Page 140 - CA Final PARAM Digital Book.

• One of related party transaction amounting 3.25 lac per month i.e., in lieu of marketing
services has been noticed of which amount ` 0.25 lac per month is exceeds the arm's
length price has not been disclosed highlighting the same as related party
transactions as per Ind- AS 24 / AS 18 Related Party Disclosures.
• Refusal by CFO of the company to provide the details of related party transaction
amounting to rupees 47 lac on the ground that same is perceived to be confidential and
cannot be shared with auditors, is not in order, as denying for the related part details of `
47 lac is imposing limitation of scope of auditor in view of SA 705.
• Further, in case of all the above cases, the auditor would also need to assess his reporting
requirements under the clauses (xiii) of Paragraph 3 of CARO 2020 with respect to related
party transactions that whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable Accounting Standards.

QNO Engagement Team Discussion -- Susceptibility of MMST due to Related Party Old Course – (M22E)
84.500 TITANIUM CNO -- Unique
JKL Limited is engaged in the business of Construction and real estate having various projects across states.
M/s YT & Co, Chartered Accountants have been appointed as Statutory Auditors. Audit Team from M/s YT
& Co for audit of JKL Limited comprises of CA Z-Engagement Partner, CA Q, a paid assistant and 3 Articled
Assistants. During preliminary verification, CA Z observed that huge amount of sub-contract payments
were made to M/s JB Associates, a partnership firm in which Director of JKL Limited is a managing partner.

The engagement team discussed that SA 315 and SA 240 shall include specific consideration of the
susceptibility of the financial statements to material misstatement due to fraud or error that could result
from the JKL Limited's related party relationships and transaction. Highlight the matters that are to be
addressed in the discussion by CA Z with engagement team members with reference to the relevant
Standard on Auditing.
Answer As per SA 550 “Related Parties”, the engagement team discussion that SA 315 and SA 240 require 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.
Accordingly matters that are to be addressed in the discussion by CA Z among the engagement team include:
1. 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).
2. 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.
3. 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 organizational structure, use of special - purpose entities for off-balance sheet transactions,
or an inadequate information system).
4. The records or documents that may indicate the existence of related party relationships or
transactions.
5. 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.
6. In addition, the discussion in the context of fraud may include specific consideration of how related
parties may be involved in fraud. For example:

(a) how special-purpose entities controlled by management might be used to facilitate earnings
management.
(b) 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.

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