International Standard on Auditing- 550

Related Parties

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 Scope of this BSA and Objective
This standard deals with the auditor's responsibilities
relating to related party relationships and transactions
in an audit of financial statements.

ISA-315 (Identifying and Assessing the Risks of Material

Misstatements through Understanding the Entity an Its
Environment), ISA-330 (The Auditor’s Responses to
Assessed Risks) and ISA-240 (The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial
Statements) are related with related parties relationship
and transactions.

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 Objectives of the Auditors
Auditors are responsible to obtain an
understanding of related party relationships
and transactions sufficient to able-
a) to recognize fraud risk factors that are
arising from related party relationship and
transactions, and
b) to conclude whether the financial
statements achieve fair presentation by
following fair presentation framework or are
not misleading in terms of compliance
framework. 3
Definitions
Related party:
A party that is either-
a) A related party as defined in applicable financial
reporting framework; or
b) Where framework establishes minimal or no related
party requirements-
i) a person or other entity that has control or
significant influence, directly or indirectly over the
reporting entity.
ii) another entity over which the reporting entity has
control or significant influence, directly or indirectly.

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Definitions
Related party:
iii) another entity that is under common control
with the reporting entity through-
1. common controlling ownership
2. owner who are close family members
3. common key management.

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Definitions
Concept of Control and Significant Influence:

Control: Control is the power to govern the financial and

operating policies of an entity so as to obtain benefits
from its activities.

Significant Influence: Is the power to participate in the

financial and operating policy decision of an entity but
is not control over the entity.

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Definitions
Relationship that may indicate the presence of
control and significant influence:
1. Direct or indirect equity holding or other
financial interest in the entity
2. Entity’s holding direct or indirect equity
holding in other entities
3. Being part of those charged of governance or
key management.
4. Being a close family member
5. Having a significant business relation
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Definitions

Arm’s length transaction:

A transaction conducted on such terms and
conditions as between a willing buyer and a
willing seller who are unrelated and are acting
independently of each other and pursuing their
own best interest.

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Risk assessment procedures and related
activities
1. Understanding the entity’s related party relationships
and transactions through-
i. Discuss among the engagement team
ii. The identity of the entity’s related parties (A12)
iii. Entity’s control over related party relation ship
and transactions
iv. Authorization and approval systems over
related party
2. Maintaining alertness for the related party
information when reviewing records and documents
(A22-A27)
3. Sharing related party information with the
engagement team (A28) 9
 Identification and assessment of the risk of
material misstatement associated with related
party relationship and transactions

Fraud risk factors associated with related party

with dominant influence need to be considered
(A29, A30)

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Identification of related parties
To identify the existence of related parties, the
auditors may:
• Enquire of management as to the identification
of related parties, whether the entity is under
common ownership or management control
with any other entities;
• Review shareholder listings to identify principal
shareholders;
• Review minutes of board and shareholder
meetings, and review prior years’
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Identification of related parties Con--d
To identify the existence of related parties, the
auditors may:
• Review returns filled with taxation authorities
and Company Law Registrar

•Review existing lists of related parties and

transactions the client may have prepared for
regulatory or other purposes.

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Responses to the risk of material
misstatement associated with related party
relationship and transactions

Additional audit procedures require to obtain

sufficient and appropriate audit evidence
through-
1. Identify the previously unidentified and
undisclosed related parties or significant
related party transactions (para-22)
2. Identify significant related party transaction
out side the entity’s normal course of business
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Identification of transactions
Once the auditors have identified related parties, the
following procedures should be performed to identify
related party transactions:
• Evaluate the company’s procedures for identifying,
accounting for, and disclosing related party transactions,
including procedures established to monitor or avoid
conflict of interest situations in purchasing, contracting, or
other elements of the conduct of its business;
• Scrutinize accounts with the related parties;
• Review confirmations of loans receivable and payable for
indications of guarantees.

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Identification of transactions Con--d
In particular, the auditor should be aware of
transactions:
•which have abnormal terms of trade;
•which appear to lack a logical reason for their
occurrence;
•where substance differs from form
•which are processed in a manner different from
the processing of other transactions.

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Other requirements are-
Evaluation of the accounting for and disclosure of
identified related party relationship and
transactions

Written Representation

Communication with those charge with governance

and

Documentation.

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Opinion in terms of related parties
In forming audit opinion, the auditor should consider the
effect of related party transactions on the financial
statements including the disclosure of such transaction
therein. If the auditor is unable to obtain sufficient
appropriate audit evidence concerning related parties, and
transaction with such parties, he should describe in his
report the limitation on the scope of his work and express
a qualified or a disclaimer of opinion, as appropriate.

If the auditor concludes that related party disclosures in the

financial statements are not in conformity with ISA 550/
IAS 24, he should express a qualified opinion or adverse
opinion, as appropriate.
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Thanks every one.

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