An auditor obtains knowledge about a new client's business and its industry in order to:

Question

BlackTom AI · Accepted Answer

The question concerns why an auditor gathers knowledge about a new client's business and industry. Beginning with what the auditor is trying to accomplish helps frame the reasoning for the answer.
- The provided correct answer states: understand the events and transactions that may have an effect on the client's financial statements. This reflects a fundamental purpose of early client acceptance procedures: gaining an understanding of the client’s business and industry to identify areas that could affect financial statement amounts and disclosures. By learning about the client’s operations, risks, and external environment, the auditor can target where misstatements are more likely to occur and tailor risk assessment and procedures accordingly.
- If we consider how this knowledge translates into practice, it enables the identification of significant accounts and disclosures, such as revenue recognition, inventory valuation, and asset depreciation, which may be influenced by business cycles, regulatory changes, or industry-specific risks. This aligns with the concept of a risk-based approach to auditing: understanding the client informs areas susceptible to material misstatement.
- A broader interpretation would consider that the auditor’s knowledge also supports planning the nature, timing, and extent of audit procedures, but the core objective remains to link business events to potential effects on financial statements. This makes the option about understanding events and transactions that may impact financial statements the most directly accurate.
- However, if alternative options were present, some common misconceptions might include thinking the purpose is only to assess compliance with industry norms, or solely to evaluate internal control design without connecting to financial statement impact. These would be incomplete because they either overemphasize compliance without linking to financial statement effects or neglect the broader risk assessment purpose.
- In summary, the reasoning centers on the audit's goal of recognizing how business activities and industry factors drive financial statement outcomes, enabling targeted testing and proper disclosures. This justification underpins why the stated option is correct, and common incorrect notions would fail to establish the direct connection between business/industry knowledge and potential financial statement effects.

Fall 2025.ACCT.5640.01 Midterm Part A Fall 25 Auditing- Requires Respondus LockDown Browser

An auditor obtains knowledge about a new client's business and its industry in order to:

View Explanation

Log in for full answers

Similar Questions

Which of the following situations would least likely increase the auditor’s RMM assessment for Accounts Receivable?

Inherent and control risk are most meaningfully evaluated:

The risk assessment phase of an audit involves the performance of detailed tests of controls and substantive testing of transactions and accounts

In a consumer society, many adults channel creativity into buying things

Economic stress and unpredictable times have resulted in a booming industry for self-help products

People born without creativity never can develop it

A product has a selling price of $20, a contribution margin ratio of 40% and fixed cost of $120,000. To make a profit of $30,000. The number of units that must be sold is: Type the number without $ and a comma. Eg: 20000

Which of the following statement regarding cost is correct:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler