The
impact of laws and regulations on financial statements varies greatly. The
legal and regulatory framework is made up of the rules and regulations that an
entity is bound by. Some laws or regulations have a direct impact on financial
statements because they determine the reported amounts and disclosures in the
financial statements of a company. Other laws or regulations must be followed
by management or establish the conditions under which the corporation is
permitted to operate, but they have no direct impact on the financial
statements. Some businesses are involved in highly regulated industries (such
as banks and chemical companies). Others are solely bound by the numerous laws
and regulations that apply to the business's operational aspects (such as those
relating to occupational safety and health and equal employment opportunity).
Noncompliance with rules and regulations could result in penalties, litigation,
or other consequences for the company, all of which could have a major impact
on the financial statements.
Management responsibility
Management
is responsible for ensuring that the entity's operations are done in conformity
with rules and regulations, with oversight from those concerned with
governance. Laws and regulations can have a variety of effects on an entity's
financial statements. For example, they can alter the specific disclosures that
the entity must make in its financial statements, or they can dictate the
applicable financial reporting structure. They may also establish the entity's
legal rights and liabilities, some of which will be reflected in the financial
statements. In addition, violation of rules and regulations may result in
sanctions.
Objectives of Auditor
under ISA 250
According
to paragraph 11 of ISA 250, the auditor's objectives are:
§ to gather adequate relevant audit proof
of conformity with the provisions of those laws and regulations commonly recognized
to have a direct impact on the assessment of material amounts and disclosures
in financial statements.
§ to carry out certain audit procedures in
order to detect instances of non-compliance with other laws and regulations
that could have a major impact on the financial statements.
§ to respond appropriately to any
suspected or identified non-compliance with laws and regulations discovered
during the audit.
Practice:
When
an auditor detects noncompliance with rules and regulations, he or she must
tell those responsible for governance. However, the auditor must exercise
caution because if the auditor suspects individuals in charge of governance are
engaged, the auditor must notify the next highest level of authority, which
might include the audit committee. If a higher level of authority is not
available, the auditor will consider seeking legal advice. The auditor must
also assess if the noncompliance has a material impact on the financial
statements and, as a result, the influence on their report.
Reference: https://bit.ly/3rVILnG
