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๐Ÿ“„ PDF โ€” HKICPA Handbook Vol III

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SectionKey ConceptBrief Description
IntroductionScope & Effect of LawsHKSA 250 covers auditor's responsibility for laws/regulations in financial statement audits; laws have direct or indirect effects on financial statements.
ResponsibilitiesManagement vs. AuditorManagement ensures compliance; auditor obtains reasonable assurance on material misstatements, not prevention of non-compliance.
ObjectivesThree Key ObjectivesObtain evidence for direct-effect laws, perform procedures for other laws, respond appropriately to non-compliance.
DefinitionNon-complianceActs of omission/commission contrary to laws, excluding personal misconduct unrelated to business.
RequirementsAudit ProceduresUnderstand framework, test direct-effect laws, perform specified procedures for other laws, remain alert, obtain written representations.
Non-Compliance ResponseInitial & Follow-upUnderstand nature, evaluate effect, discuss with management, consider legal advice, assess implications.
Communication & ReportingTo Governance & ExternalCommunicate non-compliance to governance (unless inconsequential), modify audit opinion if material, report externally if required.
DocumentationAudit EvidenceDocument procedures, judgments, conclusions, and discussions related to non-compliance.
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Introduction & Scope

Scope of HKSA 250 (Revised)

HKSA 250 (Revised) deals with the auditor's responsibility to consider laws and regulations in an audit of financial statements. It does not apply to other assurance engagements where the auditor is specifically engaged to test and report separately on compliance.

Effective Date: Audits of financial statements for periods beginning on or after 15 December 2017.

Effect of Laws and Regulations

CategoryDescriptionExamples
Direct EffectProvisions that determine reported amounts and disclosures in financial statementsTax laws, pension laws
Indirect EffectLaws fundamental to operating aspects, business continuity, or avoiding material penaltiesOperating licenses, regulatory solvency requirements, environmental regulations

Non-compliance may result in fines, litigation, or other consequences that may have a material effect on financial statements.

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Responsibilities

Management's Responsibility (Paragraph 3)

Management, with oversight from those charged with governance, is responsible for ensuring that the entity's operations are conducted in accordance with laws and regulations, including compliance with provisions that determine reported amounts and disclosures.

Auditor's Responsibility (Paragraphs 4-9)

Key Principle: The auditor is not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

The auditor is responsible for obtaining reasonable assurance that financial statements, taken as a whole, are free from material misstatement, whether due to fraud or error.

Two Categories of Laws and Regulations (Paragraph 6)

CategoryDescriptionAuditor's Responsibility
(a) Direct EffectProvisions generally recognized to have a direct effect on determination of material amounts and disclosures (e.g., tax and pension laws)Obtain sufficient appropriate audit evidence regarding compliance
(b) Other LawsLaws fundamental to operating aspects, business continuity, or avoiding material penalties (e.g., operating licenses, solvency requirements, environmental regulations)Limited to specified audit procedures to help identify non-compliance that may have a material effect

Professional Skepticism (Paragraph 8)

The auditor must remain alert to the possibility that other audit procedures applied for forming an opinion may bring instances of non-compliance to attention. Maintaining professional skepticism throughout the audit is critical.

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Objectives & Definition

Objectives (Paragraph 11)

  1. To obtain sufficient appropriate audit evidence regarding compliance with provisions of laws and regulations generally recognized to have a direct effect on determination of material amounts and disclosures in financial statements
  2. To perform specified audit procedures to help identify instances of non-compliance with other laws and regulations that may have a material effect on financial statements
  3. To respond appropriately to identified or suspected non-compliance with laws and regulations identified during the audit

Definition of Non-compliance (Paragraph 12)

Non-compliance โ€“ Acts of omission or commission, intentional or unintentional, committed by the entity, those charged with governance, management, or other individuals working for or under the direction of the entity, which are contrary to prevailing laws or regulations.

Exclusion: Non-compliance does not include personal misconduct unrelated to the business activities of the entity.

Key Points:

  • Includes transactions entered into by, or in the name of, the entity, or on its behalf
  • Includes personal misconduct related to business activities (e.g., a key management person accepting a bribe from a supplier in return for securing contracts)
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Requirements - Auditor's Consideration of Compliance

Obtaining Understanding (Paragraph 13)

As part of obtaining an understanding of the entity and its environment under HKSA 315 (Revised 2019), the auditor shall obtain a general understanding of:

  • The legal and regulatory framework applicable to the entity and the industry or sector in which the entity operates
  • How the entity is complying with that framework

Direct Effect Laws (Paragraph 14)

The auditor shall obtain sufficient appropriate audit evidence regarding compliance with provisions of laws and regulations generally recognized to have a direct effect on determination of material amounts and disclosures.

