AUDITINGCONSIDERATION OF LAWS AND REGULATIONSIN AN AUDIT OF FINANCIAL STATEMENTS (BSA-250)Lecture # 7Whendesigningandperformingaudit procedures andinevaluatingandreportingtheresultsthereof, the auditor should recognize that noncompliance by the entity with laws and regulationsmay materially affect the financial statements.The term noncompliance 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.Re!"#$%$&$t' "( M)#)*e+e#t ("r t,e C"+!&$)#ce -$t, L)- )#. Re*u&)t$"#It is managements responsibility to ensure that the entitys operations are conducted in accordancewith laws and regulations. The responsibility for the prevention and detection of noncompliancerests with management.The following policies and procedures, among others, may assist management in discharging itsresponsibilities for the prevention and detection of noncompliance !onitoring legal re"uirements and ensuring that operating procedures are designed to meetthese re"uirements. Instituting and operating appropriate internal control. #eveloping, publicizing and following a code of conduct. $nsuring employees are properly trained and understand the code of conduct. !onitoringcompliancewiththecodeof conduct andactingappropriatelytodisciplineemployees who fail to comply with it. $ngaging legal advisors to assist in monitoring legal re"uirements. !aintaining a register of significant laws with which the entity has to comply within itsparticular industry and a record of complaints.Inlargerentities, thesepoliciesandproceduresmaybesupplementedbyassigningappropriateresponsibilities to the following %n internal audit function. %n audit committee.T,e Au.$t"r/ C"#$.er)t$"# "( C"+!&$)#ce -$t, L)- )#. Re*u&)t$"#The auditor is not, and cannot be held responsible for preventing noncompliance. In accordancewith I&% '((, )b*ective and +eneral ,rinciples +overning an %udit of -inancial &tatements theauditor should plan and perform the audit with an attitude of professional s.epticism recognizingthat the audit may reveal conditions or events that would lead to "uestioning whether an entity iscomplying with laws and regulations.Inorder toplantheaudit, theauditor shouldobtainageneral understandingof thelegal andregulatory framewor. applicable to the entity and the industry and how the entity is complying withthat framewor.0Md. Mokhlesur Rahman Mozid, ACMAAu.$t 1r"ce.ure -,e# N"#c"+!&$)#ce $ .$c"2ere.When the auditor becomes aware of information concerning a possible instance of noncompliance,the auditor should obtain an understanding of the nature of the act and the circumstances in which ithas occurred, andsufficient other informationtoevaluatethepossibleeffect onthefinancialstatements0When the auditor believes there may be noncompliance, the auditor should document the findingsand discuss them with management. If management does not provide satisfactory information thatit is in fact incompliance, the auditor would consult with the entitys lawyer about the application ofthe laws and regulations to the circumstances and the possible effects on the financial statements.Whenade"uateinformationaboutthesuspectednoncompliancecannotbeobtained, theauditorshouldconsider theeffect ofthelac.ofsufficient appropriateaudit evidenceontheauditorsreport.Re!"rt$#* "( N"#c"+!&$)#ceThe auditor should, as soon as practicable, either communicate with those charged withgovernance, or obtain audit evidence that they are appropriately informed, regardingnoncompliancethat comestotheauditorsattention. /owever, theauditor neednot dosoformatters that are clearly inconse"uential or trivial and may reach agreement in advance on the natureof such matters to be communicated.If intheauditors*udgment thenoncomplianceisbelievedtobeintentional andmaterial, theauditor should communicate the finding without delay.If the auditor suspects that members of senior management, including members of the board ofdirectors, are involved in noncompliance, the auditor should report the matter to the ne0t higherlevel of authority at the entity, if it e0ists, such as an audit committee or a supervisory board.Where no higher authority e0ists, or if the auditor believes that the report may not be acted upon oris unsure as to the person to whom to report, the auditor would consider see.ing legal advice.T" t,e Uer "( t,e Au.$t"r/ Re!"rt "# t,e F$#)#c$)& St)te+e#tIf the auditor concludes that the noncompliance has a material effect on the financial statements,andhas not beenproperlyreflectedinthefinancial statements, theauditor shoulde0press a"ualified or an adverse opinion.Iftheauditorisprecludedbytheentityfromobtainingsufficientappropriateauditevidencetoevaluate whether noncompliance that may be material to the financial statements, has, or is li.ely tohave, occurred, the auditor should e0press a "ualified opinion or a disclaimer of opinion on thefinancial statements on the basis of a limitation on the scope of the audit.If the auditor is unable to determine whether noncompliance has occurred because of limitationsimposed by the circumstances rather than by the entity, the auditor should consider the effect on theauditors report.The following e0amples Indications that 1oncompliance mayhave occurred of the type ofinformation that may come to the auditors attention that may indicate that noncompliance withlaws or regulations has occurred are listed belowMd. Mokhlesur Rahman Mozid, ACMA Investigation by government departments or payment of fines or penalties. ,aymentsforunspecifiedservicesorloanstoconsultants, relatedparties, employeesorgovernment employees. &ales commissions or agents fees that appear e0cessive in relation to those ordinarily paidby the entity or in its industry or to the services actually received. ,urchasing at prices significantly above or below mar.et price. 2nusual payments in cash, purchases in the form of cashiers chec.s payable to bearer ortransfers to numbered ban. accounts. 2nusual transactions with companies registered in ta0 havens. ,ayments for goods or services made other than to the country from which the goods orservices originated. ,ayments without proper e0change control documentation. $0istenceof aninformationsystemwhichfails, whether bydesignor byaccident, toprovide an ade"uate audit trail or sufficient evidence. 2nauthorized transactions or improperly recorded transactions. !edia comment.COMMUNICATION OF AUDIT MATTERS WIT3 T3OSEC3ARGED WIT3 GO4ERNANCE (BSA-250)The auditor should consider audit matters of governance interest that arise from the audit of thefinancial statements and communicate them with those charged with governance. )rdinarily suchmatters include the following Thegeneral approachandoverallscopeoftheaudit, includinganye0pectedlimitationsthereon, or any additional re"uirements. The selection of, or changes in, significant accounting policies and practices that have, orcould have, a material effect on the entitys financial statements. The potential effect on the financial statements of any material ris.s and e0posures, such aspending litigation, that are re"uired to be disclosed in the financial statements. %udit ad*ustments, whether or not recorded by the entity that have, or could have, a materialeffect on the entitys financial statements. !aterial uncertainties related to events and conditions that may cast significant doubt on theentitys ability to continue as a going concern. #isagreements with management about matters that, individually or in aggregate, could besignificant to the entitys financial statements or the auditors report. These communicationsinclude consideration of whether the matter has, or has not, been resolved and thesignificance of the matter. $0pected modifications to the auditors report. )ther matterswarrantingattentionbythosechargedwithgovernance, suchasmaterialwea.nesses in internal control, "uestions regarding management integrity, and fraudinvolving management. %ny other matters agreed upon in the terms of the audit engagement.Md. Mokhlesur Rahman Mozid, ACMA