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Unit 6: Laws and Regulations in Audit

6.4.1 Reporting Responsibility of the Auditor for Non-compliance with Notes
the Laws and Regulations by the Entity under Audit

In case where those charged with governance are not directly involved in the management of
the business auditor shall communicate with those charged with governance matters involving
non-compliance with laws and regulations that come to the auditor’s attention during the
course of the audit. If, Auditor finds that non-compliance is believed to be intentional and
material, the auditor shall communicate the matter to those charged with governance as soon as
practicable. If the auditor suspects that management or those charged with governance are
involved in non-compliance, the auditor shall communicate the matter to the next higher level
of authority at the entity, if it exists, such as an audit committee or supervisory board. Where no
higher authority exists, or if the auditor believes that the communication may not be acted upon
or is unsure as to the person to whom to report, the auditor shall consider the need to obtain
legal advice.

6.4.2 Non-compliance on Auditor’s Report

1. When Auditor has Sufficient and Appropriate Audit evidence that non-compliance exist:
If the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the auditor
shall, in accordance SA-700 express a qualified or adverse opinion on the financial
statements.
2. When auditor has limitations on scope of Audit: If the auditor is prohibited by management
or those charged with governance from obtaining sufficient appropriate audit evidence
regarding non-compliance the auditor shall express a qualified opinion or disclaim an
opinion on the financial statements on the basis of a limitation on the scope of the audit in
accordance with SA-700.

Further, if the auditor has identified or suspects non-compliance with laws and regulations, the
auditor shall determine whether the auditor has a responsibility to report the identified or
suspected non-compliance to parties outside the entity.

6.5 Communication/Reporting of Non-compliance

6.5.1 To Management

The auditor should, as soon as possible, either communicate with the audit committee, the
board of directors and senior management, or obtain evidence that they are appropriately
informed, regarding non-compliance that comes to the auditors’ attention. However, the auditor
need not do so for matters that are clearly inconsequential or trivial and may reach agreement
in advance on the nature of such matters to be communicated.
1. If in the auditor’s judgment the non-compliance is believed to be intentional and/or
material, the auditor should communicate the finding without delay.
2. If the auditor suspects that members of senior management, including members of the
Board of Directors, are involved in non-compliance, the auditor should communicate the
matter to the next higher level of authority at the entity, such as an audit committee or
Board of Directors.

3. Where no higher authority exists, or if the auditor believes that the communication may
not be acted upon or is unsure as to the person to whom to report, the auditor may
consider seeking legal advice.

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