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NEW QUESTION: 1
An auditor is required to obtain an understanding of the entity's business, including business cycles and
reasons for business fluctuations. What is the audit purpose most directly served by obtaining this
understanding?
A. To allow the auditor to more accurately perform tests of controls.
B. To enable the auditor to accurately identify significant deficiencies.
C. To decide whether it will be necessary to perform analytical procedures.
D. To assist the auditor to accurately interpret information obtained during an audit.
Answer: D
Explanation:
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's
business. This understanding enables the auditor to better understand events, transactions, and practices
that may affect the financial statements, to plan and perform appropriate audit tests, and to properly
understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of
the entity's business would not be particularly helpful in identifying significant deficiencies. Significant
deficiencies in internal control are typically identified during the fieldwork stage of the audit. Choice "c" is
incorrect. Obtaining an understanding of the entity's business would not result in a more accurate
performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as
existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc.
Choice "d" is incorrect. Analytical procedures are always required in an audit during the planning and
overall review stages.