Guide to Using International Standards on Auditing in - IFAC

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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.
153 <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 12.4 Reporting Paragraph # Relevant Extracts from ISAs 550.25 In forming an opinion on the financial statements in accordance with ISA 700, the audi<strong>to</strong>r shall evaluate: (Ref: Para. A46) (a) Whether the identified related-party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework; and (Ref: Para. A47) (b) Whether the effects of the related-party relationships and transactions: (i) Prevent the financial statements from achieving fair presentation (for fair presentation frameworks); or (ii) Cause the financial statements <strong>to</strong> be misleading (for compliance frameworks). 550.26 Where the applicable financial reporting framework establishes related-party requirements, the audi<strong>to</strong>r shall obtain written representations from management and, where appropriate, those charged with governance that: (Ref: Para. A48-A49) (a) They have disclosed <strong>to</strong> the audi<strong>to</strong>r the identity of the entity’s related parties and all the related-party relationships and transactions of which they are aware; and (b) They have appropriately accounted for and disclosed such relationships and transactions in accordance with the requirements of the framework. 550.27 Unless all of those charged with governance are involved in managing the entity, the audi<strong>to</strong>r shall communicate with those charged with governance significant matters arising during the audit in connection with the entity’s related parties. (Ref: Para. A50) 550.28 The audi<strong>to</strong>r shall include in the audit documentation the names of the identified related parties and the nature of the related-party relationships. The audi<strong>to</strong>r would consider the following matters. Exhibit 12.4-1 Address Document and Report Obtain Management Representation Determine if the Audit Opinion Needs To Be Modified Description • Document the names of the identified related parties and the nature of the related-party relationships; and • Communicate with those charged with governance any significant matters arising during the audit in connection with related parties. Obtain written representations from management (and those charged with governance) that: • All related parties and transactions have been disclosed; and • Such relationships and transactions have been appropriately accounted for and disclosed in the financial statements. Modify the audi<strong>to</strong>r’s report if: • It is not possible <strong>to</strong> obtain sufficient appropriate audit evidence concerning related parties and transactions; or • Management’s disclosure in the financial statements (as required by the financial framework) is not considered adequate.
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Guide to Using International Standards on Auditing in - IFAC

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