Final Chapter 1 Revised 2015
-
Upload
nearchos8217 -
Category
Documents
-
view
217 -
download
0
Transcript of Final Chapter 1 Revised 2015
-
7/25/2019 Final Chapter 1 Revised 2015
1/56
P7 ACCA 1
P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
2/56
2P7 ACCA
CHAPTER 1
INTERNATIONAL REGULATORYENVIRONMENTS FOR AUDIT AND
ASSURANCE SERVICES
International regulatory frameworks for audit andassurance servicesAudit committeesInternal control effectivenessMoney launderingaws and regulations
-
7/25/2019 Final Chapter 1 Revised 2015
3/56
3P7 ACCA
E!AM C"#TE!T
T$is c$a%ter is likely to &e im%ortant in t$e e'am(%articularly money laundering w$ic$ was covered in t$e%ilot %a%er from &ot$ a discussion and %ractical conte't)
A *uestion re*uiring a definition of money laundering andits im%act on a s%ecific engagement was included for +marks in t$e ,ecem&er -..7 e'am) /uestion + 0&asked for t$e &enefits of an audit to a small com%any for2 marks 3 t$is would $ave &een a revision of a related
to%ic covered on 45 Audit 6 Assurance) T$e tec$nical content of t$is %art of t$e sylla&us ismainly drawn from your earlier studies) /uestions in t$is%a%er are unlikely to ask for straig$t re%etition of t$isknowledge( &ut rat$er to re*uire e'%lanation ordiscussion of t$e reasons &e$ind t$e regulations)
-
7/25/2019 Final Chapter 1 Revised 2015
4/56
4P7 ACCA
T$e need for laws( regulations(
standards and ot$er guidance
Cor%orate scandals( suc$ as Enron and orldcom in t$e89A( and Parmalat in Italy $ave &roug$t t$e audit
%rofession under close scrutiny from investors(&usinesses( regulators and ot$ers)
:usinesses $ave &ecome more com%le' and glo&al( andfirms of accountants $ave e'%anded t$eir range of
services well &eyond traditional assurance and ta'advice) T$is $as led to a great deal of re;e'amination ofregulatory and standard;setting structures &ot$ nationallyand internationally in recent years)
-
7/25/2019 Final Chapter 1 Revised 2015
5/56
Enron
"ne of &iggest &ankru%tcy 3 -..1
"ne of &iggest energy grou%s wit$ revenues over < +..&ns and =.(... em%loyees around t$e world
1>>.;1>>> stock %rice was rising steadily to
-
7/25/2019 Final Chapter 1 Revised 2015
6/56
Enron
4inancial re%orting irregularities 1>>7;-...) A num&er ofs%ecial;%ur%ose entities 0owned &y t$e rou% wascreated) :ig loans on 9PBs) T$e structure of 9PBs was
so com%le' to avoid &e consolidated 0auditors did notfind out it)
In t$is way de&t levels of Enron were ke%t low 3 off&alance s$eet de&t
Earning overstated
6P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
7/56
orldcom
9tart as small tele%$one com%any 3 e'%ansion %rogramt$roug$ ac*uisitions of ot$er com%anies 3 enter intelecommunication sector 0internet
4iled for &ankru%tcy in uly -..-
Accounting irregularities 0misclassification of ca%itale'%enditure
CE" was c$arged wit$ fraud and making false statementin connection wit$ accounting irregularities t$at led toorldCom?s colla%se
7P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
8/56
Parmalat
4ounded in 1>D- in Parma Italy
4ocus on milk and diary %roducts
In decade to -..=( Parmalat $ad e'%eriencedremarka&le growt$ wit$ sales from 52+ millionsin 1>>- to 1(D &illions in -..-
8P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
9/56
Parmalat Calisto TanFi C$airman and CE"
1>>. 9on of Calisto TanFi &oug$t Parma 4C 3 su&stantialin@ection of resources allowed Parma to get very strongteam
,aug$ter of Calisto TanFi 3 created Parmatour) 9u&stantialresources were diverted from Parmalat to Parmatour
Calisto TanFi 3 %restige G &oug$t television station for t$eParmalat rou%
