Consideration of Law and Regulation in an audit
Non-Compliance : Act of commission / omission by entity (intentional / unintentional), which are contrary to prevailing laws or regulation.
Management’s responsibility to ensure that entity’s operations are conducted as per laws and regulations.
Management’s responsibility for prevention and detection of non-compliance.
Management should –
(i) Monitor legal requirements.
(ii) Design and operate proper I.C.
(iii) Develop publicise and follow code of conduct.
(iv) Training to employees.
(v) Monitor compliance with code of conduct.
(vi) Establish legal department.
(vii) Maintain register of significant laws.
(viii) In larger entity, to ensure these responsibilities may be assigned to Internal auditor or Audit committee.
Auditor’s Consideration :
Auditor is/can not be held responsible for preventing non-compliance.
The risk of non-detention of non-compliance is higher.
But audit may reveal condition/events compliance.
Thus he should accordingly plan and perform audit. For this, he should perform :
1. He should obtain general understanding of (A) Legal and regulatory framework applicable to entity and (B) How entity comply with it.
2. Perform procedures to identity non-compliance to be considered when preparing f.st. specifically
3. Sufficient and appropriate evidence for compliance with those laws and regulation having effect on material amounts and disclosures in financial statement. (such laws are known and considered w.r.t. f. st.)
Except 1, 2, 3, auditor need not test compliance.
However, there may be instances of possible non-compliance came to auditors notice (fine penalty, etc.)
Written MRL that management has disclosed to auditor all known / possible non-compliance effecting preparation of f. st.
Procedures : When non-compliance is discovered :
Understanding nature/circumstances etc. to evaluate possible effect on f.st.
Documentation and discuss with management.
May consult entity’s lawyer.
Consider implication of non-compliance w.r.t. other phases of audit (Reliability of MRL).
If unable to obtain information about suspected non-compliance – consider its effect on A.R.
Withdrawal from Engagement :
He may withdraw if management doesn’t take remedial steps considered necessary by auditor, even if non-compliance is not material to f.st.
He may seek legal advice (e.g. Management involvement in non-compliance)
When incoming auditor communicates, tell him reasons of such withdrawal (not of its affairs)
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