RELATED PARTIES

CAS 550

RELATED PARTIES

CAS 550

Risk Assessment Procedures and Related Activities
  • As part of the risk assessment procedures discuss with the engagement team the susceptibility of the F/S to material misstatement due to fraud or error that could result from the entity’s related party relationships and transactions
  • Inquire of management regarding:
    • The identity of the entity’s related parties, including changes from the prior period
    • The nature of the relationships between the entity and these related parties; and
    • Whether the entity entered into any transactions with these related parties during the period and the type/purpose of the transactions
  • Inquire of management and others within the entity to obtain an understanding of the controls that management has established to:
    • Identify, account for, and disclose related party relationships and transactions in accordance with GAAP
    • Authorize and approve significant transactions with related parties; and
    • Authorize and approve significant transactions outside the normal course of business
  • During the audit, remain alert, when inspecting documents, for info that may indicate the existence of related party relationships/transactions that management has not previously identified/disclosed to the auditor
    • In particular, inspect the following:
      • Bank and legal confirmations
      • Minutes of meetings of shareholders and of those charged with governance
      • Other records or documents as the auditor considers necessary
    • If the auditor identifies significant transactions outside the entity’s normal course of business, the auditor shall inquire of management about:
      • The nature of these transactions; and
      • Whether related parties could be involved
Identification and Assessment of the Risks of Material Misstatement Associated with Related Party Relationships and Transactions
  • Identify and assess the risks of material misstatement associated with related party relationships and transactions and determine whether any of those risks are significant risks
    • Treat identified significant related party transactions outside the entity’s normal course of business as giving rise to significant risks
Responses to the Risks of Material Misstatement Associated with Related Party Relationships and Transactions
  • Perform the following audit procedures to obtain sufficient appropriate audit evidence about the assessed risks of material misstatement associated with related party relationships/transactions:
    1. If the auditor identifies related parties or significant related party transactions that management has not previously identified or disclosed to the auditor:
      • Communicate the relevant info to the other members of the engagement team
      • Request mgm’t to identify all transactions with the newly identified related parties
      • Inquire why the entity’s controls failed to identify related party transactions
      • Perform substantive audit procedures relating to the newly identified related parties or significant related party transactions (i.e. inquiring mgm’t/others, analysis of accounting records for transactions with the identified related parties, Verifying the terms and conditions of the newly identified related party transactions)
      • Reconsider the risk that other related parties or significant related party transactions may exist that management has not previously identified
      • If the non-disclosure by management appears intentional (i.e. an indicator of fraud), evaluate the implications for the audit
    2. For identified significant related party transactions outside the entity’s normal course of business:
      • Inspect the underlying contracts or agreements and evaluate whether:
        • The business rationale of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to hide misappropriation of assets
        • The terms of the transactions are consistent with management’s explanations;
        • The transactions are accounted for in accordance with GAAP
      • Obtain audit evidence that the transactions have been appropriately authorized and approved
Evaluation of the Accounting for and Disclosure of Identified Related Party Relationships and Transactions
  • In forming an opinion on the F/S, evaluate:
    • Whether the identified related party relationships and transactions have been appropriately accounted for and disclosed per GAAP
    • Whether the effects of the related party relationships and transactions prevent the F/S from achieving fair presentation or cause the financial statements to be misleading
Written Representations
  • Obtain written representations from management and those charged with governance that:
    • They have disclosed to the auditor the related parties and all the related party relationships and transactions of which they are aware; and
    • They have appropriately accounted for and disclosed such relationships and transactions in accordance with GAAP
Documentation
  • Document the names of the identified related parties and the nature of the related party relationships

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