9%onsor of #iki auda 041 %ilot
9P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
10/56
Parmalat Com%licated organisational structure including 17. su&sidiaries
9u&stantial funds were moved &etween t$ese su&sidiaries someof w$ic$ registered in Cayman Islands
4or instance( :onlat ( su&sidiary registered in Cayman Islands(was su%%osed to $eld =)>+ &illions in :ank of America accountin t$e #ew ork) In ,ec -..=( revealed t$at :onlat %rovidedfalse documentation a&out t$e asset to its auditors( rantT$ornton)
Accused rant T$ornton t$at involved in setting u% of offs$orecom%anies in Cari&&ean t$at allowed TanFi to mani%ulate fundsand $ide grou%?s true financial %osition)
10P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
11/56
11P7 ACCA
International Regulatory framework
T$e international regulatory framework foraudit and assurance services
encom%asses Pronouncements &y I4AC w$ic$ is t$e
worldwide organisation for accounting%rofession
Internal controls ; im%lications for auditors
-
7/25/2019 Final Chapter 1 Revised 2015
12/56
12P7 ACCA
International standard setting International 9tandards on Auditing are %roduced &y t$e
International Auditing and Assurance 9tandards :oard0IAA9:( a tec$nical standing committee of t$eInternational 4ederation of Accountants 0I4AC)
T$e mission of I4AC as set out in its constitution JT$edevelo%ment and en$ancement of an accountancy%rofession wit$ $armonised standards a&le to %rovideservices of consistently $ig$ *uality in t$e %u&lic interestJ)
Muc$ of %ronouncements and %rinci%les are em&odied int$e law of many @urisdictions)
4or e'am%le in t$e 8K( auditor must &e a mem&er ofLrecognised su%ervisory &ody? and audits s$ould &e carriedout in accordance wit$ International 9tandards of Auditing0I9As
-
7/25/2019 Final Chapter 1 Revised 2015
13/56
13P7 ACCA
"verview of 8K standard setting
9tandards of Auditing in t$e 8K are issued&y t$e 8K Auditing Practices :oard( %art
of t$e 4inancial Re%orting Council( &asedon t$e international ones wit$ additional8K;s%ecific guidance w$ere desira&le)
T$e AP: $as not yet ado%ted t$e IAA9:JsIAP9s( I9REs( I9AEs or I9R9s)
-
7/25/2019 Final Chapter 1 Revised 2015
14/56
14P7 ACCA
Pu&lic oversig$t internationally
In 4e&ruary -..+ t$e Public Interest Oversigt !"#r$was launc$ed to e'ercise oversig$t for all of I4AC?sJ%u&lic interest activitiesJ including its standard;setting
&odies suc$ as t$e IAA9:) Its work involves Monitoring t$e standard;setting &oards "verseeing t$e nomination %rocess for
mem&ers$i% of t$ese &oards Co;o%eration wit$ national oversig$t aut$orities)
T$e o&@ective of t$e international PI": is to increase t$econfidence of investors and ot$ers t$at t$e %u&licinterest activities of I4AC are %ro%erly res%onsive to t$e%u&lic interest)
-
7/25/2019 Final Chapter 1 Revised 2015
15/56
15P7 ACCA
"t$er e'am%les of %u&lic oversig$t
In t$e 8K( t$e Professional "versig$t :oard0P": of t$e 4RC( is a regulatory &ody w$ose aimis to %rovide assurance t$at t$e %rofessionalaccountancy &odies in t$e 8K are %ro%erly setting
standards and enforcing disci%line for t$eirmem&ers in accordance wit$ 8K;s%ecificcom%anies legislation and ot$er statutoryre*uirements)
-
7/25/2019 Final Chapter 1 Revised 2015
16/56
16P7 ACCA
"t$er e'am%les of %u&lic oversig$t
In t$e 89A( t$e Pu&lic Com%any Accounting :oard 0PCA":is a %rivate sector &ody created &y t$e 9ar&anes;"'ley Act(-..-)
Its aim is to oversee t$e auditors of %u&lic com%anies) Itsstated %ur%ose is to L%rotect t$e interests of investors andfurt$er t$e %u&lic interest in t$e %re%aration of informative(fair and inde%endent audit re%orts?)
