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

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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:

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