Auditors' Responsibilities Regarding Laws and Regulations

Responsibilities of management

Management are responsible for ensuring the entity they are responsible for complies with relevant laws and regulations, including:

• Company law, e.g. the UK Companies Act 2006;
• Corporate Governance law, e.g. the US Sarbanes Oxley Act 2002;
• Health and safety law;
• Employment law;
• Stock exchange rules; and
• Financial reporting regulations.

This requires the monitoring of legal requirements, the development of systems of internal control to ensure compliance and an effective system of assessing the effectiveness of those control systems.

Responsibilities of the auditor

The auditor is responsible for obtaining reasonable assurance that the financial statements taken as a whole, are free from material misstatement, whether caused by fraud or error (ISA 200).

Non-compliance with laws and regulations can impact the financial statements because companies in breach of the law may need to make provisions for future legal costs and fines. In the worst case scenario this could affect the ability of the company to continue as a going concern.

In addition the auditor may need to report identified non-compliance with laws and regulations either to management or to a regulatory body, if the issue requires such action. An example of the latter would be when the client is in breach of money laundering regulations.

Therefore, in planning an audit of financial statements the auditor must take into account the applicable legal and regulatory framework.

More specifically the auditor must obtain sufficient, appropriate evidence regarding compliance with those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements.

The auditor must also perform specified audit procedures to help identify instances of non-compliance with those laws and regulations that may have a material impact on the financial statements. If non-compliance is identified (or suspected) the auditor must then respond appropriately.

Audit procedures

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements requires an auditor to perform the following procedures:

• obtaining a general understanding of the client's legal and regulatory environment;
• inspecting correspondence with relevant licensing and regulatory authorities;
• enquiring of management and those charged with governance as to whether the entity is compliant with laws and regulations;
• remaining alert to possible instances of non-compliance; and
• obtaining written representations that the directors have disclosed all instances of known and possible non-compliance to the auditor.

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