The existence of a related-party transaction may be indicated when another entity
Amendments to paragraphs .03, .09, and .16 and the subheading before paragraph .08 have been adopted by the PCAOB and approved by the U.S. Securities and Exchange Commission. The standard as amended will be effective for audits of financial statements for fiscal years ending on or after December 15, 2024. See PCAOB Release No. 2022-002, SEC Release No. 34-95488. View the standard as amended. Show
Effective Date of Standard: For audits of fiscal years beginning on or after Dec. 15, 2014 Introduction.01 This standard establishes requirements regarding the auditor's evaluation of a company's identification of, accounting for, and disclosure of relationships and transactions between the company and its related parties. 1 Objective.02 The objective of the auditor is to obtain sufficient appropriate audit evidence to determine whether related parties and relationships and transactions with related parties have been properly identified, accounted for, and disclosed in the financial statements.2 Performing Risk Assessment Procedures to Obtain an Understanding of the Company's Relationships and Transactions with Its Related Parties.03 The auditor should perform procedures to obtain an understanding of the company's relationships and transactions with its related parties that might reasonably be expected to affect the risks of material misstatement of the financial statements in conjunction with performing risk assessment procedures in accordance with AS 2110, Identifying and Assessing Risks of Material Misstatement. The procedures performed to obtain an understanding of the company's relationships and transactions with its related parties include:
Note: Obtaining an understanding of the company's relationships and transactions with its related parties includes obtaining an understanding of the nature of the relationships between the company and its related parties and of the terms and business purposes (or the lack thereof) of the transactions involving related parties. Note: Performing the risk assessment procedures described in paragraphs .04-.09 of this standard in conjunction with the risk assessment procedures required by AS 2110 is intended to provide the auditor with a reasonable basis for identifying and assessing risks of material misstatement associated with related parties and relationships and transactions with related parties. Obtaining an Understanding of the Company's Process.04 In conjunction with obtaining an understanding of internal control over financial reporting, the auditor should obtain an understanding of the company's process for:3
Performing Inquiries.05 The auditor should inquire of management regarding:4
.06 The auditor should inquire of others within the company regarding their knowledge of the matters in paragraph .05 of this standard. The auditor should identify others within the company5 to whom inquiries should be directed, and determine the extent of such inquires, by considering whether such individuals are likely to have knowledge regarding:
.07 The auditor should inquire of the audit committee,7 or its chair, regarding:
Communicating with the Audit Engagement Team and Other Auditors.08 The auditor should communicate to engagement team members relevant information about related parties, including the names of the related parties and the nature of the company's relationships and transactions with those related parties.8 .09 If the auditor is using the work of another auditor, the auditor should communicate to the other auditor relevant information about related parties, including the names of the company's related parties and the nature of the company's relationships and transactions with those related parties.9 The auditor also should inquire of the other auditor regarding the other auditor's knowledge of any related parties or relationships or transactions with related parties that were not included in the auditor's communications. Identifying and Assessing Risks of Material Misstatement.10 The auditor should identify and assess the risks of material misstatement at the financial statement level and the assertion level. 10 This includes identifying and assessing the risks of material misstatement associated with related parties and relationships and transactions with related parties, including whether the company has properly identified, accounted for, and disclosed its related parties and relationships and transactions with related parties. Note: In identifying and assessing the risks of material misstatement associated with related parties and relationships and transactions with related parties, the auditor should take into account the information obtained from performing the procedures in paragraphs .04-.09 of this standard and from performing the risk assessment procedures required by AS 2110. Responding to the Risks of Material Misstatement.11 The auditor must design and implement audit responses that address the identified and assessed risks of material misstatement.11 This includes designing and performing audit procedures in a manner that addresses the risks of material misstatement associated with related parties and relationships and transactions with related parties. 12 Note: The auditor also should look to the requirements in paragraphs .66-.67A of AS 2401, Consideration of Fraud in a Financial Statement Audit, for related party transactions that are also significant unusual transactions (for example, significant related party transactions outside the normal course of business). For such related party transactions, AS 2401.67 requires that the auditor evaluate whether the business purpose (or the lack thereof) of the transactions indicates that the transactions may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets. Transactions with Related Parties Required to be Disclosed in the Financial Statements or Determined to be a Significant Risk.12 For each related party transaction that is either required to be disclosed in the financial statementsor determined to be a significant risk, the auditor should:
