Page 30 - CA Final PARAM Digital Book.

Part 2- SA 250

QNO Auditor's Responsibility (Compliance of Law) Old Course – (M23M)
21.500 TITANIUM CNO-- SA250.120

While verifying the employee records in a company, it was found that a major portion of the labour

employed was child labour. On questioning the management, the auditor was told that it was outside his
scope of the financial audit to look into the compliance with other laws. Comment in accordance with
relevant Standards on Auditing.

Answer Compliance with Other Laws: As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial
Statements”, the auditor shall obtain sufficient appropriate audit evidence regarding compliance with the

provisions of those laws and regulations generally recognised to have a direct effect on the determination
of material amounts and disclosures in the financial statements including tax and labour laws.

Further, non-compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the costs of which may need to be provided for in the financial statements, but
are not considered to have a direct effect on the financial statements.

In the instant case, major portion of the labour employed in the company was child labour. While
questioning by auditor, reply of the management that it was outside his scope of financial audit to look into
the compliance with other laws is not acceptable as it may have a material effect on financial statements.

Thus, auditor should ensure the disclosure of above fact and provision for the cost of fines, litigation or other
consequences for the entity. In case if the auditor concludes that non-compliance has a material effect on
the financial statements and has not been adequately reflected in the financial statements, the auditor shall
express a qualified or adverse opinion on the financial statement as per SA 705 “Modifications to the Opinion
in the Independent Auditor’s Report”.

QNO Indicators of Non-Compliance Old Course - (M16E, SM17, N18R, M18E, N20E, SM21, N21M, M23M)
22.000 TITANIUM CNO – Unique
R & M Co wants to be alert on the possibility of non-compliance with Laws and Regulations during the
course of audit of SRS Ltd R & M Co seeks your guidance for identifying the indications of non-compliance
with Laws and Regulations.
Answer Part I -- Relevant Standards & Laws
▪ SA 250 “Consideration of Laws and Regulations in an Audit of Financial Statements”,
Part II -- Requirements of Relevant Standards & Laws
When the auditor becomes aware of the existence of, or information about, the following matters, it may
be an indication of non-compliance with laws and regulations:

➢ Indicators of non-compliance (C2-PUPATE)
Payment to Country other than source→Unusual Cash payment →Unspecified
Payments to related party etc →Unauthorised transaction→Irrational Purchase
price →Agents Fees / Commission →Transactions in tax haven→No Exchange
documents
• Payments for goods or services made other than to the Country from which the goods or
services originated. (Non-Compliance of Customs Act)
• Unusual Payments in Cash purchases in the form of cashiers’ cheques payable to bearer or
transfers to numbered bank accounts. (May be bribe)
• Payments for unspecified services or loans to consultants, related parties, employees or
government employees. (Non-Compliance of Company Act)
• Unauthorised transactions or improperly recorded transactions. (Secrets payments against
law E.g. No approval as per company law etc.)
• Purchasing at Prices significantly above or below market price. (Non-Compliance of Income
Tax Act)

www.auditguru.in PARAM 2.9 | P a g e