ISA 250 distinguishes the auditor’s responsibilities in relation to compliance with two different categories of laws and regulations as follows;
- The provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements such as tax and pension laws and regulations; and
- Other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements, but compliance with which may be fundamental to the operating aspects of the business, to an entity’s ability to continue its business, or to avoid material penalties (for example, compliance with the terms of an operating license, compliance with regulatory solvency requirements, or compliance with environmental regulations); non-compliance with such laws and regulations may therefore have a material effect on the financial statements
ISA 250 Scope
ISA 250 deals with the auditor’s responsibility to consider laws and regulations in an audit of financial statements.
ISA 250 does not apply to other assurance engagements in which the auditor is specifically engaged to test and report separately on compliance with specific laws or regulations.
ISA 250 effective date on and after 15 December 2009.
ISA 250 Objective
The objective of auditor are;
- To obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements;
- To perform specified audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements; and
- To respond appropriately to non-compliance or suspected non-compliance with laws and regulations identified during the audit.
ISA 250 Requirements
- Auditor shall obtain understanding of legal and regulatory framework applicable to the entity and how entity is complying with it.
- Audit shall obtain sufficient and appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements.
- Auditor shall perform following procedure to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements;
- Inquiring of management and, where appropriate, those charged with governance, as to whether the entity is in compliance with such laws and regulations; and
- Inspecting correspondence, if any, with the relevant licensing or regulatory authorities.
- Auditor shall remain alert for instances of non-compliance
- Obtain written representation on all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements have been disclosed to the auditor.
Audit Procedures When Non-Compliance Is Identified or Suspected
- If the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance with laws and regulations, the auditor shall obtain;
- An understanding of the nature of the act and the circumstances in which it has occurred; and
- Further information to evaluate the possible effect on the financial statements.
- Seek legal advice if sufficient information not made available on material non-compliance, which auditor suspects.
- If information cannot be obtained consider impact on opinion.
- Consider the impact of non-compliance on auditor’s risk assessment and the reliability of written representations, and take appropriate action.
Reporting of Identified or Suspected Non-Compliance
- Communicate to those charges d with governance, unless they themselves are involved.
- If management and those charged with governance are involved consider reporting to next level of authority like audit committee.
- Where no higher authority exists, or if the auditor believes that the communication may not be acted upon or is unsure as to the person to whom to report, the auditor shall consider the need to obtain legal advice
Reporting Non-Compliance in the Auditor’s Report on the Financial Statements
- If the auditor concludes that the non-compliance has a material effect on the financial statements, and has not been adequately reflected in the financial statements, the auditor shall, express a qualified opinion or an adverse opinion on the financial statements.
- If the auditor is precluded by management or those charged with governance from obtaining sufficient appropriate audit evidence to evaluate whether non-compliance that may be material to the financial statements has, or is likely to have, occurred, the auditor shall express a qualified opinion or disclaim an opinion on the financial statements on the basis of a limitation on the scope.
- If the auditor is unable to determine whether non-compliance has occurred because of limitations imposed by the circumstances rather than by management or those charged with governance, the auditor shall evaluate the effect on the auditor’s opinion in accordance with ISA 705.
Reporting Non-Compliance to Regulatory and Enforcement Authorities
- Auditor shall consider its responsibility to report.
Documentation
- The auditor shall include in the audit documentation identified or suspected non-compliance with laws and regulations and the results of discussion with management and, where applicable, those charged with governance and other parties outside the entity