Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
Some of the potential risk fac<strong>to</strong>rs with regard <strong>to</strong> related-party transactions are set out below.
Exhibit 12.1-1
Overly Complex
Transactions
Relationships and
Transactions not
Identified
Not Conducted in
the Normal Course
of Business
Description
Related parties may operate through an extensive and complex range of relationships
and structures.
• Related-party relationships may be concealed, as they present a greater
opportunity for collusion, concealment, or manipulation by management.
• The entity’s information systems may be ineffective at identifying or summarizing
transactions and outstanding balances between the entity and its related parties.
• Management may be unaware of the existence of all related-party relationships
and transactions.
Related-party transactions may not be conducted under normal market terms
and conditions such as above; below fair values; or even with no exchange of
consideration at all.
Management is responsible for the identification and disclosure of related parties and accounting for the
transactions. This responsibility requires management <strong>to</strong> implement adequate internal control <strong>to</strong> ensure that
transactions with related parties are appropriately identified and recorded in the information system, and
disclosed in the financial statements.
The audi<strong>to</strong>r is responsible for maintaining an alertness for related-party information when reviewing records
or documents during the audit. This includes the inspection of certain key documents, but does not require
an extensive investigation of records and documents <strong>to</strong> specifically identify related parties.
In smaller entities, these procedures are likely <strong>to</strong> be less sophisticated and informal. Management may not
readily have information about related parties (the accounting systems are unlikely <strong>to</strong> have been designed <strong>to</strong>
identify related parties), so the audi<strong>to</strong>r may need <strong>to</strong> make inquiries and review accounts with specific parties,
etc. beyond the accounting records and disclosures in the accounts.
Financial Reporting Frameworks
Because related parties are not independent of each other, many financial reporting frameworks establish
specific accounting and disclosure requirements for related-party relationships, transactions, and balances.
This enables the users of financial statements <strong>to</strong> understand their nature and actual or potential effects on
the financial statements.
Where the applicable financial reporting framework establishes requirements for related-party accounting
and disclosure, the audi<strong>to</strong>r has a responsibility <strong>to</strong> perform audit procedures <strong>to</strong> identify, assess, and respond
<strong>to</strong> the risks of material misstatement arising from the entity’s failure <strong>to</strong> appropriately account for or disclose
related-party relationships, transactions, or balances in accordance with the requirements of the framework.
Where the applicable financial reporting framework establishes minimal or no related-party requirements,
the audi<strong>to</strong>r still needs <strong>to</strong> obtain a sufficient understanding of the entity’s related-party relationships and
transactions <strong>to</strong> be able <strong>to</strong> conclude whether the financial statements, insofar as they are affected by those
relationships and transactions: