Standard · SA

SA 550 Related Parties

Paragraphs

9,205

Words

—

Past Q citations

Practice on this → Open ICAI PDF

SA 550
Related Parties
(Effective for audits of financial statements for periods
beginning on or after April 1, 2010)

Contents
Paragraph(s)
Introduction
Scope of this SA..................................................................................... 1-7
Effective Date. ........................................................................................... 8
Objectives ............................................................................................... 9
Definitions ............................................................................................. 10
Requirements
Risk Assessment Procedures and Related Activities ....................... 11-17
Identification and Assessment of the Risks of Material
Misstatement Associated with Related Party Relationships and
Transactions ...................................................................................... 18-19
Responses to the Risks of Material Misstatement Associated
with Related Party Relationships and Transactions ......................... 20-24
Evaluation of the Accounting for and Disclosure of Identified
Related Party Relationships and Transactions ...................................... 25
Written Representations ........................................................................ 26
Communication with Those Charged with Governance ......................... 27
Documentation ....................................................................................... 28
Application and Other Explanatory Material
Responsibilities of the Auditor .......................................................... A1-A3
Definition of a Related Party ............................................................ A4-A7
Risk Assessment Procedures and Related Activities .................... A8-A28
Identification and Assessment of the Risks of Material
Misstatement Associated with Related Party Relationships
and Transactions .......................................................................... A29-A30

 Published in March, 2009 issue of the Journal.
Responses to the Risks of Material Misstatement Associated
with Related Party Relationships and Transactions .................... A31-A45
Evaluation of the Accounting for and Disclosure of Identified
Related Party Relationships and Transactions ............................ A46-A47
Written Representations .............................................................. A48-A49
Communication with Those Charged with Governance ....................... A50
Material Modifications vis a vis ISA 550, “Related Parties”

Standard on Auditing (SA) 550, “Related Parties” should be read in the
context of the “Preface to the Standards on Quality Control, Auditing,
Review, Other Assurance and Related Services”, which sets out the
authority of SAs and SA 200, “Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with Standards on
Auditing”.

SA 550 2
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding related party relationships and transactions when performing an audit
of financial statements. Specifically, it expands on how SA 3151, SA 3302 and SA
2403 are to be applied in relation to risks of material misstatement associated
with related party relationships and transactions.
Nature of Related Party Relationships and Transactions
2. Many related party transactions are in the normal course of business. In
such circumstances, they may carry no higher risk of material misstatement of
the financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial
statements than transactions with unrelated parties. For example:
 Related parties may operate through an extensive and complex range of
relationships and structures, with a corresponding increase in the
complexity of related party transactions.
 Information systems may be ineffective at identifying or summarising
transactions and outstanding balances between an entity and its related
parties.
 Related party transactions may not be conducted under normal market
terms and conditions; for example, some related party transactions may be
conducted with no exchange of consideration.
Responsibilities of the Auditor
3. Because related parties are not independent of each other, many financial
reporting frameworks establish specific accounting and disclosure requirements
for related party relationships, transactions and balances to enable users of the
financial statements to understand their nature and actual or potential effects on
the financial statements. Where the applicable financial reporting framework
establishes such requirements, the auditor has a responsibility to perform audit
procedures to identify, assess and respond to the risks of material misstatement
arising from the entity’s failure to appropriately account for or disclose related

1 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding

the Entity and Its Environment”.
2 SA 330, “The Auditor’s Responses to Assessed Risks”.
3 SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”.

3 SA 550
party relationships, transactions or balances in accordance with the requirements
of the framework.
4. Even if the applicable financial reporting framework establishes minimal or
no related party requirements, the auditor nevertheless needs to obtain an
understanding of the entity’s related party relationships and transactions
sufficient to be able to conclude whether the financial statements, insofar as they
are affected by those relationships and transactions: (Ref: Para. A1)
(a) Achieve a true and fair presentation (for fair presentation frameworks); or
(Ref: Para. A2)
(b) Are not misleading (for compliance frameworks). (Ref: Para. A3)
5. In addition, an understanding of the entity’s related party relationships and
transactions is relevant to the auditor’s evaluation of whether one or more fraud
risk factors are present as required by SA 2404 because fraud may be more
easily committed through related parties.
6. Owing to the inherent limitations of an audit, there is an unavoidable risk
that some material misstatements of the financial statements may not be
detected, even though the audit is properly planned and performed in
accordance with the SAs5. In the context of related parties, the potential effects of
inherent limitations on the auditor’s ability to detect material misstatements are
greater for such reasons as the following:
 Management may be unaware of the existence of all related party
relationships and transactions, particularly if the applicable financial
reporting framework does not establish related party requirements.
 Related party relationships may present a greater opportunity for collusion,
concealment or manipulation by management.
7. Planning and performing the audit with professional skepticism as required
by SA 2006 is therefore particularly important in this context, given the potential
for undisclosed related party relationships and transactions. The requirements in
this SA are designed to assist the auditor in identifying and assessing the risks of
material misstatement associated with related party relationships and
transactions, and in designing audit procedures to respond to the assessed risks.
Effective Date
8. This SA is effective for audits of financial statements for periods beginning
on or after April 1, 2010.

