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There are various laws and regulations that govern the entity being audited and entity is expected to
follow those laws and regulations. Some entities operate in heavily regulated industries like banks and
chemical companies. Non-compliance of such laws and regulations results in financial consequences to
the entities like fines, penalties. So the auditor is required to perform audit procedures to evaluate and
report the result of non-compliance.
Responsibility of management:
This is managements responsibility to operate the entity according to laws and regulations and prevent
and detect the non-compliance. Management should do followings:
Training of employees.
There are many regulations and laws and may not materially affect the financial statements.
Inherent limitation of ac
Audit procedures:
Obtain understanding of laws and regulations affecting the entity being audited while planning the audit.
The understanding may be obtained by:
Knowledge of industry.
Written representation from the management that all known non-compliance with laws and
regulations have been considered in preparation of accounts and have been disclosed to the
auditor.
Auditor should evaluate the possible effect on financial statements like fines, penalties, including
discontinuation of operations and litigation.
Whether financial consequences are too serious as to call into question the true and fair view
given by financial statements.
Reporting of non-compliance:
To management.