Chapter 16 - Related Party

Question 1

What is related party?

Answer 1

Related party means a related party defined by AFRF. If AFRF does not have related party requirements it means:
1) Individuals or organizations that has control or influence ( directly or indirectly through intermediaries) over the entity, or
2) Organization on which entity has control or influence
3) Organizations under common control and management
EXAMPLE
Holding, subsidiary and associated company

Question 2

What do you understand by related party transaction?

Answer 2

Transaction between client and related party:
1) sales, purchases of assets
2) receiving services
3) Giving loan or guarantee

Question 3

Why risk is high in related party transaction ?

Answer 3

1) Related party transaction may operate through complex relationships structures.
2) There is inherent limitation that management may be unaware of existence of all related party. Further information system may not identify all related party relationships or transaction.
3) Related party transaction may not be conducted at arm’s length basis.
4) Management may commit fraud through collusion with related party.

Question 4

What are the responsibilities of management regarding related party ?

Answer 4

If AFRF prescribes related party requirements, it is the responsibility of management to:
1) identify
2) account for
3) disclose related party relationships and transaction in financial statements in accordance with AFRF

Question 5

What are the responsibilities of Auditor regarding related party?

Answer 5

Auditor is responsible to :
1) Obtain understanding of related party relationships and transaction to asses’ risk.
2) Obtain evidence about all related party relationships and transaction have been:
* Identified
* Approved
* Accounted for
* Disclosed in financial statements
3) Obtain evidence that financial statements give true and fair view or financial statements are not misleading.

Due to inherent limitations auditor may not detect all related party.

Question 6

What are the risk assessment procedures to ensure completeness of related parties activities?

Answer 6

1) Inquiry
2) Discussion among engagement team
3) Inspection
4) other procedures to ensure completeness of related parties

Question 7

Who should be inquired by Auditor?

Answer 7

Auditor shall inquire management regarding:
a) Identify of entity,s related parties
b) Nature of relationships with related parties
c) ttypes and purpose of transaction with related parties

Question 8

Who should be inquired by Auditor?

Answer 8

Auditor shall inquire management regarding:
a) Identify of entity,s related parties
b) Nature of relationships with related parties
c) ttypes and purpose of transaction with related parties

Question 9

Who should be inquired by Auditor?

Answer 9

Auditor shall inquire management regarding:
a) Identify of entity,s related parties
b) Nature of relationships with related parties
c) types and purpose of transaction with related parties
Auditor shall inquire of management and others within the entity to obtain understanding of the controls:
a) TO identify, account for and disclose related party relationships and transaction in financial statements in accordance with AFRf.
b) To approve significant transactions with related partties and outside the normal course of buoisness.

Question 10

Who should be inquired by Auditor?

Answer 10

Auditor shall inquire management regarding:
a) Identify of entity,s related parties
b) Nature of relationships with related parties
c) types and purpose of transaction with related parties
Auditor shall inquire of management and others within the entity to obtain understanding of the controls:
a) TO identify, account for and disclose related party relationships and transaction in financial statements in accordance with AFRf.
b) To approve significant transactions with related partties and outside the normal course of buoisness.

Question 11

What should be discussion among engagement team?

Answer 11

1) Nature and extent of relationships and transaction with related party.
2) Focus of maintaining professional scepticism.
3) Circumstances which may indicate existence of unidentified related parties.
4) Documents and records which may indicate existence of unidentified related parties.

Question 12

What should be disscussion among engagement team?

Answer 12

1) Nature and extent of relationships and transaction with related party.
2) Focus of maintaining professional skepticism.
3) Circumstrances which ma indicate existence of unidentified related parties.
4) Documents and records which may indicate existence of unidentified related parties.

Question 13

What should be the discussion among the enganement team?

Answer 13

Auditor should discuss about all related particles.
1.Nature and extent of related party relationship and transactions.
2. focus on maintaining possible scepticism.
3. cirumstances which may indicate existance of unidentfied related particles.
4. documents and records which may indicate existance of unidentified related parties.

Question 14

What auditor should do while inspecting record of documents?

Answer 14

Auditor should remain alert while inspecting record of documents including
1. bank and legal confirmations obtained as part of auditor procedure.
2.minutes of meetings of shareholders and of those charged with governance.
3. records of documents which are necessary in view of auditor e.g.,
Third party confirmation, register of shareholders/directors/officers/investment, entity income tax return,documents filled to regulatory authorities internal audit reports, contracts outside the normal course of business or re-nogotiated by the entity,statments of conflits of intrest by management nad TCWG.

Question 15

WRITE SOME PROCEDURES TO ENSURE THE COMPLETENESS OF RELATED PARTIES.

