8-4

For public companies, the audit committee is responsible for hiring the auditor as required by the
Sarbanes-Oxley Act. So that the audit committee is considered as the client in those engagement.

8-5

Auditors need an understanding of the clients industry because they need to assess the risk of material
misstatement in the financial statements, including inquiries of management and analytical procedures.
The auditor uses this information to assess client business risk and the risk of material misstatement.

Some information sources are commonly used by the auditors to learn about the clients industry are
Industry and external environment; Business operations and processes; Management and governance;
Objectives and strategies; Measurement and performance.

8-6

Viewing the physical facilities, the auditor can assess physical safeguards over asset and interpret
accounting data related to assets. With such first-hand knowledge, the auditor is better able to identify
risks from factors. Discussions with nonaccounting employees during the tour and throughout the audit
also help the auditor learn more about the clients business to aid in assessing risk.

8-7

Many risks are common to all clients in certain industries, an auditor often tries to acquire background
knowledge of the clients industry. Familiarity with those risk aids the auditor in determining their
relevance to the client when assessing client business risk and risk of material misstatement including
inventory obsolescence which mean it will helps them evaluate when the inventory is obsolete which
have a value lower than cost.