Page 138 - CA Final PARAM Digital Book.

(Other Documents)
• Internal Auditor’s Report
• Invoices & Correspondence with professional advisor
• Contracts not in ordinary course of business
• Contracts re-negotiated

QNO Examples of Transactions Which are Outside Normal Course Business Old Course – (N20E)
82.500 TITANIUM CNO--SA550.100
Mr. X, while conducting audit of PQR Ltd, comes across certain transactions which according to him are
significant transactions with related parties and identified to be outside the entity's normal course of

business. Guide Mr. X with examples of such transactions and to understand the nature of significant
transactions outside the entity's normal course of business.
Answer In the given case of PQR Ltd, Mr. X, while conducting audit has come across certain significant related
party transaction which are identified to be outside the entity’s normal course of business. Mr. X wants
guidance through examples of such significant transactions which are given in SA 550 As per SA 550
“Related Parties”, examples of transactions outside the entity’s normal course of business may include:

1. Complex equity transactions, such as corporate restructurings or acquisitions.
2. Transactions with offshore entities in jurisdictions with weak corporate laws.
3. The leasing of premises or the rendering of management services by the entity to another party if
no consideration is exchanged.
4. Sales transactions with unusually large discounts or returns.
5. Transactions with circular arrangements, for example, sales with a commitment to repurchase.
6. Transactions under contracts whose terms are changed before expiry.

QNO SRPT Outside Normal Course of Business Without Business Rationale New Course – (SM23)
82.600 TITANIUM CNO--SA550.120
“Living Well Private Limited” is engaged in the manufacturing and export of floor coverings. Such products
are labour-intensive and do not require much of capital investment in machinery. The company has no
plans to diversify in other product lines. Its directors are also holding significant interest in another
company “My Living Private Limited” engaged in manufacturing of blankets using capital intensive
machinery.

During the course of the audit of “My Living Private Limited”, it was noticed by you that the company has
sold machinery of ₹ 1 crore to “Living Well Private Limited” during the year. The transaction has been done
at normal market rates applicable to such used machinery.

How do you view the above transaction as auditor of “My Living Private Limited”?
Answer In respect of significantly related party transactions outside the normal course of business of an entity, it is
the responsibility of the auditor, in accordance with SA 550, to evaluate the business rationale or lack thereof
of transactions that may have been entered to indulge in fraudulent financial reporting or conceal
misappropriation of assets.

The auditor has to seek to understand the business rationale of such a transaction from a related party’s
perspective. It would help him understand the economic reality of such a transaction and why it was carried
out.

In the given situation, there is no primary rationale for such a transaction. Living Well Private Limited does
not manufacture blankets, and the purchase of part of old machinery pertaining to blanket manufacturing
has no rationale for it primarily. A business rationale from the related party’s perspective that appears
inconsistent with the nature of its business may represent a fraud risk factor.

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