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

1 Matter of legal compliance

Auditor has to deal with applicable laws and regulations as well. For the purpose of considering compliance with laws and regulations assurance engagements can be divided into two classes as follows:

  • Other assurance engagements carried out specifically to provide opinion on compliance with specific laws and regulation
  • Rest of the assurance engagements e.g. audit, review etc

This standard deals only with the later and not the former type of engagements.

Effect of laws and regulation on the entity can be classified in two ways as follows:

  • The rules and regulations that affect the measurement, presentation or disclosure of items or elements of the financial statements and thus affecting the financial reports directly
  • The rules and regulations regarding the business activities of the entity and not the reporting responsibilities therefore affecting financial statements indirectly

The level of regulation on the entity under consideration depends on the type of industry it falls and related legal practices. Some industries are under strict legal framework whereas the others are not. However, strict or not if the laws and relevant legislations are not followed then entity may fall to financial and non-financial consequences like fines, restriction to carry activities or altogether cancellation of its operations.

2 Responsibility of compliance

2.1 Management’s responsibility

It is the responsible of management working under the supervision of those charged with governance that business activities are conducted in accordance with applicable laws and management ensures that all the requirements have been followed relevant to preparation of financial statements.

2.2 Auditor’s responsibility

Auditor is responsible to the extent of identifying material misstatements caused by not complying with legal requirements. Auditor’s responsibility does not include prevention against non-compliance and is not expected to detect violations of law.

Auditor is responsible to gather sufficient appropriate audit evidence to ensure financial statements are free from material misstatements however; auditor’s ability to detect such misstatements is affected due to inherent limitations of audit engagement. However inability to detect material misstatement due to non-compliance can be caused by the following factors and adds up to inherent limitations:

  • Laws and requirements so violated do not relate to preparation of financial statements
  • While disobeying the provisions of laws methods like concealment and intentional misstatement makes it difficult to trace such non-compliance
  • Verdict of court of law is awaited to conclude whether violation occurred.