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Audit book by m asif chapter 16 related parties

Auditing – Study Notes

Chapter 16 Related Parties

CHAPTER SIXTEEN
RELATED PARTIES
LO #

ICAP'S STUDY TEXT
REFERENCE*

LEARNING OBJCTIVE
DEFINITION OF RELATED PARTY AND RELATED PARTY
TRANSACTIONS
RESPONSIBILITIES OF MANAGEMENT AND AUDITOR
REGARDING RELATED PARTY
PROCEDURES
TO
IDENTIFY
RELATED
PARTY

RELATIONSHIPS AND TRANSACTIONS

LO 1
LO 2
LO 3

12.1.1
12.1.1, 1 2.1.2
12.1.3

LO 4

RISKS IDENTIFIED AND AUDITOR’S COURSE OF ACTION

12.1.3

LO 5

MATERIALITY,
WRITTEN
REPRESENTATION,
COMMUNICATION WITH TCWG AND DOCUMENTATION

12.1.3

*Explanation of Reference:
First digit in Study Text’s Reference represents chapter number, second and third digits represents
section and sub-section number. Contents in brackets (if any) represent part of the sub-section
which is covered by the learning objective.

Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP's Question
Bank:
 Q. # 50,
 Q. # 53
 Q. # 57

1

By: Muhammad Asif, ACA




Auditing – Study Notes

Chapter 16 Related Parties

LO 1: DEFINITION OF RELATED PARTY AND RELATED PARTY TRANSACTIONS :

Related Parties:
Related parties are individuals or organisations that might have, or might be expected to have, an
undue influence on the company that is being audited.
Examples of related parties include:
 the directors and key management of a company
 their families
 other companies controlled by directors, key managers and members of their close family
 other companies in the same group.

Related Party Transactions:
Related party transactions are transactions between the client company and a related party of the
company.

LO 2: RESPONSIBILITIES OF MANAGEMENT AND AUDITOR REGARDING RELATED PARTY:
Responsibilities of Management:
IFRS requires management to identify, account for and disclose related party relationships and
transactions.

Responsibilities of Auditor:
1. To evaluate whether related party relationships/transactions have been appropriately
identified, accounted for and disclosed in accordance with IFRS.
2. To evaluate whether:
 Fraud risk factors exist
 Financial statements present true and fair view

LO 3: PROCEDURES TO IDENTIFY RELATED PARTY RELATIONSHIPS AND TRANSACTIONS :

1. The auditor shall inquire of management regarding:
 Identification of related parties, including changes from the prior period
 Relationships with related parties; and
 Transactions with related parties
2. Obtain understanding of client’s procedures and internal controls over identification,
accounting for and disclosure of related party relationship and transactions, including:
 Authorization and approval of related party transactions.
 Review reports by internal audit department.
3. Review working papers for previous years for known related parties.
4. Evaluate relationship of directors with other entities.
5. Communicate with component auditor or predecessor auditor (if applicable) for knowledge
of related parties
6. Inspection of records or documents, including:
 Bank and legal confirmations obtained as part of the auditor’s procedures;
 Minutes of meetings of shareholders and of those charged with governance; and
 Such other records or documents as the auditor considers necessary in the
circumstances e.g. Register of shareholders, Register of directors/officers, Entity’s
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By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 16 Related Parties

reporting to regulators (e.g. SECP, FBR, SBP), Records of the entity’s investments,
Significant contracts re-negotiated by the entity during the period, Published reports by
company (e.g. financial statements of prior period, prospectuses).

LO 4: RISKS IDENTIFIED AND AUDITOR’S COURSE OF ACTION:
Risk Identified
Auditor’s course of action/procedures to address risk
Auditor shall perform following procedures when he identifies a previously
unidentified related party relationship/transaction:
 Communicate to other members of engagement.
Auditor identifies
 Reconsider risk of completeness of related parties (as other unidentified
related party
related parties may also exist).
relationships or
 Reconsider risk of fraud, if non-disclosure appears intentional.
transactions not
 Inquire as to why entity’s process and controls failed to identify it.
identified by
 Request management to identify all transactions of newly identified related
management:
party.
 Perform substantive audit procedures on newly identified related
party/transaction
Significant transactions outside the normal course of business indicate a related
party transaction. If auditor identifies such a transaction, auditor shall inquire of
management about whether related parties could be involved.

If auditor identifies
significant transactions
outside the normal
course of business.

Existence of a related
party with dominant
influence***

If a related party is involved in a significant transaction outside the normal course
of business, it will be a significant risk. Auditor shall evaluate whether:
i. Transactions have been appropriately authorized (e.g. by TCWG).
ii. Transactions have been appropriately accounted for and disclosed in
accordance with the AFRF.
iii. The terms of the transactions are consistent with management’s explanations.
iv. Transaction indicates fraud.
If there is a related party with dominant influence, auditor shall inspect significant
contracts with such related party.

***Indicators of dominant influence exerted by a related party include:
 Party has played significant role in founding the entity and continues to play that role in
managing the entity.
 Significant transactions are referred to Party for final approval
 Party has vetoed significant business decisions
 There is little or no debate/review on transactions involving Party

3

By: Muhammad Asif, ACA


Auditing – Study Notes

Chapter 16 Related Parties

LO 5: MATERIALITY, WRITTEN REPRESENTATION, COMMUNICATION WITH TCWG AND
DOCUMENTATION:
Materiality:
Transactions with related parties are usually considered material irrespective of size of transaction.

Written Representation:
Auditor shall obtain written representations from management that:
1. All Related party relationships and transactions have been appropriately identified,
accounted for and disclosed in financial statements in accordance with the requirements of
AFRF.
2. Management has disclosed to auditor all related party relationships and transactions of
which they are aware.
Communication with TCWG:
Auditor shall communicate TCWG significant matters regarding Related Parties.
Documentation:
The auditor shall include in the audit documentation:
 Name of related parties
 Nature of relationships with related parties

4

By: Muhammad Asif, ACA



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