## SA 550 — Related Parties: Scope and Definitions

### Scope

SA 550 deals with the auditor's responsibilities regarding related party relationships and transactions when performing an audit of Financial Statements — specifically, risks of material misstatement associated with such relationships.

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### Who is a Related Party?

Primary source: Definition in the Applicable Financial Reporting Framework (AFRF) (e.g., Ind AS 24).

Where AFRF establishes minimal or no requirements, a related party means:

Category	Description
(a) Person/entity with control or significant influence over the reporting entity (directly or through intermediaries)	e.g., a parent company, dominant shareholder
(b) Another entity over which the reporting entity has control or significant influence	e.g., a subsidiary or associate
(c) Another entity under common control with the reporting entity	Common controlling ownership / close family members of owners / common key management

> Exception: Entities under common control of a state (national/regional/local government) are NOT considered related parties — unless they engage in significant transactions or share resources to a significant extent.

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### Control vs. Significant Influence

Term	Definition
Control	Power to govern financial and operating policies to obtain benefits from the entity's activities
Significant Influence	Power to participate in financial and operating policy decisions — but NOT control over those policies. May be gained through ownership, statute, or agreement

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### Indicators of Control or Significant Influence

1. Direct/indirect equity holdings or other financial interests in the entity

2. Entity's own direct/indirect equity holdings or financial interests in other entities

3. Being part of TCWG or Key Management Personnel (KMP)

4. Being a close family member of TCWG/KMP

5. Having a significant business relationship with TCWG/KMP

Worked example

### Example 1

Control example: Alpha Ltd holds 70% of the shares of Beta Ltd. Alpha can govern Beta's financial and operating policies. Beta is a related party of Alpha (Alpha controls Beta — falls under category (b)).

### Example 2

Significant Influence example: Gamma Ltd holds 25% of Delta Ltd's shares and has a seat on the board. Gamma can participate in policy decisions but cannot govern them. Gamma has significant influence over Delta — Delta is a related party of Gamma.

### Example 3

Common control example: X and Y are both subsidiaries of Z Corp, which owns 100% of each. X and Y are related parties of each other through common controlling ownership under category (c).

### Example 4

State entity exception: State Bank A and State Bank B are both owned by the central government. They are NOT automatically related parties merely because of common government ownership — unless they conduct significant transactions with each other or share significant resources.

### Example 5

KMP relationship: The CFO of Reporting Entity enters into a consulting contract with a firm owned by his spouse (close family member of KMP). That firm is a related party by virtue of indicator (4) above.

⚠️ Common exam mistakes

Assuming related party definition comes only from the SA — the primary definition comes from the AFRF (e.g., Ind AS 24/AS 18); SA 550's definition applies only where AFRF has minimal or no requirements.
Confusing control (govern policies) with significant influence (participate in decisions) — control is absolute governance; significant influence falls short of control.
Forgetting the state-entity exception — entities under common state ownership are NOT automatically related parties; significance of transactions/resource-sharing must be assessed.
Overlooking indirect relationships — control or significant influence can exist 'through one or more intermediaries', not just directly.
Missing KMP-family connections as related party indicators — close family members of TCWG/KMP trigger related party status even if the family member has no direct role in the entity.

Bare-Act text Definitions · SA 550 — Related Parties · click to expand

Related party means: (a) A party that is defined in the applicable financial reporting framework; or (b) Where the applicable financial reporting framework establishes minimal or no related party requirements: (i) A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity; (ii) Another entity over which the reporting entity has control or significant influence, directly or indirectly, through one or more intermediaries; or (iii) 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.

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Scope, Definition of Related Party, Control and Significant Influence

Worked example

⚠️ Common exam mistakes