity increases the likelihood of
identifying risks of material This may create pressures on the
misstatement and helps the auditor entity that may either motivate
design appropriate audit management to take action to
procedures.
improve the business
performance or to manipulate FS.
HOW DO WE
UNDERSTAND
THE CLIENT/
ENTITY
Sources of information
The auditor can obtain knowledge of the industry and the entity from a
number of sources. These may include:
Review of prior years' working papers;

Tour of client's facilities;
Discussion with people within and outside the entity;
Reading books, periodicals and other publications related to the clients
industry; or,
Reading corporate documents and financial reports
The auditor should also ensure that assistants assigned to an audit

engagement obtain sufficient knowledge of the client's business and
industry to enable them to carry out the work delegated to them.
Knowledge of the client's business is a
frame of reference within which the
auditor exercises professional judgment.
Understanding the business and using
this information appropriately assists the
Users of auditor in:
Assessing risks and identifying
information potential problems;
Planning and performing the audit
obtained effectively and efficiently;
Evaluating audit evidence as well as
the reasonableness of client's
representations and estimates; and,
Providing better service to the client.
To make effective use of knowledge
about the client's business and
industry, the auditor should consider
how it affects the financial statements
and whether the assertions in the
financial statements are consistent
with the auditor's knowledge of
business.
Obtaining understanding of the client's

business is a continuous and
cumulative process. For continuing
engagements, the auditor should
update and re-evaluate information
gathered previously, including
information in the prior year's working
papers.
Do you have any
questions ?
Thank
You
Sources:
AUDITING THEORY by Salosagcol, Tiu, & Hermosilla
https://www.youtube.com/watch?v=J9Xg72lmEE4
https://www.youtube.com/watchv=mIoJwQxlOzI&feat
ure=youtu.be

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UNDERSTANDING

THE ENTITY AND ENOY, CIRILEN

ITS ENVIRONMENT TIRATIRA. KATE LORIE

c. Other External Factors

b. Strategies - approaches by which

Understanding Objectives, Strategies

Evaluate whether these policies are appropriate and consistent

a. Method of accounting significant and unusual transactions

environment The better

Understand the entity's

Review of prior years' working papers;

The auditor should also ensure that assistants assigned to an audit

Obtaining understanding of the client's

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