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International Auditing and Assurance
Standards Board
Related Parties
ISA Implementation Support ModulePrepared by IAASB Staff
October 2009
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Introduction
Significant Features of New Standard New Related Party Definition
A Risk-Based Approach Identifying Undisclosed RPs or Significant RPTs Significant Transactions Outside Normal Business Fraud Risk Factors
Related Party with Dominant Influence Discovery of Undisclosed RPs or Significant RPTs Additional Aspects
Practical Considerations
Overview
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Rationale for disclosure requirements under mostfinancial reporting frameworks Related parties (RPs) are not independent of each other Disclosure of RP relationships and related party
transactions (RPTs) necessary for a proper understandingof financial results and position
RPTs often part of normal business
Audit significance of RPs and RPTs Risks from inappropriate accounting Risks from non-identification or non-disclosure Risks of fraud
The Context for ISA 550
Introduction
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Inherent difficulty in identifying undisclosed RPs/RPTs E.g., management itself may be unaware of RPs and
RPTs (especially if framework does not requiredisclosure)
Heightened risk of fraud RPs present greater opportunities for collusion,
concealment, or manipulation by management RPs involved in a number of corporate reporting
scandals in recent times
New standard provides robust basis for identifying risksof material misstatement from RPs
The Context for ISA 550
Introduction
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Frameworks that require RP disclosures generallydefine meaning of a RP
For frameworks that contain minimal or no RP
requirements Standard provides a RP definition and relatedguidance
Definition not for accounting purposes but for
complying with requirements of the ISA Effect of new RP definition
Ensures minimum audit work with regard to RPs, evenif framework contains no RP requirements
New Related Party Definition
Significant Features of New Standard
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Risk-based approach requires a thorough understandingof RPs and RPTs to identify and assess risks Consider RPs in engagement team discussion Inquire into changes in RPs from prior period, nature of
RP relationships, and type and purpose of RPTs Understand controls to identify, account for, and disclose
RPs and RPTs; and to authorize and approve significantRPTs
Determine whether any of the assessed risks aresignificant risks
Respond appropriately to assessed risks
A Risk-Based Approach
Significant Features of New Standard
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Searching for unidentified or undisclosed RPs orRPTs can be an onerous task
Standard takes a robust but practicable approach Mandatory document inspection limited to a few
document types
Bank and legal confirmations and minutes
However, required to consider which other records ordocuments should be inspected in the circumstances
Required to remain alert to undisclosed RPs or RPTs
Identifying Undisclosed RPs or Significant
RPTs
Significant Features of New Standard
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Standard places specific focus on significanttransactions outside normal course of business As a means to help identify undisclosed RPs
No requirement to search for these transactions butunderstand how they are authorized and approved
Probe into the transactions when identified Make specific inquiries of management Understand nature of the transactions Determine whether RPs are involved
Significant Transactions Outside Normal
Business
Significant Features of New Standard
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Treated as significant risks If these are identified
Understand controls over them
Obtain substantive audit evidence about themInspect supporting contracts or agreements
Does business rationale of the RPTs suggest possibility of fraud?
Are their terms consistent with managements explanations? Have they been appropriately accounted for and disclosed?
Have they been appropriately authorized and approved?
Significant RPTs Outside Normal Business
Significant Features of New Standard
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Be especially alert to fraud risk factors from RPs Standard directs auditor in various ways on this, e.g.,
Consider fraud potential of RPs in engagement teamdiscussion
Consider features of the control environment that may deter orfacilitate fraud
Consider fraud implications if non-disclosure of RPs or RPTsby management appears intentional
Evaluate business rationale of significant RPTs outsidenormal business
Emphasis on fraud applies even if framework does notdeal with RPs
Fraud Risk Factors
Significant Features of New Standard
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Dominant influence introduced as a new term A RP with dominant influence is a fraud risk factor Indicator approach to recognizing dominant
influence
Significant risks of material misstatement due tofraud when other risk factors are also present E.g., the RP is unduly involved in the determination
of accounting estimates If significant risk of material misstatement due to
fraud is assessed, take appropriate action inaccordance with ISA 240
Related Party with Dominant Influence
Significant Features of New Standard
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Treated as a red flag Probe the underlying circumstances Communicate newly identified RPs to the team Ask management to identify all transactions with the
newly identified RPs Perform substantive procedures in relation to newly
identified RPs/RPTs Reassess risk that other unidentified or undisclosed
RPs or RPTs may exist If non-disclosure appears intentional, evaluate audit
implications
Discovery of Undisclosed RPs or Significant
RPTs
Significant Features of New Standard
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Evaluate whether Accounting and disclosure of RP relationships
and transactions comply with framework requirements The effects of the RPs and RPTs
Prevent the financial statements from achieving fairpresentation (for fair presentation frameworks) or
Cause the financial statements to be misleading (forcompliance frameworks)
Forming an Opinion on the Financial
Statements
Additional Aspects
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Obtain audit evidence about arms -length assertions Obtain written representations that
All RPs and RPTs have been disclosed to auditor
RP relationships and transactions have beenappropriately accounted for and disclosed
Communicate significant RP matters with TCWG
Document The names of identified RPs The nature of the RP relationships
Other Requirements
Additional Aspects
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Integrate work required by new standard with otherrisk assessment procedures
Open and timely communication on RP matters
within engagement team is vital RPs can have pervasive effects throughout the entity Share knowledge and insights about entitys RPs Agree on approach to inspecting records and
documents Share relevant RP information obtained from risk
assessment process Promptly communicate newly identified RPs to team
Practical Considerations
Practical Considerations
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Given potential for unidentified/undisclosed RPs/RPTs Maintain attitude of professional skepticism Be alert to significant transactions outside normal
business
RP disclosures may require special attention Disclosures may be complex and are often a source of
material misstatement
Complexity and excessive detail may obscure substanceof RPTs
Evaluate disclosures for adequacy and understandability
Practical Considerations
Practical Considerations
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Include relevant RP considerations in earlycommunications with TCWG Input from TCWG feeds into risk assessment process
Early dialogue helps avoid later surprises Discuss significant RP matters arising during
audit with TCWG
Reach common understanding of facts andcircumstances
Helps to address RP issues on a timely basis
Practical Considerations
Practical Considerations
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Copyright October 2009 by the International Federation of Accountants(IFAC). All rights reserved. Permission is granted to make copies of this work provided that such copies are for use in academic classrooms or for personal useand are not sold or disseminated and provided that each copy bears thefollowing credit line: Copyright October 2009 by the InternationalFederation of Accountants (IFAC). All rights reserved. Used with permission of
IFAC. Contact [email protected] for permission to reproduce, store, or transmit this work. Otherwise, written permission from IFAC is required toreproduce, store, or transmit, or to make other similar uses of, this work, exceptas permitted by law. Contact [email protected] .
International Federationof Accountants
ISBN: 978-1-60815-041-0
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