CONSIDERING THE OBSERVANCE OF LAWS AND REGULATIONS IN THE AUDIT OF FINANCIAL REPORTS

GENERAL PROVISIONS

01. This standard aims to prescribe the basic principles and procedures and guide ways of applying the basic principles and procedures related to the auditors and auditing companies when considering the observance of laws and regulations by the audited units in the process of auditing the financial reports.

02. When drawing up plans and carrying out procedures for audit, when evaluating the results and making reports on audit, auditors and auditing companies must pay attention to the question that the non-observance of laws and relevant regulations by audited units may greatly affect the financial reports, though in an audit of financial reports all acts of non-observance of laws and relevant regulations cannot be fully detected.

03. The assessment and determination of acts of non-observance of laws and regulations generally do not professionally rest with auditors and auditing companies. Where it must be determined whether acts of non-observance of laws and regulations greatly affect the financial reports or not, the auditors and auditing companies shall have to consult with the legal experts or concerned functional bodies.

04. The regulations and guidance on responsibilities of auditors and auditing companies in considering “frauds and errors” in an audit of financial reports are prescribed in another specific standard but not in this standard.

05. This standard shall apply to the audit of financial reports and also to the audit of other financial information as well as relevant services of auditing companies. This standard shall not apply to the audit of the observance, which is performed by auditing companies under separate contracts.

Auditors and auditing companies must abide by the provisions of this standard when considering the observance of laws and regulations in the process of auditing the financial reports.

The audited units and the parties using the auditing results must have necessary knowledge about the principles and procedures prescribed in this standard in order to fulfill their duties and coordinate with auditors and auditing companies in dealing with relations in the auditing process.

Terms used in this standards are construed as follows:

06. Laws and regulations mean legal documents promulgated by competent bodies (the National Assembly, the National Assembly Standing Committee, the State President, the Government, the Prime Minister, the ministries and ministerial-level agencies, the agencies attached to the Government; joint documents of competent agencies, organizations, People?s Councils and People?s Committees of all levels and other agencies prescribed by law); documents issued by the superiors of professional societies, Management Boards and directors, which are not contrary to laws and related to production and business activities as well as economic and financial and accounting management belonging to the units? domains.

07. Non-observance means acts of wrongly implementing, omitting, inadequately and/or untimely implementing or not implementing laws and regulations, whether unintentionally or intentionally, by units. These acts committed by collectives, individuals in the names of units or the units? representatives. This standard does not mention acts of non-observance committed by collectives or individuals of units but not relating to the financial reports of units.

CONTENTS OF THE STANDARD

The audited units’ responsibility in the observance of laws and regulations

08. Directors (or the heads) of the audited units have the responsibility to ensure that their units strictly observe laws and current regulations; to prevent, detect and handle acts of non-observance of laws and regulations in their units.

09. The audited units must apply measures and procedures to prevent and detect acts of non-observance of laws and regulations, including:

– Grasping in time the requirements of laws and regulations related to activities of units and applying measures to satisfy such requirements;

– Establishing and operating an appropriate and efficient internal control system;

– Elaborating and following the rules in business activities of units, applying measures for monitoring, timely commendation and discipline;

– Using legal consultancy services, including financial and accounting consultancy services in order to properly meet the requirements of laws and regulations;

– Organizing the internal audit sections suitable to the sizes and requirements of units;

– Fully achieving legal documents and relevant regulations which the units have to abide by and documents related to cases of dispute, lawsuits.

Auditor ‘s scrutiny of the observance of laws and regulations

10. The audited units have the responsibility to observe laws and regulations. Through the audit of annual financial reports, the auditors and auditing companies shall help the audited units prevent and detect acts of non-observance of laws and regulations.

