SAS No. 06 Related Parties

Status

Revised by Auditing Standards Committee in Taiwan on 8 November, 2005.

Summary

The auditor should perform audit procedures designed to obtain sufficient appropriate audit evidence regarding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements. However, an audit cannot be expected to detect all related parties or related party transactions.

The auditor should review information provided by those charged with governance and management identifying the names of all known related parties and should perform the following audit procedures in respect of the completeness of this information:

  • Review prior year working papers for names of known related parties;
  • Review the entity’s procedures for identification of related parties;
  • Inquire as to the affiliation of those charged with governance and officers with other entities;
  • Review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal shareholders from the share register;
  • Review minutes of the meetings of shareholders and those charged with governance and other relevant statutory records such as the register of directors’ interests;
  • Inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and
  • Review the entity’s income tax returns and other information supplied to regulatory agencies.
  • Audit the addition of significant investments made during the period to ensure whether such investments would be considered as related parties.
  • Audit the significant donations made during the period to ensure whether such recipients could be related parties.

If, in the auditor’s judgment, there is a lower risk of significant related parties remaining undetected, these procedures may be modified as appropriate.

The auditor should review information provided by those charged with governance and management identifying related party transactions and should be alert for other material related party transactions. When obtaining an understanding of the entity’s internal control, the auditor should consider the adequacy of control activities over the authorization and recording of related party transactions.

During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include the following:

  • Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms.
  • Transactions which lack an apparent logical business reason for their occurrence.
  • Transactions in which substance differs from form.
  • Transactions processed in an unusual manner.
  • High volume or significant transactions with certain customers or suppliers as compared with others.
  • Unrecorded transactions such as the receipt or provision of management services at no charge.

During the course of the audit, the auditor carries out audit procedures which may identify the existence of transactions with related parties. Examples include the following:

  • Performing detailed tests of transactions and balances.
  • Reviewing minutes of meetings of shareholders and those charged with governance.
  • Reviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period.
  • Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions.
  • Reviewing investment transactions, for example, purchase or sale of an equity interest in a joint venture or other entity.
  • Auditing the loans receivable and payable from non-financial institutions.
  • Auditing the description of promissory notes that are deposited in or out.
  • Reviewing the descriptions of professional fees paid to attorneys, notaries, and real estate brokers.

In examining the identified related party transactions, the auditor should obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and disclosed. Because of the limited availability of appropriate audit evidence about such transactions, the auditor considers performing audit procedures such as:

  • Confirming the terms and amount of the transaction with the related party.
  • Inspecting information in possession of the related party.
  • Confirming or discussing information with persons associated with the transaction, such as banks,lawyers, guarantors and agents.

The auditor should obtain a written representation from management concerning:

  • The completeness of information provided regarding the identification of related parties; and
  • The adequacy of related party disclosures in the financial statements.

If the auditor is unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the auditor’s report appropriately.

Effective date

This Statement is effective from 1 January, 2006.

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