## Related Party Relationships
### Control vs. Significant Influence
| Concept | Meaning |
|---|---|
| Control | X Ltd can oversee/govern the strategic and financial decisions of Y Ltd — i.e., has power to direct, not merely influence |
| Significant Influence | X Ltd participates in strategic decisions of Y Ltd but does not control them |
Key rule: Control > Significant Influence in terms of power. Both create a related party relationship.
---
### Relationships Indicating Control / Significant Influence
| Label | Relationship |
|---|---|
| (a) | X Ltd holds equity in Y Ltd |
| (b) | Y Ltd holds equity in X Ltd |
| (c) | Being part of TCWG (Those Charged with Governance) |
| (d) | Close family member of person in (c) |
| (e) | Business relations covered by person/entity in (c) |
---
### Why Related Party Relationships Create ROMM
Three root causes of Risk of Material Misstatement (ROMM):
1. Complex relationships — difficult to identify and verify
2. Ineffective information systems — related party data may not be captured
3. Non-market terms — transactions not conducted at arm's length can distort financial position
> Mnemonic: CIN — Complex, Ineffective systems, Non-market terms
---
### Auditor's Responsibilities — Understanding Related Party Relationships & Transactions
#### Step 1 — Inquiry to Management
(A) Identify the entity's related parties and related party relationships from the prior period
(B) Understand the nature of the relationship with each party
(C) Confirm transactions during the year — including their:
- Type
- Purpose
#### Step 2 — Inquiry into Management Controls
(A) Assess controls in place to:
- Identify related party relationships, accounts, and transactions
- Ensure proper disclosure as per the applicable Financial Reporting Framework (FRF)
(B) Evaluate the authorization and approval process for significant transactions/arrangements with related parties
(C) Review controls over non-standard transactions — those outside normal business operations
#### Step 3 — Verify Existence of Related Party Relationships & Transactions
Inspect the following records and documents:
| # | Document / Record |
|---|---|
| (i) | Income Tax Returns of the entity |
| (ii) | Records of entity's investments and pension plans |
| (iii) | Information supplied to regulatory authorities |
| (iv) | Shareholder's Register (to identify principal shareholders) |
| (v) | Life insurance policies acquired by the entity |
| (vi) | Internal Auditor Reports |
| (vii) | Significant contracts renegotiated by the entity during the period |