The Required Understanding of the EntityThe Required Understanding of the Entity and its Environment, Including the Entity’s Internal Control

The Required Understanding of the Entity and its Environment, Including the Entity’s Internal Control

The Entity and Its Environment

1. The auditor shall obtain an understanding of the following:
   1. Relevant industry, regulatory, and other external factors and the applicable financial reporting framework. (Ref: Para. A25-A30)
   2. The nature of the entity, including:
      1. its operations;
      2. its ownership and governance structures;
      3. the types of investments that the entity is making and plans to make, including investments in special‑purpose entities; and
      4. the way that the entity is structured and how it is financed

to enable the auditor to understand the classes of transactions, account balances, and disclosures to be expected in the financial report. (Ref: Para. A31-A35)

1. The entity’s selection and application of accounting policies, including the reasons for changes thereto. The auditor shall evaluate whether the entity’s accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry. (Ref: Para. A36)
2. The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement. (Ref: Para. A37-A43)
3. The measurement and review of the entity’s financial performance. (Ref: Para. A44-A49)

The Entity’s Internal Control

1. The auditor shall obtain an understanding of internal control relevant to the audit. Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s professional judgement whether a control, individually or in combination with others, is relevant to the audit. (Ref: Para. A50-A73)

Nature and Extent of the Understanding of Relevant Controls

1. When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of those controls and determine whether they have been implemented, by performing procedures in addition to enquiry of the entity’s personnel. (Ref: Para. A74-A76)

Components of Internal Control

Control environment

1. The auditor shall obtain an understanding of the control environment. As part of obtaining this understanding, the auditor shall evaluate whether:
   1. Management, with the oversight of those charged with governance, has created and maintained a culture of honesty and ethical behaviour; and