This standard on auditing lays emphasis on the auditors responsibilities in regard to the related parties identified during the conduct of an audit of financial statments. It deals with the responsibilities and expands on how to make application of the following in relation to related parties relationships and transactions :
- SA 315 Identification and Assessment of the Risk of Material Misstatment Through Understanding the Entity and its Environment and Related InternaL Controls
- SA 330 Responses to Assessed Risks
- SA 240 The Auditors Responsibilities Relating to Fraud in an Audit
There may exist many related parties in an entity but not all impose significant risk of material misstatement on a financial statement i.e. some relationships impose higher or some may impose lessor risk.
For the sake of this SA related parties include:
1. a person or other entity that has control or significant influence directly or indirectly through one or more intermmediaries OR
2. another entity over which the reporting entity has control or significant influence directly/indirectly or through intermmediary
The auditor is required to inquire managment regarding:
- nature of relationships
- transactions entered into/ purpose of transactions
with the related parties in understanding the entity's related party relations and transactions. The auditor shall inquire management and others within the entity regarding their initiative in assessing related party relations or about any kind of controls established to:
1. identify the related parties
2. authorize and approve significant transactions.
During the review of the audit the auditor shall always maintain alertness and Proffessional Skepticism ( doubtfull mind) about the existance of related parties which was previously not identified and disclosed by the management. And on identification of the same the nature and involvement of related parties should be inquired into.
The relevant information should be shared with the Engagement Team (all person performing audit including expert) by the auditor.
In identification and assessment as per SA 315 those risks / risk factors should be largely emphasized which are of significant in nature. Further, SA 330 should be applied on such risk factors to respond appropriately and perform substantive procedures to the identified related parties and its transactions.
Suffecient ( quantum) and appropriate (quality) evidences should be obtained to support that the transactions with the related parties were undertaken at an arms lenth ( transactions conducted on such terms and conditions between the willing buyer and the willing seller who are unrelated and are acting independently with each other without their own best interest)
It should be looked into while forming an opinion that the transactions are appropriately accounted for and disclosed and such related parties does not:
- prevent financial statements from acheiving the true and fair veiw OR
- mislead the users
Working Representations should be obtained from the management acknowledging that the transactions with the related parties are accounted and disclosed. Unless Those Charged With Governance (TCWG) are involved in management the auditor shall communicate with TCWG all significant matters arising during the course of audit. And in the end, documentation as per SA 230 shall include names identified of the Related Parties and nature of relationships.