4 SA 240, paragraph 24.
5 SA 200, paragraph A52.
6 SA 200, paragraph 15.

SA 550 4
Objectives
9. The objectives of the auditor are:
(a) Irrespective of whether the applicable financial reporting framework
establishes related party requirements, to obtain an understanding of
related party relationships and transactions sufficient to be able:
(i) To recognise fraud risk factors, if any, arising from related party
relationships and transactions that are relevant to the identification and
assessment of the risks of material misstatement due to fraud; and
(ii) To conclude whether the financial statements, insofar as they are
affected by those relationships and transactions:
a. Achieve a true and fair presentation (for fair presentation
frameworks); or
b. Are not misleading (for compliance frameworks); and
(b) In addition, where the applicable financial reporting framework establishes
related party requirements, to obtain sufficient appropriate audit evidence
about whether related party relationships and transactions have been
appropriately identified, accounted for and disclosed in the financial
statements in accordance with the framework.
Definitions
10. For purposes of the SAs, the following terms have the meanings attributed
below:
(a) Arm’s length transaction–A transaction conducted on such terms and
conditions as between a willing buyer and a willing seller who are unrelated
and are acting independently of each other and pursuing their own best
interests.
(b) Related party – A party that is either: (Ref: Para. A4-A7)
(i) A related party as defined in the applicable financial reporting
framework7; or
(ii) Where the applicable financial reporting framework establishes
minimal or no related party requirements:
a. A person or other entity that has control or significant influence,

7 In Indian context, definitions of “Related Party” and “Related Party Transactions” as given in

Accounting Standard (AS) 18, “Related Party Disclosures”, issued by the Institute of Chartered
Accountants of India, will be applicable for the purposes of this SA, and the said definitions also
meet the tests laid down in paragraph 10(b)(ii) of this SA.

5 SA 550
directly or indirectly through one or more intermediaries, over
the reporting entity;
b. Another entity over which the reporting entity has control or
significant influence, directly or indirectly through one or more
intermediaries; or
c. Another entity that is under common control with the reporting
entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
However, entities that are under common control by a state (i.e.,
a national, regional or local government) are not considered
related unless they engage in significant transactions or share
resources to a significant extent with one another.
Requirements
Risk Assessment Procedures and Related Activities
11. As part of the risk assessment procedures and related activities that SA
315 and SA 240 require the auditor to perform during the audit,8 the auditor shall
perform the audit procedures and related activities set out in paragraphs 12-17 to
obtain information relevant to identifying the risks of material misstatement
associated with related party relationships and transactions. (Ref: Para. A8)
Understanding the Entity’s Related Party Relationships and Transactions
12. The engagement team discussion that SA 315 and SA 240 require9 shall
include specific consideration of the susceptibility of the financial statements to
material misstatement due to fraud or error that could result from the entity’s
related party relationships and transactions. (Ref: Para. A9-A10)
13. The auditor shall inquire of management regarding:
(a) The identity of the entity’s related parties, including changes from the prior
period; (Ref: Para. A11-A14)
(b) The nature of the relationships between the entity and these related
parties; and
(c) Whether the entity entered into any transactions with these related parties
during the period and, if so, the type and purpose of the transactions.

8 SA 315, paragraph 5; and SA 240, paragraph 16.
9 SA 315, paragraph 10; and SA 240, paragraph 15.

SA 550 6
14. The auditor shall inquire of management and others within the entity, and
perform other risk assessment procedures considered appropriate, to obtain an
understanding of the controls, if any, that management has established to: (Ref:
Para. A15-A20)
(a) Identify, account for, and disclose related party relationships and
transactions in accordance with the applicable financial reporting
framework;
(b) Authorise and approve significant transactions and arrangements with
related parties; and (Ref: Para. A21)
(c) Authorise and approve significant transactions and arrangements outside
the normal course of business.
Maintaining Alertness for Related Party Information When Reviewing
Records or Documents
15. During the audit, the auditor shall remain alert, when inspecting records or
documents, for arrangements or other information that may indicate the
existence of related party relationships or transactions that management has not
previously identified or disclosed to the auditor. (Ref: Para. A22-A23)
In particular, the auditor shall inspect the following for indications of the existence
of related party relationships or transactions that management has not previously
identified or disclosed to the auditor:
(a) Bank, legal and third party confirmations obtained as part of the auditor’s
procedures;
(b) Minutes of meetings of shareholders and of those charged with
governance; and
(c) Such other records or documents as the auditor considers necessary in
the circumstances of the entity.
16. If the auditor identifies significant transactions outside the entity’s normal
course of business when performing the audit procedures required by paragraph
15 or through other audit procedures, the auditor shall inquire of management
about: (Ref: Para. A24-A25)
(a) The nature of these transactions; and (Ref: Para. A26)
(b) Whether related parties could be involved. (Ref: Para. A27)
Sharing Related Party Information with the Engagement Team
17. The auditor shall share relevant information obtained about the entity’s
related parties with the other members of the engagement team. (Ref: Para. A28)

7 SA 550
Identification and Assessment of the Risks of Material Misstatement
Associated with Related Party Relationships and Transactions
18. In meeting the SA 315 requirement to identify and assess the risks of
material misstatement,10 the auditor shall identify and assess the risks of material
misstatement associated with related party relationships and transactions and
determine whether any of those risks are significant risks. In making this
determination, the auditor shall treat identified significant related party
transactions outside the entity’s normal course of business as giving rise to
significant risks.
19. If the auditor identifies fraud risk factors (including circumstances relating to
the existence of a related party with dominant influence) when performing the
risk assessment procedures and related activities in connection with related
parties, the auditor shall consider such information when identifying and
assessing the risks of material misstatement due to fraud in accordance with SA
240. (Ref: Para. A6 and A29-A30)
Responses to the Risks of Material Misstatement Associated with
Related Party Relationships and Transactions
20. As part of the SA 330 requirement that the auditor respond to assessed
risks,11 the auditor designs and performs further audit procedures to obtain
sufficient appropriate audit evidence about the assessed risks of material
misstatement associated with related party relationships and transactions. These
audit procedures shall include those required by paragraphs 21-24. (Ref: Para.
A31-A34)
Identification of Previously Unidentified or Undisclosed Related Parties or
Significant Related Party Transactions
21. If the auditor identifies arrangements or information that suggests the
existence of related party relationships or transactions that management has not
previously identified or disclosed to the auditor, the auditor shall determine
whether the underlying circumstances confirm the existence of those
relationships or transactions.
22. If the auditor identifies related parties or significant related party
transactions that management has not previously identified or disclosed to the
auditor, the auditor shall:
(a) Promptly communicate the relevant information to the other members of
the engagement team; (Ref: Para. A35)

