This Auditing Standard deals with the auditor’s responsibilities relating to related party relationships and transactions in an audit of a financial report.  Specifically, it expands on how ASA 315,^[1] ASA 330,^[2] and ASA 240^[3] are to be applied in relation to risks of material misstatement associated with related party relationships and transactions.

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 report 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 report 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. 

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 report to understand their nature and actual or potential effects on the financial report.  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 party relationships, transactions or balances in accordance with the requirements of the framework.

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 report, insofar as it is affected by those relationships and transactions:  (Ref: Para. A1)

1. Achieves fair presentation (for fair presentation frameworks); or  (Ref: Para. A2)
2. Is not misleading (for compliance frameworks).  (Ref: Para. A3)

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 ASA 240,^[4] because fraud may be more easily committed through related parties. 

Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial report may not be detected, even though the audit is properly planned and performed in accordance with the Australian Auditing Standards.^[5]  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.

Planning and performing the audit with professional scepticism as required by ASA 200^[6] is therefore particularly important in this context, given the potential for undisclosed related party relationships and transactions.  The requirements in this Auditing Standard 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.

[Deleted by the AUASB.  Refer Aus 0.3]