UNDERSTANDING OF BUSINESS SITUATION

GENERAL PROVISIONS

01. This standard aims to prescribe the basic principles and procedures and guide ways of applying the basic principles and procedures in order to inquire into the business situation and the use of such knowledge in the process of auditing the financial reports.

02. To perform the auditing of financial reports, the auditors must have necessary and adequate understanding of the business situation in order to be able to assess and analyze events, operations and practical activities of the audited units, which, according to the auditors, greatly affect the financial reports, the inspection by auditors or the auditing reports. Example: Auditors use their knowledge of business situation to determine potential risks as well as controlled risks and determine the contents, order and scope of auditing procedures.

03. The auditors’ knowledge needed for performing an audit shall include their overall knowledge of the economy, the units? operation spheres, more specific knowledge of organization and operation of the audited units. The auditors? knowledge of the units must not necessary up to the level of the directorate of the audited units.

The specific contents of matters to be understood when auditing the financial reports are presented in Appendix No.1. The auditors may add contents to this list and may not apply this entire list to a specific audit.

04. This standard shall apply to the audit of financial reports and also to the audit of other financial information as well as relevant services of the auditing companies.

The auditors and auditing companies must abide by the provisions of this standard in the process of auditing financial reports.

CONTENTS OF THE STANDARD

Information gathering

05. Before accepting the auditing contracts, auditors and auditing companies shall have to gather preliminary information on the operation spheres, enterprise type, ownership form, production technologies, management apparatus organization and practical operation of the units, thereby evaluating the possibility of gathering necessary information (knowledge) about business situation in order to carry out the auditing work.

06. After accepting the auditing contracts, the auditors shall have to gather necessary detailed information right from the time the auditing work starts. In the course of audit, the auditors shall have to always examine, evaluate, update and supplement new information.

07. The gathering of necessary information on units? business situation is a process of continuous accumulation, including the gathering, evaluation and comparison of the gathered information with the auditing evidences at all stages of the auditing process. Example: Information gathered at the stage of plan elaboration must still be continuously updated and further supplemented at the subsequent stages so that the auditors fully understand the units? activities.

08. For auditing contracts of the subsequent year, the auditors shall have to update and re-evaluate the information gathered previously, particularly the information in the auditing dossiers of the previous years. The auditors shall have to pay attention to the existing problems detected in the previous year and complete all procedures with a view to detecting considerable changes which have arisen after the previous audit.

09. The auditors gather information on business situation from the following sources:

– The practical experiences about the units and the business lines of the audited units in the sum-up reports, working minutes, the press;

– The previous year?s auditing dossiers;

– The consultation with the directors, chief accountants or officials as well as employees of the audited units;

– The consultation with the internal auditors and the examination of internal audit reports of the audited units;

– The consultation with other auditors and consultants who have provided services for the audited units or work in the same fields with the audited units;

– The consultation with experts, outside subjects, who are knowledgeable about the audited units (Example: economic experts, superior bodies, customers, suppliers, competition rivals?);

– The consultation of publications relating to the audited units? operation domains (Example: Statistical figures of the Government, specialized press, banks? information, securities market?s information?);

– The legal documents and regulations which affect the audited units;

– Field surveys of the offices, workshops of the audited units;

– The documents supplied by the audited units (Example: Resolutions and minutes of meetings, materials sent to shareholders or superior bodies, internal management reports, periodical financial reports, policies on economic management, finance, tax, accounting system, internal control documents, regulations on powers, functions and tasks of each section in the units?).

Use of knowledge

10. The knowledge of business situation constitutes an important basis for the auditors to make professional assessments. The level of business situation knowledge and the rational use of such knowledge will help the auditors in the following job:

– Assessing risks and determining noteworthy issues;

– Drawing up plans and conducting the auditing work efficiently;

– Assessing the auditing evidences;

– Providing better services for the audited units.

11. In the auditing process, understanding the business situation is very important, which helps the auditors assess the following specific aspects:

– Evaluation of possible risks and controlled risks;

– Analysis of business risks and handling options of the directors (or the heads);

– Elaboration of auditing plans and programs;

– Determination of the importance and evaluation of its compatibility in the auditing process;

– Evaluation of the adequacy and appropriateness of the auditing evidences;

– Evaluation of accounting estimates and expositions of the directors;

– Determination of areas which require special attention in auditing and necessary auditing skills;

– Determination of concerned parties and operations arising among the concerned parties;

– Determination of contradicting information;

– Determination of unusual circumstances (Example: Fraudulence or non-observance of laws and regulations; statistical figures contradicting the figures of financial reports?);

– Making questionnaires and evaluation of the reasonability of the answers;

– Consideration of the compatibility of the accounting regime, information presented on the financial reports.

12. Audit assistants who are employed by auditors and auditing companies and assigned to perform auditing work must have certain knowledge of the business situation so as to perform their work. Besides, the assistants must gather supplementary information to meet the requirements of their work and exchange such information with other members of their groups.

13 In order to effectively use the knowledge of business situation, the auditors shall have to evaluate and examine the overall impacts of their knowledge on the units? financial reports as well as the consistency of the data in the financial reports as compared with the auditors? knowledge of the business situation./.