Related Parties

Objective

Objective

The objective of this project was to revise ISA 550, Related Parties. The IAASB approved ISA 550 (Revised and Redrafted), Related Parties in March 2008. The ISA will be published after the Public Interest Oversight Board has confirmed that due process was followed in its development. The ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009.
A Basis for Conclusions will provide background to the project, main comments received on the exposure draft, and the IAASB's conclusions regarding these comments in developing the final standard.

Scope

The project revised ISA 550 to align the extant standard with the audit risk model and to more tightly integrate it with ISA 240 (Redrafted), The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements.

Background

The IAASB initiated this project for a number of reasons, including the following:

  • The need to reconsider the robustness and appropriateness of ISA 550 given the prominent role played by related parties in a number of recent major corporate scandals.
  • Public expectations for stronger financial reporting standards addressing the understandability and adequacy of related party disclosures and the auditing thereof.
  • The need to revise ISA 550 to be consistent with the audit risk model.

 

Issues

ISA 550 (Revised and Redrafted) deals with the auditor's responsibilities regarding related party relationships and transactions when performing an audit of financial statements.

The revised and redrafted ISA:

  • Establishes outcome-based objectives focusing on the auditor's responsibility to:
    • Obtain an understanding of the entity's related party relationships and transactions sufficient to:
      • Recognize fraud risk factors that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and
      • Conclude whether the financial statements (insofar as they are affected by those relationships and transactions) achieve fair presentation (for fair presentation frameworks) or are not misleading (for compliance frameworks); and
    • Where the framework establishes related party requirements, obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for, and disclosed in accordance with those requirements.
  • Establishes a principles-based definition of a related party where the framework contains only minimal or no related party requirements.
  • Requires the auditor to make inquiries of management regarding:
    • The identity of the entity's related parties, including changes from the prior period;
    • The nature of the relationships between the entity and these related parties; and
    • Whether the entity entered into any transactions with these related parties during the period and, if so, the type and purpose of the transactions.
  • Requires the auditor to make inquiries of management and others within the entity, and perform other risk assessment procedures considered appropriate, to obtain an understanding of the controls, if any, that management has established to:
    • Identify, account for, and disclose related party relationships and transactions in accordance with the framework;
    • Authorize and approve significant transactions and arrangements with related parties; and
    • Authorize and approve significant transactions and arrangements outside the normal course of business.
  • Requires the auditor to remain alert, when inspecting records or documents during the audit, for arrangements or other information that may indicate the existence of related party relationships or transactions that management has not previously identified or disclosed to the auditor.
  • Requires the auditor to inspect:
    • Bank and legal confirmations obtained as part of the auditor's procedures;
    • Minutes of meetings of shareholders and of those charged with governance; and
    • Such other records or documents as the auditor considers necessary in the circumstances of the entity.
  • Requires the auditor to inquire of management regarding the nature of significant transactions outside the entity's normal course of business and whether related parties could be involved.
  • Requires the auditor to treat identified significant related party transactions outside the entity's normal course of business as giving rise to significant risks.
  • Requires the auditor to respond appropriately to assessed risks of material misstatement associated with related parties.
  • Provides guidance on related parties with dominant influence and special-purpose entities.
  • Establishes requirements for communication with those charged with governance, and documentation.

 

Task Force progress / Board discussions to date

At the December 2005 meeting, the IAASB approved the proposed revised ISA for exposure. The comment period for the exposure draft closed on April 30, 2006.

At the February 2007 meeting, the IAASB approved the proposed revised ISA for re-exposure. The comment period for the re-exposure draft closed on June 30, 2007.

The IAASB approved ISA 550 (Revised and Redrafted) as a final standard in March 2008.