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

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ISSAI 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTSincluding, for example, the auditor’s consideration of the integrity ofmanagement or employees.A4. Whether an act constitutes non-compliance with laws and regulations is amatter for legal determination, which is ordinarily beyond the auditor’sprofessional competence to determine. Nevertheless, the auditor’s training,experience and understanding of the entity and its industry or sector mayprovide a basis to recognize that some acts, coming to the auditor’sattention, may constitute non-compliance with laws and regulations.A5. In accordance with specific statutory requirements, the auditor may bespecifically required to report, as part of the audit of the financialstatements, on whether the entity complies with certain provisions of lawsor regulations. In these circumstances, ISA 700 8 or ISA 800 9 deal with howthese audit responsibilities are addressed in the auditor’s report.Furthermore, where there are specific statutory reporting requirements, itmay be necessary for the audit plan to include appropriate tests forcompliance with these provisions of the laws and regulations.Considerations Specific to Public Sector EntitiesA6. In the public sector, there may be additional audit responsibilities with respectto the consideration of laws and regulations which may relate to the audit offinancial statements or may extend to other aspects of the entity’s operations.The Auditor’s Consideration of Compliance with Laws and RegulationsObtaining an Understanding of the Legal and Regulatory Framework (Ref: Para. 12)A7. To obtain a general understanding of the legal and regulatory framework,and how the entity complies with that framework, the auditor may, forexample:• Use the auditor’s existing understanding of the entity’s industry,regulatory and other external factors;• Update the understanding of those laws and regulations that directlydetermine the reported amounts and disclosures in the financialstatements;• Inquire of management as to other laws or regulations that may beexpected to have a fundamental effect on the operations of the entity;• Inquire of management concerning the entity’s policies and proceduresregarding compliance with laws and regulations; and89ISA 700, “Forming an Opinion and Reporting on Financial Statements,” paragraph 38.ISA 800 “Special Considerations—Audits of Financial Statements Prepared in Accordance withSpecial Purpose Frameworks,” paragraph 11.11300 Consideration of Laws and Regulations in an Audit of Financial Statements
ISSAI 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTS• Inquire of management regarding the policies or procedures adoptedfor identifying, evaluating and accounting for litigation claims.Laws and Regulations Generally Recognized to Have a Direct Effect on theDetermination of Material Amounts and Disclosures in the Financial Statements(Ref: Para. 13)A8. Certain laws and regulations are well-established, known to the entity andwithin the entity’s industry or sector, and relevant to the entity’s financialstatements (as described in paragraph 6(a)). They could include those thatrelate to, for example:• The form and content of financial statements;• Industry-specific financial reporting issues;• Accounting for transactions under government contracts; or• The accrual or recognition of expenses for income tax or pension costs.Some provisions in those laws and regulations may be directly relevant tospecific assertions in the financial statements (for example, thecompleteness of income tax provisions), while others may be directlyrelevant to the financial statements as a whole (for example, the requiredstatements constituting a complete set of financial statements). The aim ofthe requirement in paragraph 13 is for the auditor to obtain sufficientappropriate audit evidence regarding the determination of amounts anddisclosures in the financial statements in compliance with the relevantprovisions of those laws and regulations.Non-compliance with other provisions of such laws and regulations andother laws and regulations may result in fines, litigation or otherconsequences for the entity, the costs of which may need to be provided forin the financial statements, but are not considered to have a direct effect onthe financial statements as described in paragraph 6(a).Procedures to Identify Instances of Non-Compliance—Other Laws and Regulations(Ref: Para. 14)A9. Certain other laws and regulations may need particular attention by theauditor because they have a fundamental effect on the operations of theentity (as described in paragraph 6(b)). Non-compliance with laws andregulations that have a fundamental effect on the operations of the entitymay cause the entity to cease operations, or call into question the entity’scontinuance as a going concern. For example, non-compliance with therequirements of the entity’s license or other entitlement to perform itsoperations could have such an impact (for example, for a bank, noncompliancewith capital or investment requirements). There are also manylaws and regulations relating principally to the operating aspects of the12Consideration of Laws and Regulations in an Audit of Financial Statements 301
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