11. The risk which always confronts the audit is that it is very difficult to detect all errors that greatly affect the financial reports, even when the audit has been carefully mapped out and carried out in strict accordance with the auditing standards. The causes of the auditing risk include:

– The units’ internal control systems and accounting systems fail to fully satisfy the requirements of the legal documents and regulations related to their operations and financial reports;

– The internal control systems and accounting systems are handicapped with potential limitations in preventing and detecting errors and violations, particularly errors and violations committed as the result of non-observance of laws and regulations;

– Auditors use the sampling method;

– The auditing evidences are often characterized more by judging and convincing than sure confirmation;

– Units may deliberately cover their acts of violation (Example: collusion, cover-up, forgery of documents, deliberately making wrong accounting?) or deliberately supply false information to auditors.

12. When drawing up plans for and performing the audit, auditors and auditing companies must take professionally cautious attitude (as provided for in Vietnamese audit standard No. 200), and must pay attention to acts of non-observance of laws and regulations, thus leading to errors which greatly affect the financial reports. When detecting an act of intentional non-observance of laws and regulations, auditors shall have to take into account the possibility of other violations committed by such unit. On the contrary, if such act is unintentional, the auditors must not necessarily apply the above caution.

13. Where the law or an auditing contract requires the report on the observance of given provisions of law, auditors and auditing companies shall have to draw up plans for inspection of the observance of such provisions by the audited units.

14. In order to draw up auditing plants, auditors must have the general knowledge of law and regulations related to the business activities and lines of the audited units; must thoroughly grasp the units? ways and measures to implement laws and regulations. Auditors shall have to pay attention to the regulations the violation of which will greatly affect the financial reports, or affect the audited units? capability for constant operation.

15. In order to obtain the overall understanding of laws and regulations related to the audited units, the auditors shall apply the following measures:

– Using the available knowledge related to business activities and lines of units;

– Requesting units to provide and explain their internal regulations and procedures related to the observance of laws and regulations;

– Exchanging opinions with units? leadership on the laws and regulations which greatly affect the financial reports of units;

– Scrutinizing the units? specific regulations on and procedures for the settlement of disputes upon their occurrence or sanctions;

– Discussing with relevant functional bodies, law consultants and other individuals for further understanding of laws and regulations related to the units? activities.

16. Basing themselves on the overall understanding of laws and regulations related to activities of audited units, the auditors and auditing companies shall have to proceed with necessary procedures for determining acts of non-observance of laws and regulations related to the process of elaborating financial reports, paying special attention to the following procedures:

– Exchanging ideas with directors (or heads) of the audited units on the observance of laws and regulations;

– Consulting with relevant functional bodies.

17. Auditors shall have to gather all appropriate auditing evidences on the non-observance of laws and regulations by units, thus greatly affecting the financial reports. Auditors must have adequate understanding of laws and regulations with a view to considering the observance of laws and regulations when auditing databases related to information on the financial reports.

18. When legal documents and regulations related to units? business activities and lines see changes in each period, the auditors and auditing companies shall have to examine the observance of these regulations in their proper temporal relations with the elaboration of the financial reports.

19. Apart from the principles and procedures already mentioned in paragraphs 16, 17 and 18, the auditors and auditing companies need not carry out other procedures for inspecting the observance of laws and regulations by units if those procedures fall outside the scope of auditing the financial reports.

20. The carrying out of procedures for auditing financial reports will help auditors and auditing companies detect acts of non-observance of laws and regulations.

21. Auditors shall have to gather the directors? written expositions and the units? documents related to acts of non-observance of laws and regulations which have actually occurred or may occur and affect the truthfulness and logic of the financial reports.

22. After carrying out the examination procedures as required by this standard, if being unable to gather evidences on acts of non-observance of laws and regulations, the auditors may regard the units as having observed laws and regulations.

Procedures which must be carried out upon the detection of acts of non-observance of laws and regulations

23. Auditors must always attach importance to clues leading to acts of non-observance of law and regulations by units. A number of these clues are mentioned in Appendix No.1.

24. When detecting information related to acts of non-observance of laws and regulations, the auditors and auditing companies must inquire into the nature of such acts, the circumstance in which such acts are committed and the relevant information for the assessment of possible impacts on the financial reports.

