ICPAK AUDIT MANUAL 9. AUDITORS RESPONSIBILITY TO CONSIDER LAWS AND REGULATIONS (INCORPORATING ISA 250) 9.1. Introduction ISA 250 requires that the auditor should recognise that non-compliance by the entity with laws and regulations may materially affect the financial statements. The term "non-compliance" refers to acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws and regulations, and do not include personal misconduct by the entity's management or its employees. It is the management's responsibility to ensure that the entity's operations are conducted in accordance with laws and regulations, and the responsibility for the prevention and detection of non-compliance rests with the management. The auditor is not responsible for preventing non- compliance nor can the auditor be expected to detect all non-compliance with laws and regulations. However, the engagement team should perform the audit with an attitude of professional scepticism recognising that the audit may reveal conditions or events that would lead to questioning whether the entity is complying with laws and regulations. Detection of non-compliance, regardless of the materiality, requires consideration of the implications for the integrity of management or employees and the possible effect on other aspects of the audit. Laws and regulations vary considerably in their relation to the financial statements. The level of relationship depends on: > Whether the laws or regulation determine the form or contents of the financial statements or the disclosures to be made in the financial statements e.g. the Kenyan Companies Act or the Retirement Benefits Act. > Whether the laws or regulations are to be complied with by the management or set the provisions under which the entity is allowed to conduct its business e.g. the Kenyan Companies Act or the Banking Act or the Insurance Act. > Whether the laws and regulations govern the general operating aspects of the entity e.g. laws governing human resource, health and safety and environmental matters. Generally the further removed the non-compliance is from the events and transactions ordinarily reflected in the financial statements, the less likely the auditor will become aware of it or recognise its possible non-compliance. 9.2. Considering Compliance with Laws and Regulations at the Planning Stage The engagement team should obtain a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with the framework. In obtaining this understanding, the engagement team should particularly recognise that some laws and regulations may give rise to business risks that have a fundamental effect on the operations of the entity such as causing the entity to cease operations or call into question the entity's continuation as a going concern. At the planning stage one should: > Use the existing understanding of the entity's industry, regulatory and other external factors. 9. Auditors Responsibility to Consider Laws and Regulations Version 1 - 9th October 2006 1 of 5
ICPAK AUDIT MANUAL > Hold discussion with the management to obtain an understanding of the: . Laws and regulations governing the entity