Page 269 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

Notes 14.2.1 Effect of Laws and Regulations

The effect on financial statements of laws and regulations varies considerably. Those laws and
regulations to which an entity is subject constitute the legal and regulatory framework. The
provisions of some laws or regulations have a direct effect on the financial statements in that
they determine the reported amounts and disclosures in an entity’s financial statements. Other
laws or regulations are to be complied with by management or set the provisions under which
the entity is allowed to conduct its business but do not have a direct effect on an entity’s financial
Statements. Some entities operate in heavily regulated industries such as banks and chemical
companies. Others are subject only to the many laws and regulations that relate generally to the
operating aspects of the business.

Notes Non-compliance with laws and regulations may result in fines, litigation or other
consequences for the entity that may affect all the financial statements adversely.

14.2.2 Responsibility for Compliance with Laws and Regulations

It is the responsibility of management, with the oversight of those charged with governance, to
ensure that the entity’s operations are conducted in accordance with the provisions of laws and
regulations, including compliance with the provisions of laws and regulations that determine
the reported amounts and disclosures in an entity’s financial statements.
The requirements in this ISA are designed to assist the auditor in identifying material
misstatement of the financial statements due to non-compliance with laws and regulations.
However, the auditor is not responsible for preventing non-compliance and cannot be expected
to detect non-compliance with all laws and regulations.
The auditor is responsible for obtaining reasonable assurance that the financial statements,
taken as a whole, are free from material misstatement.

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

14.2.3 Duty of Statutory Auditor for Compliance with Accounting
Standards

Section 211(3A) of Companies Act, 1956 provides that every profit and loss account and balance
sheet of the company shall comply with the accounting standards.
The statutory auditors are required to make qualification in their report in case any item is
treated differently from the prescribed Accounting Standard. However, while qualifying, they
should consider the materiality of the relevant item. In addition to this Section 227(3) (d) of
Companies Act, 1956 requires an auditor to report whether, in his opinion, the profit and loss
account and balance sheet are complied with the accounting standards referred to in Section
211(3C) of Companies Act, 1956.

Did u know? There are 35 Indian Standards (Ind AS) and are applicable to all companies.

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