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- 10 Marks
Question
Central to a number of government investigations in various countries have been companies trading with organisations or individuals other than at arm’s length. Such transactions were made possible by a degree of control or influence exercised by directors over both parties. Directors are responsible for the identification of such related party relationship and transactions, however, the auditor has a responsibility of ensuring good reporting in that area.
You are the audit senior of an audit firm preparing to audit a group company and its subsidiaries and sub-subsidiaries, which also trade with companies owned by some directors of the parent company.
Required:
What procedures and evidence should the auditor consider to discharge his responsibility in relation to related party transactions?
Answer
Our procedure and evidence needed to discharge our duties in relation to related parties for this audit will include:
- Enquiries of Management:
- Make enquiries of management to disclose the related parties of the company. The related parties will include the subsidiaries, the directors, the directors’ companies trading with the parent company, and the subsidiaries and sub-subsidiaries.
- Identify Related Party Transactions:
- Identify the related party transactions that occurred between the parent company, its directors, subsidiaries, sub-subsidiaries, and the companies owned by the directors.
- Arm’s Length Transactions:
- Check whether the transactions have been conducted at arm’s length by comparing the terms of trade in respect of prices, discounts, and credit periods.
- Accounting Treatment:
- Verify the treatment of the related transactions in the accounting records and the financial statements to ensure they have been correctly treated.
- Presentation and Disclosure:
- Check the presentation and disclosure of the related party transactions in the financial statements.
- Consider Audit Opinion:
- Consider the evidence obtained and decide on the audit opinion to issue. Depending on whether management has done the right thing and the financial statements give a true and fair view, we may issue an unmodified opinion. If we are unable to obtain the evidence required, we may issue a qualified opinion or a disclaimer of opinion.
- Tags: Audit Procedures, Evidence, Financial Statements, Related parties
- Level: Level 3
- Topic: Audit evidence, The audit approach
- Series: NOV 2017
- Uploader: Dotse