Consideration of Laws and Regulations

The Auditing Standards Board recently issued a clarified auditing standard, SAS Consideration of Laws and Regulations in an Audit of Financial Statements. This Statement supersedes SAS No. 54, Illegal Acts by Clients (AICPA, Professional Standards, vol. 1, AU sec. 317).

It addresses the auditor’s responsibility to consider laws and regulations in an audit of financial statement and does not apply to other assurance engagements in which the auditor is specifically engaged to test and report separately on compliance with specific laws or regulations.

The Statement addresses:

• The effect of laws and regulations on financial statements
• The responsibility for compliance with laws and regulations (both management's and the auditor’s responsibility).

Of particular interest to auditors is that the Statement discusses the auditor’s responsibilities in relation to compliance with the two categories of laws and regulations:

(1) The provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements, such as tax and pension laws and regulations.
(2) The provisions of other laws and regulations that do not have a direct effect on the determination of the amounts and disclosures in the financial statements but compliance with which may be fundamental to the operating aspects of the business; fundamental to an entity’s ability to continue its business; or necessary for the entity to avoid material penalties.

This SAS is effective for audits of financial statements for periods ending on or after December 15, 2012.

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