Chapter 11: Related Party Flashcards
Risks of related party transactions (3)
- Complex transactions due to complex structures and relationships.
- Accounting systems may not be effective at identifying RP transactions
- RP transactions may not be conducted on arm’s length
- high fraud due to risk of:
- collusion - concealment - manipulation
Risk assessment procedures and related activities. (Points)
- Specific consideration of susceptibility of F/S to material misstatement due to fraud/error from related party relationships and transactions.
- Discussions among engagement team. (heading)
- Understanding the entity. (heading)
- Understanding controls over related party relationships and transactions.
Discussion among the engagement team. (4)
Matters addressed in discussion among the engagement team:
- Nature + extent of entity’s relationships/transactions with related parties
- Emphasis on importance of maintaining professional skepticism
- Circumstances/conditions of entity that indicate the existence of rp trans/relations not identified/disclosed
- Records/documents that indicate existence of rp rel/trans.
Understanding the entity. (3)
inquire mgmt regarding:
1. identity of entity’s related parties including changes from prior period
2. nature of the relationships b.w entity and those rps
3. whether entity entered into any trans with these rps during period, if so, what type/purpose of trans?
Understanding the controls over related party relationships and transactions. (3)
Inquire mgmt and others within entity + perform other risk assessment procedures, to obtain understanding of controls, that mgmt has established to:
- identity + account for + disclose rp and transactions in a/c with frf.
- authorize and approve significant transactions and arrangements with rps
- authorize and approve significant transactions and arrangements outside normal course of bs.
Procedures for identification of completeness of Related Parties. (7)
Obtain list of rps from directors, and then consider completeness via following procedures:
1. review working papers for prev years.
2. review co.’s procedures for indentifying rps.
3. inquire abt relationship b/w directors and other entities.
4. review shareholder records for names of major shareholders.
5. review minutes of shareholder meetings.
6. ask any other audit firm involved in audit abt rps.
7. ask prev auditor of the co. about their knowledge of rps.
What to do after identifying related parties or significant related party transactions not disclosed by mgmt? (6)
- Promptly communicate the relevant info to other members of engagement team.
- Request management to identify all transactions with newly identified rps.
- inquire why entity’s controls failed to identity all transactions with newly identified rps.
- reconsider risk of existence of other rps/transactions and perform additional audit procedures.
- If non disclosure by management = intentional, evaluate implications of audits.
- Perform appropriate substantive audit procedures.
What should an auditor do after identifying related party transactions outside normal course of business? (a+b)
A) Inspect underlying contracts or agreements and evaluate whether (continued in another fc)
B) Obtain audit evidence that transactions have been appropriately authorized and approved.
Inspect underlying contracts or agreements and evaluate whether …? (3+7)
i) business rationale of transactions suggest that they may have been entered into to engage in fraud by considering
> whether transaction:
- is overly complex
- has unusual trade terms
- lacks apparent logical business reason for its occurrence.
- involves previously unidentified rps.
- is processed in unusual manner.
- whether mgmt has discussed nature+accounting for such transaction with TCWG
- whether mgmt is placing more emphasis on particular accounting treatment rather than giving due regard to the underlying economics of the transaction.
ii) terms of transactions are consistent with mgmt’s explanations.
iii) transactions appropriately accounted for and disclosed in a/c with frf.
What should auditor do if mgmt asserts that rp transactions were carried out on arm’s length basis? (6)
Obtain sufficient and appropriate evidence by:
- comparing terms of rp transactions with similar non rp transactions
- engaging an external expert to determine market value and confirm market terms and conditions for the transaction
- Comparing terms of the transactions to known market terms in an open market.
- Considering appropriateness of management’s process for saying transaction is arm’s length
- verifying source of internal/external data of assertion and testing it to determine accuracy, completeness, relevance.
- evaluating reasonableness of any significant assumptions on which assertion is based.
Evaluation of accounting for/disclosure of identified related parties. (2)
Form an opinion by evaluating:
- whether identified rp relationships and transactions in a/c with afrf
- Whether effects of RP relations or transactions:
- prevent F/S from achieving fair presentation
- cause F/S to be misleading
Written representation from mgmt about rp
Auditor shall obtain written representations from mgmt and TCWG that they have:
- disclosed the identity of entity’s related parties + rp transactions & relationships that they are aware about
- Appropriately accounted for and disclosed such relations and transactions in a/c with frf.