Its %owers include setting auditing( *uality control( et$ics(inde%endence and ot$er standards relating to t$e
%re%aration of audit re%orts &y issuers) It also $as t$eaut$ority to regulate t$e non;audit services t$at audit firmscan offer 3 t$is %ower was awarded to it as a result of t$eEnron and orldcom scandals)
-
7/25/2019 Final Chapter 1 Revised 2015
17/56
17P7 ACCA
Au$it c"%%itteesCom&ined Code %rovisions
T$e &oard would esta&lis$ an audit committee of at least t$reemem&ers) T$e main role and res%onsi&ilities s$ould &e set outin written terms of reference and s$ould include
0a To monitor t$e integrity of t$e financial statements of t$ecom%any( reviewing significant financial re%orting issues and@udgments contained in t$em
0& To review t$e com%anyJs internal financial controls and(unless e'%ressly addressed &y a se%arate &oard risk
committee com%osed of inde%endent directors or &y t$e &oarditself( t$e com%anyJs control and risk management systems
0c To monitor and review t$e effectiveness of t$e com%anyJsinternal audit function)
-
7/25/2019 Final Chapter 1 Revised 2015
18/56
18P7 ACCA
Au$it c"%%ittees0d To make recommendations to t$e &oard for it to %ut
to t$e s$are$olders for t$eir a%%roval in generalmeeting in relation to t$e a%%ointment of t$e e'ternalauditor and to a%%rove t$e remuneration and termsof engagement of t$e e'ternal auditors
0e To monitor and review t$e e'ternal auditorJsinde%endence( o&@ectivity and effectiveness( takinginto consideration relevant 8K %rofessional andregulatory re*uirements regarding audit and non;
audit services offered &y t$e auditors
T$e audit committee s$ould &e %rovided wit$su&&icient res"urces to undertake its duties)
-
7/25/2019 Final Chapter 1 Revised 2015
19/56
19P7 ACCA
Advantages and disadvantagesAdvantages Increased confidence in credi&ility of re%orting 4rees e'ecutive directors to manage
"ffers t$e e'ternal auditors a direct link wit$non;e'ecutive directors Creates culture o%%osed to fraud
,isadvantages 9electing suita&le inde%endent non;e'ecutive
directors can &e difficult Cost of audit committee
-
7/25/2019 Final Chapter 1 Revised 2015
20/56
20P7 ACCA
ink &etween non e'ecutive
directors and e'ternal auditors ,iscuss %rior t$e audit matters suc$ as 9co%e of audit Role of internal auditors Audit fees And after t$e audit Control environment and weaknesses identified Any differences of o%inion &etween t$e auditors and t$e
management and $ow t$ese $ave &een resolved 9ignificant ad@ustments made
-
7/25/2019 Final Chapter 1 Revised 2015
21/56
21P7 ACCA
Internal control effectiveness Internal control is a key %art of good cor%orategovernance) ,irectors are res%onsi&le formaintaining a system of control t$at will contri&uteto
9afeguarding t$e com%anyJs assets
Hel%ing to %revent and detect fraud
9afeguarding t$e s$are$oldersJ investment
ood internal control $el%s t$e &usiness to runefficiently) A control system reduces identified risksto t$e &usiness) It also $el%s to ensure relia&ility ofre%orting and com%liance wit$ laws)
-
7/25/2019 Final Chapter 1 Revised 2015
22/56
22P7 ACCA
,irectors res%onsi&ilities
It is t$e directors? res%onsi&ility to im%lement andmaintain an a%%ro%riate system of internal controls)
Auditors s$ould not take any e'ecutive role in t$is area)
Instead t$eir res%onsi&ility is to review t$e controls as%art of t$eir audit work and decide w$et$er any reliancecan &e %laced on t$em)
T$e Com&ined Code recommends t$at t$e &oard ofdirectors re'"rts on its review of internal controls as %art
of t$e annual re%ort) T$e statement s$ould &e &ased onan annual assessment of internal control w$ic$ s$ouldconfirm t$at t$e &oard $as considered #ll signi&ic#nt#s'ects of internal control)
-
7/25/2019 Final Chapter 1 Revised 2015
23/56
23P7 ACCA
Auditors res%onsi&ilities
T$e guidance states t$at t$e auditors s$ould concentrateon t$e review carried out &y t$e &oard) T$e o&@ective oft$e auditorsJ work is to assess w$et$er t$e com%anyJs
