ISAs – Summaries and Application Guide ISA 250

ISA 250
CONSIDERATION OF LAWS AND
REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS

REQUIREME APPLICATION
LO # LEARNING OBJECTIVE PARAGRAPHS
NTS

INTRODUCTION (SCOPE, OBJECTIVE, AND

LO 1 1 – 12 A1−A10
DEFINITION)
THE AUDITOR’S CONSIDERATION OF COMPLIANCE
LO 2 13 – 18 A11−A16
WITH LAWS AND REGULATIONS
AUDIT PROCEDURES WHEN NON-COMPLIANCE IS
LO 3 19 – 22 A17−A25
IDENTIFIED OR SUSPECTED
COMMUNICATING AND REPORTING IDENTIFIED OR
LO 4 23 – 25 A26−A34
SUSPECTED NON-COMPLIANCE

LO 5 DOCUMENTATION 26 – 29 A35−A36

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ISAs – Summaries and Application Guide ISA 250

LO 1: INTRODUCTION (SCOPE, OBJECTIVE, AND DEFINITION):

An audit client may subject to some laws and regulations. Some client operates in heavily regulated
industry (e.g. banks, insurance), and some may operate in less regulated industry.

There are two categories of laws and regulations i.e.

1. Those laws which directly affect financial statements (e.g. tax laws, pension laws, money
laundering).
2. Those laws which indirectly affect financial statements (e.g. licensing requirements,
environmental regulations).

Non-compliance with these laws may result in fines, litigations and other regulatory actions.

LO 2: THE AUDITOR’S CONSIDERATION OF COMPLIANCE WITH LAWS AND

REGULATIONS:
As part of understanding of entity (as per ISA 315), auditor shall obtain understanding of:
 Laws applicable on entity.
 How the entity is complying with laws.

If laws directly affect financial statements, auditor shall obtain sufficient appropriate audit evidence
regarding compliance with laws.

If laws do not directly affect financial statements, auditor shall:

 Inquire management whether entity is complying laws and regulations.
 Inspect correspondence with relevant licensing/regulatory authorities.

Auditor shall obtain written representation from management that it has considered all known
non-compliances in preparation of financial statements and has disclosed them to auditor.

LO 3: AUDIT PROCEDURES WHEN NON-COMPLIANCE IS IDENTIFIED OR

SUSPECTED:
If non-compliance with laws or suspected non-compliance with laws is identified, the auditor shall
obtain:
 Understanding of nature of act, and
 Further information to evaluate the possible effect on financial statements.

Auditor shall also discuss the matter with TCWG (unless prohibited by law or regulation). If TCWG
do not provide sufficient information that entity is complying with legal requirements, auditor
shall:
 Evaluate effect on auditor’s opinion.
 Evaluate effect on other aspects of audit e.g. risk assessment, reliability of representations,
and
 Obtain legal advice.

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ISAs – Summaries and Application Guide ISA 250

LO 4: COMMUNICATING AND REPORTING IDENTIFIED OR SUSPECTED NON-

COMPLIANCE:
Communicating identified or suspected non-compliance with TCWG:
Auditor shall communicate matters involving non-compliance with TCWG, unless matters are
clearly inconsequential.

If non-compliance appears to be intentional and material, auditor shall communicate with TCWG as
soon as possible.

If management or TCWG is involved, auditor shall communicate the non-compliance with next
higher level of authority (e.g. audit committee or supervisory board). If no higher authority exists,
auditor shall obtain legal advice.

Potential Implications of identified or suspected non-compliance for the auditor’s report:

If effect of non-compliance with laws and regulation is not reflected in financial statements, auditor
shall express qualified opinion (if effect is material) or adverse opinion (if effect is pervasive) on
financial statements.

If auditor is unable to determine whether non-compliance has occurred, auditor shall evaluate
effect on auditor’s opinion.

Reporting identified or suspected non-compliance to appropriate authority outside the

entity:
Auditor shall determine whether reporting non-compliance to appropriate authority outside the
entity may be required or appropriate (e.g. when auditor has right to do so). In such situation, this
communication would not be considered a breach of duty of confidentiality.

LO 5: DOCUMENTATION:
Auditor shall document following with respect to non-compliance with laws and regulations:
 Identified or suspected non-compliance.
 Audit procedures performed, judgments made and conclusion reached.
 Discussion with management and TCWG, and how management and TCWG have responded
to the matter.

APX 1: EXAM TIP:

In case of NOCLAR, discuss:
1. Impact on financial statements (due to legal actions and penalties)
2. Impact on audit and audit report (including Withdrawal due to integrity)
3. Communication to regulators