HKSA 250 - Consideration of Laws and Regulations (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Introduction | Scope & Effect of Laws | HKSA 250 covers auditor's responsibility for laws/regulations in financial statement audits; laws have direct or indirect effects on financial statements. |
| Responsibilities | Management vs. Auditor | Management ensures compliance; auditor obtains reasonable assurance on material misstatements, not prevention of non-compliance. |
| Objectives | Three Key Objectives | Obtain evidence for direct-effect laws, perform procedures for other laws, respond appropriately to non-compliance. |
| Definition | Non-compliance | Acts of omission/commission contrary to laws, excluding personal misconduct unrelated to business. |
| Requirements | Audit Procedures | Understand framework, test direct-effect laws, perform specified procedures for other laws, remain alert, obtain written representations. |
| Non-Compliance Response | Initial & Follow-up | Understand nature, evaluate effect, discuss with management, consider legal advice, assess implications. |
| Communication & Reporting | To Governance & External | Communicate non-compliance to governance (unless inconsequential), modify audit opinion if material, report externally if required. |
| Documentation | Audit Evidence | Document procedures, judgments, conclusions, and discussions related to non-compliance. |
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.
Effect of Laws and Regulations
| Category | Description | Examples |
|---|---|---|
| Direct Effect | Provisions that determine reported amounts and disclosures in financial statements | Tax laws, pension laws |
| Indirect Effect | Laws fundamental to operating aspects, business continuity, or avoiding material penalties | Operating 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.
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)
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)
| Category | Description | Auditor's Responsibility |
|---|---|---|
| (a) Direct Effect | Provisions 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 Laws | Laws 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.
Objectives & Definition
Objectives (Paragraph 11)
- 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
- 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
- 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.
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)
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:
- Inquire of management and, where appropriate, those charged with governance, as to whether the entity is in compliance with such laws and regulations
- 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)
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.
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.
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.
Implications for Auditor's Report (Paragraphs 26-28)
| Scenario | Required Action |
|---|---|
| Material non-compliance not adequately reflected in financial statements | Express qualified opinion or adverse opinion per HKSA 705 (Revised) |
| Precluded by management/governance from obtaining sufficient evidence | Express 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.
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
| Area | Key Requirement |
|---|---|
| Management Responsibility | Ensure operations comply with laws and regulations |
| Auditor Responsibility | Reasonable assurance; not responsible for preventing non-compliance |
| Direct Effect Laws | Obtain sufficient appropriate audit evidence |
| Other Laws | Perform specified procedures (inquiry, inspection of correspondence) |
| Professional Skepticism | Remain alert throughout the audit |
| When Non-Compliance Identified | Understand nature, evaluate effect, discuss with management |
| Insufficient Evidence | Evaluate effect on opinion |
| Communication with Governance | Unless clearly inconsequential or prohibited by law |
| Intentional/Material | Communicate as soon as practicable |
| Management Involvement | Escalate to next higher authority |
| Auditor's Report | Modify opinion as appropriate per HKSA 705 |
| External Reporting | Determine if required or appropriate |
| Documentation | Include procedures, judgments, conclusions, discussions |
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