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Related Parties (PSA 550) (AUDIT RELATED PARTIES (c. Examine Identified…
Related Parties (PSA 550)
INTRODUCTION TO RELATED PARTIES
Definitions
A Related Party is either
1.A related party as defined in the applicable financial reporting framework; or
2.Where the applicable financial reporting framework establishes minimal or no related party requirements:
a. A person or other entity that has control or
significant influence, directly or indirectly
through one or more intermediaries, over the
reporting entity;
b. Another entity over which the reporting entity
has control or significant influence, directly or
indirectly through one or more intermediaries;
or
c. Another entity that is under common control
with the reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members;
or
iii. Common key management
Nature of Related Party Relationships and Transactions
a. Related parties may operate through an extensive and complex range of relationships and structures, with a corresponding increase in the complexity of related party transactions.
b. Information systems may be ineffective at identifying or summarizing transactions and outstanding balances between an entity and its related parties.
c. Related party transactions may not be conducted under normal market terms and conditions; for example, some related party transactions may be conducted with no exchange of consideration.
OBJECTIVES OF THE AUDITOR
A. To obtain an understanding of related party relationships and transactions sufficient to be able:
i. To recognize fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and
ii. To conclude whether the financial statements, insofar as they are affected by
B. To obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework
AUDIT RELATED PARTIES
c. Examine Identified Related Party Transactions
After identifying related parties, the auditor should place emphasis on testing material transactions with parties known to be or associated to the reporting entity
d. Consider Audit Disclosures
Disclosures of related party transactions may not be understandable if:
The business rationale and the effects of the transactions on the financial statements are unclear or misstated; or;
Key terms, conditions, or other important elements of the transactions necessary for understanding them are not appropriately disclosed.
b. Identify Related Party Transactions
Certain transactions serve as potential indicators of the existence of Related Parties.
Agreements under which one party pays expenses on behalf of another party
Business deals done above or below the market value
Goods and services bought from another party at little to no cost
e. Audit Documentation
Issues and findings that are deemed significant by the auditor, as well as the actions taken to address such issues and findings, including any additional evidence obtained, are documented
a. Determine Existence of Related Parties
Procedures used in determining the existence of related parties include but not limited to
:
i. Review prior year working papers for known related parties;
ii. Review the entity’s procedures for identification of related parties;
iii. Inquire as to the affiliation of directors and officers with other entities