10 SA 315, paragraph 25.
11 SA 330, paragraphs 5-6.

SA 550 8
(b) Where the applicable financial reporting framework establishes related
party requirements:
(i) Request management to identify all transactions with the newly
identified related parties for the auditor’s further evaluation; and
(ii) Inquire as to why the entity’s controls over related party relationships
and transactions failed to enable the identification or disclosure of the
related party relationships or transactions;
(c) Perform appropriate substantive audit procedures relating to such newly
identified related parties or significant related party transactions; (Ref:
Para. A36)
(d) Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or
disclosed to the auditor, and perform additional audit procedures as
necessary; and
(e) If the non-disclosure by management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit. (Ref: Para. A37)
Identified Significant Related Party Transactions outside the Entity’s
Normal Course of Business
23. For identified significant related party transactions outside the entity’s
normal course of business, the auditor shall:
(a) Inspect the underlying contracts or agreements, if any, and evaluate
whether:
(i) The business rationale (or lack thereof) of the transactions suggests
that they may have been entered into to engage in fraudulent
financial reporting or to conceal misappropriation of assets;12 (Ref:
Para. A38-A39)
(ii) The terms of the transactions are consistent with management’s
explanations; and
(iii) The transactions have been appropriately accounted for and
disclosed in accordance with the applicable financial reporting
framework; and
(b) Obtain audit evidence that the transactions have been appropriately
authorised and approved. (Ref: Para. A40-A41)

12 SA 240, paragraph 32(c).

9 SA 550
Assertions That Related Party Transactions Were Conducted on Terms
Equivalent to Those Prevailing in an Arm’s Length Transaction
24. When management has made an assertion in the financial statements to
the effect that a related party transaction was conducted on terms equivalent to
those prevailing in an arm’s length transaction, the auditor shall obtain sufficient
appropriate audit evidence about the assertion. (Ref: Para. A42-A45)
Evaluation of the Accounting for and Disclosure of Identified Related
Party Relationships and Transactions
25. In forming an opinion on the financial statements in accordance with SA
700(Revised),13 the auditor shall evaluate: (Ref: Para. A46)
(a) Whether the identified related party relationships and transactions
have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework; and (Ref:
Para. A47)
(b) Whether the effects of the related party relationships and transactions:
(i) Prevent the financial statements from achieving true and fair
presentation (for fair presentation frameworks); or
(ii) Cause the financial statements to be misleading (for compliance
frameworks).
Written Representations
26. Where the applicable financial reporting framework establishes related
party requirements, the auditor shall obtain written representations from
management and, where appropriate, those charged with governance that: (Ref:
Para. A48-A49)
(a) They have disclosed to the auditor the identity of the entity’s related parties
and all the related party relationships and transactions of which they are
aware; and
(b) They have appropriately accounted for and disclosed such relationships
and transactions in accordance with the requirements of the framework.
Communication with Those Charged with Governance
27. Unless all of those charged with governance are involved in managing the

13 SA 700(Revised), “Forming an Opinion and Reporting on Financial Statements”; paragraphs 10-

15.

SA 550 10
entity14, the auditor shall communicate with those charged with governance
significant matters arising during the audit in connection with the entity’s related
parties. (Ref: Para. A50)
Documentation
28. In meeting the documentation requirements of SA 23015 and other SAs, the
auditor shall include in the audit documentation the names of the identified
related parties and the nature of the related party relationships.
***
Application and Other Explanatory Material
Responsibilities of the Auditor
Financial Reporting Frameworks That Establish Minimal Related Party
Requirements (Ref: Para. 4)
A1. An applicable financial reporting framework that establishes minimal related
party requirements is one that defines the meaning of a related party but that
definition has a substantially narrower scope than the definition set out in
paragraph 10(b)(ii) of this SA, so that a requirement in the framework to disclose
related party relationships and transactions would apply to substantially fewer
related party relationships and transactions.
Fair Presentation Frameworks (Ref: Para. 4(a))
A2. In the context of a fair presentation framework,16 related party relationships
and transactions may cause the financial statements to fail to achieve true and fair
presentation if, for example, the economic reality of such relationships and
transactions is not appropriately reflected in the financial statements. For instance,
true and fair presentation may not be achieved if the sale of a property by the entity
to a controlling shareholder at a price above or below fair market value has been
accounted for as a transaction involving a profit or loss for the entity when it may
constitute a contribution or return of capital or the payment of a dividend.
Compliance Frameworks (Ref: Para. 4(b))
A3. In the context of a compliance framework, whether related party
relationships and transactions cause the financial statements to be misleading as
discussed in SA 700(Revised) depends upon the particular circumstances of the
engagement. For example, even if non-disclosure of related party transactions in

14 SA 260(Revised), paragraph 16(c).
15 SA 230, “Audit Documentation”.
16 SA 200, paragraph 13(a), defines the meaning of fair presentation and compliance frameworks.

11 SA 550
the financial statements is in compliance with the framework and applicable law
or regulation, the financial statements could be misleading if the entity derives a
very substantial portion of its revenue from transactions with related parties, and
that fact is not disclosed. However, it will be extremely rare for the auditor to
consider financial statements that are prepared and presented in accordance
with a compliance framework to be misleading if in accordance with SA 21017 the
auditor determined that the framework is acceptable18.
Definition of a Related Party (Ref: Para. 10(b))
A4. Many financial reporting frameworks discuss the concepts of control and
significant influence. Although they may discuss these concepts using different
terms, they generally explain that:
(a) Control is the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities; and
(b) Significant influence (which may be gained by share ownership, statute or
agreement) is the power to participate in the financial and operating policy
decisions of an entity, but is not control over those policies.
A5. The existence of the following relationships may indicate the presence of
control or significant influence:
(a) Direct or indirect equity holdings or other financial interests in the entity.
(b) The entity’s holdings of direct or indirect equity or other financial interests
in other entities.
(c) Being part of those charged with governance or key management (i.e.,
those members of management who have the authority and responsibility
for planning, directing and controlling the activities of the entity).
(d) Being a close family member of any person referred to in subparagraph (c).
(e) Having a significant business relationship with any person referred to in
subparagraph (c).
Related Parties with Dominant Influence
A6. Related parties, by virtue of their ability to exert control or significant
influence, may be in a position to exert dominant influence over the entity or its
management. Consideration of such behavior is relevant when identifying and
assessing the risks of material misstatement due to fraud, as further explained in
paragraphs A29-A30.

