Laws and Regulations
An important part of an external audit is the consideration by the auditor as to whether the client has
complied with laws and regulations.
Key points
Management’s responsibility: Management have a responsibility to ensure that the operations of
The client are conducted in accordance with the provisions of laws and regulations. This includes
compliance with laws and regulations that determine amounts and disclosures in financial
statements, including tax liabilities and charges.
Auditor’s responsibility: Auditors are not responsible for preventing non-compliance with laws and
regulations, and cannot be expected to detect non-compliance with all laws and regulations.
They have a responsibility to obtain reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or error.
Auditor’s responsibility differs in relation to the two different categories of laws and regulations
identified below:
1. Laws and regulations which have a DIRECT effect on the determination of material amounts and
disclosures in financial statements. Here the auditor is responsible for obtaining sufficient
appropriate audit evidence regarding compliance.
2. Laws and regulations which DO NOT HAVE A DIRECT EFFECT on the determination of material
amounts and disclosures in financial statements, but may impact the entity’s ability to continue to
trade. Here the auditor’s responsibility is limited to specified audit procedures to help identify
non-compliance with those laws and regulations that may have a material effect on the financial
statements. This includes inquiring with management whether the entity is in compliance with
such laws and regulations, and inspecting correspondence with relevant licensing or regulatory
authorities.
The auditor also has a responsibility to remain alert, by maintaining professional scepticism, to the
possibility that other audit procedures may bring instances of identified or suspected non-compliance
with laws and regulations.
DIRECT AND INDIRECT LAWS AND REGULATIONS- IMPORTANT EXAPLANATION TO GO THROUGH
There are many laws and regulations that a reporting entity may have to comply with in order to
continue in business. For example, many entities (particularly in the UK) will have to comply with strict
health and safety legislation; a food manufacturer may have strict food hygiene legislation to comply
with, and an accountancy firm will have a code of ethics to follow from its professional body.
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An important part of an external audit is the consideration by the auditor as to whether the client has
complied with laws and regulations.
Key points
Management’s responsibility: Management have a responsibility to ensure that the operations of
The client are conducted in accordance with the provisions of laws and regulations. This includes
compliance with laws and regulations that determine amounts and disclosures in financial
statements, including tax liabilities and charges.
Auditor’s responsibility: Auditors are not responsible for preventing non-compliance with laws and
regulations, and cannot be expected to detect non-compliance with all laws and regulations.
They have a responsibility to obtain reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or error.
Auditor’s responsibility differs in relation to the two different categories of laws and regulations
identified below:
1. Laws and regulations which have a DIRECT effect on the determination of material amounts and
disclosures in financial statements. Here the auditor is responsible for obtaining sufficient
appropriate audit evidence regarding compliance.
2. Laws and regulations which DO NOT HAVE A DIRECT EFFECT on the determination of material
amounts and disclosures in financial statements, but may impact the entity’s ability to continue to
trade. Here the auditor’s responsibility is limited to specified audit procedures to help identify
non-compliance with those laws and regulations that may have a material effect on the financial
statements. This includes inquiring with management whether the entity is in compliance with
such laws and regulations, and inspecting correspondence with relevant licensing or regulatory
authorities.
The auditor also has a responsibility to remain alert, by maintaining professional scepticism, to the
possibility that other audit procedures may bring instances of identified or suspected non-compliance
with laws and regulations.
DIRECT AND INDIRECT LAWS AND REGULATIONS- IMPORTANT EXAPLANATION TO GO THROUGH
There are many laws and regulations that a reporting entity may have to comply with in order to
continue in business. For example, many entities (particularly in the UK) will have to comply with strict
health and safety legislation; a food manufacturer may have strict food hygiene legislation to comply
with, and an accountancy firm will have a code of ethics to follow from its professional body.
Page | 175
