Final answer:
The next step after understanding the entity and its environment is to conduct a risk assessment, then develop an audit plan, perform audit procedures, and finally issue an audit report.
Step-by-step explanation:
The next step after obtaining an understanding of the entity and its environment is to conduct a risk assessment. Risk assessment involves evaluating the likelihood and impact of potential risks on the entity's objectives and determining the appropriate response to mitigate those risks.
Once the risk assessment is completed, the next step is to develop an audit plan. The audit plan outlines the scope, objectives, and approach for the audit, including the specific audit procedures to be performed.
After developing the audit plan, the next step is to perform audit procedures. These procedures involve gathering and evaluating evidence to determine if the entity's financial statements are presented fairly and in accordance with applicable accounting standards.
Finally, once the audit procedures are complete, the auditor can issue an audit report which expresses their opinion on the entity's financial statements.