Page 148 - CA Inter Audit PARAM

CA Ravi Taori

QNO Situation when RPT will lead to higher RMM Old Course -- (M20R/SM20/SM21)
550.02 Bhaskar CNO SA550.040 New course-- (N23E/SM25)
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.
Explain with the help of at least three examples.
Answer ➢ RPT in normal course doesn’t lead to higher RMM
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.

➢ Situation when RPT will lead to higher RMM
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:
They are not conducted at normal market prices, terms & conditions.
• E.g. Goods purchased at double the market price from MDs son proprietor firm or goods
sold to brother of MD at triple the market price)

Transactions are conducted through complex related party relationships & structures.
• (Indian Co pays Technical Consultancy Fees -- USA Sub pays Management Consultancy --
UK Sub pays Dividend -- Canada Holding Co where MD is having major stake)

Where there are no appropriate employees / register / software (systems) to identify,
authorize, record, summaries and disclose related party transactions which may lead to non-
compliance of AS 18.
• (E.g. Delhi based Company indirectly holds controlling stake in Australian company
through its subsidiaries in Mumbai and Chennai, but this thing is not disclosed in financial
statement as per AS 18, because of lack of expertise in staff managing related party
transactions (Non-CA / CS / CWA)

Records or Documents which can provide details of Old course-- (N21R/N23M)
QNO related party relationships or related party transactions
550.04 New course-- (S24M)
Bhaskar CNO- SA550.080
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 related party
relationships, transactions or balances. During the audit, the auditor should maintain alertness for related
party information while reviewing records and documents. He may inspect the records or documents that
may provide information about related party relationships and transactions. Explain in detail with

examples.
OR
While performing audit of financial statements of a listed company, statutory auditor needs to maintain an
attitude of professional skepticism for related party information. State examples of the records or the
documents that may provide information about related party relationships and transactions.
Answer During the audit, the auditor should maintain alertness for related party information while reviewing
records and documents. He may inspect the following records or documents that may provide
information about related party relationships and transactions,
For Example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.

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