Risk Assessment ProceduresRisk Assessment Procedures

Risk Assessment Procedures

11 Based on the auditor’s knowledge of the business and enquiries of those charged with governance and management, the auditor shall assess the risk that related parties and related party transactions will not be identified, or that related party transactions will not be disclosed or measured in accordance with the applicable financial reporting framework.

12 To assess the risk of material misstatement at the assertion level, the auditor uses professional judgement to evaluate the impact of the following relevant factors:

• A complex organisational or ownership structure may make the identification of related parties more difficult, a situation which may be further complicated when the auditor does not audit all entities within an economic entity.
• The number of related parties and the volume of related party transactions.
• The extent to which the entity operates in foreign jurisdictions.
• Goods or services are provided at no charge.
• Indications of changes in the terms of transactions with related parties, particularly if they no longer reflect normal commercial terms.
• The entity is experiencing difficulty meeting the terms of debt agreements or has going concern problems.
• The entity has aggressive incentive programmes or is experiencing rapid growth in profitability when compared with other entities in the same industry.
• The nature of transactions with related parties, such as those involving intangibles.

13 Based on the auditor’s understanding of the entity and its environment including its internal control, the auditor shall make an assessment of the risk of material misstatement as it relates to the identification of related parties and the authorisation and recording of related party transactions.

14 Ordinarily, this assessment involves consideration of policies and procedures relating to matters such as:

(a) ensuring that declarations of interests in other entities are current and communicated by and to those charged with governance and management within the entity;

(b) identifying related party transactions within information systems, including those policies and procedures which ensure the recording of transactions for which no consideration has been received or paid; and

(c) authorising and approving prices for transactions with related parties, including those not in the normal course of operations.

15 In some circumstances, the entity’s control procedures may not be effective in providing relevant and reliable information about related parties and related party transactions, particularly those that are not in the normal course of operations. In this case the risk of material misstatement is ordinarily assessed as high.