Related parties and complex evidence

Understand why a relationship changes the evidence

A related-party transaction can be commercially sensible and correctly recorded. The audit concern is whether the relationship creates a risk that the accounts conceal, misstate or inadequately explain what happened. Connections may be difficult to identify, information systems may not flag them, and negotiated terms may differ from those available between independent parties. Collusion can also make apparently consistent documents less persuasive.

Use the applicable reporting framework to identify related parties. Do not decide from a supplier's trading name alone. Consider the underlying ownership, control and influence, including relationships through other entities. The auditor needs to understand the relationships well enough to identify relevant fraud risks and assess their effect on the financial statements. Where the framework requires related-party accounting and disclosures, obtain evidence that those requirements have been met.

This lesson follows the supplied guide's advanced evidence section. It concentrates on related parties; the guide develops laws and regulations, segment disclosures, litigation and subsequent events further in Module 4.

Concept sources: ASA 550, December 2023, paragraphs 2–10 — related-party risks, objectives and definitions in the study period.

Build an understanding that can expose omissions

Begin with management's list, the nature of each relationship, changes since the preceding period and the purpose of transactions. Discuss with the team how these relationships could affect the statements. A previous year with no identified problem does not establish that the current list is complete.

Understand how the entity identifies connections, records transactions, prepares disclosures and approves significant dealings. Enquiries should reach people who know about ownership, contracts and unusual arrangements; they need not stop with the person who prepared the ledger. Establish whether controls exist and how they actually work before proposing reliance on them.

Concept sources: ASA 550, paragraphs 11–17 — original questions for understanding relationships and controls.

The table is a set of learning prompts, not a universal checklist. Match the work to the reporting framework, entity and assessed risks.

Search beyond the related-party register

Remain alert throughout the audit. Inspect shareholder and governance minutes, bank and legal confirmations already obtained, and other records needed in the circumstances. These may reveal guarantees, interests in other businesses or commitments absent from management's initial explanation. When a significant transaction falls outside normal business activity, ask what it involves and whether a related party participates.

In a smaller entity, a standard accounting package may contain no reliable related-party marker. A transaction export can help identify counterparties with a few exceptionally large entries, unusual descriptions or unexpected patterns. Validate the export's completeness and investigate the exceptions. A spreadsheet identifies leads; it does not establish a relationship or prove that the remaining population contains no related parties.

Concept sources: ASA 550, paragraphs 11–17 and A22–A28 — enquiries, required record inspection, unusual transactions and team communication.

Reassess risk when the facts change

Distinguish a missing relationship from an incorrectly measured transaction and an incomplete disclosure. Each may require different evidence, and several can arise together. Newly discovered information may undermine the initial risk assessment or confidence in management's explanations.

If information suggests an undisclosed connection, first establish whether the underlying facts confirm it. Once a previously unidentified related party or significant transaction is established, inform the engagement team promptly. Ask management to assemble all relevant dealings, investigate the failure in the identification process, perform appropriate substantive procedures and reconsider whether further relationships remain undisclosed. Apparent deliberate concealment has fraud implications beyond the particular account entry.

Concept sources: ASA 550, paragraphs 21–22 — response to previously unidentified or undisclosed related parties and significant transactions.

Investigate significant dealings outside normal business

Identified significant related-party transactions outside the entity's normal course of business give rise to significant risks. This is stronger than merely describing them as unusual. Inspect the underlying contracts and other agreements, evaluate the commercial explanation, compare terms with management's account of events, and obtain evidence of appropriate approval.

A lack of a convincing commercial rationale can indicate manipulated reporting or concealed asset diversion. Approval alone does not resolve those risks, particularly where the interested party dominates the approval process. Conversely, an unusual arrangement is not proof of fraud: investigate and evaluate evidence before concluding.

Recognise dominant influence and weak corroboration

A founder or controlling owner may have enough influence to prevent meaningful challenge. Warning signs include decisions routinely accepted without debate, unilateral vetoes, final control over significant deals and transactions receiving no independent review. Consider these indicators together with incentives, opportunities and contradictory evidence; family ownership alone does not establish fraud.

Substantive procedures may include discussing specific transaction features with banks, lawyers or other intermediaries, obtaining explanations from the related party, and examining that party's financial information where available. Choose evidence that addresses the uncertainty. A related party's confirmation is less persuasive if management can influence the response or both parties could coordinate it.

Concept sources: ASA 550, paragraphs 18–24, A29–A32 and A38–A45 — significant risks, dominant influence and responsive procedures.

Separate existence, recoverability and market terms

An agreed balance can exist but still be overstated. For an amount due from a connected entity, examine repayment terms, subsequent receipts, the debtor's resources and the reasonableness of any impairment assessment. For a liability or commitment, consider whether all obligations and relevant terms have been captured. Do not use one confirmation to claim that every assertion is supported.

Likewise, payment of a stated price does not establish that an arrangement was on market terms. Compare relevant conditions, such as security, credit period, guarantees and services provided, as well as the headline amount. If the financial statements claim that related-party dealings were equivalent to arm's-length transactions, obtain sufficient appropriate evidence supporting that claim.

Reach an evidence-based conclusion

Evaluate whether the accounting and disclosures properly convey the arrangements and whether their effects prevent fair presentation or make a compliance-framework report misleading. Obtain the required written representations about known relationships, transactions and their accounting. Representations support the conclusion; they do not repair an incomplete search or replace necessary substantive evidence.

Communicate significant related-party matters to governance, subject to the standard's circumstances, and document identified parties and the nature of their relationships. Unresolved evidence limitations or inadequate disclosures may affect the opinion under the relevant reporting standards. Keep the working-paper conclusion specific: identify the risk, evidence, remaining uncertainty and reporting consequence.

Concept sources: ASA 550, paragraphs 25–28 and Aus 27.1–27.2 — evaluation, representations, communication, documentation and Australian reporting requirements.

Sources and further reading

• ASA 550, Related Parties, December 2023 — historical standard supporting the guide's study coverage; read paragraphs 11–25 alongside their application material.
• ASA 500, Audit Evidence, December 2022 — relevance, reliability and contradictory evidence when evaluating documents, confirmations and explanations.