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? (10 marks)
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- 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.
- We will have to identify the related party transactions that occurred between the parent company, its directors, subsidiaries, sub-subsidiaries, and the companies owned by the directors.
- We will check whether the transactions have been conducted at arm’s length by comparing the terms of trade in respect of prices, discount and credit periods.
- We will check the treatment of the related transaction in the accounting records and the financial statements and ensure that they have been correctly treated.
- We will check the presentation and disclosure of the related party transaction in the financial statements.
- We will consider the evidence obtained and consider the audit opinion to issue depending on whether management has done the right thing and the financial statements give a true and fair view of or whether we have not been able to obtain the evidence we required, we may issue a qualified opinion or a disclaimer of opinion. (5 points @ 2 marks each)