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Unit 6: Laws and Regulations in Audit

6.12 Summary Notes

When planning and performing audit procedures and in evaluating and reporting the
results thereof, the auditor should recognize that non-compliance by the entity with the
laws and regulations may materially affect the financial statements.
The term “non-compliance” as used in the SAP refers to acts of omission or commission by
the entity being audited, either intentional or unintentional, which are contrary to the
prevailing laws or regulations.
Laws and regulations vary considerably in their relation to the financial statements. Some
laws or regulations determine the form or content of an entity’s financial statements or
the amounts to be recorded or disclosures to be made in financial statements. Other laws
or regulations are to be complied with by management or prescribe the provisions under
which entity is allowed to conduct its business.
It is management’s responsibility to ensure that the entity’s operations are conducted in
accordance with laws and regulations. The responsibility for the prevention and detection
of non-compliance rests with management.
If the auditor becomes aware of information concerning an instance of non-compliance or
suspected non-compliance with laws and regulations, the auditor shall obtain: (a) An
understanding of the nature of the act and the circumstances in which it has occurred; and
(b) Further information to evaluate the possible effect on the financial statements.

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.
Accounting assumptions underlie the preparation and presentation of financial statements
fundamental accounting assumptions are as follows: (1) Going Concern, (2) Consistency
and (3) Accrual.

6.13 Keywords

Accounting Standards are the statements of code of practice of the regulatory accounting bodies
that are to be observed in the preparation and presentation of financial statements.
Going concern as given in AS-I states that “the continuance of an entity is assumed for a foreseeable
future and that there is neither an intention nor necessity of liquidation or of curtailing materially
the scale of operations.”
The term “non-compliance” as used refers to acts of omission or commission by the entity being
audited, either intentional or unintentional, which are contrary to the prevailing laws or
regulations.

6.14 Review Questions

1. What is the term non-compliance with laws and regulation means?
2. What are Auditor’s Duty while considering laws and regulation in an audit of financial
statements?
3. What audit procedures are necessary to be applied by the auditor when non-compliance is
identified or suspected?
4. What are reporting responsibility of the auditor for non compliance with the laws and
regulations by the entity under audit?
5. What shall be effect of non-compliance on auditor’s report?

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