summary of t$e %rocess t$at t$e &oard $as ado%ted inreviewing t$e effectiveness of t$e system of internalcontrol is su%%orted &y t$e documentation %re%ared &yt$e directors and reflects t$at %rocess)
T$e auditors s$ould make a%%ro%riate en*uiries andreview t$e statement made &y t$e &oard in t$e accountsand t$e su%%orting documentation)
-
7/25/2019 Final Chapter 1 Revised 2015
24/56
24P7 ACCA
Auditors may re%ort
T$e auditors may re%ort &y e'ce%tion if T$e &oard?s summary of t$e %rocess of
review of internal controls is not su%%orted T$e &oard $as not made an a%%ro%riate
disclosure if it $as failed to conduct an
annual review( or t$at disclosure made isnot consistent wit$ t$e auditors?understanding
-
7/25/2019 Final Chapter 1 Revised 2015
25/56
25P7 ACCA
Auditors re%ort
T$e re%ort s$ould &e included in a se%arate %aragra%$&elow t$e o%inion %aragra%$) T$e :ulletin gives t$efollowing e'am%le
Oter %#tter e $ave reviewed t$e &oardJs descri%tion of its %rocess
for reviewing t$e effectiveness of internal control set outon %age ' of t$e annual re%ort) In our o%inion t$e &oardscomments concerning ))) do not a%%ro%riately reflect ourunderstanding of t$e %rocess undertaken &y t$e &oard&ecause)))
-
7/25/2019 Final Chapter 1 Revised 2015
26/56
26P7 ACCA
Money aundering
,efinition Money laundering is t$e 'r"cess &y w$ic$
criminals attem%t to c"nce#l te true"rigin and owners$i% of te 'r"cee$s "&teir cri%in#l #ctivit(( allowing t$em tomaintain control over t$e %roceeds and(ultimately( %roviding a cover for t$eirsources of income)
-
7/25/2019 Final Chapter 1 Revised 2015
27/56
27P7 ACCA
International recommendations An inter;governmental &ody( t$e 4inancial Action Task 4orce
on Money aundering 04AT4 was esta&lis$ed to setstandards and develo% %olicies to com&at money launderingand terrorist financing)
In 1>>.( 4AT4 issued recommendations for governments on$ow to com&at t$ese offences and t$ese recommendations$ave now &een endorsed &y more t$an 1=. countries)
Customer due diligence Re%orting sus%icious transactions International coo%eration Make money laundering criminal offence
-
7/25/2019 Final Chapter 1 Revised 2015
28/56
28P7 ACCA
Criminal offences
Possessing( dealing wit$ or concealing t$e%roceeds of any crime 0%roceeds from ta'evasion( &ri&ery
Attem%ting and assisting to commit moneylaundering
4ailure of an individual in t$e regulated sector tore%ort a sus%icion of money laundering
,oing or disclosing somet$ing t$at may%re@udice an investigation in suc$ activities0Ti%%ing;off
-
7/25/2019 Final Chapter 1 Revised 2015
29/56
29P7 ACCA
Penalties and risks
Im%risonment 8nlimited fine oss of aut$ority to conduct &usiness Adverse %u&licity G loss of re%utation
,E4E#CE9 a re%ort &eing made to a%%ro%riate aut$ority or t$e
MR" t$at it was t$e intention to make a re%ort &ut t$ere was areasona&le e'cuse for not $aving done so
Jreasona&le e'cuseJ is likely to encom%ass t$e fear of%$ysical violence
-
7/25/2019 Final Chapter 1 Revised 2015
30/56
30P7 ACCA
ACCA 8I,A#CE1) A%%oint an MLRO (Money Laundering Reporting Officer) and
im%lement internal re%orting %rocedures-) Esta&lis$ internal controls and %olicies a%%ro%riate to %revent
money laundering( and make relevant individuals aware oft$e %rocedures
=) Train individuals to ensure t$at t$ey are aware of t$e relevantlegislation( know $ow to recognise and deal wit$ %otentialmoney laundering, $ow to re%ort sus%icions to t$e MLRO(and $ow to identify clients
2) Berify t$e identity of new and e'isting clients and maintainevidence of identification 0ie customer due diligencemeasures
+) Esta&lis$ record kee%ing system for all transactionsD) Re%ort sus%icions of money laundering to relevant aut$ority
-
7/25/2019 Final Chapter 1 Revised 2015
31/56
ACCA 8I,A#CE
A%%oint an MLRO:
T$e MR" s$ould $ave a suita&le level of
seniority and e'%erience) Individuals s$ould make internal re%orts of