Other Laws - Specified Procedures (Paragraph 15)

The auditor shall perform the following audit procedures to help identify instances of non-compliance with other laws that may have a material effect:

  1. Inquire of management and, where appropriate, those charged with governance, as to whether the entity is in compliance with such laws and regulations
  2. Inspect correspondence, if any, with relevant licensing or regulatory authorities

Remaining Alert (Paragraph 16)

During the audit, the auditor shall remain alert to the possibility that other audit procedures applied may bring instances of non-compliance or suspected non-compliance to attention.

Written Representations (Paragraph 17)

Important: Written representations do not provide sufficient appropriate audit evidence on their own and do not affect the nature and extent of other audit evidence to be obtained.

Limitation on Procedures (Paragraph 18)

In the absence of identified or suspected non-compliance, the auditor is not required to perform audit procedures regarding compliance with laws and regulations other than those set out in paragraphs 13-17.

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Audit Procedures When Non-Compliance Is Identified or Suspected

Initial Response (Paragraph 19)

If the auditor becomes aware of information concerning an instance of non-compliance or suspected non-compliance, the auditor shall obtain:

  • An understanding of the nature of the act and the circumstances in which it has occurred
  • Further information to evaluate the possible effect on the financial statements

Indications of Non-Compliance

Examples include: investigations by regulatory organizations, payment of fines or penalties, unusual cash payments, unauthorized transactions, adverse media comment.

Discussion with Management (Paragraph 20)

If the auditor suspects there may be non-compliance, the auditor shall discuss the matter (unless prohibited by law or regulation) with the appropriate level of management and, where appropriate, those charged with governance.

If management or those charged with governance do not provide sufficient information supporting compliance, and the suspected non-compliance may be material, the auditor shall consider the need to obtain legal advice.

Insufficient Evidence (Paragraph 21)

If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate the effect of the lack of sufficient appropriate audit evidence on the auditor's opinion.

Evaluating Implications (Paragraph 22)

The auditor shall evaluate the implications of identified or suspected non-compliance in relation to other aspects of the audit, including the auditor's risk assessment and the reliability of written representations.

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Communicating and Reporting Identified or Suspected Non-Compliance

Communication with Those Charged with Governance (Paragraphs 23-25)

General Rule: Unless all those charged with governance are involved in management (and therefore already aware), the auditor shall communicate (unless prohibited by law or regulation) with those charged with governance matters involving non-compliance that come to attention during the audit, other than when matters are clearly inconsequential.

Intentional and Material Non-Compliance (Paragraph 24): If the auditor believes non-compliance is intentional and material, the auditor shall communicate the matter with those charged with governance as soon as practicable.

Implications for Auditor's Report (Paragraphs 26-28)

ScenarioRequired Action
Material non-compliance not adequately reflected in financial statementsExpress qualified opinion or adverse opinion per HKSA 705 (Revised)
Precluded by management/governance from obtaining sufficient evidenceExpress qualified opinion or disclaim an opinion due to scope limitation per HKSA 705 (Revised)
Unable to determine due to circumstances (not management)Evaluate effect on opinion per HKSA 705 (Revised)

Reporting to an Appropriate Authority Outside the Entity (Paragraph 29)

If the auditor has identified or suspects non-compliance, the auditor shall determine whether law, regulation or relevant ethical requirements require reporting to an appropriate authority outside the entity or establish responsibilities under which reporting may be appropriate.

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Documentation

Documentation Requirements (Paragraph 30)

The auditor shall include in audit documentation identified or suspected non-compliance with laws and regulations and:

  • The audit procedures performed, significant professional judgments made, and conclusions reached
  • Discussions of significant matters related to non-compliance with management, those charged with governance, and others, including how management and, where applicable, those charged with governance have responded

Key Takeaways Summary

AreaKey Requirement
Management ResponsibilityEnsure operations comply with laws and regulations
Auditor ResponsibilityReasonable assurance; not responsible for preventing non-compliance
Direct Effect LawsObtain sufficient appropriate audit evidence
Other LawsPerform specified procedures (inquiry, inspection of correspondence)
Professional SkepticismRemain alert throughout the audit
When Non-Compliance IdentifiedUnderstand nature, evaluate effect, discuss with management
Insufficient EvidenceEvaluate effect on opinion
Communication with GovernanceUnless clearly inconsequential or prohibited by law
Intentional/MaterialCommunicate as soon as practicable
Management InvolvementEscalate to next higher authority
Auditor's ReportModify opinion as appropriate per HKSA 705
External ReportingDetermine if required or appropriate
DocumentationInclude procedures, judgments, conclusions, discussions

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