13.65 Assume you are a staff auditor working on a long term debt account of a cl
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Question
13.65 Assume you are a staff auditor working on a long term debt account of a client that is a company where you are performing an audit in accordance with auditing standards issued by the IAASB. You notice that one of the clients loans might be with a related party because the loan is with a close family member of key management. You are not sure whether this contitutes a related party. Further, if this loan is with a related party you will need additional guidance on the required disclosure of related parties relationships and transactions. Refer to the standards appendix to the text to dentify the standard that can address your questions. Obtain a copy of the relevant standard, define related party and discuss the required disclosure of the identified related party relationships and transactions.
Explanation / Answer
As per standerds issued by IAASB, According to ISA 550 Related Parties
Definition
(a) Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities; and
(b) Significant influence (which may be gained by share ownership, statute or agreement) is the power to participate in the financial and operating policy decisions of an entity, but is not control over those policies
The existence of the following relationships may indicate the presence of control or significant influence:
(a) Direct or indirect equity holdings or other financial interests in the entity.
(b) The entity’s holdings of direct or indirect equity or other financial interests in other entities.
(c) Being part of those charged with governance or key management (that is, those members of management who have the authority and responsibility for planning, directing and controlling the activities of the entity).
(d) Being a close family member of any person referred to in subparagraph (c).
(e) Having a significant business relationship with any person referred to in subparagraph (c).
Disclosure of related parties
Evaluating the related party disclosures in the context of the disclosure requirements of the applicable financial reporting framework means considering whether the facts and circumstances of the entity’s related party relationships and transactions have been appropriately summarized and presented so that the disclosures are understandable. Disclosures of related party transactions may not be understandable if
So in this current issue as close family member of key managerial person then it hould be treated as related party transaction so appropriate disclosure is required for that transaction in the financial statements. if it is not properly diclosed then Auditor may Qualify the Audit report.
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