Obtaining an Understanding of the EntityObtaining an Understanding of the Entity and Its Environment, the Applicable Financial Reporting Framework and the Entity’s System of Internal Control

Obtaining an Understanding of the Entity and Its Environment, the Applicable Financial Reporting Framework and the Entity’s System of Internal Control

Understanding the Entity and Its Environment, and the Applicable Financial Reporting Framework

1. In applying ASA 315,[18] based on the auditor’s understanding of the entity and its environment, the applicable financial reporting framework and the entity’s accounting policies, the auditor shall obtain an understanding of matters that may lead to an increased susceptibility to misstatement due to management bias or other fraud risk factors. (Ref: Para. A61–A70)

Understanding the Components of the Entity’s System of Internal Control

Control Environment

1. In applying ASA 315,[19] the auditor shall:
   1. Obtain an understanding of:
      1. How management’s oversight responsibilities are carried out, such as the entity’s culture and management’s commitment to integrity and ethical values, including how management communicates with its employees its views on business practices and ethical behaviour with respect to the prevention and detection of fraud. (Ref: Para. A71–A72)
      2. The entity’s whistleblower program (or other program to report fraud), if the entity has such a program, including how management and, if applicable, those charged with governance address allegations of fraud made through the program. (Ref: Para. A73–A75)
      3. How those charged with governance exercise oversight of management’s processes for identifying and responding to the fraud risks and the controls that management has established to address these risks. (Ref: Para. A76–A79)
   2. Make enquiries of management regarding management’s communications with those charged with governance regarding its processes for identifying and responding to the risks of fraud in the entity.
   3. Make enquiries of those charged with governance about: (Ref: Para. A80–A82)
      1. Whether they have knowledge of any fraud or suspected fraud including allegations of fraud, including those received from tips or complaints, affecting the entity, and if so, how they have responded to such matters;
      2. Their views about whether and how the financial report may be materially misstated due to fraud, including their views on possible areas that are susceptible to misstatement due to management bias or management fraud; and
      3. Whether they are aware of deficiencies in the system of internal control related to the prevention and detection of fraud, and the remediation efforts to address such deficiencies.

The Entity’s Risk Assessment Process