Acca aa s21 Notes

September 2021 to June 2022 exams
Watch our free ACCA AA lectures
51

---

Only on 
OpenTuition
you can find: Free ACCA notes 
•
Free ACCA lectures 
•
Free ACCA tests 
•
Free ACCA tutor support 
•
The largest ACCA community
3. Understanding the entity
In order to identify and assess the risks of material misstatement, the auditor must obtain an 
understanding of:
๏
the entity;
๏
its environment;
๏
the applicable financial reporting framework; and 
๏
system of internal control.
3.1. Required understanding
๏
The entity and its environment.
The complexity of its organisational structure, its ownership 
and governance and IT environment. Also the entity's business model and business risks that 
may increase the risk of misstatement in the financial statements (e.g. management incentives 
may result in bias to overstate profits).
๏
Industry factors.
Banks, insurance companies, and many other operations in the financial 
sector are subject to regulation and sometimes the auditor has to ensure that these regulations 
have been adhered to.
๏
Financial performance measures. 
Measures can put pressure on management to achieve 
targets that may result in management bias or even fraud (see Chapter 25).
๏
Applicable financial reporting framework.
The auditor should consider the entity's financial 
reporting practices and accounting policies (e.g. for revenue recognition) and changes thereto 
(e.g. new IFRS Standards).
๏
System of internal controls.
The auditor has to gain an understanding of the entity’s internal 
controls. Whether they exist and to what extent they are expected to operate. We will see in 
Chapter 12 that this has a profound effect on how the audit is likely to be conducted.
๏