Your audit firm is auditing the current year’s financial statements of a major client in the insurance industry. At the planning stage when the engagement partner was doing the risk assessment, he had an information that the company is under investigation by the National Insurance Commission for non-compliance with regulations. The client may be liable to sanctions if found culpable.
Non-compliance with laws and regulations has many implications for the operations of entities, their financial statements and the audit of their financial statements.
Required:
i) Discuss the implications of the suspected non-compliance with the insurance law by the client on its operations and the financial statements. (5 marks)
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Non-compliance with Insurance law regulations whether suspected or actual has many implications on the clients’ operations and Financial Statements
- Non-compliance with the insurance laws can lead to withdrawal of operating licence bringing the operations of the entity to either temporary or permanent halt thereby affecting the going concern of the entity.
- Non-compliance with the insurance laws may results in fines and penalties which can have adverse consequences on the result of operations and financial position of the entity if the amounts involved are substantial.
- If the investigations become public knowledge it may cause existing clients to end their relationship with the Company and prospective clients may refuse to patronise the services of the company.
- Non-compliance with the insurance laws has further implications on the financial statements, which if not properly treated may result in the financial statements not giving a true and fair view. Fines and damage should be correctly treated in the financial statements while provision should be made or disclosed in respect of contingent liabilities.
- Non-compliance with the insurance law if is found to be intentional can affect the integrity of the management and those charged with governance
ii) Evaluate the implications of the client’s non-compliance with the Insurance law on your audit. (5 marks)
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- Risk assessment: In accordance with ISA 315 as part of our risk assessment we have to obtain knowledge of the clients operations to identify risk areas which include non-compliance with laws and regulations.
- Further audit procedures to perform. Having discovered that the company is under investigation we have to determine further audit procedures to perform to obtain sufficient appropriate audit evidence to determine the proper treatment of the suspected non-compliance with the insurance law in the financial statements.
- Assessing the effect of the suspected non-compliance with the Insurance law on the view given by the financial statements. We have to use the evidence obtained in two above to determine whether management has reflected the possible outcome of the investigation in the financial statements or have adequately disclosed the matter in a note to the financial statements.
- Going concern implication: We have to determine whether the investigations are likely to affect the going concern of the client.
- Audit Opinion: We have to consider the types of audit opinion to issue in the light of our audit findings and conclusion. If management correctly reflected the effect of the suspected non- compliance in the financial statements or adequately disclosed them we may issue an unmodified opinion with an emphasis of matter paragraph or issued a modified opinion depending on the circumstances.