Consideration of laws and regulations in an audit of financial statements

SAS No. 72 Consideration of Laws and Regulations in an Audit of Financial Statements

Status

Issued by Auditing Standards Committee in Taiwan on 13 August, 2019

Summary

This statement deals with the auditor’s responsibility to consider laws and regulations in an audit of financial statements. This statement distinguishes the auditor’s responsibilities in relation to compliance with two different categories of laws and regulations as follows:

(a)  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.

(b)  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; non-compliance with such laws and regulations may therefore have a material effect on the financial statements.

The auditor shall:

 1.   obtain a general understanding of (a)the legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates; and (b) how the entity is complying with that framework.

 2.   obtain sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally.

 3.   perform the following audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on the financial statements:(a) inquiring of management and, where appropriate, those charged with governance, as to whether the entity is in compliance with such laws and regulations; and (b) inspecting correspondence, if any, with the relevant licensing or regulatory authorities.

In addition, the auditor shall：

 1.    remain alert to the possibility that other audit procedures applied may bring instances of non-compliance or suspected non-compliance with laws and regulations to the auditor’s attention.

 2.   request management and, where appropriate, those charged with governance, to provide written representations that 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.

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. If the auditor suspects there may be non-compliance, the auditor shall discuss the matter, unless prohibited by law or regulation, with the appropriate level of management and, where appropriate, those charged with governance. If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion. Furthermore, the auditor shall evaluate the implications of identified or suspected non-compliance in relation to other aspects of the audit and take appropriate action.

Unless all of those charged with governance are involved in management of the entity, and therefore are aware of matters involving identified or suspected non-compliance already communicated by the auditor, the auditor shall communicate, unless prohibited by law or regulation, with those charged with governance matters involving non-compliance with laws and regulations that come to the auditor’s attention during the course of the audit, other than when the matters are clearly inconsequential. If, in the auditor’s judgment, the non-compliance is believed to be intentional and material, the auditor shall communicate the matter with to those charged with governance as soon as practicable. If the auditor suspects that management or those charged with governance are involved in non-compliance, the auditor shall communicate the matter to the next higher level of authority at the entity, if it exists.

If the auditor concludes that the identified or suspected 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 of the audit. 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.

The auditor shall include in the audit documentation identified or suspected non-compliance with laws and regulations and:

(a)  The audit procedures performed, the significant professional judgments made and the conclusions reached.

(b)  The discussions of significant matters related to the non-compliance with  management,  those charged with governance and others, including how management and, where applicable, those charged with governance have responded to the matter.

Effective date

This Statement is effective from 1 January, 2020.

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