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SriLankaAuditingStandard550
RelatedParties
Sanath Fernando
Partner,Ernst&Young
04October2012
1. DefinitionofRelatedParties LKAS24
2. Auditorsresponsibility
3. Managementsresponsibility
4. Auditprocedures
5. Practicalconsiderations
Content
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1.RelatedPartyDefinition
In summary RP definition includes:
Persons
Entities
That controls, influences or joint controls a Reporting Entity
That is controlled, influenced or joint controlled by a Reporting Entity
Entities connected with persons
4
A person or a close member of that persons family is related to a reporting
entity if that person:
(i) has Control or Joint Control over the reporting entity;
(ii) has Significant Influence over the reporting entity; or
(iii) is a member of the Key Management Personnel of the reporting entity or of
a parent of the reporting entity.
C
SI
Persons
Reporting
Entity
JC
KMP
Parent
9 (a) (iii)
KMP
1. Related Party Definition
3
5
Entities
An entity is related to a reporting entity if any of the following conditions
applies:
(i) The entity and the reporting entity are members of the same group (which
means that each parent, subsidiary and fellow subsidiary is related to the
others).
(ii) One entity is an associate or joint venture of the other entity (or an
associate or joint venture of a member of a group of which the other entity is
a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an
associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees
of either the reporting entity or an entity related to the reporting entity.
Continued..
1. Related Party Definition
6
Entities
(upstream)
Entities that controls,
influences or joint controls a
Reporting Entity
C
Reporting
Entity
JC
SI
C
9 (b) (i)
9 (b)
(ii),12
9 (b)
(ii),12
SI JC
C C C
9 (b) (i) 9 (b) (ii) 9 (b) (ii)
9 (b) (i)
C
C
JC
SI
9 (b)
(i),12
9 (b)
(ii)
C
SI JC
JC
SI
Parent
9 (b) (i),
JV Prtn
9 (b) (i)
9 (b) (ii)
C
JC
SI
9 (b) (ii) 9 (b) (iv) 9 (b) (iii)
C
JC SI
C C C
C C C C
Investor
9 (b) (ii)
9 (b) (i)
C
9 (b) (ii) 9 (b) (iv)
C
JC SI
C C
SI
JC
C
C
Relationship
paragraph
Related Party
Not a Related
Party
Significant
Influence
Joint Control
Control
SI
JC
C
Legend
1. Related Party Definition
4
7
Entities
(downstream)
Entities that is controlled,
influenced or joint controlled by
a Reporting Entity
C
Reporting
Entity
JC
SI
JV
9(b) (ii)
JC
9 (b)
(ii),12
C
JC SI
C
Relationship
paragraph
Related Party
Not a Related
Party
Significant
Influence
Joint Control
Control
SI
JC
C
Sub
9 (b) (i)
SI
9 (b) (i) 9 (b) (ii) 9 (b) (ii)
C
JC SI
C C C
Assc
9 (b) (ii)
9 (b)
(ii),12
C
JC SI
C
SI
C
Legend
1. Related Party Definition
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(vi) The entity is controlled or jointly controlled by a person identified in (a).
vii) A person identified in (a)(i) has significant influence over the entity or is
a member of the key management personnel of the entity (or of a parent of
the entity).
C
SI
Entities connected with Persons
Reporting
Entity
JC
Parent
KMP
9 (a) (iii)
9 (b) (vii)
Sub/JV
9 (b) (vi)
C
Assoc
9 (b) (vi)
SI
KMP
JC
KMP
9 (a) (iii)
Sub
9 (b) (vi)
C
JC
Sub
9 (b) (vi)
C
JC
Sub
9 (b) (vi)
C
JC
SI
SI
C C
C
C
C
SI
Relationship
paragraph
Related Party
Not a Related
Party
Legend
1. Related Party Definition
5
Auditorshouldperformauditproceduresdesignedto
obtainsufficientappropriateauditevidenceregardingthe:
identificationofrelatedparties
disclosurebymanagementofrelatedpartiesand
theeffectofrelatedpartytransactionsthatarematerial
tothefinancialstatements.
However,anauditcannotbeexpectedtodetectallrelated
partytransactions.
2.Auditorsresponsibility
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DegreeofuncertainlyisinherentinRPT:affects
completenessassertion
SLAuS 550providesauditproceduresthatwillprovide
sufficientappropriateauditevidenceovercompleteness
assertion,unlesstheauditoridentifiedcircumstancethat:
(a)Increasestheriskofmaterialmisstatementbeyondthat
whichwouldordinarilybeexpected;or
(b)Indicatesthatamaterialmisstatementregardingrelated
partieshasoccurred.
Ifsoperformmodified,extendedoradditionalaudit
proceduresasareappropriateinthecircumstances
2.Auditorsresponsibility
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6
Responsiblefortheidentificationanddisclosureofrelated
partiesandtransactionswithsuchparties.
