ISA 250 - Consideration of Laws and Regulations in an Audit of Financial Statements

Question 1

ISA 250: Consideration of Laws and Regulations in an Audit of Financial Statements:

Answer 1

Check the Compliance to the Laws and Regulations applicable:
> It is the Primary responsibility of the management to check and prevent from non-compliance of Laws and Regulations.

> It is the responsibility of the Auditor to ensure / check that management have complied with applicable Laws and Regulations, eg Labour Laws, Tax Laws, Licencing Laws, etc.
Auditor to obtain Sufficient Appropriate Evidence (SAE) of those Laws and Regulations that have impact on Financial Statements.

Laws that have Direct Impact on Financial Statements:
> The Income tax Act, 1961
> Foreign Exchange Management Act, 1999,
> The Payment of Bonus Act, 1965,
> Payment of Gratuity Act, 1972.

Laws that do not have Direct impact on Financial Statements;
> Non-compliance of such Law may impact existence of an organization.
- Environment protection Act,
- Labor Law - Child Labour Prohibition & Regulation Act, 1986.

Therefore it is important for the Auditor to Obtain Sufficient Appropriate Audit Evidence with reference to compliance of such Laws and Regulations.

Question 2

ISA 250: Risk Assessment Procedure

Answer 2

> Discuss with Management and try to understand the entity and its environment.
Check the applicable Laws and Regulations.
Question the Management about Compliance and Procedure followed with regards to applicable Laws and Regulations.
Once that is done, Obtain Sufficient Appropriate Audit Evidence (SAAE) with reference to Compliance of such Laws and Regulations having Direct Impact on Financial Statements.
Check the indicator of Non-compliance of Laws and Regulations which Do Not Directly Impact the Financial Statements.
Auditor should be alert and maintain Professional Scepticism throughout the Audit.
Auditor should Obtain Management Representation Letter with regards:
- Compliance of Laws and Regulations,
- Disclosure of any Non-compliance.

Question 3

ISA 250: Apply the Audit Procedure in case of Identification/ suspicion of Non-compliance of Laws and Regulations

Answer 3

Identification of Non-compliance:
> Understand the nature of Non-compliance.
> Reasons behind it,
> It’s Impact on Financial Statements.

Suspicion of Non-compliance:
> Discuss with Management/ TCWG.
> Take expert advice, where Management / TCWG fail to cooperate.

Report the Matters to:
> TCWG.
> The senior Authority in case of involvement of TCWG.
> Take expert advice (in absence of Senior Authority)

When it comes to giving the Opinion:
> Is the Non-compliance material and pervasive?
> If Material and Pervasive, = Yes, then Give an Adverse Report.
> If Material but not Pervasive, Give a Qualified Opinion.

If Management does not provide Sufficient information about Non-compliance:
Auditor to evaluate if it’s material and pervasive? = If Yes, give a Disclaimer or a Qualified Opinion.

Report to the Regulatory bodies / enforcement bodies about any Non-compliance.
> Tax authorities,
> Banking Regulators, etc.

Question 4

ISA 250: Documentation:

Answer 4

> All the Communication/ Discussion with Management/ TCWG/ Superior bodies in relation to Non-compliance/ suspected Non-compliance should be Documented.

Due to Inherent Limitation, sometimes the Non-compliance is not detected

It is the Auditor’s responsibility to report about the Non-compliance and not preventing Non-compliance.