17 SA 210, “Agreeing the Terms of Audit Engagements,” paragraph 6(a).
18 SA 700(Revised), “Forming an Opinion and Reporting on Financial Statements”, paragraph A12.

SA 550 12
Special-Purpose Entities as Related Parties
A7. In some circumstances, a special-purpose entity19 may be a related party of
the entity because the entity may in substance control it, even if the entity owns
little or none of the special- purpose entity’s equity.
Risk Assessment Procedures and Related Activities
Risks of Material Misstatement Associated with Related Party
Relationships and Transactions (Ref: Para. 11)
A8. In case of certain entities, auditor’s responsibilities regarding related party
relationships and transactions may be affected by the audit mandate, or by
obligations on those entities arising from legislation, regulation, ministerial
directives, government policy requirements, or resolutions of the legislature.
Consequently, in such cases the auditor’s responsibilities may not be limited to
addressing the risks of material misstatement associated with related party
relationships and transactions, but may also include a broader responsibility to
address the risks of non-compliance with laws and regulations governing such
entities that lay down specific requirements in the conduct of business with
related parties. Further, in such cases the auditor may need to have regard to
any specific financial reporting requirements for related party relationships and
transactions that may differ from other entities.
Understanding the Entity’s Related Party Relationships and Transactions
Discussion among the Engagement Team (Ref: Para. 12)
A9. Matters that may be addressed in the discussion among the engagement
team include:
 The nature and extent of the entity’s relationships and transactions with
related parties (using, for example, the auditor’s record of identified
related parties updated after each audit).
 An emphasis on the importance of maintaining professional skepticism
throughout the audit regarding the potential for material misstatement
associated with related party relationships and transactions.
 The circumstances or conditions of the entity that may indicate the
existence of related party relationships or transactions that management
has not identified or disclosed to the auditor (e.g., a complex
organisational structure, use of special-purpose entities for off-balance
sheet transactions, or an inadequate information system).
 The records or documents that may indicate the existence of related party
relationships or transactions.

19 SA 315, paragraphs A32-A33, provides guidance regarding the nature of a special-purpose entity.

13 SA 550
 The importance that management and those charged with governance
attach to the identification, appropriate accounting for, and disclosure of
related party relationships and transactions (if the applicable financial
reporting framework establishes related party requirements), and the
related risk of management override of relevant controls.
A10. In addition, the discussion in the context of fraud may include specific
consideration of how related parties may be involved in fraud. For example:
 How special-purpose entities controlled by management might be used to
facilitate earnings management.
 How transactions between the entity and a known business partner of a
key member of management could be arranged to facilitate
misappropriation of the entity’s assets.
The Identity of the Entity’s Related Parties (Ref: Para. 13(a))
A11. Where the applicable financial reporting framework establishes related
party requirements, information regarding the identity of the entity’s related
parties is likely to be readily available to management because the entity’s
information systems will need to record, process and summarise related party
relationships and transactions to enable the entity to meet the accounting and
disclosure requirements of the framework. Management is therefore likely to
have a comprehensive list of related parties and changes from the prior period.
For recurring engagements, making the inquiries provides a basis for comparing
the information supplied by management with the auditor’s record of related
parties noted in previous audits.
A12. However, where the framework does not establish related party
requirements, the entity may not have such information systems in place. Under
such circumstances, it is possible that management may not be aware of the
existence of all related parties. Nevertheless, the requirement to make the
inquiries specified by paragraph 13 still applies because management may be
aware of parties that meet the related party definition set out in this SA. In such a
case, however, the auditor’s inquiries regarding the identity of the entity’s related
parties are likely to form part of the auditor’s risk assessment procedures and
related activities performed in accordance with SA 315 to obtain information
regarding:
 The entity’s ownership and governance structures;
 The types of investments that the entity is making and plans to make; and
 The way the entity is structured and how it is financed.

SA 550 14
In the particular case of common control relationships, as management is more
likely to be aware of such relationships if they have economic significance to the
entity, the auditor’s inquiries are likely to be more effective if they are focused on
whether parties with which the entity engages in significant transactions, or
shares resources to a significant degree, are related parties.
A13. In the context of a group audit, SA 600 requires the group engagement
team to provide each component auditor with a list of related parties prepared by
group management and any other related parties of which the group
engagement team is aware20. Where the entity is a component within a group,
this information provides a useful basis for the auditor’s inquiries of management
regarding the identity of the entity’s related parties.
A14. The auditor may also obtain some information regarding the identity of the
entity’s related parties through inquiries of management during the engagement
acceptance or continuance process.
The Entity’s Controls over Related Party Relationships and Transactions (Ref:
Para. 14)
A15. Others within the entity are those considered likely to have knowledge of
the entity’s related party relationships and transactions, and the entity’s controls
over such relationships and transactions. These may include, to the extent that
they do not form part of management:
 Those charged with governance;
 Personnel in a position to initiate, process, or record transactions that are
both significant and outside the entity’s normal course of business, and
those who supervise or monitor such personnel;
 Internal auditors;
 In-house legal counsel; and
 The chief ethics officer or equivalent person.
A16. The audit is conducted on the premise that management and, where
appropriate, those charged with governance have acknowledged and understand
that they have responsibility for the preparation of the financial statements in
accordance with the applicable financial reporting framework, including where
relevant their fair presentation, and for such internal control as management and,
where appropriate, those charged with governance, determine is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.21 Accordingly, where the

