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Kim Smith.
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Mufadhal
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In the scenario, “a managing director is suing the company for unjust dismissal”
and there is possibility that the company may not have complied with employment regulations.
The questions:
Which of following responsibility is CORRECT regarding the responsibility of auditors in relations to compliance with employment regulations?
A. To obtain sufficient appropriate evidence regarding compliance, as they have a direct effect on the financial statement.
B. To perform specific audit procedures to identify possible non-compliance
The answer to this question says it is B because it has direct effect, but I thought it is quite the opposite it is correct when there is indirect effect and there for A is the answer.
Please help me with this confusion.
Kim Smith
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You don’t say where this question comes from.
On page 114 of our notes:
The auditor:
… Is responsible for obtaining sufficient appropriate audit evidence regarding compliance with
‘direct’ laws and regulations;I would say this is a responsibility “in general”.
However, you have a scenario here which suggests a risk of non-compliance with employment legislation – so the auditor would need to respond to that risk – with substantive procedures.
That’s all I can suggest – what does the answer justification say?
Mufadhal
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The question comes from BPP practice & Revision Kit 2022-2023, Question 128.
Kim Smith
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It’s possible that the correct answer has been mislabeled and it should be A rather than B – I can look in the book tomorrow and see if there’s anything else to confirm this as a typo – but that is really for BPP to confirm.
Kim Smith
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I think the typo is that “direct” should be “indirect”:
“For those which have aN INdirect effect on the financial statements ….”
Employment regulations generally would be indirect.
“Direct” means directly affecting the financial statements and include:
o The form and content of financial statements; E.G. Companies Act 2006 provisions
o Industry-specific financial reporting issues; E.G. for financial institutions
o Accounting for transactions under government contracts; (you’re not expected to have any idea what this means but as well as following GAAP, government contracts are required to apply specific cost accounting principles)
o The accrual or recognition of expenses for income tax or pension costs. E.G. Tax legislation
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