S3: Understanding S3: Understanding the Businessthe Business

SessionSession objective objective

To explain why understanding To explain why understanding of the business of the entity is of the business of the entity is important for the auditorimportant for the auditor

To outline the steps involved To outline the steps involved in understanding the entity to in understanding the entity to be auditedbe audited

Process of understanding Process of understanding the business of the entitythe business of the entity

Understanding of accounting systemUnderstanding of accounting system Assessing the control environment Assessing the control environment

especially internal controlsespecially internal controls Assessing riskAssessing risk Determining Materiality levelDetermining Materiality level Designing audit proceduresDesigning audit procedures Understanding substance of transactions Understanding substance of transactions Identifying the nature and source of audit Identifying the nature and source of audit

evidenceevidence Evaluating financial statements keeping Evaluating financial statements keeping

in mind the interest of stakeholdersin mind the interest of stakeholders

Why understand the Why understand the business?business?

Auditors should have/obtain a knowledge of Auditors should have/obtain a knowledge of the business of the entity to be audited the business of the entity to be audited which is sufficient to enable them to identify which is sufficient to enable them to identify

and understand the events, transactions and and understand the events, transactions and practices practices

that may have a significant effect on the that may have a significant effect on the financial statements or the audit thereoffinancial statements or the audit thereof

Such knowledge of the business of the Such knowledge of the business of the auditee should be obtained so as to be auditee should be obtained so as to be sufficient to enable the auditor to carry out sufficient to enable the auditor to carry out the audit work effectivelythe audit work effectively

Why understand the Why understand the business? (contd.)business? (contd.)

Understanding the business helps us to Understanding the business helps us to design an approach that isdesign an approach that is EffectiveEffective EfficientEfficient Adds valueAdds value Develops the teamDevelops the team

Without a very good understanding of the Without a very good understanding of the business audit will not be able to satisfy business audit will not be able to satisfy the above mentioned criteria.the above mentioned criteria.

It is a key component also for maximising It is a key component also for maximising the impact of our audit.the impact of our audit.

Why understand the Why understand the business? (contd.)business? (contd.)

The business activity and The business activity and regularity framework drive the regularity framework drive the financial statements. financial statements.

We should form an expectation We should form an expectation of what the financial statements of what the financial statements contain based on our contain based on our understanding of these.understanding of these.

External factorsExternal factors

Authorising Legislation Authorising Legislation Regulations issued under Authorising Regulations issued under Authorising

LegislationLegislation Parliamentary AuthorityParliamentary Authority Political EnvironmentPolitical Environment Business EnvironmentBusiness Environment Financial and Performance Reporting Financial and Performance Reporting

requirementsrequirements Future EventsFuture Events Other FactorsOther Factors

Internal factorsInternal factors

These are factors that look inside These are factors that look inside the business. e.g.the business. e.g.

Corporate PlansCorporate Plans Business PlansBusiness Plans Management ReportsManagement Reports Board MinutesBoard Minutes The structure of the organisation, andThe structure of the organisation, and Audit committeesAudit committees

Overall control environmentOverall control environment

The effectiveness of the top The effectiveness of the top management of the auditee organisationmanagement of the auditee organisation

The effectiveness of the finance wing of The effectiveness of the finance wing of the auditee organisationthe auditee organisation

Organisational structure, roles and Organisational structure, roles and responsibilities – the efficacy of the responsibilities – the efficacy of the organisational structure, in terms of organisational structure, in terms of flow of information, staff training and flow of information, staff training and supervision etcsupervision etc

Overall control environmentOverall control environment

Human resources policies and procedures – Human resources policies and procedures – the effectiveness of the HR policies and the effectiveness of the HR policies and procedures, in terms of ensuring appropriate procedures, in terms of ensuring appropriate recruitment, induction, training, management, recruitment, induction, training, management, retention and promotionretention and promotion

Management’s risk assessment process – the Management’s risk assessment process – the effectiveness of risk identification, effectiveness of risk identification, promulgation, management, ownership, promulgation, management, ownership, monitoring and reportingmonitoring and reporting

Reliability of overall financial reporting and Reliability of overall financial reporting and budgetary controlbudgetary control

Overall control environmentOverall control environment

Effectiveness of the Audit Committee – Effectiveness of the Audit Committee – the effectiveness of the audit committee the effectiveness of the audit committee in terms of ensuring appropriate in terms of ensuring appropriate challenge of and support to the challenge of and support to the Accounting OfficerAccounting Officer

Effectiveness of Internal Audit – the Effectiveness of Internal Audit – the effectiveness of internal audit in terms of effectiveness of internal audit in terms of providing adequate levels of appropriate providing adequate levels of appropriate internal audit provision, and of reporting internal audit provision, and of reporting backback