ISA 550 (Revised) — Related Parties

ISA 550 (Revised) DEALS with the auditor’s responsibilities RELATING to related party relationships and transactions in an ‘Audit‘ of Financial Statements.

Table of Contents

ISA 550 (Revised) – Introduction
- 1. Scope of this ISA
- 2. Effective Date
ISA 550 – Objectives
ISA 550 – Definitions
- 1. Arm’s Length Transaction
- 2. Related Party
ISA 550 – Requirements
Synopsis

ISA 550 (Revised) – Introduction

1. Scope of this ISA

It EXPANDS on how ISA 315 (Revised), ISA 330 and ISA 240 are to be applied in relation to risks of Material Misstatement associated with related party relationships and transactions.

2. Effective Date

This ISA is EFFECTIVE for audits of financial statements for periods beginning on or after December 15, 2009.

ISA 550 – Objectives

The Objectives of the Auditor are:
(a) To OBTAIN an *Understanding of related party relationships and transactions* sufficient to be able: (i) To recognize fraud risk factors; AND (ii) To conclude whether the ‘Financial Statements: – Achieve fair presentation; OR – Are Not Misleading.
(b) In addition, whether related party relationships and transactions have been appropriately ‘Identified‘, ‘Accounted for‘ and ‘Disclosed‘.

ISA 550 – Definitions

1. Arm’s Length Transaction

A Transaction conducted on such terms and conditions as between willing buyer and seller who are UNRELATED and are acting INDEPENDENTLY and pursuing their own ‘Best Interests’.

2. Related Party

(a) A person or other entity that has control or significant influence;

(b) Another entity over which the reporting entity has control or significant influence; OR

(c) Another entity that is under Common Control with the Reporting Entity through having:
– Common Controlling Ownership;
– Owners who are Close Family Members; OR
– Common Key-Management.

ISA 550 – Requirements

1. Risk Assessment Procedures and Related Activities

As per ISA 315 (Revised) and ISA 240, the auditor shall PERFORM the audit procedures and related activities to obtain information relevant to identifying the ‘Risks of Material Misstatement’ associated with related party relationships and transactions.

1.1 Understanding the Entity’s Related Party Relationships and Transactions

The ‘Auditor’ shall INQUIRE of Management regarding:

The identity of entity’s related parties INCLUDING changes from the prior period;
The nature of relationships between the entity and these related parties; AND
Whether the entity entered into any transactions during the period and if so, the type and purpose of the transactions.

1.2 Maintaining Alertness for Related Party Information When Reviewing Records or Documents

During the audit, the ‘Auditor’ as per ISA 550 shall REMAIN ALERT for arrangements or other information that May indicate the existence of related party relationships or transactions.

In Particular, the Auditor Shall INSPECT the Following:
(a) Bank and legal confirmations obtained as part of the auditor’s procedures;
(b) Minutes of ‘Meetings’ of shareholders and those charged with governance; AND
(c) Such other records or documents as the auditor considers Necessary in the circumstances of the entity.

1.3 Sharing Related Party Information with the Engagement Team

The ‘Auditor’ shall SHARE Relevant information with the other Members of the Engagement Team.

2. Identification and Assessment of the Risks of Material Misstatement Associated with Related Party Relationships and Transactions

As Per ISA 315 (Revised), the ‘Auditor’ shall IDENTIFY and ASSESS the risks of Material Misstatement and determine whether any of those risks are ‘SIGNIFICANT Risks‘.

3. Responses to the Risks of Material Misstatement Associated with Related Party Relationships and Transactions

As Part of ISA 330, the ‘Auditor’ DESIGNS and PERFORMS further audit procedures to obtain sufficient appropriate audit evidence.

3.1 Identification of Previously Unidentified or Undisclosed Related Parties or Significant Related Party Transactions

The ‘Auditor’ shall DETERMINE whether the Underlying circumstances CONFIRM the existence of those related party relationships or transactions.

The Auditor Shall:
(a) Promptly communicate to the other Members of the engagement team;
(b) Where the applicable Financial Reporting Framework establishes related party Requirements: – Request Management to identify all transactions; AND – Inquire as to why the entity’s controls failed to enable the identification or disclosure.
(c) Perform appropriate substantive audit procedures;
(d) Reconsider the risk that other related parties or significant related party transactions May exist; AND
(e) If the Non-Disclosure by Management appears intentional, evaluate the Implications for the audit.

3.2 Identified Significant Related Party Transactions Outside the Entity’s Normal Course of Business

The ‘Auditor’ shall:

INSPECT the underlying contracts or arrangements, if any; AND
OBTAIN audit evidence that the transactions have been appropriately authorized and approved.

3.3 Assertions That Related Party Transactions Were Conducted on Terms Equivalent to Those Prevailing in an Arm’s Length Transaction

The ‘Auditor’ shall OBTAIN sufficient appropriate audit evidence about the assertion.

4. Evaluation of the Accounting for and Disclosure of Identified Related Party Relationships and Transactions

In Forming an Opinion as per ISA 700 (Revised), the ‘Auditor’ shall EVALUATE:

(a) Whether the identified related party relationships and transactions been appropriately accounted for and disclosed; AND

(b) Whether the effects of the related party relationships and transactions:
– Prevent the financial statements from achieving the fair presentation; OR
– Cause the financial statements to be Misleading.

5. Written Representations

The Auditor shall OBTAIN ‘Written Representations’ from Management and where appropriate those charged with governance that:

They have disclosed to the auditor the identity of the entity’s related parties and all such relationships and transactions they are aware; AND
They have appropriately accounted for and disclosed such relationships and transactions.

6. Communication with Those Charged with Governance

UNLESS, all those charged with governance are involved in Managing the entity, the auditor shall COMMUNICATE ‘SIGNIFICANT MATTERS’ arising during the audit.

7. Documentation

The ‘Auditor’ shall INCLUDE the Names of the identified related parties and the Nature of the related party relationships.

Synopsis

ISA 550 ‘Related Parties‘ DEALS with the auditor’s responsibilities relating to related party relationships and transactions in an ‘Audit‘ of Financial Statements.

[500-599] Audit Evidence