Subsection 2: Certification of accounts

The professional practice standard relating to the recognition of the risk of material misstatement of the financial statements resulting from non-compliance with legal and regulatory texts, approved by the Minister of Justice, is shown below:

ACCOUNTING FOR THE RISK OF MATERIAL MISTAKINGS IN THE ACCOUNTS RESULTING FROM NON-COMPLIANCE WITH LEGAL AND REGULATORY TEXT

Introduction

1. The entity is subject to laws and regulations, non-compliance with which may lead to material misstatement of the financial statements.

2. The purpose of this standard is to define the audit procedures that the auditor performs:

- to identify and assess the risk of material misstatement of the financial statements due to possible non-compliance with laws and regulations;

- when identifying instances of non-compliance with laws and regulations that may lead to misstatements in the financial statements.

3. It also defines the implications for the auditor's opinion of cases of non-compliance with legal and regulatory texts likely to lead to material misstatements in the accounts that it has identified.

Identification and assessment of the risk of material misstatement of the accounts resulting from non-compliance with legal and regulatory texts

4. When obtaining an understanding of the entity and its environment, the statutory auditor shall obtain an understanding of the entity's business segment, its regulatory environment, including the applicable financial reporting framework, and the resources deployed by the entity to comply with those frameworks.

5. To this end, the statutory auditor shall enquire of management:

- the legal and regulatory texts that it considers likely to have a decisive impact on the entity's business;

- the procedures designed and implemented in the entity to ensure compliance with legal and regulatory texts;

- the existing rules and procedures for identifying disputes and for assessing and accounting for their impact.

6. When the statutory auditor identifies legal and regulatory texts relating to the preparation and presentation of the financial statements that have an impact on the determination of material items in the financial statements:

- he acquires sufficient knowledge of them to enable him to verify their application;

- he collects sufficient and appropriate evidence justifying their compliance.

7. When the statutory auditor identifies legal and regulatory texts that do not relate to the preparation and presentation of the financial statements but whose non-compliance may have financial consequences for the entity, such as fines or indemnities to be paid, or may call into question the entity's ability to continue as a going concern:

- it enquires of management about compliance with these texts;

- it reviews correspondence received from the administrative and supervisory authorities to identify any cases of non-compliance with the texts.

8. Throughout his assignment, the statutory auditor is also attentive to the fact that the audit procedures implemented may reveal cases of non-compliance with legal and regulatory texts likely to lead to material misstatements in the accounts.

9. Where, at the end of these procedures, the statutory auditor has a doubt as to whether the entity complies with a legal or regulatory text likely to lead to material misstatements in the accounts, he shall gather additional information to remove this doubt and shall discuss this with management.

10. The statutory auditor asks the legal representative, as the person responsible for the accounts, for a written statement in which he declares that he has, to the best of his knowledge, applied the legal and regulatory texts.

Audit procedures implemented by the statutory auditor when he identifies cases of non-compliance with legal and regulatory texts likely to lead to material misstatements in the accounts

11. When the statutory auditor identifies a case of non-compliance with a legal or regulatory text likely to lead to material misstatement of the financial statements, the statutory auditor:

- assesses whether such non-compliance leads to a material misstatement of the financial statements;

- analyses the impact on its assessment of the risk of material misstatement of the financial statements, on the audit procedures performed and on the evidence gathered, in particular on the reliability of management representations.

12. The statutory auditor shall communicate as soon as possible any cases of non-compliance with legal and regulatory texts identified to the bodies referred to in Article L. 823-16 of the French Commercial Code or shall ensure that they have been informed.

Impact on the opinion

13. Where there is uncertainty about the application of a legal or regulatory text and the statutory auditor is unable to obtain sufficient and appropriate information to resolve it and assess its effect on the accounts:

- it assesses the need to make an observation in order to draw the attention of the reader of the financial statements to the information provided in the notes in respect of this uncertainty when this information is relevant;

- it assesses the impact on its opinion when no information is provided in the notes in respect of this uncertainty or when the information provided is not relevant.

14. When the statutory auditor concludes that non-compliance with a legal or regulatory text leads to a material misstatement in the accounts and that this is not corrected, he shall assess the impact on his opinion. The same applies when the auditor has been unable to perform audit procedures to assess whether there have been instances of non-compliance with laws and regulations that could lead to material misstatement of the financial statements.