Explain how auditors obtain an initial understanding of the entity, its environment and the applicable financial reporting framework.

Auditors obtain an initial understanding of the entity, its environment, and the applicable financial reporting framework through several steps:

1. Preliminary Engagement Activities: The auditor first establishes the terms of the engagement with the entity. This includes understanding the objectives of the audit, the responsibilities of the auditor and the management, and the scope of the audit.

2. Risk Assessment Procedures: The auditor then performs risk assessment procedures to identify risks of material misstatement in the financial statements. This involves understanding the entity and its environment, including its internal control.

3. Understanding the Entity and Its Environment: The auditor gains an understanding of the entity's operations, its ownership and governance structures, the types of investments that the entity is making and plans to make, the entity's structure and how it is financed, and the applicable financial reporting framework.

4. Understanding the Applicable Financial Reporting Framework: The auditor needs to understand the financial reporting framework that is applicable to the entity. This includes the accounting principles and practices that the entity uses and the legal and regulatory framework within which the entity operates.

5. Inquiries of Management and Others: The auditor makes inquiries of management and others within the entity to gain a better understanding of the entity and its environment.

6. Analytical Procedures: The auditor performs analytical procedures to identify unusual or unexpected relationships that may indicate risks of material misstatement.

7. Observation and Inspection: The auditor observes and inspects documents and reports, and visits the entity's premises and plant facilities to gain a better understanding of the entity and its operations.

8. Documentation: The auditor documents the understanding of the entity, its environment, and the applicable financial reporting framework in the audit working papers.

These steps help the auditor to plan the audit and to determine the nature, timing, and extent of audit procedures that are necessary to achieve the audit objectives.