RELATED PARTIES Flashcards
DEFINE RELATED PARTIES ?
Related party means related party as defined in AFRF.If AFRF doesnot prescribed related party requirements , it means
* Individuals or Organizations that has control or influence (directly or indirectly through intermediaries) over the entity.
* Organization on which entity has control or influence.
* Organizations under common management and control.
EXAMPLES OF RELATED PARTIES
**
- Companies in the same group i.e holding company , subsidiary company,and associated company.
- Majority shareholders,Directors,and key management of the company and their close relatives.
- Other entities controlled by key management ,directors OR their close relatives.
What are related parties transactions?
- Related party transactions are transactions between client and Related parties.
EXAMPLES OF RELATED PARTIES TRANSACTION ?
- Sale OR purchase of assets
- Receiving Or providing services e.g,consultancy,management,or accountancy.
- Giving or obtaining loan OR Guarantee OR repayment of loan.
WHY RISK IS HIGH IN RELATED PARTY TRANSACTIONS ?
Related party transactions may operate through compex relations and structures.
Management may commit fraud through collusion with related parties.
Related party transactions may not be conducted on arm’s length basis.
There is an inherent limitation that management may be unaware of existence of all related parties. further,Information system may not identify all related party relationships and transactions.
RESPONSIBILITIES OF MANAGEMENT REGARDING RELATED PARTIES ?
- If AFRF prescribes requirements of related party.then it is the responsibility of management to identify ,account for and disclose related party relationships and transactions.
RESPONSIBILITIES OF AUDITOR REGARDING RELATED PARTY ?
- Auditor is responsible to obtain understandings of related party relationship and transaction to assess the risk ( including risk of fraud)
- Auditor is responsible to obtain evidence :
All related party relationships and transactions are identified,accounted for and disclosed in accordance with AFRF.
Financial statements gives true and fair view (fair presentation framework)
Financial statements are not misleading ( compliance framework).
Due to inherent limitations of audit,auditor may not detect all related parties.
RISK ASSESSMENT PROCEDURES OR PROCEDURES TO ENSURE COMPLETENESS OF RELATED PARTIES ?
- INQUIRY
- DISCUSSIONS AMONG ENGAGEMENT TEAM
- INSPECTION
- OTHER PROCEDURES TO ENSURE COMPLETENESS OF RELATED PARTIES
INQUIRY
- Auditor shall inquire of management regarding
* identity of entity’s related parties(including changes from prior period)
* nature of relationship with related parties.
* Type and purpose of transaction with related parties - Auditor shall inquire of management and others within entity to obtain understandings of controls
* To identify ,account for and disclose related party relationships and transactions in accordance with AFRF.
* To approve significant transactions with related parties and outside normal course of business.
DISCUSSION AMONG ENGAGEMENT TEAM
- Auditor shall discuss among engagement team about related parties.
*Nature and Extent of related party relationship and transactions.
* Focus of maintaining professional skepticism
* Circumstances which may indicate existence of unidentified related parties.
* Documents or records which may indicate existence of unidentified related parties.
INSPECTION
- Auditor shall remains alert when inspecting record or documents including:
- Bank and legal confirmation obtained as part of the auditor’s procedures.
- Minutes of meetings of shareholders and those charged with governance and
* Such other records or documents as the auditor considers necessary in the circumstances.
* e.g third party confirmation,Register of shareholders/directors/Officers/investment ,Entity’s income tax return,documents fiked to regulatory authourities(prospectus),internal audit reports,contract outsidenormal course of business OR re-negotiated by entity , statement of conflict of interest by management and TCWG.
OTHERS PROCEDURES TO ENSURE COMPLETENESS OF RELATED PARTIES
- Auditor shall inspect working papers of previous year for kown related parties.
- Auditor shall inquire of predecessor auditor about knowledge of related parties.
- Auditor shall inquire of affiliation of TCWG and other officers with other entities.
- Auditor shall inquire other audit firms involved in the audit (in case of group audit )about their knowledge of related parties.
POSSIBILITY OF RISKS IN RELATED PARTIES ?
- RELATED PARTY TRANSACTIONS ARE NOT APPROPRIATELY ACCOUNT FOR.
- IF AUDITOR IDENTIFIES RELATED PARTY RELATIONSHIP AND TRANSACTIONS NOT IDENTIFIED BY MANAGEMENT.
- IF THERE IS SIGNIFICANT TRANSACTION OUTSIDE NORMAL COURSE OF BUSINESS.
- RELATED PARTY WITH DOMINANT INFLUENCE.
- RELATED PARTY TRANSACTIONS ARE NOT APPROPRIATELY ACCOUNT FOR.
- If management makes assertion in financial statementsthat “Related party transactions were conducted on arm’s length basis “,auditor shall obtain appropriate audit evidence about assertion.
Management may provide followings evidence in support of its assertion
. comparing (price and others) of related party transaction to transaction in open market.
.comparing terms of related party transaction with unrelated parties.
.Engaging an external expert to confirm terms and conditions for the transaction. - Auditor shall
. consider the appropriateness of management’s process for supporting the assertions.
.verify the source of data,and testing its accuracy,completeness and relevance. - . evaluate reasonableness of any significant assumptions.
IF AUDITOR IDENTIFIES RELATED PARTY RELATIONSHIP AND TRANSACTIONS NOT IDENTIFIED BY MANAGEMENT
Auditor shall perform following procedures
1. Promptly communicate the relevant information to other members of engagement team to assist them in determining whether risk should be revised.
2. If AFRF requires related party requirements:
* Inquire as why entity’s process and control failed to identify and disclose related party relationship and transaction.
* Request management to identify all transactions with newly identified related parties for auditor’s further evaluation.
3.Perform appropriate substantive procedures on newly identified related party OR significant related party transactions.
4.Reconsider risk of completeness of related party information because other unidentified related parties may also exist.Akso perform additional audit procedures as necessary.
5.If non-disclosure appears intentional,reconsider risk of fraud.Also evaluate other implications on the audit (e.g:re-evaluate integrity of management).
