3. Scope
This standard deals with the auditor’s
responsibility relating to related party
relationship and transactions in audit of
financial statements.
5. Nature of Related Party
Relationship and Transactions
Related party Transaction
Normal
Course of Business
No higher
risk of material
misstatement
Other than
Normal Course of Business
Higher
risk of material
misstatement
Extensive and complex range of Relationship
Ineffective Information System
Transactions at abnormal Market terms
6. Responsibilities of auditor
Applicable
Financial Reporting Standard
Establishes
Establishes
no/minimal Requirements
Specific Requirements
Accounting Requirements
Achieve fair Presentation
Disclosure Requirements
Are not misleading
7. Question…
Is there any situation in which a
non-disclosure of related party is in
compliance of relevant Framework
but is misleading ?????
8. Answer
If the entity derives a very substantial
portion of its revenue from transaction with
related parties, and that fact is not
disclosed.
10. Objectives
• Obtain appropriate audit evidence that all
related party transactions have been
identified and accounted for.
• Recognized fraud risk factors.
• To conclude that Financial Statements are
fairly presented or not misleading.
12. Arm’s length transaction.
• Willing buyer and
•
•
•
willing seller.
Unrelated .
Acting independently.
Pursuing their own
best interest.
13. Related party
• As defined in applicable
•
Financial Reporting
Framework.
A person or other entity has
– Direct or indirect control
– Significant influence
Over reporting entity or vice versa.
• Another Entity under common
control with the reporting entity
through having
–
–
Common controlling ownership
Owners who are close family
members or
14. control
• Power to govern financial and operating
policies of an entity
Significant influence
• Power to participate in financial and
operating policy decisions of the entity
• But is not control over such policies
15. Question.
If two entities are under common control by
estate or local government whether those
can be called related parties???
16. Common control by state
Such entities are not considered related
unless they engage in
• significant transitions
• share resources to a significant extent with
one another
17. Risk Assessment Procedures
• Discussion Among
•
•
the engagement team
Inquiries from
management
Understanding of
control environment
18. Discussion Among the engagement team
•
•
•
•
•
Nature and extent of entity’s relationship.
Importance of professional Skepticism.
Record and document indicating relationship.
How related party may be involved in fraud.
Related party relation indicators
–
–
–
Organizational structure
Inadequate information system
Special purpose entities for earning management
20. Answer
Earnings management is a strategy used
by the management of a company to
deliberately manipulate the company's
earnings so that the figures match a
pre-determined target.
21. Inquiries from management
• Identity of entity’s
•
•
•
•
related party
Nature of relationship
Transactions with
related party if any
Internal control
Transactions in
– Normal course of
business
– Other than normal
course of business
22. Understanding of control
environment
•
•
•
•
•
•
•
•
Internal ethical codes
Policies and procedures for disclosures
Responsibility assignment
Management’s discussions
Transaction’s approval method
Internal auditor’s reviews
Actions taken by management
Whistle-blowing policies
23. Reasons for deficiency of controls
•
•
•
•
•
Low importance
Lack of over sight
Intentional disregard
Insufficient understanding of framework
Absence of disclosure requirement in
framework
24. Indicators of related party
relationships and transactions
•
•
•
•
•
•
•
•
•
Bank and legal conformation
Minutes of the meeting
Entity’s income tax return
Share holders register
Records of investments
Contracts and agreements with related party
Correspondence of legal advisers
Life insurance policy
Internal auditor report
25. Related parties with dominant
influence
•Domination of management by
one or more person is a fraud risk
factor
•Take appropriate action in
accordance with ISA 240
26. Indicators of dominant influence
•
•
•
•
Veto power
Control over final approval
Unquestioned decisions
Approval of Transaction without review
27. Indicators of material misstatement
• High turnover of senior management
• Unjustified transactions through
intermediaries
• Excessive participation in selection of
accounting polices
28. Responses to the assessed risk
• Auditor should reassess the nature,
timing & extent of further audit procedures
29. Substantive audit procedures
•
•
•
•
•
•
Confirmations from third parties
Inquires from management
Inquires from related parties
Reading Financial Statements
Inspections of significant contracts
Appropriate background research
30. Discovery of Undisclosed
Related Parties
•
•
•
•
•
Communicate to engagement team members
Identification of all transactions with such parties
Inquiry about internal control failure
Apply substantive procedures
Reassess risk that other unidentified or
undisclosed RPs or RPTs may exist
31. Intentional Non Disclosure
• Indicative of material misstatement due to
fraud and error.
• Consider requirements of ISA-240
• Re-evaluate reliability of management’s
responses.
32. Significant RPTs Outside Normal
Business
• Inspection of
– Business rationales
– Terms of transactions
– Transactions accounted for and disclosed
• Transactions are authorized and
approved.
33. Evaluation of business
rationales
• Consider weather Transactions
–
–
–
–
–
Is overly complex
Has unusual terms of trade
Lacks logical business reasons
Involves unidentified parties
Processed in unusual manner
34. Evaluation of Accounting and
Disclosures of Transactions
• Transactions should be accounted for and
disclosed in accordance with applicable
Financial Reporting Framework.
• The disclosures should be understandable
and should include
–
–
–
Business rationales
Key terms
conditions
35. Written Representation
There are some circumstances in which it is
appropriate to obtained written
representation from those charge with
governance.
36. Circumstances
• Approval of specific transaction
– having material effect on the financial
statement
– Involvement of management
• Oral representations by management
• Financial or other interest in RP
37. Communication with TCWG
• Non disclosures by management
• Inappropriately authorized and approved
transactions
• Disagreement with management
• Non compliance with applicable laws
• Difficulties in identifying the controlling
entity