20 SA 600, ‘Using the Work of Another Auditor’.
21 SA 200, paragraph A2.

15 SA 550
framework establishes related party requirements, management, with oversight
from those charged with governance, is responsible for the design,
implementation and maintenance of adequate controls over related party
relationships and transactions so that these are identified and appropriately
accounted for and disclosed in accordance with the framework. In their oversight
role, those charged with governance are responsible for monitoring how
management is discharging its responsibility for such controls. Regardless of any
related party requirements the framework may establish, those charged with
governance may, in order to fulfill their oversight responsibilities, obtain
information from management to enable them to understand the nature and
business rationale of the entity’s related party relationships and transactions.
A17. In meeting the SA 315 requirement to obtain an understanding of the
control environment,22 the auditor may consider features of the control
environment relevant to mitigating the risks of material misstatement associated
with related party relationships and transactions, such as:
 Internal ethical codes, appropriately communicated to the entity’s personnel
and enforced, governing the circumstances in which the entity may enter
into specific types of related party transactions.
 Policies and procedures for open and timely disclosure of the interests that
management and those charged with governance have in related party
transactions.
 The assignment of responsibilities within the entity for identifying, recording,
summarising, and disclosing related party transactions.
 Timely disclosure and discussion between management and those charged
with governance of significant related party transactions outside the entity’s
normal course of business, including whether those charged with
governance have appropriately challenged the business rationale of such
transactions (for example, by seeking advice from external professional
advisors).
 Clear guidelines for the approval of related party transactions involving
actual or perceived conflicts of interest, such as approval by a
subcommittee of those charged with governance comprising individuals
independent of management.
 Periodic reviews by internal auditors, where applicable.
 Proactive action taken by management to resolve related party disclosure
issues, such as by seeking advice from the auditor or external legal
counsel.

22 SA 315, paragraph 14.

SA 550 16
 The existence of whistle-blowing policies and procedures, where
applicable.
A18. Controls over related party relationships and transactions within some
entities may be deficient or non-existent for a number of reasons, such as:
 The low importance attached by management to identifying and disclosing
related party relationships and transactions.
 The lack of appropriate oversight by those charged with governance.
 An intentional disregard for such controls because related party disclosures
may reveal information that management considers sensitive, for example,
the existence of transactions involving family members of management.
 An insufficient understanding by management of the related party
requirements of the applicable financial reporting framework.
 The absence of disclosure requirements under the applicable financial
reporting framework.
Where such controls are ineffective or non-existent, the auditor may be unable to
obtain sufficient appropriate audit evidence about related party relationships and
transactions. If this were the case, the auditor would, in accordance with SA
705(Revised)23, consider the implications for the audit, including the auditor’s
report.
A19. Fraudulent financial reporting often involves management override of
controls that otherwise may appear to be operating effectively.24 The risk of
management override of controls is higher if management has relationships that
involve control or significant influence with parties with which the entity does
business because these relationships may present management with greater
incentives and opportunities to perpetrate fraud. For example, management’s
financial interests in certain related parties may provide incentives for
management to override controls by (a) directing the entity, against its interests,
to conclude transactions for the benefit of these parties, or (b) colluding with such
parties or controlling their actions. Examples of possible fraud include:
 Creating fictitious terms of transactions with related parties designed to
misrepresent the business rationale of these transactions.
 Fraudulently organizing the transfer of assets from or to management or
others at amounts significantly above or below market value.

23 SA 705(Revised), “Modifications to the Opinion in the Independent Auditor’s Report”.
24 SA 240, paragraphs 31 and A4.

17 SA 550
 Engaging in complex transactions with related parties, such as special-
purpose entities, that are structured to misrepresent the financial position or
financial performance of the entity.
Considerations specific to smaller entities
A20. Control environment in smaller entities is likely to be different from larger
entities. In particular those charged with governance may not include an outside
member, and the role of governance may be undertaken directly by the owner-
manager where no other owner exists. Control activities in smaller entities are
likely to be less formal and smaller entities may have no documented processes
for dealing with related party relationships and transactions. An owner-manager
may mitigate some of the risks arising from related party transactions, or
potentially increase those risks, through active involvement in all the main
aspects of the transactions. For such entities, the auditor may obtain an
understanding of the related party relationships and transactions, and any
controls that may exist over these, through inquiry of management combined
with other procedures, such as observation of management’s oversight and
review activities, and inspection of available relevant documentation.
Authorisation and approval of significant transactions and arrangements (Ref:
Para. 14(b))
A21. Authorisation involves the granting of permission by a party or parties with
the appropriate authority (whether management, those charged with governance
or the entity’s shareholders) for the entity to enter into specific transactions in
accordance with pre-determined criteria, whether judgmental or not. Approval
involves those parties’ acceptance of the transactions the entity has entered into
as having satisfied the criteria on which authorisation was granted. Examples of
controls the entity may have established to authorise and approve significant
transactions and arrangements with related parties or significant transactions
and arrangements outside the normal course of business include:
 Monitoring controls to identify such transactions and arrangements for
authorisation and approval.
 Approval of the terms and conditions of the transactions and arrangements
by management, those charged with governance or, where applicable,
shareholders.
Maintaining Alertness for Related Party Information When Reviewing
Records or Documents
Records or Documents That the Auditor May Inspect (Ref: Para. 15)
A22. During the audit, the auditor may inspect records or documents that may
provide information about related party relationships and transactions, for

SA 550 18
example:
 Entity income tax returns.
 Information supplied by the entity to regulatory authorities.
 Shareholder registers to identify the entity’s principal shareholders.
 Statements of conflicts of interest from management and those charged
with governance.
 Records of the entity’s investments and those of its pension plans.
 Contracts and agreements with key management or those charged with
governance.
 Significant contracts and agreements not in the entity’s ordinary course of
business.
 Specific invoices and correspondence from the entity’s professional
advisors.
 Life insurance policies acquired by the entity.
 Significant contracts re-negotiated by the entity during the period.
 Internal auditors’ reports.
 Documents associated with the entity’s filings with a securities regulator
(e.g., prospectuses).
Arrangements that may indicate the existence of previously unidentified or
undisclosed related party relationships or transactions
A23. An arrangement involves a formal or informal agreement between the entity
and one or more other parties for such purposes as:
 The establishment of a business relationship through appropriate vehicles
or structures.
 The conduct of certain types of transactions under specific terms and
conditions.
 The provision of designated services or financial support.
Examples of arrangements that may indicate the existence of related party
relationships or transactions that management has not previously identified or
disclosed to the auditor include:
 Participation in unincorporated partnerships with other parties.
 Agreements for the provision of services to certain parties under terms and
conditions that are outside the entity’s normal course of business.
 Guarantees and guarantor relationships.

