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Isa 550 related parties

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Isa 550 related parties

  1. 1. ISA-550 RELATED PARTIES Presenter . Mirza Imran Ali
  2. 2. OVER VIEW • • • • • • • • Scope Introduction Objectives Definitions Requirements Written Representation Communication Documentation
  3. 3. Scope This standard deals with the auditor’s responsibility relating to related party relationship and transactions in audit of financial statements.
  4. 4. Introduction • Nature of Related Party Relationship and Transactions • Responsibility of auditor
  5. 5. Nature of Related Party Relationship and Transactions Related party Transaction Normal Course of Business No higher risk of material misstatement Other than Normal Course of Business Higher risk of material misstatement Extensive and complex range of Relationship Ineffective Information System Transactions at abnormal Market terms
  6. 6. Responsibilities of auditor Applicable Financial Reporting Standard Establishes Establishes no/minimal Requirements Specific Requirements Accounting Requirements Achieve fair Presentation Disclosure Requirements Are not misleading
  7. 7. Question… Is there any situation in which a non-disclosure of related party is in compliance of relevant Framework but is misleading ?????
  8. 8. Answer If the entity derives a very substantial portion of its revenue from transaction with related parties, and that fact is not disclosed.
  9. 9. Some other considerations • • • Fraud risk factors Professional Skepticism Inherent Limitations – Management is unaware. – Concealment by management
  10. 10. Objectives • Obtain appropriate audit evidence that all related party transactions have been identified and accounted for. • Recognized fraud risk factors. • To conclude that Financial Statements are fairly presented or not misleading.
  11. 11. Definitions • Arm’s length transaction. • Related Party
  12. 12. Arm’s length transaction. • Willing buyer and • • • willing seller. Unrelated . Acting independently. Pursuing their own best interest.
  13. 13. Related party • As defined in applicable • Financial Reporting Framework. A person or other entity has – Direct or indirect control – Significant influence Over reporting entity or vice versa. • Another Entity under common control with the reporting entity through having – – Common controlling ownership Owners who are close family members or
  14. 14. control • Power to govern financial and operating policies of an entity Significant influence • Power to participate in financial and operating policy decisions of the entity • But is not control over such policies
  15. 15. Question. If two entities are under common control by estate or local government whether those can be called related parties???
  16. 16. Common control by state Such entities are not considered related unless they engage in • significant transitions • share resources to a significant extent with one another
  17. 17. Risk Assessment Procedures • Discussion Among • • the engagement team Inquiries from management Understanding of control environment
  18. 18. Discussion Among the engagement team • • • • • Nature and extent of entity’s relationship. Importance of professional Skepticism. Record and document indicating relationship. How related party may be involved in fraud. Related party relation indicators – – – Organizational structure Inadequate information system Special purpose entities for earning management
  19. 19. Earning management ?
  20. 20. Answer Earnings management is a strategy used by the management of a company to deliberately manipulate the company's earnings so that the figures match a pre-determined target.
  21. 21. Inquiries from management • Identity of entity’s • • • • related party Nature of relationship Transactions with related party if any Internal control Transactions in – Normal course of business – Other than normal course of business
  22. 22. Understanding of control environment • • • • • • • • Internal ethical codes Policies and procedures for disclosures Responsibility assignment Management’s discussions Transaction’s approval method Internal auditor’s reviews Actions taken by management Whistle-blowing policies
  23. 23. Reasons for deficiency of controls • • • • • Low importance Lack of over sight Intentional disregard Insufficient understanding of framework Absence of disclosure requirement in framework
  24. 24. Indicators of related party relationships and transactions • • • • • • • • • Bank and legal conformation Minutes of the meeting Entity’s income tax return Share holders register Records of investments Contracts and agreements with related party Correspondence of legal advisers Life insurance policy Internal auditor report
  25. 25. Related parties with dominant influence •Domination of management by one or more person is a fraud risk factor •Take appropriate action in accordance with ISA 240
  26. 26. Indicators of dominant influence • • • • Veto power Control over final approval Unquestioned decisions Approval of Transaction without review
  27. 27. Indicators of material misstatement • High turnover of senior management • Unjustified transactions through intermediaries • Excessive participation in selection of accounting polices
  28. 28. Responses to the assessed risk • Auditor should reassess the nature, timing & extent of further audit procedures
  29. 29. Substantive audit procedures • • • • • • Confirmations from third parties Inquires from management Inquires from related parties Reading Financial Statements Inspections of significant contracts Appropriate background research
  30. 30. Discovery of Undisclosed Related Parties • • • • • Communicate to engagement team members Identification of all transactions with such parties Inquiry about internal control failure Apply substantive procedures Reassess risk that other unidentified or undisclosed RPs or RPTs may exist
  31. 31. Intentional Non Disclosure • Indicative of material misstatement due to fraud and error. • Consider requirements of ISA-240 • Re-evaluate reliability of management’s responses.
  32. 32. Significant RPTs Outside Normal Business • Inspection of – Business rationales – Terms of transactions – Transactions accounted for and disclosed • Transactions are authorized and approved.
  33. 33. Evaluation of business rationales • Consider weather Transactions – – – – – Is overly complex Has unusual terms of trade Lacks logical business reasons Involves unidentified parties Processed in unusual manner
  34. 34. Evaluation of Accounting and Disclosures of Transactions • Transactions should be accounted for and disclosed in accordance with applicable Financial Reporting Framework. • The disclosures should be understandable and should include – – – Business rationales Key terms conditions
  35. 35. Written Representation There are some circumstances in which it is appropriate to obtained written representation from those charge with governance.
  36. 36. Circumstances • Approval of specific transaction – having material effect on the financial statement – Involvement of management • Oral representations by management • Financial or other interest in RP
  37. 37. Communication with TCWG • Non disclosures by management • Inappropriately authorized and approved transactions • Disagreement with management • Non compliance with applicable laws • Difficulties in identifying the controlling entity
  38. 38. Thank You for Your Attention • Any Questions????