How Does the Auditor Gain an Understanding of the Entity

question 109

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 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)the entity'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:

Profit Margin Ratio

A financial metric used to evaluate a company's profitability by comparing net income to revenue.

Economic Conditions

The state of a country or region's economy, influenced by factors such as GDP, unemployment rates, and inflation.

Industry Average

A statistical measure that represents the average performance or output of companies within a particular sector or industry.

Adjusting Entries

Journal entries made at the end of an accounting period to update account balances before the preparation of financial statements, ensuring records adhere to the accrual basis of accounting.