19 SA 550
Identification of Significant Transactions outside the Normal Course of Business
(Ref: Para. 16)
A24. Obtaining further information on significant transactions outside the entity’s
normal course of business enables the auditor to evaluate whether fraud risk
factors, if any, are present and, where the applicable financial reporting
framework establishes related party requirements, to identify the risks of material
misstatement.
A25. Examples of transactions outside the entity’s normal course of business
may include:
 Complex equity transactions, such as corporate restructurings or
acquisitions.
 Transactions with offshore entities in jurisdictions with weak corporate laws.
 The leasing of premises or the rendering of management services by the
entity to another party if no consideration is exchanged.
 Sales transactions with unusually large discounts or returns.
 Transactions with circular arrangements, for example, sales with a
commitment to repurchase.
 Transactions under contracts whose terms are changed before expiry.
Understanding the nature of significant transactions outside the normal course of
business (Ref: Para. 16(a))
A26. Inquiring into the nature of the significant transactions outside the entity’s
normal course of business involves obtaining an understanding of the business
rationale of the transactions, and the terms and conditions under which these
have been entered into.
Inquiring into whether related parties could be involved (Ref: Para. 16(b))
A27. A related party could be involved in a significant transaction outside the
entity’s normal course of business not only by directly influencing the transaction
through being a party to the transaction, but also by indirectly influencing it
through an intermediary. Such influence may indicate the presence of a fraud
risk factor.
Sharing Related Party Information with the Engagement Team (Ref: Para. 17)
A28. Relevant related party information that may be shared among the
engagement team members includes, for example:
 The identity of the entity’s related parties.
 The nature of the related party relationships and transactions.

SA 550 20
 Significant or complex related party relationships or transactions that may
require special audit consideration, in particular transactions in which
management or those charged with governance are financially involved.
Identification and Assessment of the Risks of Material Misstatement
Associated with Related Party Relationships and Transactions
Fraud Risk Factors Associated with a Related Party with Dominant
Influence (Ref: Para. 19)
A29. Domination of management by a single person or small group of persons
without compensating controls is a fraud risk factor.25 Indicators of dominant
influence exerted by a related party include:
 The related party has vetoed significant business decisions taken by
management or those charged with governance.
 Significant transactions are referred to the related party for final approval.
 There is little or no debate among management and those charged with
governance regarding business proposals initiated by the related party.
 Transactions involving the related party (or a close family member of the
related party) are rarely independently reviewed and approved.
Dominant influence may also exist in some cases if the related party has played
a leading role in founding the entity and continues to play a leading role in
managing the entity.
A30. In the presence of other risk factors, the existence of a related party with
dominant influence may indicate significant risks of material misstatement due to
fraud. For example:
 An unusually high turnover of senior management or professional advisors
may suggest unethical or fraudulent business practices that serve the
related party’s purposes.
 The use of business intermediaries for significant transactions for which
there appears to be no clear business justification may suggest that the
related party could have an interest in such transactions through control of
such intermediaries for fraudulent purposes.
 Evidence of the related party’s excessive participation in or preoccupation
with the selection of accounting policies or the determination of significant
estimates may suggest the possibility of fraudulent financial reporting.

25 SA 240, Appendix 1.

21 SA 550
Responses to the Risks of Material Misstatement Associated with
Related Party Relationships and Transactions (Ref: Para. 20)
A31. The nature, timing and extent of the further audit procedures that the
auditor may select to respond to the assessed risks of material misstatement
associated with related party relationships and transactions depend upon the
nature of those risks and the circumstances of the entity.26
A32. Examples of substantive audit procedures that the auditor may perform
when the auditor has assessed a significant risk that management has not
appropriately accounted for or disclosed specific related party transactions in
accordance with the applicable financial reporting framework (whether due to
fraud or error) include:
 Confirming or discussing specific aspects of the transactions with
intermediaries such as banks, law firms, guarantors, or agents, where
practicable and not prohibited by law, regulation or ethical rules.
 Confirming the purposes, specific terms or amounts of the transactions with
the related parties (this audit procedure may be less effective where the
auditor judges that the entity is likely to influence the related parties in their
responses to the auditor).
 Where applicable, reading the financial statements or other relevant
financial information, if available, of the related parties for evidence of the
accounting of the transactions in the related parties’ accounting records.
A33. If the auditor has assessed a significant risk of material misstatement due
to fraud as a result of the presence of a related party with dominant influence, the
auditor may, in addition to the general requirements of SA 240, perform audit
procedures such as the following to obtain an understanding of the business
relationships that such a related party may have established directly or indirectly
with the entity and to determine the need for further appropriate substantive audit
procedures:
 Inquiries of, and discussion with, management and those charged with
governance.
 Inquiries of the related party.
 Inspection of significant contracts with the related party.
 Appropriate background research, such as through the Internet or specific
external business information databases.
 Review of employee whistle-blowing reports where these are retained.

26 SA 330 provides further guidance on considering the nature, timing and extent of further audit

procedures. SA 240 establishes requirements and provides guidance on appropriate responses
to assessed risks of material misstatement due to fraud.

