Explanation:

Let’s break it down:

- Reduce inherent risk – Here’s the thing: knowing the business doesn’t literally reduce the underlying risk. Inherent risk exists outside the auditor’s control—it’s about how risky the business or its transactions are by their nature.

- Identify problem areas – The more you know the business, the more likely you'll spot where things could go wrong. That’s a direct result of understanding how the company works.

- Evaluate reasonableness of estimates – You can’t judge estimates without context. Knowing the business helps you sniff out if management’s numbers really make sense.

- Evaluate appropriateness of GAAP – Simply put, you need to know the business to figure out if they’re using the right accounting rules for their particular situation.

Correct Answer:

Option 1 – Reduce inherent risk.