money laundering to MR")
T$e MR" must consider w$et$er to re%ort torelevant aut$ority and document t$e %rocess)
31P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
32/56
32P7 ACCA
ACCA 8I,A#CE
Audit firm should establish policies that cover:client acce%tance
gat$ering Jknow your clientJ 0KC information controls over client money and transactionst$roug$ t$e client account
advice and services to clients t$at could &e ofuse to a money launderer
internal re%orting linest$e role of t$e MR"
-
7/25/2019 Final Chapter 1 Revised 2015
33/56
33P7 ACCA
Client i$enti&ic#ti"n T$e re*uirement to verify t$e identities of all
clients is mandatory) Berification must &edocumented &efore any work is
undertaken) 9ufficient knowledge of a clientmust &e maintained to &e a&le to identifyt$at w$ic$ is unusual andGor sus%icious)
$o is t$e client( w$o controls( %ur%ose of &usinessrelations$i%( nature of client( client?s sources of funds
-
7/25/2019 Final Chapter 1 Revised 2015
34/56
34P7 ACCA
T('ic#l i$enti&ic#ti"n 'r"ce$ures
4or an individual ; o&taining official documents(wit$ a %$otogra%$( w$ic$ esta&lis$ t$e clientJsfull name and %ermanent address 0eg a drivinglicense or %ass%ort su%%orted &y a recent utility&ill)
4or an entity ; o&taining from t$e Registrar ofCom%anies a certificate of incor%oration( t$eregistered address and a list of s$are$oldersand directors
-
7/25/2019 Final Chapter 1 Revised 2015
35/56
35P7 ACCA
"ffences for firms
It is an offence not to com%ly wit$ t$e a&oveo&ligations( designed to assist mem&ers indetecting and %reventing t$eir organisations&eing used for money laundering %ur%oses)
All %artners wit$in a %ractice 0and directors in afirm are %otentially lia&le on a @oint and several&asis for &reac$es of t$e firmJs o&ligations) Allindividuals are lia&le in res%ect of &reac$es oft$eir individual o&ligations)
-
7/25/2019 Final Chapter 1 Revised 2015
36/56
36P7 ACCA
E'ercise 1)1
Re*uired
$y is t$ere a need for et$ical guidance
for accountants in res%ect of moneylaunderingN
-
7/25/2019 Final Chapter 1 Revised 2015
37/56
37P7 ACCA
Answer 1)1 In many countries t$e legal re*uirements are onerous
and t$e %enalties for non;com%liance are severe 0fore'am%le( in t$e 8K auditors risk long %rison sentences ift$ey commit an offence) ive guidance to act inaccordance wit$ law re*uirements)
Money laundering is widely defined and it is not alwayso&vious t$at an offence $as &een committed)
it$out t$e guidance in issue accountants may &e usedunintentionally to launder criminal funds)
In many countries t$e law creates a conflict &etween t$eet$ical duty of confidentiality to t$e client and t$e legalduty to re%ort money laundering offences) T$e guidance$el%s to clarify t$e mem&ersJ %rofessional duty to re%ortoffences)
-
7/25/2019 Final Chapter 1 Revised 2015
38/56
38P7 ACCA
Professional duty of confidence
Accounting %rofessionals 0ACCA mem&ers are not in&reac$ of any %rofessional duty of confidence if t$eyre%ort in good fait$ any money laundering knowledge or
sus%icions to t$e a%%ro%riate aut$ority) T$is %rotection a%%lies even if sus%icions %rove later to
&e groundless( %rovided t$ey were made in good fait$) ,isclosure wit$out reasona&le grounds for knowledge or
sus%icions will increase t$e risk to &e in &reac$ ofconfidentiality)
-
7/25/2019 Final Chapter 1 Revised 2015
39/56
39P7 ACCA
E!ERCI9E 1)-
ive five e'am%les of &usinesses w$ic$would &e more susce%ti&le to money
laundering t$an ot$ers)
-
7/25/2019 Final Chapter 1 Revised 2015
40/56
40P7 ACCA
A#9ER 1)-
Any cas$ &ased &usinesses would &e %articularlysuita&le for criminals to launder money(%articularly ones w$ere t$e origins of t$e cas$
cannot &e easily %roven and w$ere services are%rovided rat$er t$an goods sold( for e'am%le Casinos :ookmakers
Private &anking Money transfer services
-
7/25/2019 Final Chapter 1 Revised 2015
41/56
41P7 ACCA
MONEY LAUNDERING RIS)
