An auditor studies the client’s business to answer three questions: How does the company make money? What could go wrong in its financial statements? What evidence would help the auditor find out? Understanding the business helps the auditor identify risks and choose procedures that address them. mia.org.my
The examples below use Jengka Furniture Sdn. Bhd., a fictional Malaysian company that buys timber, manufactures furniture and sells it on credit to retailers. The page numbers follow your textbook outline.
1. Obtaining background information about the client
| Planning activity | What the auditor does | Example and why it matters |
|---|---|---|
| 1. Understand the client | Identify the owners, directors, main products, customers, locations and sources of finance. Read prior financial statements, board minutes and major agreements, and discuss changes with management. | Jengka Furniture earns half its revenue from one retailer. If that retailer is struggling financially, the auditor considers whether the company can collect the amount owed. |
| 2. Tour the client’s facilities | Visit the factory, warehouse and dispatch area. Observe how goods move and ask staff how they record each movement. | The auditor sees damaged tables stored alongside finished goods ready for sale. This raises a valuation question: has management reduced the carrying amount of the damaged tables where necessary? |
| 3. Understand the industry and business | Learn about external conditions affecting the industry and how the company purchases, produces, sells and collects payment. | Timber prices have risen, but the company’s selling prices are fixed under contract. The auditor considers the effect on margins and investigates any unexpected increase in reported gross profit. |
| 4. Identify related parties | Ask management about related parties and transactions with them. Inspect ownership records, board minutes and significant contracts for relationships management may have overlooked. | A director controls a transport company that delivers the furniture. The auditor examines the delivery charges, year-end balance and whether the financial statements disclose the relationship and transactions as required. AUASB Local |
| 5. Determine whether an expert is needed | Decide whether the audit requires knowledge outside accounting or auditing. Assess the expert’s competence, capabilities and objectivity, agree on the work and evaluate the results. | Management revalues the factory building. The auditor may engage a property valuer to assess the valuation assumptions. The auditor remains responsible for the audit opinion. AUASB Local |
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