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The situation amounts to non compliance with law.
Management is primarily responsible for compliance with laws and regulations.
When there is a non compliance, the management has to disclose it and take steps for compliance of the same.
Where management has decided not to report it to relevant authority, the auditor has to qualify his report and has to check its impact on the true and fairness of financial reporting, impact of non compliance on the functioning of company and reporting it to the regulatory authorities in lines with professional ethics and code of conduct.
