Page 154 - Internal Auditing Standards

Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts

Paragraph # Relevant Extracts from ISAs

550.23 For identifi ed significant related-party transactions outside the entity’s normal course of

business, the auditor 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 into to engage in fraudulent financial reporting or to 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 to the effect that a related-party

transaction was conducted on terms equivalent to those prevailing in an arm’s length transaction, the

auditor shall obtain sufficient appropriate audit evidence about the assertion. (Ref: Para. A42-A45)

In responding to the identified risks of material misstatement associated with related-party relationships and

transactions, the auditor would consider the matters set out below.

Exhibit 12.3-1

Address Description
Where Auditor • Determine whether underlying circumstances confirm their existence;

Identifi es • Promptly communicate the information to the engagement team;
Arrangements
or Information • Request management to identify all transactions with the related-party;
That Suggests • If related-party was not previously identified, ask why. Consider:

Existence of

Related-party – Failure of any related-party identification controls, and
Relationships or – Fraud (non-disclosure by management appears intentional);
Transactions • Reconsider the risk that other undisclosed related parties or signifi cant related-party
transactions may exist, and perform additional audit procedures as necessary; and
• Perform appropriate substantive audit procedures.
Signifi cant • Inspect underlying contracts or agreements, if any, and evaluate whether:
Related-party – Rationale suggests possible fraudulent financial reporting or

Transactions concealment of misappropriated assets,
Outside Normal
Course of Business – 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.

Management’s Obtain sufficient appropriate audit evidence about management’s assertions about

Assertions 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.

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