Final answer:
An auditor must understand the transaction flow, components, and reporting structure of an entity's information system to assess financial reporting correctly.
Step-by-step explanation:
An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the flow of transactions through the system. This understanding includes knowledge about the shapes and dimension of all physical components, distinguishing which components are externally acquired versus internally fabricated, and the materials and processes used for in-house production. A comprehensive grasp of the detailed schematic diagram of electrical subsystems and the computer code for embedded assembly processes is also crucial.
Understanding the reporting structure is fundamental for an auditor, as it answers who, what, when, where, why, and how questions pertaining to the transactions. The reporting structure encapsulates the entire process - from the transaction's initiation to its reflection in the financial statements and ensures that the auditor can assess the internal controls effectively.