Importance of Gaining Knowledge About Client's Business

In an audit it is important for an auditor to acquire sufficient knowledge about the client's business this will not only help him/her express an opinion as to the truth and fairness of assertions in the financial statements but also help him/her safeguard against any form of pitfalls or being misled.

This article is an attempt to briefly highlight those points which auditors keep in mind and adopt in practice.

The following points/matters about which the auditor is to be knowledgeable:

1. About ownership, organisation & capital structure.

2. Management objectives, strategy and philosophy, Management Information System (MIS).

3. Internal control environment

4. Products, markets, suppliers and business operations.

5. Inventories (location, quantity and costing)

6. Financial performance, trends & past financial reports/statements.

7. Regulatory environment and requirements Sources for Obtaining Knowledge:

* Previous experience with the industry.

* Discussion with the people in the organization.

*Discussion with past/other auditors and professionals.

* Industry profile and publications

* Entity-industry visits.

*Promotion literature, case studies, budgets, office manual, survey reports etc.

The knowledge of the business is a frame of reference within which the auditor exercises his/her professional judgement.

The auditor benefits if he/she could use the information with him/her in:

1. Assessing risks and problems.

2. Audit planning and performance.

3. Audit evidences evaluation.

4. Client service.

Auditors knowledge of the client's business would help him/her in the following areas:

* Developing and formulating audit plan and programme.

* Assessing audit evidences.

* Identifying special audit areas where attention is required.

* Assessing inherent and control risks in the entity.

* Identifying related party transactions.

* Evaluating accounting and management representation.

* Considering the fraud risk factors.

The auditor should draft a plan to obtain right and sufficient knowledge of the business and the same should be communicated to his/her audit staff. Any additional or new information should be carefully assessed and the audit staff should take note of it. The knowledge of the business should form the back drop of auditor's judgement.

Thank you readers.

Ashish Sharma.