Acca aaa s21 Notes

completeness
, in particular.
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Chapter 20
RELATED PARTIES
1. Introduction
Related parties can pose real difficulties for auditors because it can be very difficult to detect the 
relationship and related party transactions. Certainly the letter of representation sent by directors to 
the auditors at the end of the audit would make reference to the fact that either there were no related 
party transactions or that all have been disclosed.
For example, one person owns two companies and each company has different auditors. If Company 
A sells goods to Company B at inflated prices, Company B will make artificial losses and Company A 
artificial profits. Perhaps the owner intends to put Company B into liquidation to escape liabilities, but 
the cash has been safely transferred to Company A. It would probably be difficult for the auditors to 
detect what was going on.
2. What is a related party and why are they difficult for 
auditors?
Related parties are defined in IAS 24.
The objective of IAS 24 is to ensure that an entity’s financial statements contain the disclosures 
necessary to draw attention to the possibility that its financial position and profit or loss may have 
been affected by the existence of related parties and by transactions and outstanding balances, 
including commitments, with such parties.
A related party is a person or an entity that is related to the reporting entity:
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A person or a close member of that person’s family is related to a reporting entity if that person 
has control, joint control, or significant influence over the entity or is a member of its key 
management personnel.
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An entity is related to a reporting entity if, among other circumstances, it is a parent, subsidiary, 
fellow subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly 
controlled, or significantly influenced or managed by a person who is a related party.
Note that subsidiaries, associated companies, joint venture partners and the entity’s pension scheme 
are related parties. You might think it is easy, for example, to identify when a company is an associate, 
and this would be expected when producing the group financial accounts. But if you were auditing 
the associate, how would you detect if it was trading with another company that was also an associate 
of the same parent and therefore under the influence of the parent?
Detecting ownership by family members is also very difficult: they might not all have the same family 
name.