Note: The applicable financial reporting framework may allow the aggregation of similar related party transactions for disclosure purposes. If the company has aggregated related party transactions for disclosure purposes in accordance with the applicable financial reporting framework, the auditor may perform the procedures in paragraph .12 for only a selection of transactions from each aggregation of related party transactions (versus all transactions in the aggregation), commensurate with the risks of material misstatement. Intercompany Accounts.13 The auditor should perform procedures on intercompany account balances as of concurrent dates, even if fiscal years of the respective companies differ. Note: The procedures performed should address the risks of material misstatement associated with the company's intercompany accounts. Evaluating Whether the Company Has Properly Identified Its Related Parties and Relationships and Transactions with Related Parties.14 The auditor should evaluate whether the company has properly identified its related parties and relationships and transactions with related parties. Evaluating whether a company has properly identified its related parties and relationships and transactions with related parties involves more than assessing the process used by the company. This evaluation requires the auditor to perform procedures to test the accuracy and completeness of the related parties and relationships and transactions with related parties identified by the company, taking into account the information gathered during the audit. 15 As part of this evaluation, the auditor should read minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared. Note: Appendix A contains examples of information and sources of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist. .15 If the auditor identifies information that indicates that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist, the auditor should perform the procedures necessary to determine whether previously undisclosed relationships or transactions with related parties, in fact, exist.16 These procedures should extend beyond inquiry of management. .16 If the auditor determines that a related party or relationship or transaction with a related party previously undisclosed to the auditor exists, the auditor should:
Evaluating Financial Statement Accounting and Disclosures.17 The auditor must evaluate whether related party transactions have been properly accounted for and disclosed in the financial statements. This includes evaluating whether the financial statements contain the information regarding relationships and transactions with related parties essential for a fair presentation in conformity with the applicable financial reporting framework. 19 Assertions That Transactions with Related Parties Were Conducted on Terms Equivalent to Those Prevailing in Arm's-Length Transactions.18 If the financial statements include a statement by management that transactions with related parties were conducted on terms equivalent to those prevailing in an arm's-length transaction, the auditor should determine whether the evidence obtained supports or contradicts management's assertion. If the auditor is unable to obtain sufficient appropriate audit evidence to substantiate management's assertion, and if management does not agree to modify the disclosure, the auditor should express a qualified or adverse opinion.20 Note: Transactions with related parties might not be conducted on terms equivalent to those prevailing in arm's-length transactions (e.g., a company may receive services from a related party without cost). Except for routine transactions, it may not be possible for management to determine whether a particular transaction would have taken place, or what the terms and manner of settlement would have been, if the parties had not been related. Accordingly, it may be difficult for the auditor to obtain sufficient appropriate audit evidence to substantiate management's assertion that a transaction was consummated on terms equivalent to those that prevail in arm's-length transactions. A preface to a statement such as "management believes that" or "it is the company's belief that" does not change the auditor's responsibilities. Communications with the Audit Committee.19 The auditor should communicate to the audit committee the auditor's evaluation of the company's identification of, accounting for, and disclosure of its relationships and transactions with related parties.21 The auditor also should communicate other significant matters arising from the audit regarding the company's relationships and transactions with related parties including, but not limited to:
Appendix A - Examples of Information and Sources of Information That May Be Gathered During the Audit That Could Indicate That Related Parties or Relationships or Transactions with Related Parties Previously Undisclosed to the Auditor Might Exist.A1 This Appendix contains examples of information and sources of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist. Specifically, paragraph .A2 of this Appendix contains examples of information that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist. Similarly, paragraph .A3 contains examples of sources that could contain such information. The examples contained in this Appendix are not intended to represent a comprehensive listing. .A2 The following are examples of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist:
.A3 The following are examples of sources of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist:
What qualifies as a related party transaction?"Related Party Transaction" means any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which (i) the Company or any of its subsidiaries is or will be a participant, and (ii) any Related Party has or will have a direct or indirect interest.
What makes an entity a related party?A related party is a person or an entity that is related to the reporting entity: A person or a close member of that person's family is related to a reporting entity if that person has control, joint control, or significant influence over the entity or is a member of its key management personnel.
Which of the following most likely would indicate the existence of related parties?Exchanging property for similar property in a nonmonetary transaction. This answer is correct because exchanging property for similar property in a nonmonetary transaction may indicate the existence of related parties (the exchange may or may not approximate what would occur in an arm's-length transaction).
Which transactions are related party transactions?A related party transaction is a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged.
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