How Does the Auditor Gain an Understanding of the Entity

question 92

Multiple Choice

How does the auditor gain an understanding of the entity and its environment? The auditing standards require the auditor to understand

• A)industry,regulatory and other external factors relevant to the entity
• B)the nature of management of the entity,including its operations,ownership and governance structures,the types of investments management makes,and the way the entity is structured and financed
• C)management's selection and use of accounting policies,including any changes in these policies
• D)management's objectives and strategies and the related business risks that may lead to the risk of material misstatement

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Definitions:

Type I Error

The mistake of rejecting a true null hypothesis, or in other words, concluding that a difference or effect exists when it actually does not.

Decision Rule

A pre-determined guideline or criterion used to choose between multiple alternatives in the face of uncertainty, often based on statistical analysis.

P Value

The probability of observing the given result, or more extreme, by chance if the null hypothesis is true.

Critical Value

A threshold in hypothesis testing, which when exceeded or not met determines the outcome of the test, often leading to the rejection or acceptance of the null hypothesis.