Page 139 - CA Final PARAM Digital Book.

QNO Related Party Case Study – Approach of Auditor Old Course – (N20M, N21M)
84.000 TITANIUM CNO -- Unique
Whilst the Audit team has identified few matters, they need your advice to conclude on the same.
Engagement Partner have asked them to review the Board minutes and other secretarial / regulatory
records based on which the following additional matters were brought to the attention of the Partner:-

(i) The long-term borrowings from the parent company has no written terms and neither the interest
nor the principal has been repaid so far.

(ii) Certain computers were received from the parent company free of cost, the value of which is ₹ 0.23
lac and no accounting or disclosure of the same has been made in the notes to accounts.

(iii) An amount of ₹ 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm, which
is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the marketing services
rendered by them. Based on an independent assessment, the consideration paid is higher than the
arm's length pricing by ₹ 0.25 Lakhs per month. Whilst the transaction was accounted in the financial
statements based on the amounts' paid, no separate disclosure of this related party transaction has
been made in the notes to accounts forming part of the financial statements highlighting the same as a
'related party' transaction.

Audit Manager has reported that she had asked certain information relating to another 'related party'
transaction (amounting to approx. ₹ 47 lac) but the CFO refused to provide the same since the same is
perceived to be confidential and cannot be shared with the Auditors.

You are required to advise about items to be reported to those charged with governance, where
applicable, based on your audit findings in the given situation.
Part I -- Relevant Standards & Laws
▪ SA 550, Related Parties
▪ Ind AS 24 / AS 18
▪ Clauses (xiii) of Paragraph 3 of CARO 2020
▪ Sections 177 and 188 of Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per SA 550, Related Parties,
• Communicating significant matters arising during the audit 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; etc.

• It may be noted that unless all of those charged with governance are involved in managing the
entity, the auditor shall communicate with those charged with governance significant matters
arising during the audit in connection with the entity’s related parties.

• The auditor is also required to ensure the compliance of Ind AS 24 / AS 18 Related Party
Disclosures.
Part III—Case Study & Conclusion

• In view of above in the given scenario, the auditor is required to prepare a brief summary of
following items to be reported to those charged with governance in accordance with SA 260
Communication with Those Charged with Governance:
• Receipt of free of cost Computers and long-term borrowing (on no agreed terms and
repayment of interest and principal) from the Parent Company need separate
disclosure in financial statements as per Ind AS 24 / AS 18 Related Party
Disclosures.

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