Risk assessment
Auditors use their knowledge of the business, the industry and the environment in which the company operates to identify and assess the risks that could lead to a material misstatement in the financial statement. Those risks often involve a high degree of judgement and require a significant level of knowledge and experience by the auditor, particularly on large and complex engagements. This requires a good understanding of the business and its risks, which is typically built up over a number of years as part of the audit firm’s and auditor’s knowledge. It also means that the auditors need to be well informed about the industry and wider environment in which the company operates. And about what its competitors, customers, suppliers and-where relevant-regulators are doing.