Guide to Using International Standards on Auditing in - IFAC

152
<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
Paragraph #
Relevant Extracts from ISAs
550.23 For identified significant related-party transactions outside the entity’s normal course of
business, the audi<strong>to</strong>r shall:
(a) Inspect the underlying contracts or agreements, if any, and evaluate whether:
(i) The business rationale (or lack thereof) of the transactions suggests that they may
have been entered in<strong>to</strong> <strong>to</strong> engage in fraudulent financial reporting or <strong>to</strong> conceal
misappropriation of assets; (Ref: Para. A38-A39)
(ii) The terms of the transactions are consistent with management’s explanations; and
(iii) The transactions have been appropriately accounted for and disclosed in accordance
with the applicable financial reporting framework; and
(b) Obtain audit evidence that the transactions have been appropriately authorized and
approved. (Ref: Para. A40-A41)
550.24 If management has made an assertion in the financial statements <strong>to</strong> the effect that a related-party
transaction was conducted on terms equivalent <strong>to</strong> those prevailing in an arm’s length transaction, the
audi<strong>to</strong>r shall obtain sufficient appropriate audit evidence about the assertion. (Ref: Para. A42-A45)
In responding <strong>to</strong> the identified 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 12.3-1
Address
Where Audi<strong>to</strong>r
Identifies
Arrangements
or Information
That Suggests
Existence of
Related-party
Relationships or
Transactions
Significant
Related-party
Transactions
Outside Normal
Course of Business
Management’s
Assertions
Description
• Determine whether underlying circumstances confirm their existence;
• Promptly communicate the information <strong>to</strong> the engagement team;
• Request management <strong>to</strong> identify all transactions with the related-party;
• If related-party was not previously identified, ask why. Consider:
– Failure of any related-party identification controls, and
– Fraud (non-disclosure by management appears intentional);
• Reconsider the risk that other undisclosed related parties or significant related-party
transactions may exist, and perform additional audit procedures as necessary; and
• Perform appropriate substantive audit procedures.
• Inspect underlying contracts or agreements, if any, and evaluate whether:
– Rationale suggests possible fraudulent financial reporting or
concealment of misappropriated assets,
– Terms are consistent with management’s explanations, and
– Transactions are accounted for and disclosed in accordance with the
applicable financial reporting framework; and
• Ensure transactions have been appropriately authorized and approved.
Obtain sufficient appropriate audit evidence about management’s assertions about
the nature and extent of related-party transactions.
Consider whether external confirmation of the balances would provide reliable evidence.
Consider the collectability and valuation of period-end balances.