Page 104 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes consequences for the entity such as fines, litigations, etc. Generally, the further removed
non-compliance is from the events and transactions ordinarily reflected in financial statements,
the less likely the auditor are to become aware of it or recognize its possible non-compliance. This
SAP applies to audits of financial statements and does not apply to other engagements in which
the auditor is specifically engaged to test and report separately on compliance with specific laws
or regulations.
Financial statements are prepared to summarize the end-result of all the business activities by
an enterprise during an accounting period in monetary terms. These business activities vary
from one enterprise to other. To compare the financial statements of various reporting enterprises
poses some difficulties because of the divergence in the methods and principles adopted by
these enterprises in preparing their financial statements. In order to make these methods and
principles uniform and comparable to the extent possible – standards are evolved.

Did u know? The auditor’s responsibility to consider fraud and errors in an audit of financial
statements is provided in SAP 4, “Fraud and Error.”
6.1 Considerations of Laws and Regulations in an Audit of Financial

Statements

6.1.1 Scope

1. Addresses the auditor’s responsibility to consider laws and regulations in an audit of
financial statements.
2. Does not apply to other assurance engagements in which the auditor is specifically engaged
to test and report separately on compliance with specific laws or regulations.
6.1.2 Effect of Laws and Regulations

1. The impact of laws and regulations on financial statements varies considerably.
2. The applicable laws and regulations constitute the legal and regulatory framework of the
entity.
3. Some laws or regulations have provisions with a direct effect on the financial statements
because they determine the reported amounts and disclosures required in an entity’s
financial statements.

4. Other laws or regulations are to be complied with by management, or set the provisions
under which the entity is allowed to conduct its business, but do not have a direct effect on
an entity’s financial statements.
5. Some entities operate in heavily regulated industries (such as banks and chemical
companies) while others are subject only to the many laws and regulations that relate
generally to the operating aspects of the business (such as those related to occupational
safety and health and equal employment opportunity).

6. Non-compliance with laws and regulations may result in fines, litigation, or other
consequences for the entity that may have a material effect on the financial statements.

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