The audit of related parties and the application of professional scepticism

Related parties generally carry a higher detection risk, ie the risk the audit procedures would not detect a material misstatement, which is increased because -

Transactions with related parties may not take place on normal commercial terms

Management may be unaware of some related parties due unawareness of reporting requirements and related parties offer the opportunity for collusion, manipulation or concealment by management

The auditor cannot enquire parties outside the entity

The information systems belonging to the entity may not be effective in identifying and recording related party relationships and transactions

The application of professional scepticism in performing an audit involves -

Questioning all the information provided by management

All of these

Adopting a questioning approach when considering information or forming conclusions and performing a critical assessment of audit evidence

Being sceptical about information obtained from management unless past experience indicates that they are honest and have integrity

Which of the following audit procedures need to be performed to obtain a detailed understanding of related party relationships and transactions -

All of these

Inquiry of management and others within the entity to understand the entity controls on related party relationships and transactions

Discussion among the engagement team of the issues of related parties

Inquiry of management about the identity of related parties, the nature of relationships and the type and purpose of related party transactions

When obtaining an understanding of related parties controls in a small entity the auditor should -

Assume that related parties controls are deficient

Inspect relevant documentation for related party transactions and perform other procedures, as the direct involvement of an owner-manager increases related party risks

Enquire management, inspect relevant documentation for related party transactions and perform other procedures, like observation of management supervision of staff

Rely on inquiry of management, as the direct involvement of an owner-manager reduces related party risks

What records and documents should be reviewed by the auditor to search for unidentified and undisclosed related party relationships and transactions?

Bank and legal confirmations obtained as part of the audit procedures, and minutes of shareholders and board of directors meetings

Records of the investments of the entity, significant contracts and agreements outside their normal course of business and shareholder registers to identify significant shareholders

Bank and legal confirmations obtained as part of the audit procedures, minutes of shareholders and board of directors meetings and any other records or documents relevant in the circumstances of the entity

Bank and legal confirmations obtained as part of the audit procedures, minutes of shareholders and board of directors meetings and shareholder registers to identify significant shareholders

What arrangements may indicate the existence of unidentified or undisclosed related party relationships or transactions?

Investments in other entities

leasing arrangements

Consultancy agreements

Significant contracts and agreements outside the normal course of business and relationships of guarantees and guarantor

Which of the following transactions outside the normal course of business require inquiry of management to identify undisclosed related parties?

Transactions with circular arrangements, like sale and repurchase agreements, and complex equity transactions like corporate restructuring or acquisitions

Neither of these

Transactions with offshore entities in jurisdictions with weak corporate law and transactions with circular arrangements, like sale and repurchase agreements

All of these

When the auditor identifies significant related party transactions outside the normal course of business, he/she should -

Verify if the transactions have been appropriately accounted for and disclosed

Inspecting underlying contracts or agreements, if any

Treat them as significant risks and perform substantive procedures that are specifically responsive to those risks

Assume that they have been appropriately accounted for and disclosed as they have been identified

The existence of a related party with dominant influence represents a fraud risk factor. Which indicators may suggest the existence of such a dominant party?

Related party transactions are authorised or approved by management or directors

All of these

A related party has vetoed some significant business decisions taken by management or directors and approves all significant transactions

Informal controls or no documented processes to identify related parties and authorise transactions with them

If the auditor identifies related parties and transactions that have intentionally not been disclosed by management, the auditor should -

Perform substantive audit procedures in respect of the identified parties or transactions

Consider whether it is appropriate to withdraw from the engagement and re-plan the audit if appropriate

Consider the implications for the audit report

Withdraw from the engagement

The audit of related parties and the application of professional scepticism

Related parties generally carry a higher detection risk, ie the risk the audit procedures would not detect a material misstatement, which is increased because -

The application of professional scepticism in performing an audit involves -

Which of the following audit procedures need to be performed to obtain a detailed understanding of related party relationships and transactions -

When obtaining an understanding of related parties controls in a small entity the auditor should -

What records and documents should be reviewed by the auditor to search for unidentified and undisclosed related party relationships and transactions?

What arrangements may indicate the existence of unidentified or undisclosed related party relationships or transactions?

Which of the following transactions outside the normal course of business require inquiry of management to identify undisclosed related parties?

When the auditor identifies significant related party transactions outside the normal course of business, he/she should -

The existence of a related party with dominant influence represents a fraud risk factor. Which indicators may suggest the existence of such a dominant party?

If the auditor identifies related parties and transactions that have intentionally not been disclosed by management, the auditor should -

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