## SA 550: Control, Significant Influence & Risks in Related Party Transactions
### Government-Controlled Entities — Special Exception
Entities under common control by a state (national, regional, or local government) are not considered related parties unless they:
- Engage in significant transactions with each other, OR
- Share resources to a significant extent
> Example: Gujarat State's Agriculture Dept and Infrastructure Dept are not automatically related parties merely because the same government controls both.
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### Control vs. Significant Influence
| Concept | Meaning |
|---|---|
| Control | Power to govern financial and operating policies to obtain benefits |
| Significant Influence | Power to participate in financial/operating policy decisions — but not control |
Significant influence can be gained through share ownership, statute, or agreement.
Indicators of Control or Significant Influence:
1. Direct/indirect equity holdings or other financial interests
2. Entity's own holdings of equity in other entities
3. Being part of TCWG or key management (planning, directing, controlling activities)
4. Being a close family member of key management
5. Having a significant business relationship with key management
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### Dominant Influence
Related parties may exert dominant influence over the entity or its management by virtue of control or significant influence. This is relevant when assessing risks of material misstatement due to fraud.
### Special-Purpose Entities (SPEs) as Related Parties
An SPE may be a related party if the entity in substance controls it — even if it owns little or none of the SPE's equity.
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### Risks Associated with Related Party Transactions (RPT)
Remember: CIM
| # | Risk |
|---|---|
| C | Complexity — Related parties often operate through extensive, complex relationships and structures, increasing transaction complexity |
| I | Information systems may be ineffective at identifying/summarising RPT and outstanding balances |
| M | Market terms — RPT may not be conducted under normal market terms and conditions |
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### Understanding RPR & RPT — What the Auditor Must Know
1. Identity of related parties (including changes from the prior period)
2. Nature of relationships between the entity and related parties
3. Whether any transactions occurred during the period — and if so, the type and purpose
Accounting system evaluation focuses on: Can the system identify, account for, and disclose RPR and RPT per the AFRF?
Related internal controls focus on: Are significant transactions/arrangements with related parties (especially outside normal course of business) being authorised and approved?
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### Considerations for Small Entities
Small entities present a distinct control environment:
- TCWG may not include outside/independent members
- Governance may be undertaken directly by the owner-manager
- Control activities are less formal; processes for RPT may be undocumented
- Owner-manager involvement can mitigate or increase RPT risks
Auditor's approach for small entities:
Obtain understanding through:
- Inquiry of management, combined with
- Observation of management's oversight and review activities
- Inspection of available relevant documentation