Final answer:
An auditor is required to obtain knowledge about industry, business operations, and entity objectives to assess risks and design audit procedures. This includes gathering information from stakeholders, finding expert information, and doing a root cause analysis.
Step-by-step explanation:
In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the industry and regulatory factors, operational and financial processes, and the entity's objectives and strategies.
This includes gathering information from customers and other stakeholders, which may reveal insights into the entity's market standing and customer satisfaction levels. It also involves finding expert information, such as industry benchmarks or best practices that can be compared against the entity's operations. Moreover, an auditor should conduct a root cause analysis to identify underlying problems that might affect financial reporting and internal controls.
A thorough understanding in these areas enables an auditor to assess risks and design appropriate audit procedures. Knowledge gained from stakeholders can inform the auditor of risks associated with customer relations or supply chain disruptions. Expert insights provide a benchmark to measure entity's practices, while root cause analysis can reveal systemic issues that may impact financial accuracy and reporting integrity.