Responsibilities of the AuditorResponsibilities of the Auditor

Responsibilities of the Auditor

1. Because related parties are not independent of each other, many financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions and balances to enable users of the financial report to understand their nature and actual or potential effects on the financial report. Where the applicable financial reporting framework establishes such requirements, the auditor has a responsibility to perform audit procedures to identify, assess and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions or balances in accordance with the requirements of the framework.
2. Even if the applicable financial reporting framework establishes minimal or no related party requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related party relationships and transactions sufficient to be able to conclude whether the financial report, insofar as it is affected by those relationships and transactions: (Ref: Para. A1)
   1. Achieves fair presentation (for fair presentation frameworks); or (Ref: Para. A2)
   2. Is not misleading (for compliance frameworks). (Ref: Para. A3)
3. In addition, an understanding of the entity’s related party relationships and transactions is relevant to the auditor’s evaluation of whether one or more fraud risk factors are present as required by ASA 240,[4] because fraud may be more easily committed through related parties.
4. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial report may not be detected, even though the audit is properly planned and performed in accordance with the Australian Auditing Standards.[5] In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for such reasons as the following:

• Management may be unaware of the existence of all related party relationships and transactions, particularly if the applicable financial reporting framework does not establish related party requirements.
• Related party relationships may present a greater opportunity for collusion, concealment or manipulation by management.

1. Planning and performing the audit with professional scepticism as required by ASA 200[6] is therefore particularly important in this context, given the potential for undisclosed related party relationships and transactions. The requirements in this Auditing Standard are designed to assist the auditor in identifying and assessing the risks of material misstatement associated with related party relationships and transactions, and in designing audit procedures to respond to the assessed risks.