ISA 550 - Related Parties

Question 1

ISA 550: Related Parties

Answer 1

Related Parties:
> High risk of Material Misstatement.
> Ensure proper identification, accounting and disclosure of related parties by the management.

Financial Reporting Frameworks establish specific Accounting and disclosure requirements for related parties.

If yes to FRF:
> In accordance with the requirements of the FRF.

If no to FRF:
> ISA 550 Related Party transactions.

Common Control with the Reporting entity through:
* Common controlling ownership.
* Owners who are close family members.
* Common key management.

Exception - Common control by the Government.

It is an area of high risk.

Question 2

ISA 550: Risk Assessment Procedure

Answer 2

Reference: ISA 315 & ISA 240.
1. Obtain an understanding of the Entity’s related partty relationships and transactions.
2. Maintaining alertness for Related Party information when reviewing records or documents.
3. Identification and Assessment of the risks of Material Misstatement associated with Related Party relationships and transactions.

Assessment of Risk of Related Party Transactions:
Step 1. Inquire with the management.
> The identity of the Entity’s Related Parties.
> The nature of the transactions.
> Transactions entered with Related Parties.
> Changes in identity from the prior period.
> Appropriate controls.

Step 2: Maintaining Alertness for Related Party information when reviewing records or documents.
> Is there any agreement with Related Party?
> Beyond the normal course of the business.
* Understanding Related Parties and activities.
* Maintain Alertness:
> Bank , Legal and 3rd Party Confirmations.
> Minutes of Meetings of shareholders/ TCWG.

Step 3: Dominance of Related Parties in the business if any.
> Where everything from Related Parties is approved, without questioning, know that there is Related Party Dominance, and thus a high risk pointer.
* Fraud Risk Indicator:
> Low = Green, Normal = Yellow, and High = Red.

Question 3

ISA 550: How to respond to the Assessed risks?:

Answer 3

1. Inquire with the management:
   > Where there is No full disclosures.
   * Possibility 1 - Ignorance.
   * Possibility 2 - Intentional.
   > Promptly communicate the relevant information to the Engagement team.
   > Request Management:
   * To identify all transactions with the newly identified related parties.
   * Disclosure and Account for as per applicable Financial Reporting Framework.
   > Inquire as to why the Entity’s controls over related partty relationships and transactions failed.
   > Perform appropriate Substantive Audit Procedures relating to such newly identified related parties.
2. Identified Significant Related Party Transactions outside the Entity’s Normal course of business.
   * Enquire with management:
   > The business rationale of the transaction.
   > Terms of the transactions are consistent with Management’s explanations.
   > Obtain Audit Evidence that the transactions have been appropriately Authorized and Approved.
   > The transactions have been appropriately Accounted for and Disclosed.
3. Assertions that Related Party Transactions were conducted on terms equivalent to those prevailing in an arm’s Length Transaction.

Question 4

ISA 550: Communication with TCWG:

Answer 4

Obtain written representation from the management.
> Identification
> Accounting
> Disclosure of Related Party Relationships and Transactions.

Documentation required:
> Names of Related Parties
> Transactions with Related Parties.

Conclusion:
> Identify, Account, and Disclose all the Related Parties and Transactions as per applicable FRF.