Page 108 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 2. Inquire of management concerning the entity’s policies and procedures regarding
compliance with laws and regulations.
3. Discuss with management the policies or procedures adopted for identifying, evaluating
and accounting for litigation claims and assessments.
After obtaining the general understanding, the auditor should perform procedures to identify
instances of non-compliance with these laws and regulations where non-compliance should be
considered when preparing financial statements, specifically:
1. Inquiring of management as to whether the entity is in compliance with such laws and
regulations.
2. Inspecting correspondence with the relevant licensing or regulatory authorities
Further, the auditor should obtain sufficient appropriate audit evidence about compliance with
those laws and regulations generally recognized by the auditor to have an effect on the
determination of material amounts and disclosures in financial statements. The auditor should
have a sufficient understanding of these laws and regulations in order to consider them when
auditing the assertions related to the determination of the amounts to be recorded and the
disclosures to be made.
Such laws and regulations would be well established and known to the entity and within the
industry; they would be considered on a recurring basis each time financial statements are
issued. These laws and regulations may relate, for example, to the form and content of financial
statements, including industry specific requirements or the accrual or recognition of expenses
for retirement benefits etc.
Other than as described in paragraphs 17, 18, and 19, the auditor need not test or perform other
procedures on the entity’s compliance with laws and regulations since this would be outside the
scope of an audit of financial statements.
The auditor should be conscious that procedures applied for the purpose of forming an opinion
on the financial statements may bring instances of possible non-compliance with laws and
regulations to the auditor’s attention. For example, such procedures include reading minutes;
inquiring of the entity’s management and legal counsel concerning litigation, claims and
assessments; and performing substantive tests of details of transactions or balances.

The auditor should obtain written representations that management has disclosed to the auditor
all known actual or possible non-compliance with laws and regulations whose effects should be
considered when preparing financial statements.
In absence of evidence to the contrary, the auditor is entitled to assume the entity is in compliance
with these laws and regulations.

!
Caution The auditor is not, and cannot be held responsible for preventing non-compliance.
The fact that an audit is carried out may, however, act as a deterrent.

Self Assessment

Fill in the blanks:
4. Management’s responsibility is to ensure that .................. are conducted in accordance with
the provisions of laws and regulations.
5. The auditor is responsible for obtaining assurance that the financial statements are free
from.................... caused by fraud or error.

102 LOVELY PROFESSIONAL UNIVERSITY