Page 103 - DCOM204_AUDITING_THEORY

Unit 6: Laws and Regulations in Audit

Objectives Notes

After studying this unit, you will be able to:
Discuss considerations of laws and regulations in an audit of financial statements;
Know about responsibility for compliance with laws and regulations;
State procedures when non-compliance is discovered;
Know about law and regulation for auditing procedures;
Communicate/report about non-compliance.

Introduction

The Audit operation refers to an examination of auditing records undertaken with a view to
establishing the correctness or otherwise of the transactions reflected therein. It involves an
intelligent scrutiny of the books of account of a company, with reference to documents, vouchers
and other relevant records to ensure that the entries made therein give a true picture of the
business conducted during that period, that every transaction has been properly authorized by
the appropriate authority and that the effect of all the entries in the books of account has been
reflected in the final accounts. The role of regulators and inspectors such as auditors has been
brought into prominence with the sweeping changes that liberalization has brought in, along
with recent instances of embezzlement, which have shaken investor confidence.

When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that non-compliance by the entity with the laws and
regulations may materially affect the financial statements. However, an audit cannot be expected
to detect non-compliance with all laws and regulations. Detection of non-compliance, regardless
of materiality, requires consideration of the implications for the integrity of management or
employees and the possible effect on other aspects of the audit.
The term “non-compliance” as used in the SAP refers to acts of omission or commission by the
entity being audited, either intentional or unintentional, which are contrary to the prevailing
laws or regulations. Such acts include transactions entered into by, or in the name of, the entity
or on its behalf by its management or employees. For the purpose of this SAP, non-compliance
does not include personal misconduct (unrelated to the business activities of the entity) by the
entity’s management or employees.

Whether an act constitutes non-compliance is a legal determination that is ordinarily beyond
the auditor’s professional competence. The auditor’s training, experience and understanding of
the entity and its industry may provide a basis for recognition that some acts coming to the
auditor’s attention may constitute non-compliance is generally based on the advice of an informed
expert qualified to practice law but ultimately can only be determined by a court of law.

Laws and regulations vary considerably in their relation to the financial statements. Some laws
or regulations determine the form or content of an entity’s financial statements or the amounts
to be recorded or disclosures to be made in financial statements. Other laws or regulations are
to be complied with by management or prescribe the provisions under which entity is allowed
to conduct its business. Some entities operate in heavily regulated industries (such as banks,
sugar and pharmaceuticals industries). Others are only subject to the many laws and regulations
that generally relate to the operating aspects of the business (such as those related to occupational
safety and health). Non-compliance with laws and regulations could result in financial

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