LEGAL ISSUE I

ASSURANCE AGREEMENT

As defined by Code of Ethics for Professional Accountants;

An assurance engagement is where a professional accountant in public

practice expresses a conclusion designed to enhance the degree of
confidence of the intended users, other than the responsible party, about the
outcome of the evaluation or measurement of a subject matter against
criteria.

An assurance, is an assertion that the statements presented are correct.

Nature of laws, regulation, standards and codes in the context of

assurance engagements

The regulatory environment in which auditors function requires auditors to:

 Complywiththecodeofethicsoftheprofessionabodyofwhichtheauditorisa
membere.g.theNBAA, CAEW
 Comply with national laws and regulations
 Comply with accounting and auditing standards (national as well as
international standards)

Compliance with Code of Ethics:

The auditor should compy with the Code of Ethics for professional
accountants, issued by the International Federaton of Accountants. A code of
Ethics is a set of rules obligatory on the member of the professional body.

Compliance with national laws and regulations:

(a) Compliance with The Companies Act

A statutory audit is an audit required by statute. Forexampe,The Companies

Act of each country, requires all Companies(above a certain sze)registered
under the Act to have their financial statements audited by an Independent
auditor.

Laws and regulations that the auditor should comply with:

Right of an auditor:

The rights of an auditor are governed by the regulatory framework within

which an auditor functions.

The rights can be summarized as follows:

  Right of access to records
 Right to information and explanations
 Right to receive resolutions
 Right to attend and receive notice of meeting auditof
 Right to speak and to be heard at general meetings of the company

Duties of an auditor:

The duties of an auditor are governed by the regulatory framework within b

which an auditor functions.

 Maintenance of adequate accounting records

 Compliance with legislation while preparing the financial statements.
 examination,comparison and verification of accounting records and
returns with financial statements of The entity
 truth and fairness of financial statements
 compliance of material disclosures in financial statements with the
applicable statute

b)Compliance with Income tax Act

In many countries a statutory audit is required under the Income Tax Act.The
auditor performing tax audit has to comply the provisions of the Income Tax
Act as wellas of the Companies Act.

( C) Compliance with industry specific norms

Statutory audit should also comply the laws and regulations related to a
particular indu strylike the a

Bank must comply with the provisions of Banking and Financial Institutions
Act 2006 and BOT Act 2006..

(d)Compliance with provisions of professional bodies regulating audits

The regulatory environment for audit differs from country to country. Each
country has a number of different

Compliance with accounting and auditing standards (national as well as

international)

Apart from the laws and regulations, the auditor should also conduct an audit
in accordance with International
Standard on Auditing(ISAs).ISA contain basic principles and essential
procedures together with related Guidance.

Purpose of laws, regulations standards and codes in the context of

assurance engagements

Regulation of the audit and the auditor is necessary for the following
reasons:

I. To protect public interest

II. To maintain dignity of the profession
III. To ensure independence and professional competence of the
auditors
IV. To bring uniformity to the audit procedures

Meaning of Money Laundering

Money laundering can be defined as any actor attempted act to disguise the
source of money or assets Derived from criminal activity. That is
transforming “dirtymoney”into“clean money”.

Anti-Money Laundering Act, 2006 provides a more technical definition

“Money Laundering means Engagement of a person or persons, director
indirectly in conversion, transfer, concealment, disguising, use Or acquisition
of money or property known to be of illicit origin and in which such
engagement intends to avoid ,The legal consequence of such action and
incudes offences referred n section 12 ofAMLA, 2006).

Financing of Terrorism

As provided in theAMLA2006, terrorist financing means

(a) The provision of ,or making available such financial or other related
services to a terrorist, group or entity Which s concerned with terrorist
act; or
(b)Entering into or facilitating, directly or indirectly, any financial
transaction related to dealing In property owned or controlled by or on
behalf of any terrorist or any entity owned or controlled by a Terrorist.
STAGES OFMONEY LAUNDERING AND FINANCING OF TERRORISM

Money laundering stage / Financial Terrorism Stage:

I. Cash from criminal crime

II. Placement stage: cash is deposited into account
III. Layering stage: funds moved to other institution to abscure origin
IV. Integration stage: funds used to acquire legitimate assets

