Page 32 - CA Final PARAM Digital Book.

➢ Auditor should understand Nature of act & circumstances→Possible effect on
financial statement→Discuss with management→if not satisfied obtain legal
advice→if still not able obtain sufficient & appropriate evidence→Modify as per
SA 705→Impact on other areas
If the auditor becomes aware of information concerning an instance of noncompliance or suspected
non-compliance with laws and regulations, the auditor shall obtain: (Children working in factory
premises, could be contravention of child labour act)
• An understanding of the nature of the act and the circumstances in which it has occurred
(25 children were working in packing department under supervision of contractor without
identity card & age proof); and
• Further information to evaluate the possible effect on the financial statements. (Go
through law, amendments, rule to determine penalty, impact on production license etc.)

If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and, where appropriate, those charged with governance. If management or, as
appropriate, those charged with governance do not provide sufficient information that supports
that the entity is in compliance with laws and regulations and, in the auditor’s judgment, the effect
of the Suspected non-compliance may be material to the financial statements, the auditor shall
consider the need to obtain legal advice. (Discuss with management if required obtain legal advice
E.g., VODAFONE case).

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.
(Modify Opinion)

The auditor shall evaluate the implications of non-compliance in relation to other aspects of the
audit, including the auditor’s risk assessment and the reliability of written representations, and
take appropriate action. (MD / CFO both were aware & they also gave in writing there are no child
labour in fire cracker factory, affects reliability of WR)
Part III – Case Discussion
➢ Major Portion of Labour Employed was Child Labour / Contention of Management
that it was outside scope of financial audit is not acceptable.

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.
Part IV -- Conclusion
➢ After performing audit procedures as given in SA 250, ensure that cost of fines l
litigation etc. are properly accounted and disclosed / if not express qualified or
adverse opinion as appropriate.
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.

QNO Pending Proceedings Old Course – (M22R)
23.050 TITANIUM CNO-- SA250.140
"Abhinandan Limited a chemical manufacturing company, having its factory located at Nanded Village, for
the year 2021-22 appointed Subahu & Co. as their statutory auditors. During the course of the audit,
Subahu & Co. identified that Abhinandan Limited received a show cause notice from National Green
Tribunal based on the investigation performed by the regional forest department for violating
environmental laws. Upon gathering a further understanding of the said matter, it was identified that
Abhinandan Limited was dumping toxic solid waste, without treating it, on the nearby grounds, and
because of this, the nearby water bodies were getting polluted. Based on the preliminary investigation
performed by the regional forest department under the directions of the National Green Tribunal, it was

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