Acca aaa s21 Notes

September 2021 to June 2022 exams
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Particular problems can arise if:
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Transactions between the parties take place without charge. For example, simply moving 
inventory from one party to the other without any accounting entries will distort profits.
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Related party transactions are ‘buried’ amongst normal transactions.
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There are parties that the auditor is unaware of.
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Complex group structures can make identifying related parties very difficult.
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Management might try to conceal the relationships.
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Management simply might not know that certain transactions fall within related party rules.
There is nothing illegal about a company trading with a related party: this happens all the time in 
groups. However, as described above, the existence of related party transaction increases the chance 
that transactions are not 'at arm's length' or, have been entered into to defraud other parties or to 
evade tax.
3. Responsibilities
It is management’s responsibility to identify and disclose related party transactions. However, of 
course, this does not absolve the auditors from exercising professional scepticism or from trying to 
obtain evidence about the existence of related party transactions.
If related party transactions are not identified by management or the auditors there is an increased 
risk of:
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Fraud
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Unfair presentation
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Non-compliance with the law (eg tax legislation)
Audit procedures include
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Enquire from management about related party transactions. Auditors would have to explain the 
concepts and give examples to help management.
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Review last year’s working papers.
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Review the board minutes.
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Review the accounting records for unusual transactions. CAAT techniques could help here by 
looking at every significant transaction over the period.
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Review bank certificates (one company might have given guarantees on behalf of another).
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Review principal shareholders of companies with whom the client trades.
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Ask the directors about their other directors and share ownership
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Review correspondence with lawyers.
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Review investment activities eg the purchase of shares that might indicate that significant 
control has been acquired.
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Enquire into the names of pension trustees.
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Obtain written representation from management.