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Audit International Auditing Standards

ISA 550 Summary Related Parties

ISA 550 Related Parties – Effective date 15 December 2009

ISA 550 Related Parties Requirements

ISA 550 Scope

ISA 550 deals with the auditor’s responsibilities relating to related party relationships and transactions in an audit of financial statements. Specifically, it expands on how ISA 315, ISA 330, and ISA 240 are to be applied in relation to risks of material misstatement associated with related party relationships and transactions.

ISA 550 Objective

Under ISA 550 objective of auditor are:

  • Irrespective of whether the applicable financial reporting framework establishes related party requirements, to obtain an understanding of related party relationships and transactions sufficient to be able:
    • To recognize fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and
    • To conclude, based on the audit evidence obtained, 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
  • In addition, where the applicable financial reporting framework establishes related party requirements, to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework.

ISA 550 – Definitions

Arm’s length transaction – Definition

A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

Related party –Definition

  • A related party as defined in the applicable financial reporting framework; or
  • Where the applicable financial reporting framework establishes minimal or no related party requirements:
    • A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity;
    • Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or
    • Another entity that is under common control with the reporting entity through having:
      • Common controlling ownership;
      • Owners who are close family members; or
      • Common key management.

However, entities that are under common control by a state (that is, a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another.