SA 550 22
A34. Depending upon the results of the auditor’s risk assessment procedures,
the auditor may consider it appropriate to obtain audit evidence without testing
the entity’s controls over related party relationships and transactions. In some
circumstances, however, it may not be possible to obtain sufficient appropriate
audit evidence from substantive audit procedures alone in relation to the risks of
material misstatement associated with related party relationships and
transactions. For example, where intra-group transactions between the entity and
its components are numerous and a significant amount of information regarding
these transactions is initiated, recorded, processed or reported electronically in
an integrated system, the auditor may determine that it is not possible to design
effective substantive audit procedures that by themselves would reduce the risks
of material misstatement associated with these transactions to an acceptably low
level. In such a case, in meeting the SA 330 requirement to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant
controls,27 the auditor is required to test the entity’s controls over the
completeness and accuracy of the recording of the related party relationships
and transactions.
Identification of Previously Unidentified or Undisclosed Related Parties or
Significant Related Party Transactions
Communicating Newly Identified Related Party Information to the Engagement
Team (Ref: Para. 22(a))
A35. Communicating promptly any newly identified related parties to the other
members of the engagement team assists them in determining whether this
information affects the results of, and conclusions drawn from, risk assessment
procedures already performed, including whether the risks of material
misstatement need to be reassessed.
Substantive Procedures Relating to Newly Identified Related Parties or
Significant Related Party Transactions (Ref: Para. 22(c))
A36. Examples of substantive audit procedures that the auditor may perform
relating to newly identified related parties or significant related party transactions
include:
 Making inquiries regarding the nature of the entity’s relationships with the
newly identified related parties, including (where appropriate and not
prohibited by law, regulation or ethical rules) inquiring of parties outside the
entity who are presumed to have significant knowledge of the entity and its
business, such as legal counsel, principal agents, major representatives,
consultants, guarantors, or other close business partners.

27 SA 330, paragraph 8(b).

23 SA 550
 Conducting an analysis of accounting records for transactions with the
newly identified related parties. Such an analysis may be facilitated using
computer-assisted audit techniques.
 Verifying the terms and conditions of the newly identified related party
transactions, and evaluating whether the transactions have been
appropriately accounted for and disclosed in accordance with the applicable
financial reporting framework.
Intentional Non-Disclosure by Management (Ref: Para. 22(e))
A37. The requirements and guidance in SA 240 regarding the auditor’s
responsibilities relating to fraud in an audit of financial statements are relevant
where management appears to have intentionally failed to disclose related
parties or significant related party transactions to the auditor. The auditor may
also consider whether it is necessary to re-evaluate the reliability of
management’s responses to the auditor’s inquiries and management’s
representations to the auditor.
Identified Significant Related Party Transactions outside the Entity’s
Normal Course of Business
Evaluating the Business Rationale of Significant Related Party Transactions
(Ref: Para. 23)
A38. In evaluating the business rationale of a significant related party transaction
outside the entity’s normal course of business, the auditor may consider the
following:
 Whether the transaction:
o Is overly complex (e.g., it may involve multiple related parties within a
consolidated group).
o Has unusual terms of trade, such as unusual prices, interest rates,
guarantees and repayment terms.
o Lacks an apparent logical business reason for its occurrence.
o Involves previously unidentified related parties.
o Is processed in an unusual manner.
 Whether management has discussed the nature of, and accounting for,
such a transaction with those charged with governance.
 Whether management is placing more emphasis on a particular accounting
treatment rather than giving due regard to the underlying economics of the
transaction.

SA 550 24
If management’s explanations are materially inconsistent with the terms of the
related party transaction, the auditor is required, in accordance with SA 500,28 to
consider the reliability of management’s explanations and representations on
other significant matters.
A39. The auditor may also seek to understand the business rationale of such a
transaction from the related party’s perspective, as this may help the auditor to
better understand the economic reality of the transaction and why it was carried
out. A business rationale from the related party’s perspective that appears
inconsistent with the nature of its business may represent a fraud risk factor.
Authorization and Approval of Significant Related Party Transactions (Ref: Para.
23(b))
A40. Authorisation and approval by management, those charged with
governance, or, where applicable, the shareholders of significant related party
transactions outside the entity’s normal course of business may provide audit
evidence that these have been duly considered at the appropriate levels within
the entity and that their terms and conditions have been appropriately reflected in
the financial statements. The existence of transactions of this nature that were
not subject to such authorisation and approval, in the absence of rational
explanations based on discussion with management or those charged with
governance, may indicate risks of material misstatement due to error or fraud. In
these circumstances, the auditor may need to be alert for other transactions of a
similar nature. Authorisation and approval alone, however, may not be sufficient
in concluding whether risks of material misstatement due to fraud are absent
because authorisation and approval may be ineffective if there has been
collusion between the related parties or if the entity is subject to the dominant
influence of a related party.
Considerations specific to smaller entities
A41. A smaller entity may not have the same controls provided by different levels
of authority and approval that may exist in a larger entity. Accordingly, when
auditing a smaller entity, the auditor may rely to a lesser degree on authorization
and approval for audit evidence regarding the validity of significant related party
transactions outside the entity’s normal course of business. Instead, the auditor
may consider performing other audit procedures such as inspecting relevant
documents, confirming specific aspects of the transactions with relevant parties,
or observing the owner-manager’s involvement with the transactions.