How To Manage The Risk Of Money Laundering

 Know Your Client

Appropriate identification procedures, as required by the AMLR 2007,
are mandatory when accepting Appointment as auditor. The extent of
information collected about the client and verification of identity
Undertaken will depend on the client risk assessment.
 On-Going Monitoring of Business Relationships
For accountants and auditors, ongoing monitorng of the business
relationship is very important. This comprises Scrutiny of activity
during the relationship, including enquiry into source of funds if
needed, to ensure all is Consistent with expected behavior based on
accumulated customer due diligence information. Accountants And
auditors may wish to consider updating customer information on a
more routine bass as appropriate Opportunities arise.
 Client Identification
As with other professional services, firms, accountants and auditors are
required to identify their clients for The purposes of the anti-money
laundering legislation. They are likely to request from their client, and
retain
Some information and documentation and/or to make searches of
appropriate information of their clients. If the Accountant or auditor is
not able to obtain satisfactory evidence of identifying the client within
a Reasonable time, there may be circumstances in which an
accountant or auditor is not able to proceed With the assignment.
 Further Client Identification
Once the accountant or auditor suspects a possible breach of AMLA or
its regulations, the accountant or Auditor will need to make further
enquiries to assess the implications of the breach in the financial
Statements. Auditing standards require that when the auditor becomes
aware of information concerning a
 Possible instance of non-compliance of laws and regulations, the
auditor should obtain an understanding of The nature of the act and
the circumstances in which it has occurred, and sufficient other
information Evaluate the possible effect on the financial statements.

IDENTIFYING SUSPICIOUSTRANSACTIONS

The number of different activities, customer types and individual transaction

circumstances, makes it Impossible to produce an exhaustive list of
indicators of suspicious or unusual transaction.

Client General Indicators:

There are several indicators that an accountant or auditor can use to identify
transactons that may be related

To money laundering and terrorsm financing. Examples include;

(a) Client is known to be involved in, or indicates his involvement in criminal

activities

(b) Client does not want correspondence sent to home address

(c) Client has accounts with several banks ina particular jurisdiction for no
obvious reason, or has recently Established relationships with different
financial institutions.

(d) Client uses same address but frequently changes the names involved.

(e) Client appears to have only a vague knowledge of the amount of the
transaction and the client goes to Unnecessary length’s to justify the
transaction.

REPORTING OFSUSPICIOUSTRANSACTION

Reporting of Suspicious Transactions

To the extent possible, all suspicious transactions should be reported to the

AMLRO before they are Undertaken Full details of all suspicious transactions
whether put through or not should be reported n writing to the AMLRO.

THEAUDITOR’S REPORTON FINANCIALSTATEMENTS

Where It is suspected that money laundering has occurred the auditor will
need to apply the concept of Materiality when considering whether the
auditor’s report on the financial statements needs to be qualfied or Modified,
taking into account whether:

(a) The crime itself has a material effect on the financial statements;

(b)The consequences of the crime have a material effect on the financial

statements; or

(c) The outcome of any subsequent investigation by the police or other

investigatory body may have a Material effect on the financial statements.

INTERNALCONTROLS OF AUDIT FIRMS

Controls should be in place to ensure that detection and reporting

procedures are being folowed.There Should be;

(a) Clear lines of authority and responsibility

(b) Segregation of duties

(c) Rotation

(d) Establishment of limits

(e) Monitoring of activities

(f) Identification and monitoring of key risks

(g) New and ongoing client acceptance process

The expectation gap

The expectation gap is the gap between an auditor’s actual standards of

performance and what the public Expects of his performance i.e. To occurs
when the audits fail to meet the expectations of users of audited Financial
statements..

Classification of expectation gap

1. Requirement gap

A requirement gap consists of a performance gap and a standards gap.

(a)Performance gap

When auditors do not adhere to generally accepted auditing standards, a

performance gap is created.

(b)Standards gap

A standards gap arises when the public does not interpret the auditing
standards correctly.

A standards gap is a gap between:

 The public’s interpretation of statutes and accounting standards; and

 The interpretation of the standards through cases held in courts of law.

(c)Feasibility gap

This is the gap between the public’s expectations of the auditor which are
beyond the accepted standards of Auditing i.e. Society’s unrealistic demands
of auditors.

2. Liability Gap

This gap is formed when the public is not aware of the persons to whom the
auditor owes responsibility.

Methods to bridge the expectation gap

The expectation gap can be bridged in the following ways:

(i) Making the public aware of the auditing practices and the reasons
why they cannot meet public expectation.
(ii) Auditors must ensure that the engagement letter includes the
nature, scope and purpose of the audit And significant areas which
will not be covered.
(iii) Professional bodies like the NBAA and ICAEW must consider the
possibility of increasing auditors’ responsibilities towards third
parties.
(iv) Auditors must take steps to ensure that the quality of audit is
maintained at the highest level.
 (v) Audit reports must include a disclaimer of the auditor’s
responsibility towards detection of fraud.

Liabilities faced by accountant:

(i) Criminal liability

(ii) Specific statutory liability
(iii) Civil liability

Ways to restrict auditor’s liability:

1. Issue a Disclaimer
2. Use of an Engagement Letter
3. Avoiding liability to third parties
4. Capping
5. Incorporation
6. Limited Liability Partnership (LLP)
7. Professional Indemnity Insurance (PII)
8. Liability Limitation Agreements (LLA)