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
To identify and assess the risks of material misstatement associated with related-party relationships and
transactions, the audi<strong>to</strong>r would consider the matters set out below.
Exhibit 12.2-1
Identifying Risks
Address Existence/
Nature/
Impact of Related
Parties and
Transactions
Consider Possible
Fraud
Remain Alert
When Inspecting
Records or
Documents
Description
Inquire about the:
• Identity of related parties, including changes from prior period.
• Nature of relationships between the entity and related parties.
• Type and purpose of any transactions with related parties.
• Controls, if any, that management has established <strong>to</strong>:
• Identify, account for, and disclose related-party relationships and transactions in
accordance with the applicable financial reporting framework;
• Authorize and approve significant transactions and arrangements with related
parties; and
• Authorize and approve significant transactions and arrangements outside the
normal course of business.
Discuss among the engagement team the susceptibility of financial statements <strong>to</strong>
material misstatement due <strong>to</strong> fraud or error resulting from related-party relationships
and transactions.
Also consider whether domination of management occurs by a single person or
a small group of persons without compensating controls. Indica<strong>to</strong>rs of dominant
influence include:
• The related-party has ve<strong>to</strong>ed significant business decisions made by
management or those charged with governance;
• Significant transactions are referred <strong>to</strong> the related-party for final approval;
• There is little or no debate among management and those charged with
governance regarding business proposals initiated by the related-party; and
• Transactions involving the related-party (or a close family member of the
related-party) are rarely independently reviewed and approved.
Dominant influence may also exist in some cases if the related-party has played a leading
role in founding the entity and continues <strong>to</strong> play a leading role in managing the entity.
If fraud risk fac<strong>to</strong>rs are identified, make an assessment of the risks of material
misstatement. If a risk of material misstatement could occur, develop an appropriate
audit response.
When inspecting records or documents, always remain alert <strong>to</strong> undisclosed relatedparty
relationships or transactions. In particular, inspect the following records and
documents for related parties not previously identified or disclosed:
• Bank and legal confirmations obtained;
• Minutes of meetings of shareholders and of those charged with governance; and
• Such other records or documents as considered necessary in the circumstances.
Always share information obtained about possible related parties with other team
members.