MODULE 1 LEGAL FRAMEWORK

OUTLINE

• An in-depth knowledge relevant legislation affecting the auditor.

• Responsibilities imposed on auditors of Stock Exchange listed companies and legal responsibilities to shareholders.

• An in-depth knowledge of audit standards and other technical pronouncements

An in-depth knowledge relevant legislation affecting

the auditor. • The auditors plan, and perform the audit with an

attitude of professional skepticism. They should recognize that the audit may reveal conditions or events that could lead to questioning whether, an entity is complying with law and regulations. For audit purposes, laws and regulations relevant to the audit, can be regarded as falling into two main categories:

• (a) Those which relate directly to the preparation of, or the inclusion or disclosure of specific items in, the financial statements of the entity, and;

• (b) Those which provide a legal framework within which the entity conducts its business and which are central to the entity’s ability to conduct its business and where non-compliance may reasonably be expected to result in the entity ceasing operations, or call into question its continuance as a going concern (Chitty, 2004).

• APB SAS 120 requires the auditors to .obtain sufficient appropriate audit evidence about compliance with those laws and regulations which relate directly to the preparation of, or the inclusion or disclosure of specific items in the financial statements..

• Those laws and regulations which relate directly to the preparation of, or the inclusion or disclosure of specific items in, the financial statements include:

• (a) Those which specify the form and content of financial statements, such as, Schedule to the Companies and Allied Matters Act, 2004; and

• (b) Those laws which require auditors expressly to report non-compliance, such as, the requirements of the Companies and Allied Matters Act, 2004 relating to the maintenance of proper accounting records or the disclosure of particulars of directors remuneration in a company’s financial statements.

• Financial reporting requirements for particular industries e.g. banks. Where statutory requirements exist which require the auditors to report, as part of the audit of the financial statements, whether the entity complies with certain provisions of laws or regulations, for example the Companies and Allied Matters Act, 1990, the auditors need to have a sufficient understanding of such laws and regulations in order to consider them when auditing the assertions relating to the determination of the amounts to be recorded and the disclosures to be made; and to test for compliance with such provisions.

• The auditors should perform procedures to help identify possible or actual instances of non-compliance with those laws and regulations which provide a legal framework within which the entity conducts its business and which are central to the entity’s ability to conduct its business and hence to its financial statements, by:

• (a) Obtaining a general understanding of the legal and regulatory framework which is applicable to the entity and the industry, and of the procedures followed to ensure compliance with that framework;

• (b) Inspecting correspondence with relevant licensing or regulatory authorities;

• (c) enquiring of the directors instances of non-compliance with law or regulations; and

• (d) obtaining written confirmation from the directors that they have disclosed to the auditors all those events of which they are aware which involve possible non-compliance, together with the actual contingent consequences which may arise therefrom.

• The practice of Auditing worldwide is governed by sets of rules and guidelines. These rules and guidelines are compiled into standards. There are sets of standards governing auditing practice in Nigeria. They are:

• (a) International Standards:

(i) IAS: International Accounting Standards

(ii) SIC: Standing Interpretations Committee.

• (b) Local Standards:

(i) SAS: Statement of Accounting Standards

(ii) AG: Auditing Guidelines

International Financial Reporting Standards

• Each standard discusses the Accounting treatment of a particular item or group of items. A summary of the international standards are as follows:

• IAS 1 - Presentation of Financial Statement. • IAS 2 - Inventories. • IAS 3 - (Superseded by IAS 27 and IAS 28). • IAS 4 - (Superseded by IAS 16, IAS 22 and IAS 38). • IAS 5 - (Superseded by IAS 1). • IAS 6 - (Superseded by IAS 15). • IAS 7 - Cash flow Statements. • IAS 8 - Net profit or loss for the Period, Fundamental

Errors and changes in Accounting Policies. • IAS 9 - (Superseded by IAS 38). • IAS 10 - Events after the Balance Sheet date.

• IAS 11 - Construction Contracts. • IAS 12 - Income Taxes. • IAS 13 - (Superseded by IAS 1). • IAS 14 - Segment Reporting. • IAS 15 - Information Reflecting the Effects of Changing Prices. • IAS 16 - Property, Plant and Equipment. • IAS 17 - Leases. • IAS 18 - Revenue. • IAS 19 - Employee Benefits. • IAS 20 - Accounting for Government Grants and Disclosure of Government Assistance. • IAS 21 - The Effects of Changes on Foreign Exchange in

Rates. • IAS 22 - Business Combinations. • IAS 23 - Borrowing Costs. • IAS 24 - Related Party Disclosures.

• IAS 25 - (Superseded by IAS 39 and IAS 40). • IAS 26 - Accounting and Reporting by

Retirement benefit Plans • IAS 27 - Consolidated Financial Statements and

Accounting for Investments in Subsidiaries.

• IAS 28 - Accounting for Investments in Associates. • IAS 29 - Financial Reporting in Hyperinflationary

Economics. • IAS 30 - Disclosures in the Financial Statements of

Bank and Similar Financial Institutions. • IAS 31 - Financial Reporting of Interests in Joint

Ventures

• IAS 32 - Financial Instruments: Disclosure and Presentation

• IAS 33 - Earnings Per Share. • IAS 34 - Interim Financial Reporting. • IAS 35 - Discontinuing Operations. • IAS 36 - Impairment of Assets. • IAS 37 - Provisions, Contingent Liabilities and

Contingent Assets. • IAS 38 - Intangible Assets. • IAS 39 - Financial Instruments: Recognition and

Measurement. • IAS 40 - Investment property. • IAS 41 - Agriculture (effective January 1, 2003).

Auditing Standards and Guidelines

(AG)

• AG 1 - Auditing Guideline on Engagement Letters

• AG 2 - Auditing Guideline: Prospectus and Reporting Accountant

RESPONSIBILITIES OF THE AUDITORS

• Prevention

APB SAS 120 on Consideration of law and regulations states that: “it is not the auditors’ function to prevent non-compliance with law or regulations. The fact that an audit is carried out may, however, act as a deterrent”.

• Detection

The auditors plan, perform and evaluate their audit work in order to have a reasonable expectation of detecting material misstatements in the financial statements of the entity audited. When doing so, they recognize that material misstatements may arise from non-compliance with law or regulations.

However, an audit cannot reasonably be expected to detect all possible noncompliance with law and regulations. In an audit, there is the unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with auditing standards.

• This risk is higher with regard to misstatements resulting from non-compliance with law or regulations due to such factors as the following:

• (a) There are many laws and regulations, relating principally to the operating aspects of the entity, that typically do not have a material effect on the financial statements and where the consequences of any non-compliance are not captured by the accounting and internal financial control systems;

• (b) The effectiveness of audit procedures is affected by the inherent limitations of the accounting and internal control systems and by the use of selective testing rather than the examination of all transactions;

• (c) Much of the evidence obtained by the auditors is persuasive rather than conclusive in nature; and

• (d) Non-compliance with law or regulations may involve conduct designed to conceal it, such as collusion, forgery, override or intentional misrepresentations being made to the auditors (Chitty, 2004).

An in-depth knowledge of audit standards and

other technical pronouncements

• International Standards on Auditing (ISA) are

professional standards for the performance of financial audit of financial information. These standards are issued by International Federation of Accountants (IFAC) through the International Auditing and Assurance Standards Board (IAASB). According to Olung M (CAO - L) ISA guides the auditor to add value to the assignment hence building confidence of investors.

• ISA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing

• ISA 210 Agreeing the Terms of Audit Engagements • ISA 220 Quality Control for an Audit of Financial

Statements • ISA 230 Audit Documentation • ISA 240 The Auditor's Responsibilities Relating to

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

an Audit of Financial Statements • ISA 260 Communication with Those Charged with

Governance • ISA 265 Communicating Deficiencies in Internal

Control to Those Charged with Governance and Management

• ISA 299 Responsibility of Joint Auditors

• ISA 300 Planning an Audit of Financial Statements

• ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment

• ISA 320 Materiality in planning and performing an audit

• ISA 330 The auditor's responses to assessed risks

Internal Control • ISA 402 Audit Considerations Relating to an

Entity Using a Service Organization • ISA 450 Evaluation of Misstatements Identified

during the Audit

Audit evidence • ISA 500 Audit Evidence • ISA 501 Audit Evidence – Additional Considerations

for Specific Items • ISA 505 External Confirmations • ISA 510 Initial Engagements - Opening Balances • ISA 520 Analytical Procedures • ISA 530 Audit Sampling and Other Means of Testing • ISA 540 Auditing Accounting Estimates, Including

Fair Value Accounting Estimates, and Related Disclosures

• ISA 550 Related Parties • ISA 560 Subsequent Events • ISA 570 Going Concern • ISA 580 Written Representations

Using work of other experts • ISA 600 Special Considerations - Audits of Group Financial

Statements (Including the Work of Component Auditors) • ISA 610 Using the Work of Internal Auditors • ISA 620 Using the Work of an Auditor's Expert Audit conclusions and Audit report • ISA 700 Forming an Opinion and Reporting on Financial

Statements • ISA 705 Modifications to the Opinion in the Independent

Auditor's Report • ISA 706 Emphasis of Matter Paragraphs and Other Matter

Paragraphs in the Independent Auditor's Report • ISA 710 Comparative Information - Corresponding Figures

and Comparative Financial Statements • ISA 720 The Auditor's Responsibilities Relating to Other

Information in Documents Containing Audited Financial Statements

Specialized Areas • ISA 800 Special Considerations-Audits of

Financial Statements Prepared in Accordance with Special Purpose Frameworks

• ISA 805 Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement

• ISA 810 Engagements to Report on Summary Financial Statements

• International Standard on Quality Control (ISQC) 1, Quality Controls for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements

Review Questions 1. Highlight the relevant legislation affecting

auditors.

2. Enumerate the responsibilities of the auditor to the shareholders.

3. Highlight the standards of auditing.

Reference

• Adebisi .J.F (2009), Auditing, Investigation and Assurance Services, Hamtul Press Nigeria Ltd, Jos Nigeria.

• ANAN Study Pack