25. When deeming that acts of non-observance of laws and regulations have affected the financial reports, the auditors shall have to take into account:

– The possible financial consequences, even risks, which force the audited units to cease their operation;

– The necessity to explain the financial consequences in the section on explanation of financial reports;

– The degree of effect on the truthfulness and logic of the financial reports.

26. When having any doubts about or detecting acts of non-observance of laws and regulations, the auditors shall have to note down and keep in auditing dossiers such detection and discuss with the directors (or heads) of the audited units. Such a dossier shall include the extract of accounting vouchers and books, minutes of meetings and other relevant documents.

27. Where directors (or heads) of the units fail to adequately supply information proving that their units have strictly observed laws and regulations, the auditors and auditing companies should discuss and consult with legal experts or concerned functional bodies about acts of suspected non-observance of laws, thus affecting the financial reports. These discussions and exchanges shall help auditors and auditing companies further understand the consequences and measures to be further implemented.

28. Where it is unable to gather adequate information in order to do away with doubts about acts of non-observance of laws and regulations, the auditors and auditing companies must examine the impact of the lack of evidences and present such in the auditing report.

29. Auditors and auditing companies shall have to analyze the consequences of the non-observance of laws and regulations related to auditing work, particularly on the reliability of the expositions of the directors. Auditors shall have to re-evaluate the risks and re-examine the directors? expositions in the following cases where:

– The internal control system fail to detect and fail to prevent acts of non-observance;

– Acts of non-observance have not been mentioned in the expositions, particularly acts which the units have deliberately concealed.

Notification on acts of non-observance of laws and regulations.

Notification to directors (or heads) of the audited units.

30. In the course of audit, the auditors shall have to notify the directors (or the heads) of the units of the acts of non-observance of laws and regulations, which have been detected by the auditors. The auditors are allowed not to notify non-observance acts if they are determined as not having caused considerable consequences, except otherwise agreed upon by the auditors and the units.

31. If auditors and auditing companies determine that acts of non-observance of laws and regulations are intentionally committed and greatly affect the financial reports, they must immediately notify their findings in writing to the directors (or the heads) of the units.

32. If auditors and auditing companies detect that directors (or heads) of units are involved in acts of non-observance of laws and regulations, thus greatly affecting the financial reports, they must consult with legal experts and report such to the superior authorities of the audited units.

Notification to the auditing report users of the financial reports.

33. If auditors conclude that acts of non-observance of laws and regulations have greatly affected the financial reports but not been correctly reflected in the financial reports though the auditors have requested the amendments and adjustments, such auditors shall have to state their opinions of partial acceptance or non-acceptance.

34. If units fail to create conditions for auditors to adequately gathers appropriate auditing evidences for the assessment of acts of non-observance of laws and regulations, which greatly affect the financial reports, the auditors shall have to give their opinions of partial acceptance or their refusal to give opinions as they have been restricted in auditing scope.

35. If being unable to gather adequate evidences on acts of non-observance of laws and regulations, which have occurred, auditors must examine their impacts on the financial reports.

Notification to concerned functional bodies.

36. Auditors and auditing companies have the responsibility to keep confidential the customers? information and data. Yet, if audited units have committed acts of non-observance of laws and regulations, depending on the legal requirements, the auditors and auditing companies must notify such acts to concerned functional bodies. For this case, the auditors are allowed to make prior consultation with legal experts.

Auditors and auditing companies withdraw from auditing contracts.

37. When deeming that the audited units fail to take necessary measures to handle acts or signs of non-observance of laws and regulations, including acts which do not greatly affect the financial reports, the auditing companies are allowed to terminate the auditing contracts. The auditing companies shall have to carefully consider and consult with legal experts before making such decisions.

38. When substitute auditors request the incumbent auditors to supply information on customers, the latter have the responsibility:

– If allowed by customers to discuss about their work, to supply the substitute auditors with information on acts of non-observance of laws and regulations, the reasons for termination of contracts as well as their recommendations on whether to refuse or accept the contracts.

– If not allowed by customers to discuss about their work, to notify such disallowance to the substitute auditors./.