Page 175 - Internal Auditing Standards

Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts

Non-compliance by the entity with laws and regulations could result in a material misstatement of the
fi nancial statements.

The responsibility for the prevention and detection of non-compliance with laws and regulations rests with
management and those charged with governance. Management actions to address these risks could include:

• Maintaining a register of significant laws, and a record of any complaints received;
• Monitoring legal requirements and designing procedures/internal controls to ensure compliance with
these requirements;
• Engaging legal advisors to assist in monitoring legal requirements; and

• Developing, publicizing, implementing, and following a code of conduct.

When the auditor detects instances of non-compliance, the impact on the financial statements and other
aspects of the audit (such as the integrity of management/employees) will need to be considered.

Risk Assessment

Paragraph # Relevant Extracts from ISAs

250.12 As part of obtaining an understanding of the entity and its environment in accordance with
ISA 315, the auditor shall 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. (Ref: Para. A7)
250.14 The auditor shall 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 fi nancial

statements: (Ref: Para. A9-A10)
(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.

Risk assessment procedures involve obtaining a general understanding of the legal and regulatory framework
and how the entity complies with that framework. This general understanding could include the matters set
out below.

Exhibit 15.2-2

Address Description

Identifying Laws What laws and regulations address:
and Regulations
Relevant to • The form and content of fi nancial statements?

the Financial • Industry-specifi c financial reporting issues?
Statements • Accounting for transactions under government contracts?
• The accrual or recognition of expenses for income tax or pension costs?

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