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Question

A·-A. | . U.,be x' g-B' | | Emphasis x, "Heading 1 Heading 3 Font Paragraph Styles 2 Compliance with Laws and Regulations. Audit standards distinguish auditors' responsibility for planning procedures for detecting noncompliance with laws and regulations having a direct effect on financial statements versus planning procedures for detecting noncompliance with laws and regulations that do not have a direct effect on financial statements Required: What are the requirements for auditors to plan procedures to detect . direct-effect compliance versus indirect-effect compliance? . For each of the following instances of noncompliance, explain why they are either direct-effect (D) or indirect-effect (I) noncompliance: e A manufacturer inflates expenses on its corporate tax return e A retailer pays men more than women for performing the same jolb .A coal mining company fails to place proper ventilation in its mines. . A military contractor inflates the overhead applied to a combat vehicle. .An insurance company fails to maintain required reserves for losses. . An exporter pays a bribe to a foreign government official so that government will buy its products. search

Explanation / Answer

1. "As per ISA 250, Consideration of Laws and Regulations in an Audit of Financial Statements, and the objectives of the auditor according to paragraph 10, an auditor is required:

When designing the plan procedures to help to identify non-compliance with laws and regulations, as per "ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires an auditor to obtain a general understanding of:

Moreover, where fraud and/or money laundering is concerned  auditor must maintain a degree of professional scepticism and remain alert to the possibility that other audit procedures applied may bring instances of non-compliance or suspected non-compliance with laws and regulations to the auditor’s attention, and such procedures could include:

Where the auditor discovers non-compliance with laws and regulations, the auditor must notify those charged with governance. However, care must be taken by the auditor because if the auditor suspects that those charged with governance are involved, the auditor must then communicate with the next highest level of authority, which may include the audit committee. If a higher level of authority does not exist, the auditor will then consider the need to obtain legal advice. The auditor must also consider whether the non-compliance has a material effect on the financial statements and, in turn, the impact the non-compliance will have on their report.  

2. a. - Manufacturer inflates expenses in corporate tax returns - In the given case, the misstatement is a direct effect non-compliance as the same is tax evasion in the eyes of law. And the same falls under the purview of Non-Compliance of Taxes. This leads to the penalty penalty being charged by tax authorities on the company. Auditor should notify the senior management as soon as he has the knowledge of it.

b. Retailer pays more to men than women for same job- This is a case of indirect non-compliance as the same is prejudice in the eyes of law. All men and women are equal as the per the law and therefore, they are required to be paid equally for the same job performed by them. Any type of discrimination on the basis of caste, creed, gender, religion or colour is prohibited under the law and attracts severe action against the person practicising it. This type of practice may not have direct impact on the financial statements of the business but the same are not healthy practices and may lead to downfall of the business in the long run.

c. Coal mining company fails to place proper ventilation- This is a case of indirect non-compliance as the same is not having any direct impact on the financial statements of the company. However, as per the protocols of mining industry it is mandatory for each and every company to install proper ventilation in the mines. Absence of proper ventilation will result in derrogatory respiratory conditions for the workers mining in suuch mines due to which not only cost to company will increase but also the same will be subject to litigation in courts.

d. Military contractor inflates the overhead applied-  This is a case of direct non-compliance as it will lead to increased cost to the company in the form of inflated overheads and eventually the cost of production will increase which will lead to less profits being shown by the company and ultimately tax evasion. Auditor is expected to find out the best method to be used for applying overheads and should notify the same to the senior management or if necessary to the audit committee.

e. Insurance company failed to maintain reserves for losses - This is a case of direct non-compliance because as per the Insurance norms all the insurance companies are required to maintain certain percentage of their expected losses as reserves throughout the year. Such reserves are shown as provision on the liability side of the balance sheet.  

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