28 SA 500, “Audit Evidence”, paragraph 11.

25 SA 550
Assertions That Related Party Transactions Were Conducted on Terms
Equivalent to Those Prevailing in an Arm’s Length Transaction (Ref: Para. 24)
A42. Although audit evidence may be readily available regarding how the price of
a related party transaction compares to that of a similar arm’s length transaction,
there are ordinarily practical difficulties that limit the auditor’s ability to obtain
audit evidence that all other aspects of the transaction are equivalent to those of
the arm’s length transaction. For example, although the auditor may be able to
confirm that a related party transaction has been conducted at a market price, it
may be impracticable to confirm whether other terms and conditions of the
transaction (such as credit terms, contingencies and specific charges) are
equivalent to those that would ordinarily be agreed between independent parties.
Accordingly, there may be a risk that management’s assertion that a related
party transaction was conducted on terms equivalent to those prevailing in an
arm’s length transaction may be materially misstated.
A43. Management is responsible for the substantiation of an assertion that a
related party transaction was conducted on terms equivalent to those prevailing
in an arm’s length transaction. Management’s support for the assertion may
include:
 Comparing the terms of the related party transaction to those of an identical
or similar transaction with one or more unrelated parties.
 Engaging an external expert to determine a market value and to confirm
market terms and conditions for the transaction.
 Comparing the terms of the transaction to known market terms for broadly
similar transactions on an open market.
A44. Evaluating management’s support for this assertion may involve one or
more of the following:
 Considering the appropriateness of management’s process for supporting
the assertion.
 Verifying the source of the internal or external data supporting the
assertion, and testing the data to determine their accuracy, completeness
and relevance.
 Evaluating the reasonableness of any significant assumptions on which the
assertion is based.
A45. Some financial reporting frameworks require the disclosure of related party
transactions not conducted on terms equivalent to those prevailing in arm’s
length transactions. In these circumstances, if management has not disclosed a
related party transaction in the financial statements, there may be an implicit

SA 550 26
assertion that the transaction was conducted on terms equivalent to those
prevailing in an arm’s length transaction.
Evaluation of the Accounting for and Disclosure of Identified Related
Party Relationships and Transactions
Materiality Considerations in Evaluating Misstatements (Ref: Para. 25)
A46. SA 450 requires the auditor to consider both the size and the nature of a
misstatement, and the particular circumstances of its occurrence, when
evaluating whether the misstatement is material.29 The significance of the
transaction to the financial statement users may not depend solely on the
recorded amount of the transaction but also on other specific relevant factors,
such as the nature of the related party relationship.
Evaluation of Related Party Disclosures (Ref: Para. 25(a))
A47. Evaluating the related party disclosures in the context of the disclosure
requirements of the applicable financial reporting framework means considering
whether the facts and circumstances of the entity’s related party relationships
and transactions have been appropriately summarized and presented so that the
disclosures are understandable. Disclosures of related party transactions may
not be understandable if:
(a) The business rationale and the effects of the transactions on the financial
statements are unclear or misstated; or
(b) Key terms, conditions, or other important elements of the transactions
necessary for understanding them are not appropriately disclosed.
Written Representations (Ref: Para. 26)
A48. Circumstances in which it may be appropriate to obtain written
representations from those charged with governance include:
 When they have approved specific related party transactions that (a)
materially affect the financial statements, or (b) involve management.
 When they have made specific oral representations to the auditor on
details of certain related party transactions.
 When they have financial or other interests in the related parties or the
related party transactions.
 Management’s assertion of responsibility that related party transactions

29 SA 450, “Evaluation of Misstatements Identified during the Audit,” paragraph 11(a). Paragraph

A16 of SA 450 provides guidance on the circumstances that may affect the evaluation of a
misstatement.

27 SA 550
were conducted on terms equivalent to those prevailing in an arm’s length
transaction.
A49. The auditor may also decide to obtain written representations regarding
specific assertions that management may have made, such as a representation
that specific related party transactions do not involve undisclosed side
agreements.
Communication with Those Charged with Governance (Ref: Para. 27)
A50. Communicating significant matters arising during the audit30 in connection
with the entity’s related parties helps the auditor to establish a common
understanding with those charged with governance of the nature and resolution
of these matters. Examples of significant related party matters include:
 Non-disclosure (whether intentional or not) by management to the auditor of
related parties or significant related party transactions, which may alert
those charged with governance to significant related party relationships and
transactions of which they may not have been previously aware.
 The identification of significant related party transactions that have not been
appropriately authorised and approved, which may give rise to suspected
fraud.
 Disagreement with management regarding the accounting for and
disclosure of significant related party transactions in accordance with the
applicable financial reporting framework.
 Non-compliance with applicable law or regulations prohibiting or restricting
specific types of related party transactions.
 Difficulties in identifying the party that ultimately controls the entity.
Material Modifications vis a vis ISA 550, “Related Parties”
Additions
1. In paragraph A20 of the Application Section of ISA 550 (A20 of SA 550),
the lines, “Control environment in smaller entities is likely to be different from
larger entities. In particular those charged with governance may not include an
outside member, and the role of governance may be undertaken directly by the
owner-manager where no other owner exists” have been added so to explain the
difference between the control environment in the larger entities and smaller
entities.

30 SA 230, “Audit Documentation”, paragraph A8 provides further guidance on the nature of significant

matters arising during the audit.

SA 550 28
2. In paragraph A48 of the Application Section of ISA 550 (A48 of SA 550), it
has been added that a written representation may be obtained by the auditor
regarding management’s assertion of responsibility that related party
transactions were conducted on terms equivalent to those prevailing in an arm’s
length transaction.
Deletions
1. Paragraph A8 of the Application Section of ISA 550 (A8 of SA 550) deals
with the application of the requirement of ISA 550 to the audits of public sector
entities regarding the effect of laws and regulations governing the public sector
bodies on the auditor’s responsibilities with regard to related party relationships
and transactions. Since as mentioned in the “Preface to the Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services”, the
Standards issued by the Auditing and Assurance Standards Board, apply equally
to all entities, irrespective of their form, nature and size, a specific reference to
applicability of the Standard to public sector entities has been deleted.
Further, it is also possible that even in case of certain entities, the laws and
regulations may also include a broader responsibility to address the risks of non-
compliance with laws and regulations that lay down specific requirements in the
conduct of business with related parties. Accordingly, the spirit of Paragraph A8,
in ISA highlighting such additional responsibilities of the auditor, has been
retained.

29 SA 550