ISA 250: Consideration of Laws and Regulations in an Audit
of Financial Statements
Learning outcomes
Describe the responsibility of the auditor for an entity’s compliance with laws and regulations in an
audit of financial statements
1. Objective of ISA 250
The objective of the auditor is to:
• Obtain sufficient appropriate audit evidence regarding compliance with laws and regulations that
have a direct effect on the determination of material amounts and disclosures in the financial
statements.
• Perform specified audit procedures to identify non-compliance with other laws and regulations
that may have a material effect on the financial statements.
• Respond appropriately to identified or suspected non-compliance.
2. Scope of the Standard
ISA 250 addresses the auditor’s responsibilities relating to:
• Compliance with laws and regulations in an audit of financial statements.
• The impact of laws and regulations on the financial statements.
• Situations involving suspected or identified non-compliance.
3. Types of Laws and Regulations
ISA 250 distinguishes between two categories:
a. Laws and regulations with a direct effect on the financial statements
Examples:
• Tax laws (e.g., Income Tax Act)
• Labour laws (e.g., payroll regulations)
• Financial reporting standards (e.g., Companies Act disclosures)
b. Other laws and regulations that do not have a direct effect, but compliance may be
fundamental to the entity's operations
Examples:
• Environmental laws
• Occupational health and safety laws
• Industry-specific regulations (e.g., FICA for financial institutions)
4. Responsibilities of Management and Those Charged with Governance
• Management is responsible for ensuring compliance with laws and regulations.
• They must establish and maintain effective internal control systems to ensure compliance.
• Those charged with governance are responsible for oversight of the financial reporting process,
including compliance.
5. Auditor’s Responsibilities
a. Obtain understanding:
• Gain a general understanding of the legal and regulatory framework applicable to the entity and the
industry.
• Understand how the entity ensures compliance with laws and regulations.
b. Audit procedures:
• Perform audit procedures to identify instances of non-compliance with laws and regulations that
have a direct effect on the financial statements.
• Remain alert throughout the audit for any signs of possible non-compliance.
c. No responsibility for legal determination:
• Auditors are not expected to detect every violation of laws and regulations.
• They are not responsible for preventing non-compliance or for legal interpretations.
6. Procedures When Non-Compliance is Identified or Suspected
If non-compliance is suspected or identified, the auditor must:
• Understand the nature and circumstances of the non-compliance.
• Evaluate the possible effect on the financial statements.
• Discuss the matter with management and/or those charged with governance.
• Consider the need to obtain legal advice.
7. Reporting Non-Compliance
a. To management and governance:
• Non-compliance must be reported to those charged with governance unless they are involved in the
non-compliance.
b. In the auditor’s report:
• If the non-compliance is material and not properly disclosed, the auditor should modify the audit
opinion.
• The type of modification depends on the materiality and pervasiveness of the matter.
c. External reporting:
• If required by law or regulation, the auditor must report to regulatory or enforcement authorities.
8. Documentation Requirements (ISA 250.27)
The auditor shall document:
• Findings or indications of non-compliance.
• Discussions with management or governance.
• How the matter was addressed in the audit.
• Any decisions regarding communication with regulatory authorities.
QUESTION 1 :- LAWS AND REGULATIONS
