International Auditing and Assurance Standards Board Related Parties ISA Implementation Support Module Prepared by IAASB Staff October 2009

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 2

Rationale for disclosure requirements under most financial reporting frameworks – Related parties (RPs) are not independent of each other – Disclosure of RP relationships and related party transactions (RPTs) necessary for a proper understanding of 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 3

Inherent difficulty in identifying undisclosed RPs/RPTs – E.g., management itself may be unaware of RPs and RPTs (especially if framework does not require disclosure) 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 risks of material misstatement from RPs The Context for ISA 550 Introduction 4

Frameworks that require RP disclosures generally define meaning of a RP For frameworks that contain minimal or no RP requirements – Standard provides a RP definition and related guidance – 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, even if framework contains no RP requirements New Related Party Definition Significant Features of New Standard 5

Risk-based approach requires a thorough understanding of 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 significant RPTs Determine whether any of the assessed risks are significant risks Respond appropriately to assessed risks A Risk-Based Approach Significant Features of New Standard 6

Searching for unidentified or undisclosed RPs or RPTs 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 or documents should be inspected in the circumstances – Required to remain alert to undisclosed RPs or RPTs Identifying Undisclosed RPs or Significant RPTs Significant Features of New Standard 7

Standard places specific focus on significant transactions outside normal course of business – As a means to help identify undisclosed RPs No requirement to search for these transactions but understand 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 Significant Features of New Standard 8

Treated as significant risks If these are identified – Understand controls over them – Obtain substantive audit evidence about them   Inspect supporting contracts or agreements   Does business rationale of the RPTs suggest possibility of fraud?   Are their terms consistent with management’s explanations?   Have they been appropriately accounted for and disclosed?   Have they been appropriately authorized and approved? Significant RPTs Outside Normal Business Significant Features of New Standard 9

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 team discussion – Consider features of the control environment that may deter or facilitate fraud – Consider fraud implications if non-disclosure of RPs or RPTs by management appears intentional – Evaluate business rationale of significant RPTs outside normal business Emphasis on fraud applies even if framework does not deal with RPs Fraud Risk Factors Significant Features of New Standard 10

“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 to fraud 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 in accordance with ISA 240 Related Party with Dominant Influence Significant Features of New Standard 11

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 Significant Features of New Standard 12

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 fair presentation (for fair presentation frameworks) or   Cause the financial statements to be misleading (for compliance frameworks) Forming an Opinion on the Financial Statements Additional Aspects 13

Obtain audit evidence about arm’s-length assertions Obtain written representations that – All RPs and RPTs have been disclosed to auditor – RP relationships and transactions have been appropriately 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 14

Integrate work required by new standard with other risk 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 entity’s 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 Practical Considerations 15

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 substance of RPTs – Evaluate disclosures for adequacy and understandability Practical Considerations 16

Include relevant RP considerations in early communications 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 and circumstances – Helps to address RP issues on a timely basis Practical Considerations 17

Note This set of support slides does not amend or override the ISAs, the texts of which alone are authoritative. Reading the slides is not a substitute for reading the ISAs. The slides are not meant to be exhaustive and reference to the ISAs themselves should always be made. In conducting an audit in accordance with ISAs, the auditor is required to comply with all the ISAs that are relevant to the engagement. 18

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