A Brief Explanation on SA 550 Related Parties

in relation to related parties and its transactions.

There may exist many related parties in an entity but not all impose significant risks of material misstatements on a financial statement i.e. some may impose higher or some may impose lessor risk of misstatement. For the sake of this SA related parties would include:

1. a person or other entity that has control or significant influence directly or indirectly through one or more intermediaries
2. another entity over which the reporting entity has control or significant influence directly or indirectly.

1. identity
2. nature of relationships transactions entered into/purpose

The auditor shall inquire management and others within the entity regarding their initiative in assessing the related parties relations or about any kind of controls established to:

1. identify the related parties OR
2. authorize and approve significant transactions.

During the review of the audit the auditor shall always maintain Professional Skepticism ( questioning mind) about the existence of related parties which was previously not identified or disclosed by the management. And on identification of the same the nature and involvement of related parties should be inquired into with the management.

The relevant information should be shared with the engagement team ( other person involved in the conduct of an audit) by the auditor. In identification and Assessment as per SA 315 those risk/ fraud risk factors ( SA 240) should be largely emphasized upon which are of significant in nature.

SA 330 should be applied on such risk factors to respond appropriately and perform substantive procedures to the identified related parties and its transactions.

Further, sufficient (quantum) and appropriate (quality) evidences should be obtained to support that the transactions with the related parties were undertaken at an arms length ( terms and conditions between willing buyer and 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 transactions are appropriately accounted for and related parties does not prevent financial statements from:

1. achieving true and fair view OR
2. mislead the users

Working Representations should be obtained by the auditor from the  management that they have disclosed the relations with the related parties and the transactions are properly accounted for and disclosed. Unless TCWG are involved in management the auditor shall communicate with the TCWG all significant matters arising during the course of audit with related parties. At last, documentation as per SA 230 shall include names identified of the related parties and nature of relationships.