Sarah O'Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class and it was clear that he didn't really understand the nature of the audit process as he asked the following questions:

Given the CPA firm is auditing financial statements, why would they need to understand anything about the client's business?

A. Each entity faces a number of risks unique to the nature of its business and industry. The types of operations, the extent of regulation, how the organization obtains capital to fund its business model, and the nature of accounts in the financial statements, among other factors, each trigger different types of risks that could lead to material misstatements.

B. There are unique accounting standards for certain industries that impact how transactions, accounts, and disclosures are reported in financial statements. Thus, a thorough understanding of the client's business is critical to assessing the risk of material misstatements in the financial statements when planning the audit.

C. The only way to detect fraud is to have a thorough understanding of the client's business and all of the internal controls and processes. This also lowers the risk of material misstatements in the financial statements.

D. All of the above.

E. Both A and B.

F. Both B and C.