Page 110 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes effect of the suspected non-compliance may be material to the financial statements, the auditor
shall consider the need to obtain legal advice. If sufficient information about suspected
non-compliance cannot be obtained, the auditor shall evaluate the effect of the lack of sufficient
appropriate audit evidence on the auditor’s opinion.

Task Find out and explain with examples factors that cause non-compliance in a financial
statement.

6.4 Procedures when Non-compliance is Discovered

SAP sets out examples of the type of information that might come to the auditor’s attention that
may indicate non-compliance.

When the auditor becomes aware of information concerning a possible instances of
non-compliance, the auditor should obtain an understanding of the nature of the act and the
circumstances in which it has occurred, and sufficient other information to evaluate the possible
effect on the financial statements.
When evaluating the possible effect on the financial statements, the auditor considers:
1. The potential financial consequences, such as fines, penalties, damages, litigation, threat
of expropriation of assets and enforced discontinuation of operations, including vitiation
of going concern assumption.
2. Whether the potential financial consequences require disclosure.
3. Whether the potential financial consequences are so serious as to call into question the
true and fair view given by the financial statements.
When the auditor believes there may be non-compliance, the auditor should document the
findings and discuss them with management. Documentation of findings would include copies
of records and documents and making minutes of conversations, if appropriate.
If management does not provide satisfactory information that it is in fact in compliance, the
auditor would consult with the entity’s lawyer about application of the laws and regulations to
the circumstances and the possible effects on the financial statements. When it is not considered
appropriate to consult with the entity’s lawyer or when the auditor is not satisfied with the
opinion, the auditor would consider consulting some other lawyer as to whether a violation of
a laws and regulations is involved, the possible legal consequences and what further action, if
any, the auditor would take.
When adequate information about the suspected non-compliance cannot be obtained, the auditor
should consider the effect of the lack of audit evidence on the auditor’s report.
The auditor should consider the implications of non-compliance in relation to other aspects of
the audit, particularly the reliability of management representations. In this regard, the auditor
reconsiders the risk assessment and the validity of management representations, in case of
non-compliance not detected by internal controls or not included in management representations.
The implications of particular instances of non-compliance discovered by the auditor will depend
on the relationship of the perpetration and concealment, if any, of the act to specific control
procedures and the level of management or employees involved.

104 LOVELY PROFESSIONAL UNIVERSITY