Chapter 16 Related Paty ISA 550 Flashcards
Define a Related Party?
[Chapter 16]
- Individuals or organizations which has influence (or control) over entity
- Organizations on which entity influence (or control).
- Organizations under common management and control.
Give some examples of Related Parties?
[Chapter 16]
- Companies in the same group e.g. holding company, subsidiary, associated company.
- Majority shareholders, Directors, Key management and their relatives.
- Other entities controlled by majority shareholders, directors, key management or their relatives.
Give some examples of Related Party Transactions?
[Chapter 16]
- Sale (or purchase) of assets.
- Receiving (or providing) services e.g. consultancy/management/accounting services.
- Giving (or obtaining) loan or guarantee or repayment of loan.
Why risk is high in related party transactions?
[Chapter 16]
- Parties difficult to identify in complex structure and relationships.
- Management may be unaware.
- Information system may not be able to identify all parties/transactions.
- Transactions may not be on arm’s length basis.
- Possibility of fraud by collusion with related parties.
What is the responsibility of management regarding Related Parties?
[Chapter 16]
To identify, account for and disclose related party relationships and transactions (if AFRF requires).
What is the responsibility of auditor regarding Related Parties?
[Chapter 16]
- To obtain understanding of related party relationships and transactions.
- To assess risks relating to related parties, and to respond to risks.
- To ensure that management has identified accounted for and disclosed related party relationships and transactions (if AFRF requires)
- To ensure that financial statements give true and fair view.
List down the four categories of procedures to ensure completeness of related parties?
[Chapter 16]
- Inquiry
- Discussion among Engagement Team
- Inspection
- Other Procedures
Give some examples of “Inquiry” procedures which are used to ensure all related parties have been included in financial statements?
[Chapter 16]
- Inquiry of Management (regarding identify, relationship, and transactions)
- Inquiry of Management and Others (regarding controls over identification and approval of transactions)
Which matters are discussed among engagement team regarding related parties?
[Chapter 16]
- Professional scepticism.
- Nature and extent of related party relationship and transactions.
- Circumstances.
- Documents and records.
List some documents or records which may indicate existence of related parties?
[Chapter 16]
- Bank and legal confirmations.
- Minutes of meetings (shareholders + TCWG)
- Other Records e.g.
* Third-party confirmations,
* Register of shareholders/directors/officers/investment,
* Entity’s income tax return,
* Documents filed to regulatory authorities (e.g. prospectus),
* internal audit reports,
* Contracts outside normal course of business or re-negotiated by entity,
* statements of conflicts of interest by management and TCWG.
What are procedures in the category of “Other Procedures” to identify related parties?
[Chapter 16]
- Inspect prior year working papers.
- Inquire predecessor auditor.
- Inquire other firms (involved in audit)
- Inquire TCWG and other officers about affiliations with other entities.
How auditor obtains evidence about management’s assertion that “Related Party Transactions were conducted on arm’s length basis”?
[Chapter 16]
Management’s evidence may include:
* Comparing with market.
* Comparing with unrelated parties.
* Engaging expert.
Auditor’s procedures may include:
* Appropriateness of management’s process.
* Verify the source of data (i.e. accuracy and completeness).
* Evaluate significant assumptions.
What procedures shall auditor perform if he identifies related party relationships or transactions not identified by management?
[Chapter 16]
1.Communicate other members.
2.Inquire why entity’s process failed.
3.Request management to identify all transactions.
4.Perform procedures on newly identified related party/transactions.
5.Reconsider risk of completeness
6.Reconsider risk of fraud (if omission is intentional)
What procedures shall auditor perform if there is a significant transaction outside the normal course of business?
[Chapter 16]
1.Inquire and evaluate about business rationale, and related party. Significant risk if related party is involved.
2.Inspect contract and evaluate:
* Approval.
* Terms of the contract.
* Accounting and disclosure as per AFRF.
* Any indication of fraud.
What factors are considered by auditor in evaluating business rationale of a transaction which is outside the normal course of business?
[Chapter 16]
Such transactions may not have valid business rationale if they:
1.are overly complex.
2.have unusual terms of trade.
3.have no reason for occurrence.
4.involved previously unidentified related party.
5.are processed in unusual manner.
6.are not discussed with TWG
7.are aggressively defended by management on a particular accounting treatment.
