ACCA Strategic Professional · Advanced Audit and Assurance (International) · Laws and regulations
While auditing Brightwater Ltd, a manufacturer, the auditor learns from the finance director that the company may have breached an environmental discharge licence. No fine has yet been imposed and the potential penalty is uncertain but could be material. Which procedure is the auditor required by ISA 250 (Revised) to perform in the first instance?
The auditor should first discuss the suspected non-compliance with management and, where appropriate, those charged with governance, and obtain enough information to understand its nature and circumstances. Only after evaluating the effects on the financial statements and the audit would external reporting, resignation or report modification be considered.
- AImmediately report the matter to the appropriate external authority
- BDiscuss the matter with management and, where appropriate, those charged with governance, and obtain sufficient information on the nature of the act and its circumstancesCorrect
- CWithdraw from the engagement before concluding on the matter
- DInclude an emphatic Other Matter paragraph in the auditor's report
Explanation
When the auditor becomes aware of suspected non-compliance, ISA 250 requires discussing it with management and, where appropriate, those charged with governance, and evaluating its effect on the financial statements and the audit. Reporting externally, resigning or modifying the report are considered only after that evaluation. Option A is premature because reporting depends on the evaluation and on the law and ethical requirements.
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