Consideration of Laws and Regulations in an Audit of ... - ISSAI
Consideration of Laws and Regulations in an Audit of ... - ISSAI Consideration of Laws and Regulations in an Audit of ... - ISSAI
ISSAI 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTSentity that typically do not affect the financial statements and are notcaptured by the entity’s information systems relevant to financial reporting.A10. As the financial reporting consequences of other laws and regulations canvary depending on the entity’s operations, the audit procedures required byparagraph 14 are directed to bringing to the auditor’s attention instances ofnon-compliance with laws and regulations that may have a material effecton the financial statements.Non-Compliance Brought to the Auditor’s Attention by Other Audit Procedures (Ref:Para. 15)A11. Audit procedures applied to form an opinion on the financial statementsmay bring instances of non-compliance or suspected non-compliance withlaws and regulations to the auditor’s attention. For example, such auditprocedures may include:• Reading minutes;• Inquiring of the entity’s management and in-house legal counsel orexternal legal counsel concerning litigation, claims and assessments;and• Performing substantive tests of details of classes of transactions,account balances or disclosures.Written Representations (Ref: Para. 16)A12. Because the effect on financial statements of laws and regulations can varyconsiderably, written representations provide necessary audit evidenceabout management’s knowledge of identified or suspected non-compliancewith laws and regulations, whose effects may have a material effect on thefinancial statements. However, written representations do not providesufficient appropriate audit evidence on their own and, accordingly, do notaffect the nature and extent of other audit evidence that is to be obtained bythe auditor. 10Audit Procedures When Non-Compliance Is Identified or SuspectedIndications of Non-Compliance with Laws and Regulations (Ref: Para. 18)A13. If the auditor becomes aware of the existence of, or information about, thefollowing matters, it may be an indication of non-compliance with laws andregulations:• Investigations by regulatory organizations and governmentdepartments or payment of fines or penalties.10ISA 580, “Written Representations,” paragraph 4.13302 Consideration of Laws and Regulations in an Audit of Financial Statements
ISSAI 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTS• Payments for unspecified services or loans to consultants, relatedparties, employees or government employees.• Sales commissions or agent’s fees that appear excessive in relation tothose ordinarily paid by the entity or in its industry or to the servicesactually received.• Purchasing at prices significantly above or below market price.• Unusual payments in cash, purchases in the form of cashiers’cheques payable to bearer or transfers to numbered bank accounts.• Unusual transactions with companies registered in tax havens.• Payments for goods or services made other than to the country fromwhich the goods or services originated.• Payments without proper exchange control documentation.• Existence of an information system which fails, whether by design orby accident, to provide an adequate audit trail or sufficient evidence.• Unauthorized transactions or improperly recorded transactions.• Adverse media comment.Matters Relevant to the Auditor’s Evaluation (Ref: Para. 18(b))A14. Matters relevant to the auditor’s evaluation of the possible effect on thefinancial statements include:• The potential financial consequences of non-compliance with lawsand regulations on the financial statements including, for example,the imposition of fines, penalties, damages, threat of expropriation ofassets, enforced discontinuation of operations, and litigation.• Whether the potential financial consequences require disclosure.• Whether the potential financial consequences are so serious as to callinto question the fair presentation of the financial statements, orotherwise make the financial statements misleading.Audit Procedures (Ref: Para. 19)A15. The auditor may discuss the findings with those charged with governancewhere they may be able to provide additional audit evidence. For example,the auditor may confirm that those charged with governance have the sameunderstanding of the facts and circumstances relevant to transactions orevents that have led to the possibility of non-compliance with laws andregulations.14Consideration of Laws and Regulations in an Audit of Financial Statements 303
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<strong>ISSAI</strong> 1250ISA 250CONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTS• Payments for unspecified services or lo<strong>an</strong>s to consult<strong>an</strong>ts, relatedparties, employees or government employees.• Sales commissions or agent’s fees that appear excessive <strong>in</strong> relation tothose ord<strong>in</strong>arily paid by the entity or <strong>in</strong> its <strong>in</strong>dustry or to the servicesactually received.• Purchas<strong>in</strong>g at prices signific<strong>an</strong>tly above or below market price.• Unusual payments <strong>in</strong> cash, purchases <strong>in</strong> the form <strong>of</strong> cashiers’cheques payable to bearer or tr<strong>an</strong>sfers to numbered b<strong>an</strong>k accounts.• Unusual tr<strong>an</strong>sactions with comp<strong>an</strong>ies registered <strong>in</strong> tax havens.• Payments for goods or services made other th<strong>an</strong> to the country fromwhich the goods or services orig<strong>in</strong>ated.• Payments without proper exch<strong>an</strong>ge control documentation.• Existence <strong>of</strong> <strong>an</strong> <strong>in</strong>formation system which fails, whether by design orby accident, to provide <strong>an</strong> adequate audit trail or sufficient evidence.• Unauthorized tr<strong>an</strong>sactions or improperly recorded tr<strong>an</strong>sactions.• Adverse media comment.Matters Relev<strong>an</strong>t to the <strong>Audit</strong>or’s Evaluation (Ref: Para. 18(b))A14. Matters relev<strong>an</strong>t to the auditor’s evaluation <strong>of</strong> the possible effect on thef<strong>in</strong><strong>an</strong>cial statements <strong>in</strong>clude:• The potential f<strong>in</strong><strong>an</strong>cial consequences <strong>of</strong> non-compli<strong>an</strong>ce with laws<strong><strong>an</strong>d</strong> regulations on the f<strong>in</strong><strong>an</strong>cial statements <strong>in</strong>clud<strong>in</strong>g, for example,the imposition <strong>of</strong> f<strong>in</strong>es, penalties, damages, threat <strong>of</strong> expropriation <strong>of</strong>assets, enforced discont<strong>in</strong>uation <strong>of</strong> operations, <strong><strong>an</strong>d</strong> litigation.• Whether the potential f<strong>in</strong><strong>an</strong>cial consequences require disclosure.• Whether the potential f<strong>in</strong><strong>an</strong>cial consequences are so serious as to call<strong>in</strong>to question the fair presentation <strong>of</strong> the f<strong>in</strong><strong>an</strong>cial statements, orotherwise make the f<strong>in</strong><strong>an</strong>cial statements mislead<strong>in</strong>g.<strong>Audit</strong> Procedures (Ref: Para. 19)A15. The auditor may discuss the f<strong>in</strong>d<strong>in</strong>gs with those charged with govern<strong>an</strong>cewhere they may be able to provide additional audit evidence. For example,the auditor may confirm that those charged with govern<strong>an</strong>ce have the sameunderst<strong><strong>an</strong>d</strong><strong>in</strong>g <strong>of</strong> the facts <strong><strong>an</strong>d</strong> circumst<strong>an</strong>ces relev<strong>an</strong>t to tr<strong>an</strong>sactions orevents that have led to the possibility <strong>of</strong> non-compli<strong>an</strong>ce with laws <strong><strong>an</strong>d</strong>regulations.14<strong>Consideration</strong> <strong>of</strong> <strong>Laws</strong> <strong><strong>an</strong>d</strong> <strong>Regulations</strong> <strong>in</strong> <strong>an</strong> <strong>Audit</strong> <strong>of</strong> F<strong>in</strong><strong>an</strong>cial Statements 303
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