Why is Related Party important for Auditor to Planning Phase of an Audit?

Why is Related Party important for Auditor to Planning Phase of an Audit?

Related Party is important for Auditor to Planning Phase of an Audit.

A related party is a person or an entity that is related to the reporting entity. 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 panics and by transactions and outstanding balances with such parties.

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. The risk of management override of controls is higher if management has relationships that involve control or significant influence with parties with which the entity does business because these relationships may present management with greater incentives and opportunities to perpetrate fraud. For example, management’s financial interests in certain related parties may provide incentives for management to override controls by

(a) directing the entity, against its interests, to conclude transactions for the benefit of these parties, or

(b) colluding with sea parties or controlling their actions Examples of possible fraud include the following –

  • Creating fictitious terns of transactions with related parties designed to misrepresent the business rationale of these transactions.
  • Fraudulently organizing the transfer of assets from or to management or others at amounts significantly above or below market value
  • Engaging in complex transactions with related parties, such as entities formed to accomplish specific purposes that are structured to misrepresent the financial position or financial performance of the entity.