Consideration of Laws and Regulations in an Audit of ... - ISSAI

ISSAI 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTSwhether caused by fraud or error. 1 In conducting an audit of financialstatements, the auditor takes into account the applicable legal and regulatoryframework. Owing to the inherent limitations of an audit, there is anunavoidable risk that some material misstatements in the financial statementsmay not be detected, even though the audit is properly planned and performedin accordance with the ISAs. 2 In the context of laws and regulations, thepotential effects of inherent limitations on the auditor’s ability to detectmaterial misstatements are greater for such reasons as the following:• There are many laws and regulations, relating principally to theoperating aspects of an entity, that typically do not affect thefinancial statements and are not captured by the entity’s informationsystems relevant to financial reporting.• Non-compliance may involve conduct designed to conceal it, such ascollusion, forgery, deliberate failure to record transactions,management override of controls or intentional misrepresentationsbeing made to the auditor.• Whether an act constitutes non-compliance is ultimately a matter forlegal determination by a court of law.Ordinarily, the further removed non-compliance is from the events andtransactions reflected in the financial statements, the less likely the auditoris to become aware of it or to recognize the non-compliance.6. This ISA distinguishes the auditor’s responsibilities in relation tocompliance with two different categories of laws and regulations as follows:(a)(b)The provisions of those laws and regulations generally recognized tohave a direct effect on the determination of material amounts anddisclosures in the financial statements such as tax and pension lawsand regulations (see paragraph 13); andOther laws and regulations that do not have a direct effect on thedetermination of the amounts and disclosures in the financialstatements, but compliance with which may be fundamental to theoperating aspects of the business, to an entity’s ability to continue itsbusiness, or to avoid material penalties (for example, compliance withthe terms of an operating license, compliance with regulatory solvencyrequirements, or compliance with environmental regulations); noncompliancewith such laws and regulations may therefore have amaterial effect on the financial statements (see paragraph 14).12ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordancewith International Standards on Auditing,” paragraph 5.ISA 200, paragraph A51.5294 Consideration of Laws and Regulations in an Audit of Financial Statements