What does ISA 402 require auditors to understand?

What does ISA 402 require auditors to understand?

• A. The financial performance of the entity
• B. The relationship with services organizations
• C. The internal audit processes
• D. The regulatory environment

Answer: (B)

ISA 402 focuses on the auditor's understanding of the relationship with service organizations when planning the audit of an entity that uses these services. This standard is particularly relevant in situations where an entity relies on outsourced services, which can significantly affect financial reporting and the overall control environment. Understanding the relationship with service organizations includes assessing the nature of the services provided, the controls at those service organizations, and how they might impact the financial statements of the entity being audited. This understanding is crucial for auditors because it helps them evaluate the adequacy of the internal controls in place and any risks related to the reliance on those service organizations. By effectively assessing these aspects, auditors can design their audit procedures to address the risks associated with the use of such services, ensuring that they obtain sufficient appropriate audit evidence.

ISA 402 focuses on the auditor's understanding of the relationship with service organizations when planning the audit of an entity that uses these services. This standard is particularly relevant in situations where an entity relies on outsourced services, which can significantly affect financial reporting and the overall control environment.

Understanding the relationship with service organizations includes assessing the nature of the services provided, the controls at those service organizations, and how they might impact the financial statements of the entity being audited. This understanding is crucial for auditors because it helps them evaluate the adequacy of the internal controls in place and any risks related to the reliance on those service organizations. By effectively assessing these aspects, auditors can design their audit procedures to address the risks associated with the use of such services, ensuring that they obtain sufficient appropriate audit evidence.