It is obtained through inquiry, analytical procedures, observation and inspection, and updated throughout the audit. An insufficient understanding leads to misjudged risks and to unnecessary or missing procedures.
Source: BDS 315
Related terms
Risk of material misstatementThe risk that the financial statements are materially misstated, due to error or fraud, before the audit; it consists of inherent risk and control risk.Audit strategy and audit planThe audit strategy sets the scope, timing and direction of the audit; the audit plan sets the nature, timing and extent of procedures responding to risks.Internal controlProcesses and controls designed by management to provide reasonable assurance regarding the effectiveness of operations, the reliability of financial reporting and compliance with laws and regulations.Adverse opinionThe opinion in which the auditor states that the financial statements are not presented fairly, where misstatements are both material and pervasive.Agreed-upon proceduresAn engagement in which the practitioner performs procedures agreed with the entity and, where relevant, a third party, and reports only the findings without providing assurance.Analytical proceduresThe evaluation of financial information through analysis of plausible relationships among financial and non-financial data.
Last updated: November 8, 2026 · This definition is for general information only.