Joanne M. Flood - Wiley Practitioner's Guide to GAAS 2020

Consider the need to seek legal advice (AU-C 250.18)

Evaluate the effect on the opinion (AU-C 250.19)

Evaluate the implication on other areas of the audit—for example, the assessment of audit risk (AU-C 250.20)

However, aside from the requirements above and absent specific information concerning possible noncompliance, the auditor does not need to perform any further procedures in this area. AU-C 580, Written Representations , requires the auditor to obtain a written representation from management concerning the absence of noncompliance with laws or regulations. (AU-C 250.16)

When the auditor becomes aware of information about a possible noncompliance, the auditor should obtain an understanding of:

The nature of the possible noncompliance,

The circumstances in which the act occurred, and

Sufficient other information to allow the auditor to consider the effect on the financial statements.

Investigations by regulatory agencies

Payment of fines or penalties

Excessive in relation to those ordinarily paid sales commissions or agent’s fees

Purchases significantly above or below market prices

Unusual transactions with companies in tax havens

Unauthorized transactions

Improperly reported transactions

Negative comments in the media, including social media

Existence of an information system that does not provide adequate trails or sufficient evidence

Payments made to a country different from the one from which the goods or services originated

Noncompliance with laws or regulations cited in reports of examinations by regulatory agencies that have been made available to the auditor

Unusual payments in cash

Large payments for unspecified services to consultants, related parties, affiliates, or employees or government employees or officials

Failure to file tax returns or pay government duties or similar fees that are common to the entity’s industry or the nature of its business

(AU-C 250.A19)

If management or those charged with governance do not provide sufficient evidence to support the entity’s compliance, the auditor may consider consulting with the client’s legal counsel (with the client’s permission) or other specialists about applying relevant laws and regulations to the circumstances and the possible effects on the financial statements. (AU-C 250.A23)

The auditor should consider the quantitative and qualitative aspects of the noncompliance. Loss contingencies resulting from noncompliance that may be required to be disclosed should be evaluated similar to other loss contingencies. (AU-C 250.A21)

The auditor should consider the implications of noncompliance for the rest of the audit, particularly whether the auditor can rely on client representations. Factors to consider include the relationship of the perpetration and concealment, if any, of the noncompliance to specific control procedures and the level of management or employees involved. (AU-C 250.A24)

Even when the noncompliance is not material to the financial statements, the auditor may decide to withdraw from the engagement when the client does not take the remedial action the auditor considers necessary in the circumstances. (AU-C 250.A25)

The auditor should communicate with those charged with governance to make sure they are adequately informed about noncompliance that came to the auditor’s attention. (AU-C 250.21) (If senior management is involved in the noncompliance, the auditor should communicate directly with those charged with governance.) If the noncompliance is believed to be intentional and material, the auditor should communicate with those charged with governance as soon as practicable. (AU-C 250.22)

Since clearly inconsequential matters need not be communicated to those charged with governance, the auditor may agree in advance with the audit committee on the nature of matters to be communicated.

Any communication regarding noncompliance or suspected noncompliance should describe:

The noncompliance

The circumstances of its occurrence

The financial statement effect

(AU-C 250.A26)

If the auditor concludes that the noncompliance that has a material effect on the financial statements has not been properly accounted for or disclosed, the auditor should issue a qualified or an adverse opinion in accordance with AU-C 705, Modifications to the Opinion in the Independent Auditor’s Report . (AU-C 250.24)

If the client prevents the auditor from obtaining sufficient competent evidential matter to evaluate whether noncompliance that could be material to the financial statements has occurred or is likely to have occurred, the auditor should express a qualified opinion or disclaim an opinion in accordance with AU-C 705. (AU-C 250.25)

If the client refuses to accept the auditor’s report as modified because of noncompliance, the auditor should withdraw from the engagement and communicate, in writing, the reasons for withdrawal to the audit committee or to those charged with governance. (AU-C 250.A27)

Normally, disclosing noncompliance with laws or regulations outside the client’s organization would be precluded by the auditor’s ethical or legal obligation of confidentiality. However, the auditor should determine whether there is a responsibility to report the matter to outside parties. (AU-C 250.27) The auditor should recognize that in the following circumstances, a duty to notify parties outside the client may exist:

To the SEC when the client reports an auditor change on Form 8-K (or to comply with other legal and regulatory requirements, such as Section 10A of the Securities Exchange Act of 1934)

To a successor auditor under Section 210

To a court order

To a funding agency or other specified agency in audits of entities that receive financial assistance from a government agency

(AU-C 250.A28)

The auditor should document identified or suspected noncompliance and the related discussions with management, those charged with governance, and other internal or external parties. (AU-C 250.28)

Scope

Definitions of Terms

Objectives of AU-C Section 260

Requirements

Those Charged with Governance

Matters to Be Communicated

Communication Process

Qualitative Aspects of Accounting Practices

Other AU-C Sections

AU-C 260 provides guidance on the auditor’s responsibility to communicate with those charged with governance matters related to the financial statement audit that are, in the auditor’s professional judgment, significant and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Note that AU-C 260 does not apply to managers unless they also have a role in governance. (AU-C 260.01) This section may also be adopted and applied to audits of other historical financial information when those charged with governance oversee the preparation and fair presentation of that information. (AU-C 260.02) Certain matters should be communicated in each audit (as described below); however, the auditor is not required to perform procedures specifically to identify these matters.