7-22

(Understanding the entity and its environment) You have just been assigned as in-charge accountant on HipStar, Inc. a new audit client in the recording industry. HipStar is an emerging growth company that finds new recording artists, records their music, and distributes the music directly to consumers exclusively over the Internet. The company does not produce CDs or tapes and does not distribute the artist's music through traditional distribution channels. In order to better understand HipStar, you have set out to understand the following:

1. Industry conditions
2. The regulatory environment
3. Other external factors affecting the business
4. The entity's business operations
5. The entity's investing activities and financing activities
6. The entity's financial reporting activities
7. The entity's objectives, strategies, and related business risks
8. How the entity measures and reviews its financial performance.

Required

For each of these eight categories (1) describe the knowledge and understanding you want to obtain about HipStar to develop a knowledgeable perspective about the entity and (2) identify how this knowledge might assist in assessing the risk of material misstatement. Use the following format:

Key Categories	Describe the knowledge used to develop a knowledgeable perspective about HipStar	Identify how this knowledge might assist in assessing the risk of material misstatement
Industry conditions Regulatory environment Other external factors affecting the business The client's business operations The client's investing activities and financing activities The client's financial reporting activities The client's objectives, strategies, and related business risks How the client measures and reviews the entity's financial performance