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AUDITING ATR -20 (Revised 2012)

AUDITORS REPORTING RESPONSIBILITIES WITH RESPECT TO NONCOMPLIANCES WITH LAWS OR REGULATIONS

1. The statutory audit of financial statements in Pakistan is required to beconducted in accordance with the requirements of the InternationalStandards on Auditing (ISAs) as have been adopted by the Institute ofChartered Accountants of Pakistan. The said standards should,therefore, be the primary basis for determining the auditors reportingresponsibilities in case of an entitys non-compliance with the applicablelaws or regulations including with respect to the provisions of sections195 or 208 of the Companies Ordinance, 1984 (the Ordinance).

2. In relation to the above, ISA 250 (re-drafted) Consideration of laws andregulations in an audit of financial statements prescribes as under:

18. If the auditor becomes aware of information concerning aninstance of non-compliance or suspected non-compliance with lawsand regulations, the auditor shall obtain:

(a) An understanding of the nature of the act and thecircumstances in which it has occurred; and

(b) Further information to evaluate the possible effect on thefinancial statements.

25. If the auditor concludes that the non-compliance has a materialeffect on the financial statements, and has not been adequatelyreflected in the financial statements, the auditor shall, inaccordance with ISA 705 (Revised and Redrafted), express aqualified or adverse opinion on the financial statements.

3. It follows from the above that the basic objective of an auditor whenconfronted with instances of infraction of laws or regulations includingwith respect to the provisions of section 195 or 208 of the Ordinance, isto asses the impact of the same on the financial statements in terms of

any monetary adjustments or requirements of disclosures.

4. It should be noted that the provisions of sections 195 or 208 of theOrdinance do not deal with the determination of amounts that are to beincluded in the financial statements nor prescribe the form and content ofdisclosures in a companys financial statements, instead, the saidprovisions prohibit the board of directors (BoD) of a company fromundertaking certain specified transactions or require that approval fromthe shareholders be obtained before making investments in associates.Hence, any contravention of the said provisions of the Ordinance by theBoD of the company, although may be regarded as undertaking oftransaction beyond the powers of the BoD, but the same cannot bedeemed as being beyond the powers of the company. An act which is

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ultra vires the powers of the BoD would still be valid if it is intra vires thepowers of the company having been permitted by its constitution. What ismore important is to understand that such contraventions do not result ina misstatement in the financial statements if the transaction has beenproperly accounted for and disclosed in these financial statements.Accordingly, in such circumstances, a modification in the auditorsopinion is not mandated by the ISAs.

5. It should also be noted that it is not the purpose of the audit nor theresponsibility of the auditor to highlight any contraventions of corporateand other laws by the company or its management.

6. However, notwithstanding the above, in some instances, the transactionssubject to non compliance with the provisions of sections 195 or 208 ofthe Ordinance may be so significant in the context of the overall financialstatements, that a non disclosure of the matter in the financialstatements may impair the users ability to understand the state of affairsof a company. Therefore, in such a situation, the auditor is not precludedfrom adding an emphasis of matter paragraph in his report to highlightthe subject non compliance.

7. Additionally, where a non compliance with the laws and regulations doesoccur and is in the knowledge of the auditor, ISA 250 (re-drafted) alsorequires the auditor to report the same to members of the managementcharged with governance. ISA 250 (re-drafted) states as follows in this

respect:

22. Unless all of those charged with governance are involved inmanagement of the entity, and therefore are aware of mattersinvolving identified or suspected non-compliance alreadycommunicated by the auditor, the auditor shall communicate withthose charged with governance matters involving non-compliancewith laws and regulations that come to the auditor's attentionduring the course of the audit, other than when the matters areclearly inconsequential.

23. If, in the auditor's judgment, the non-compliance referred to inparagraph 22 is believed to be intentional and material, the

auditor shall communicate the matter to those charged withgovernance as soon as practicable.

24. If the auditor suspects that management or those charged withgovernance are involved in non-compliance, the auditor shallcommunicate the matter to the next higher level of authority at theentity, if it exists, such as an audit committee or supervisoryboard. Where no higher authority exists, or if the auditor believesthat the communication may not be acted upon or is unsure as tothe person to whom to report, the auditor shall consider the needto obtain legal advice.

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8. In view of the above matters it is concluded that an infraction of laws orregulations, the financial implication of which is not material to thefinancial statements does not require a modification in the auditorsopinion. However, the auditor should follow the guidance referred to inparagraphs 6 and 7 above.

This revised ATR-20 (2012) supersedes the requirements as contained in ATR-20 and is applicable for audits of financial statements for periods beginning on orafter July 1, 2011. However earlier application is encouraged.

(230th

meeting of the Council December 17, 2011)

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