INDICATIONS Transactions routed t$roug$ several @urisdictions 9ecrecy over transactions E'cessive use of wire transfers Pattern t$at after a de%osit( t$e same 0or nearly t$e
same amount is wired to anot$er financial institution arge currency instrument transactions Re%eated de%osits or wit$drawals @ust &elow t$e
monitoring t$res$old on t$e same day Hig$ value de%osits or wit$drawals not c$aracteristic of
t$e ty%e of account
-
7/25/2019 Final Chapter 1 Revised 2015
42/56
E'ercise 1)=
ou are t$e audit manager of oft Co a c$ain of nig$tclu&s),uring t$e course of t$e audit Mr Roy( an em%loyee of t$ecom%any( informed you t$at a su&stantial cas$ de%osit was
%aid into com%any?s &ank account and a mont$ later( t$esame amount was %aid &y direct transfer into a &ankaccount in t$e name of Evissa( a com%any &ased overseas)
T$e em%loyee informed you t$at Mr 4o' t$e managingdirector of oft Co $ad instructed $im not to record t$etransaction as it $ad not$ing to do wit$ oft Co?s &usiness)
42P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
43/56
Answer 1)=
T$e transaction raises sus%icion of money laundering for t$efollowing reasons)
It $as &een stated t$at t$e %ur%ose of transaction $as
not$ing to do wit$ oft Co?s &usiness) T$is could &e a signof an attem%t to legitimise t$e %roceeds of a crime t$roug$oft Co &y concealing t$e illegal source of t$e cas$)
T$e amount of transaction is su&stantial for oft Co) An
unusually large transaction s$ould alert t$e auditor for t$e%ossi&ility of money laundering( es%ecially as it does noseem to relate to t$e &usiness of oft Co)
43P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
44/56
Answer 1)=
T$e cas$ amount %aid into oft Co?s &ank account is t$esame as t$e amount %aid to Evissa) T$is could &e anattem%t &y Mr 4o' to make t$e cas$ a%%ear legitimate &y
moving t$roug$ several com%anies and @urisdictions) Mr Roy was instructed not to record t$e transaction in t$e
accounting records of oft Co) Increased secreacy overtransactions is anot$er indicator of money laundering)
T$e sus%icious transaction s$ould &e re%orted tofirm?s MR")
44P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
45/56
45P7 ACCA
Anti*%"ne( l#un$ering 'r"gr#%
T$e &asic elements to &e considered w$en designing ananti;money laundering %rogram include
dedicated resources
written %olicies and %rocedures com%re$ensive coverage timely re%orting and resolution of matters e'%licit management su%%ort sufficient training and education regular reviewGaudit of t$e %rogram)
-
7/25/2019 Final Chapter 1 Revised 2015
46/56
aws and regulations
Com%anies are su&@ect to laws andregulation w$ic$ t$ey must com%ly)
E'am%lesHealt$ and safety law
Em%loyment law
Environmental lawCom%any law
46P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
47/56
47
aw and regulations
MA#AEME#T
A8,IT"R
Ensure t$e entity?s o%erations areconducted in accordance wit$ laws andregulations
Prevention and detection ofnoncom%liance
Res%onsi&ilities
Recognise t$at noncom%liance maymaterially affect t$e financial statements
#ot res%onsi&le for %reventing noncom%liance and can not detect non;com%liance wit$ all laws and regulations asmany of t$em not affect financial statements
-
7/25/2019 Final Chapter 1 Revised 2015
48/56
,ifficulties for detection
Reasons w$y is difficult for auditors not todetect all non;com%liances
May not affect t$e financial statements#on;com%liance is ultimately a mater oflegal determination 0may &e &eyond
auditor?s %rofessional com%etenceTestingGsam%le
48P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
49/56
Auditors? understanding of laws
T$e auditor would usually o&tain a generalunderstanding of t$e laws and regulations
affecting t$e entity in t$e following ways 8se t$e e'isting knowledge 0and u%date
of t$e entity?s industry and &usiness
,iscuss G en*uire of management
49P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
50/56
50P7 ACCA
I9A -+.
