Related Parties
NFRA AUDITOR - AC INTERACTION SERIES 3
Presentation of and disclosures in financial statements requires Management to inter alia
(a) identify related party relationships and transactions;
(b) identify outstanding balances, including commitments , between an entity and its related parties;
(c) identify the circumstances in which disclosure of the items in (a) and (b) is required; and
(d) determining the disclosures to be made about those items.
Some of these could be challenging requiring special attention by the Preparers, AC and the Auditors.
The need:
Ind AS 24 - Related Party Disclosures and SA 550 - Related Parties require identification and disclosures of related party relationships and transactions.
The CA 2013 requires the AC and the Board to review and approve related party transactions. SEBI LODR Regulations also have similar requirements.
The directive:
Auditors and AC - Illustrative discussion points on this topic:
- Management’s understanding of related parties.
- Auditor’s enquiry, risk assessment and audit procedures regarding related parties, nature of relationship and transactions.
- Appropriateness of internal control process.
- Database of related parties on a technology enabled platform and integrated with other databases of the Company.
- Manner of determination of control of an entity or individual over the company and whether the same has been reviewed by the Management.
- Exchange of list of related party transactions by investor-investee companies in case of schemes of arrangement.
Identification and completeness of relationships and transactions:
- Periodic confirmations from the directors, promoter group, large shareholders and other related parties.
- Procedures established to independently validate information declared by directors or promoters.
- Procedures established to determine and monitor shareholding of investors with a prescribed shareholding.
- Performance of post-facto compliance of all transactions entered during the year by finance, legal and secretarial team and whether steps have been taken to rectify errors from such compliance.
- Procedures established to identify indirect transactions.
- Identification of related parties not identified by the Management.
- Determination of significant risk in related party relationships and transactions.
- Fraud risks identified along with procedures performed to mitigate the same.
- Evaluation of business rationale of significant related party transactions.
- Assurance that related party disclosure is complete and compliant with the CA 2013, SEBI LODR Regulations and Ind AS 24.
Approval of related party transactions:
- Presence of any technology enabled database/ relevant systems to generate an alert for approval of related party transactions by ACs and for shareholders’ approvals when such transactions cross a particular threshold.
- Compliance with rules prescribed in SEBI LODR Regulations and CA 2013 by all the group companies.
- Controls in place to monitor changes in contracts and evaluate whether the change is a material modification.
- Evaluation of related party transactions including identification, approvals, disclosures and compliance with laws and regulations by any independent agency.
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Exemption availed, if any, from obtaining approval from AC and shareholders for transactions between:
Evaluation of relationships and transactions:
(a) holding company and its wholly owned subsidiary,
(b) two wholly owned subsidiaries, and/ or two Government companies.
Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment
SA 315
The Auditor’s Responses to Assessed Risks
SA 330
SA 550
Related Parties
SA 240
The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
SA 200
Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing
Key SAs that are relevant to related parties:
