Page 106 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 6.2.2 Responsibility of the Auditor

1. The requirements in SAS are designed to assist the auditor in identifying material
misstatement of the financial statements due to non-compliance with laws and regulations.
2. The auditor is not responsible for preventing non-compliance and cannot be expected to
detect non-compliance with all laws and regulations.
3. The auditor is responsible for obtaining reasonable assurance that the financial statements
as a whole are free from material misstatement, whether caused by fraud or error.
4. The auditor is responsible for taking into account the applicable legal and regulatory
framework during the planning and execution of the audit procedures.

5. In the context of laws and regulations, the potential effects of inherent limitations on the
auditor’s ability to detect material misstatements are greater for the following reasons:
(a) Many laws and regulations (relating principally to the operating aspects of an entity)
typically do not affect the financial statements and are not captured by the entity’s
information systems relevant to financial reporting.

(b) Non-compliance may involve acts designed to conceal it, such as collusion, forgery,
deliberate failure to record transactions, management override of controls, or
intentional misrepresentations made to the auditor.
(c) Whether an act constitutes noncompliance is ultimately a matter for legal
determination, such as by a court of law.

Given below are the auditor’s responsibilities in relation to compliance with the following two
categories of laws and regulations that may have a material effect on the financial statements of
the company:
1. The provisions of those laws and regulations generally recognized to have a direct effect
on the determination of material amounts and disclosures in the financial statements,
such as tax and pension laws and regulations.
2. The provisions of other laws and regulations that do not have a direct effect on the
determination of the amounts and disclosures in the financial statements but compliance
with which may be:
(a) Fundamental to the operating aspects of the business,

(b) Fundamental to an entity’s ability to continue its business, or necessary for the
entity to avoid material penalties (for example, compliance with the terms of an
operating license, regulatory solvency requirements, or environmental regulations).

6.2.3 Differing Requirements are specified for each of the previously
mentioned Categories of Laws and Regulations

1. Auditor’s responsibility to obtain sufficient appropriate audit evidence regarding material
amounts and disclosures in the financial statements that are determined by the provisions
of those laws and regulations.

2. Auditor’s responsibility is limited to performing specified audit procedures that may
identify noncompliance with those laws and regulations that may have a material effect
on the financial statements.
3. The auditor is required to remain alert to the possibility that other audit procedures
applied for the purpose of forming an opinion on financial statements may bring instances

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