T$e #u$it"rs+ res'"nsibilities for considering laws andregulations as %art of t$eir audit is discussed in I9A -+.Consideration of las and regulations in an audit offinancial statements!Pr"ce$ures
9$ould %lan so as to identify any e'am%les ofnoncom%lianceEvi$ence9$ould o&tain sufficient a%%ro%riate audit evidence of noncom%liance wit$ laws and regulations wit$ a direct effect on
material amounts and disclosures in t$e 49)D"cu%ent &in$ings,ocument non;com%liance and t$e results of discussionwit$ management( t$ose c$arged wit$ governance andt$ird %arties)
-
7/25/2019 Final Chapter 1 Revised 2015
51/56
I9A -+. 3Audit %rocedures
T$e auditor s$all %erform t$e following %roceduresto $el% identify instances of non com%liances t$atmay $ave a material effect on 4inancial 9tatements
In*uiring of management or t$ose c$arged wit$governance as to w$et$er t$e entity is incom%liance wit$ all a%%lica&le laws
Ins%ecting corres%ondence wit$ relevant regulatory
aut$ority
51P7 ACCA
-
7/25/2019 Final Chapter 1 Revised 2015
52/56
52P7 ACCA
E!AMPE9T$e I9A sets out e'am%les of t$e ty%e of information t$at mig$t
come to t$e auditorJs attention t$at may indicate non;com%liance)
Investigation &y a government de%artment or %ayment of fines
Payments for uns%ecified services or loans to consultants(
related %arties( em%loyees or government em%loyees 9ervices fees t$at a%%ear e'cessive in relation to t$osenormally %aid &y t$e entity or in its industry or to t$e servicesactually received
Purc$asing at %rices significantly a&ove or &elow market %rice
8nusual %ayments in cas$
8nusual transactions wit$ com%anies registered in ta' $avens
Adverse media comments
-
7/25/2019 Final Chapter 1 Revised 2015
53/56
53P7 ACCA
Audit %rocedures w$en %ossi&le
non;com%liance is discovered $en t$e auditor &ecomes aware of information
concerning a %ossi&le instance of noncom%liance( t$eauditor s$ould o&tain
an understanding of t$en#ture
of t$e act and t$ecircumstances in w$ic$ it $as occurred( and su&&icient "ter in&"r%#ti"n to evaluate t$e %ossi&le
effect on t$e financial statements)
Any non;com%liance wit$ law or regulations s$ould &e
$"cu%ente$ and discussed wit$ t$e a%%ro%riate level ofmanagement) T$e auditor s$ould consider t$e im%licationsin relation to financial statements 0fines( litigation 3 %ro%erdisclosures and to ot$er as%ects of t$e audit( %articularlyt$e relia&ility of management re%resentations)
-
7/25/2019 Final Chapter 1 Revised 2015
54/56
54P7 ACCA
Re'"rting n"n*c"%'li#nce
M#n#ge%ent #on;com%liance s$ould &e discussed wit$ t$ose
c$arged wit$ governance
If t$ose c$arged wit$ governance are involved( re%ort to$ig$er level of aut$ority eg audit committee) If not e'ist orauditor &elieves t$at not &e acted u%on 3 legal advice
S#re"l$ers Consider t$e im%act on audit re%ort 3 modified o%inion
Tir$ '#rties Is t$ere a statutory dutyN Is it in t$e %u&lic interestN "&tain legal advice
-
7/25/2019 Final Chapter 1 Revised 2015
55/56
55P7 ACCA
T$e auditor?s re%ort
"isagreement $ere t$e auditor concludes t$at t$e non;com%liance
$as a material effect on t$e financial statements( w$ic$
$as not &een amended( $e s$ould e'%ress a *ualified oradverse o%inion)Limitation on scope $ere ade*uate information a&out com%liance or
sus%ected noncom%liance cannot &e o&tained( t$e
auditor may need to e'%ress a *ualified o%inion ordisclaimer of o%inion due to limitation on t$e sco%e of t$eaudit)
-
7/25/2019 Final Chapter 1 Revised 2015
56/56
it$drawal from t$e engagement
T$e auditor may conclude t$at wit$drawalfrom t$e engagement is necessary w$en
t$e entity does not take t$e remedialaction t$at t$e auditor considersnecessary in t$e circumstances( even
w$en t$e non;com%liance is not materialto t$e financial statements)