How Does the Auditor Gain an Understanding of the Entity

question 18

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 that management deems relevant to the entity
• B)the nature of the entity,including its operations,ownership and governance structures,the types of investments the entity 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:

Pearson Correlation

A measure of linear correlation between two variables, ranging from -1 to 1, where 1 means a perfect positive linear relationship, -1 means a perfect negative linear relationship, and 0 indicates no linear relationship.

Non-Directional

Refers to a hypothesis that predicts a change or difference but does not specify the direction of the change.

Sample Size

The number of observations or data points collected from a subset of a larger population for the purpose of statistical analysis.

Pearson Correlation

A measure of the linear correlation between two variables, showing how closely the data fit to a line.