Answer 15

1. Inspection of working papers of previous year for known related parties.
2. Inquire other audit firms involved in the audit about their knowledge of related parties.(in case of group audit)
3. inquiry of predecessors auditor(if any) about their knowledge of related parties.
4. inquiry of affiliation of TCWG and other officers with other entities.

Question 16

Specify the procedures that an audiotr should perform to ensure completeness of list of related parties provided by the directors

Answer 16

this is a concept review question

Question 17

if auditor identifies related party relationships or transactions not identified by the management that what would be his/her procedure?

Answer 17

Auditor shall
1. promptly communicate the relevant information to other members of engagement to assist them in determining whether risk should be revised.
2. if AFRF prescribed related party requirements
a. inquires as to why entity process and controls fails to identify or disclose such related party relationship.
b. Requet management to identify all transactions with newly identified related party for auditor further evaluation.
3. perform appropriate substantive procedures on newly identified related party and/or significant related party transactions.
4. reconsider risk of completeness of related party information because other unidentified related parties may also exist. Also perform additional audit procedures as necessary.
5. if non-disclosure appears intentional reconsider risk of fraud. also evaluate other implications on audit. (e.g., re-evaluate integrity of management)

Question 18

what would the procedure if there is a significant transaction outside the normal course of business?

Answer 18

1.auditor shall inquire and evaluate business rationale of such transactions.
2. if related party is involved, it will be a significant risk.
3. auditor shall inspect underlying contracts or agreements to evaluate:
a. terms of transaction are consistent with managements explanation.
b. transactions had been appropriately authorised in accordance with law and policy.
c. transaction had been appropriately accounted for and disclosed in accordance with AFRF.

Question 19

WHAT ARE EXAMPLES OF TRASACTIONS OUTSIDE THE NORMAL COURSE OF THE BUSINEES?

Answer 19

1. equity transactions
2. transactions with offshore companies
3. providing property or service without consideration.
4. sales with unusually large discounts or returns or with
   commitment to repurchase.
5. transactions whose terms are changed before expiry.

Question 20

What is procedure to evaluate business rationale?

Answer 20

auditor should consider following order to evaluate business rationale of transaction outside the normal course of business.
1. whether the transaction
a. is overly complex (for example. it may involve multiple related parties within a consolidation group)
b. has unusual terms of trade such as unusual prices interest rates, guarantees and repayment terms.
c. lacks apparent logical business reason for its occurrence.
d. involves previously unidentified parties.
e. is processed in unusual manner.
2. whether management has discussed the nature of, and accounting for, such as transaction with those charged with governance.
3. whether management is placing more focus on particular accounting treatment rather than giving due regard to underlying economics of the transaction.

Question 21

what to do if there is a related party dominant influence?

Answer 21

this would be a fraud risk factor. auditor shaal address it in accoardance with ISA 240.

Question 22

What are indicators of related party with dominant influence.

Answer 22

1. Founder of entity who is currently managing the entity.
2. significant transactions referred to related party for final approval.
3. related party voted significant business decisions.
4. little or no debate on proposals by related party.
5. transactions involved the related party are not reviewed and approved by others.

Question 23

what to di if related party transactions are not appropiately accounted for?

Answer 23

if management makes assertion in financial statements that related party transactions were conducted on arms length basis,auditor shall obtain sufficient appropriate audit evidence about this assertion

management may provide following evidence in order to support its assertion

1. comparing terms (price and others) of related party transaction to transaction in open market.
2. comparing terms of related party transactions with unrelated parties.
3. engaging an external to confirm terms and conditions for the transaction.

Question 24

what auditor shall do if management provides evidence in support of assertion.

Answer 24

auditor shall
1. consider the appropriateness of management process for supporting the assertion.
2. verify the sources of data, and testing its accuracy, completeness and relevence.
3. evaluate the reasonableness of any significant assertion.

Question 25

What are the implications on report after evaluation of controls?

Answer 25

1.if controls over related party transactions are ineffective there may be scope limitation.
2. auditor may express qualified opinion or disclaimer of opinion

Question 26

wha tto do if disclosure is not given or disclosure is not adequate?

Answer 26

1.related party transactions are material by nature (even if amount is small).
2. if related party transaction is not disclosed or is not adequate,this will be misstatement.
3. auditor shall expressqualified opinion (if effect is materail) or adverse opinion(if efect is pervasive)

Question 27

what written presentation auditor shall obtain from management?

Answer 27

uditor shall obtain written presentation from management that
1. they have appropriately accounted for disclosed such relationship and transactions in financial statement in accordance with AFRF.
2. thay have disclosed to auditor the identity of entity related parties and all the related party relationship and transactions of which they are aware.
3.

Question 28

which representation from TCWG in following cases

Answer 28

1. when they have approved specific related partytransactions that:
   a.materially involved financial statement or
   b. involved management
2. when they have financial or other intrest in related party or transaction
3. when they have made specific oral representation to the auditor on details of certain related party transacions.