Final answer:
The auditor gains an understanding of internal controls through a process called internal control evaluation. This involves assessing the design and effectiveness of the controls in place to ensure the accuracy of financial statements and safeguarding of assets.
Step-by-step explanation:
The auditor gains an understanding of internal controls through a process called internal control evaluation. This involves assessing the design and effectiveness of the controls in place to ensure the accuracy of financial statements and safeguarding of assets. The auditor may use various techniques, such as interviewing personnel, observing operations, inspecting documents, and testing transactions to gain this understanding.
For example, the auditor may interview employees to determine how transactions are processed and how segregation of duties is established. They may also review the company's policies and procedures manual to understand the control environment. Additionally, the auditor may perform tests of controls to assess whether the controls are operating effectively.
In gaining an understanding of internal controls, the auditor aims to identify any weaknesses or deficiencies that could lead to material misstatements in the financial statements. This understanding helps the auditor plan the audit procedures and determine the nature, timing, and extent of the testing that needs to be performed.