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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


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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


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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


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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


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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


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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


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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


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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



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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



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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



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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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