4.5 - Related Party Transactions

Question 1

What is a related party?

Answer 1

Someone (or a company) who is related to the entity, its owners or its management. Transactions with related parties may take place for reasons other than the normal entity’s business

Question 2

Most financial reporting frameworks require companies to disclose related party transactions. How is this done?

Answer 2

Usually done in the notes of the financial statements

Question 3

From the auditor’s point of view, why are related party transactions inherently risky?

Answer 3

Because the auditor may not be aware that the party is related. May be even riskier if management are not aware of reporting requirements in relation to these transactions

Question 4

What does ISA 550 note?

Answer 4

That auditors need to understand related party relationships and transactions in order to ensure that the economic reality of a transaction is reflected in the financial statements

Question 5

When are substantive procedures not enough?

Answer 5

In many audits there will be a risk that routine transactions are not recorded accurately. There will, by definition, be lots of these transactions, so if the auditor only uses substantive procedures, they would have to do a very large amount of work in order to obtain sufficient evidence

Question 6

Why may performing substantive procedures not really help to identify problems anyway, especially when processes are highly automated?

Answer 6

Because errors are less likely to occur as a result of a fault in the routine processing than because of a failure of control to begin with