## SA-550: Related Parties

### Definition of Related Party (as per Financial Reporting Framework)

Related party includes:

1. Entities under common control through:

Common owner
Owners being close family members
Common key management

2. An entity/person having control or significant influence over the reporting entity

3. An entity over which the reporting entity has control or significant influence

Exception: Entities controlled by a state (national, state, or regional government) are NOT considered related parties unless they have significant transactions with or share significant resources with the reporting entity.

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### Key Concepts

Control: Power to govern the operating and financial policies of an entity.

Significant Influence:

Power to participate in operating and financial policy decisions (through share ownership, status, or agreement)
Does NOT include the power to control those policies

Key Management: Persons having authority and responsibility for planning, directing, and controlling the activities of the entity.

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### Examples of Related Parties

1. Entity having equity/financial interest in the reporting entity

2. Reporting entity having equity/financial interest in another entity

3. Members of TCWG or key management

4. Close family members of TCWG/key management

5. Persons having a significant business relationship with TCWG/key management

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### Inquiry with Management

Auditor inquires about:

1. Identification of all related parties

2. Nature of relationships with related parties

3. Nature of related party transactions (RPTs)

4. Changes in relationships from the prior period

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### Risk Assessment Procedures (RAP)

Auditor examines:

1. Accounting and disclosure of RPTs as per FRF

2. Significant RPTs = must be authorised AND approved

3. RPTs outside normal course of business = must be authorised AND approved

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### Risk Assessment for RPTs

Lower RMM	Higher RMM
RPTs in normal course of business (comparable to unrelated party terms)	RPTs not on normal market terms
—	Complex nature of relationships
—	Information systems ineffective at identifying/summarising RPTs and outstanding balances

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### Records and Documents to Identify Related Parties

1. Minutes of meetings

2. Entity's income tax returns (ITR)

3. Register of members

4. Life insurance premiums paid

5. Internal auditor's report

6. Agreements with TCWG/key management

7. Contracts outside the ordinary course of business

8. Register of investments and shareholding

9. Statements of conflict of interest by TCWG/key management

10. Information supplied to regulatory authorities (annual returns)

11. Documents filed with regulators (e.g., prospectus)

Worked example

### Example 1

Identifying Related Party via Common Owner: Company A and Company B are both owned 60% by Mr. X. Even though A and B have no direct relationship, they are related parties because they are under common control (common owner). Any transactions between A and B are RPTs and must be assessed for appropriate arm's length terms, authorization, and FRF disclosure.

### Example 2

State-Controlled Entity Exception: A central government-owned enterprise transacts with another state government enterprise. These are generally NOT considered related parties under the exception. However, if the two entities share significant resources (e.g., joint infrastructure) or have significant transactions between them, the exception does not apply and they must be treated as related parties.

⚠️ Common exam mistakes

Forgetting the state-controlled entity exception — entities controlled by government are generally excluded from the related party definition unless they have significant transactions or share significant resources.
Treating all RPTs as high RMM — RPTs conducted on normal market terms in the ordinary course of business do NOT automatically have high RMM.
Missing that BOTH authorization AND approval are required for significant RPTs and for RPTs outside the normal course of business — authorization alone is insufficient.
Overlooking close family members of key management as related parties — spouses, children, and dependants of key management persons must be identified.
Relying only on management declarations to identify related parties — auditor must independently inspect documents such as ITR, register of members, minutes of meetings, and regulatory filings.

Reference: SA-550 — Standards on Auditing — ICAI

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