Thisresponsibilityrequiresmanagementtoimplement
adequateinternalcontroltoensurethattransactionswith
relatedpartiesareappropriatelyidentifiedinthe
informationsystemanddisclosedinthefinancial
statements
3.Managementsresponsibility
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A. Existenceand
disclosureofRP
B. Transactionswith
RelatedParties
C. ExaminingIdentified
RelatedParty
Transactions
D. Management
Representations
3.Auditprocedures
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7
Theauditorshouldreviewinformationprovidedbythose
chargedwithgovernanceandmanagementidentifyingthe
namesofallknownrelatedpartiesandshouldperformthe
followingauditproceduresinrespectofthecompletenessof
thisinformation:
a) Reviewprioryearworkingpapersfornamesofknown
relatedparties;
b) Reviewtheentitysproceduresforidentificationofrelated
parties;
c) Inquireastotheaffiliationofthosechargedwith
governanceandofficerswithotherentities;
A.ExistenceanddisclosureofRP
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d) Reviewshareholderrecordstodeterminethenamesof
principalshareholdersor,ifappropriate,obtainalistingof
principalshareholdersfromtheshareregister;
e) Reviewminutesofthemeetingsofshareholdersandthose
chargedwithgovernanceandotherrelevantstatutory
recordssuchastheregisterofdirectorsinterests;
f) Inquireofotherauditorscurrentlyinvolvedintheaudit,or
predecessorauditors,astotheirknowledgeofadditional
relatedparties;and
g) Reviewtheentitysincometaxreturnsandother
informationsuppliedtoregulatoryagencies.
A.ExistenceanddisclosureofRP
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8
Theauditorshouldreviewinformationprovidedbythose
chargedwithgovernanceandmanagementidentifying
relatedpartytransactionsandshouldbealertforother
materialrelatedpartytransactions
Whenobtaininganunderstandingoftheentitysinternal
control,theauditorshouldconsidertheadequacyof
controlactivitiesovertheauthorizationandrecordingof
relatedpartytransactions.
Focusonthe
Process
Internalcontrolsovercompletenessofrecording
B.TransactionswithRP
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Keepyoureyesopenfor:
Transactionswhichhaveabnormaltermsof
trade,suchasunusualprices,interestrates,
guarantees,andrepaymentterms.
Transactionswhichlackanapparentlogical
businessreasonfortheiroccurrence.
Transactionsinwhichsubstancediffersfrom
form.
Transactionsprocessedinanunusual
manner.
Highvolumeorsignificanttransactionswith
certaincustomersorsuppliersascompared
withothers.
Unrecordedtransactions
B.TransactionswithRP
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9
Considersperformingaudit
proceduressuchas:
Confirmingthetermsand
amountofthetransaction
withtherelatedparty.
Inspectinginformationin
possessionoftherelated
party
Confirmingordiscussing
informationwithpersons
associatedwiththe
transaction,suchasbanks,
lawyers,guarantorsand
agents.
C.ExaminingIdentifiedRelatedParty
Transactions
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Theauditorshouldobtaina
writtenrepresentationfrom
managementconcerning:
Thecompletenessof
informationprovided
regardingtheidentification
ofrelatedparties;and
Theadequacyofrelated
partydisclosuresinthe
financialstatements
D.ManagementRepresentations
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10
Iftheauditorisunableto
obtainsufficientappropriate
auditevidenceconcerning
relatedpartiesand
transactionswithsuchparties
orconcludesthattheir
disclosureinthefinancial
statementsisnotadequate,
theauditorshouldmodifythe
auditorsreportappropriately
E.AuditConclusionsandReporting
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Open and timely communication on RP matters
within engagement team is vital
RPs can have pervasive effects throughout the entity
Share knowledge and insights about entitys RPs
Agree on approach to inspecting records and
documents
Share relevant RP information obtained from risk
assessment process
Promptly communicate newly identified RPs to team
Practical Considerations
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11
Given potential for unidentified/undisclosed RPs/RPTs
Maintain attitude of professional skepticism
Be alert to significant transactions outside normal
business
RP disclosures may require special attention
Disclosures may be complex and are often a source of
material misstatement
Complexity and excessive detail may obscure substance
of RPTs
Evaluate disclosures for adequacy and understandability
Practical Considerations
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Include relevant RP considerations in early
communications with TCWG
Input from TCWG feeds into risk assessment process
Early dialogue helps avoid later surprises
Discuss significant RP matters arising during
audit with TCWG
Reach common understanding of facts and
circumstances
Helps to address RP issues on a timely basis
Practical Considerations
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Thisisit!!!TheLeeFamilysSamsungDynasty
Questions
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Thepresentationiswrittenintheauthor'spersonalcapacity
anddoesnotreflecttheviewsofErnst&Young.