ISA 550 – Related Parties

Related Parties
Control /Joint
Person / Entity Control / Directly / Indirectly
Significant influence

Affiliate vs. Related Party?

Family members?
The following are deemed not related:

• 2 entities with director / key manager in common,

• 2 venturers sharing joint control over a joint venture,
• Customer/Supplier/Distributor with whom an entity transacts a
significant volume of business merely by virtue of the resulting
economic dependence.
 ARMS LENGTH
An arm's length transaction refers to a business deal in which buyers and sellers
act independently without one party influencing the other.

These types of sales assert that both parties act in their own self-interest and are
not subject to pressure from the other party; furthermore, it assures others that
there is no collusion between the buyer and seller.

A statement that related party transactions were made on terms equivalent to

those that prevail in arm's length transactions should be made only if such terms
can be substantiated.
 OBJECTIVE
Auditors responsibility to obtain an understanding of related party
relationships and transactions.

This understanding is used to assess any resulting fraud risk

indicators, and to conclude on the appropriateness of the
accounting treatment and disclosures applied to related parties and
transactions.

In turn, assess the risk of material misstatements arising.

 RISKS
Complex
Management
Relationships &
awareness
Structures
Identification of
transactions /
outstanding
balances

Concealment by
Management
 IDENTIFICATIO
N
Requires a risk based approach.

ISA 550 imposes specific requirements in terms of inquiry with

the Management to be made by the Auditor:
• The identity of related parties including changes from last reporting period;
• The nature of the relationships; and
• Whether there were any transactions, and the type and purpose of (if) any
such transactions.
The Auditor needs to obtain an understanding of the
controls used by the Management to:

• Identify, account for & disclose related party relationships,&

transactions;
• Authorize & approve significant transactions & arrangements
with related parties; and
• Authorize & approve significant transactions & events outside
the normal course of business.
 DOCUMENTS
As per the guidelines certain documents that can be inspected are
for example:
• Bank confirmations;
• Legal documents;
• Tax returns;
• Information supplied to regulatory authorities;
• Records of any investments; and
• Significant contracts, to name a few.
Examples of transactions to be disclosed if they are with a
Related Party:
• Purchases/Sales of goods
• Purchases/Sales of Property & other assets,
• Rendering/Receiving of services,
• Leases,
• Transfer of research & development,
• Transfers under license agreements,
• Transfers under finance arrangements,
• Provision of collateral,
• Commitments to do something if a particular event occurs or does not occur in the
future,
• Settlements of liabilities on liability on behalf of the entity or by the entity of behalf
of another party.
 WRITTEN REPRESENTATIONS
Circumstances in which it may be appropriate to obtain written representations
from those charged with governance include:
• When they have approved specific related party transactions that
(a) materially affect the financial statements, or (b) involve management.
• When they have made specific oral representations to the auditor on details
of certain related party transactions.
• When they have financial or other interests in the related parties or the
related party transactions.
The auditor may also decide to obtain written representations regarding specific
assertions that management may have made, such as a representation that
specific related party transactions do not involve undisclosed side agreements.
ISA 570 – Summary Going
Concern
 SCOPE
Auditor’s responsibilities in the audit of financial statements relating
to Management’s use of the going concern assumption in the
preparation of the financial statements.
 OBJECTIVE
• To obtain sufficient appropriate audit evidence regarding the
appropriateness of management’s use of the going concern
assumption in the preparation of the financial statements;
• To conclude, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that
may cast significant doubt on the entity’s ability to continue as
a going concern; and
• To determine the implications for the auditor’s report.
 CONCEPT
An entity prepares financial statements on a going concern basis when, under the going
concern assumption, the entity is viewed as continuing in business for the foreseeable future.

The term ‘foreseeable future’ is not defined within ISA 570, but IAS 1, Presentation of
Financial Statements deems the foreseeable future to be a period of 12 months from the
entity’s reporting date.

The concept of going concern is an underlying assumption in the preparation of financial

statements, hence it is assumed that the entity has neither the intention, nor the need, to
liquidate or curtail materially the scale of its operations.

If management conclude that the entity has no alternative but to liquidate or curtail materially
the scale of its operations, the going concern basis cannot be used and the financial statements
must be prepared on a different basis (such as the ‘break-up’ basis).
 MANAGEMENT’s
RESPONSIBILITY
It is the Management’s responsibility to make an assessment, make judgements on various
uncertain future outcomes of events or conditions. ISA 570 outlines factors that are relevant and
which must be taken into consideration on whether or not the entity can prepare the financial
statements on going concern basis. These are;

• The degree of uncertainty associated with the outcome of an event or condition increases
significantly the further into the future an event or condition or the outcome occurs.
(Remember previous slide? What does IAS 1 say?)

• The size and complexity of the entity, the nature and condition of its business and the degree
to which it is affected by external factors affect the judgment regarding the outcome of
events or conditions.

• Any judgment about the future is based on information available at the time at which the
judgment is made. Subsequent events may result in outcomes that are inconsistent with
judgments that were reasonable at the time they were made.
Certain examples of what these indicators can be?
• Growth in level of competition;
• Significant decline in demand for its products
• Difficulty in recruiting suitably trained staff
• Loss of keys staff
• Legal cases
• Intellectual property
• Investing in company growth using overdraft
• Delayed payments to suppliers with certain suppliers withdrawing
credit
• Cash flow forecast showing worsening position
• Industry – Name a few?
 AUDITORS’s RESPONSIBILITY

• Obtain sufficient appropriate evidence about appropriateness of assumption used;

• Conclude whether there is Material uncertainty about entity’s use of the going concern
assumption
• Where management has not yet performed an assessment of the entity's ability to continue as
a going concern, the auditor shall request management to make its assessment.
• The auditor shall evaluate whether events or conditions that may cast significant doubt on
the entity's ability to continue as a going concern give rise to a risk of management bias in
the preparation of the financial statements.
 AUDITORS’s RESPONSIBILITY
In addition it is the Auditor’s responsibility to perform Risk
Assessment Procedures, by gaining understanding of the
following to name a few;

• The Entity and its Environment;

• Applicable Financial Reporting Framework;
• The Entity’s System of Internal Controls;
• Entity’s Risk Assessment Process and the Results;
• The Entity’s Information System & Other Business
Processes
• The Entity and its Environment;
o The entity’s business model, operations, structure, method of finance,
measurement and review of financial performance including
Management’s Budgeting process

• Applicable Financial Reporting Framework;

o The requirements of the applicable financial reporting framework relating
to going concern, and the related disclosures that the auditor expects to be
included in the entity's financial statements

• The Entity’s System of Internal Controls;

o The nature and extent of oversight and governance that the entity has in
place
• Entity’s Risk Assessment Process and the Results;
o Identifies, assess and addresses those risks

• The Entity’s Information System & Other Business Processes

o How the information system identifies and captures events or conditions that,
individually or collectively, may cast significant doubt on the entity's ability to
continue as a going concern;
o How management identifies the relevant method, assumptions and data that are
appropriate in assessing the entity's ability to continue as a going concern;
o How the financial reporting process used to prepare the entity's financial
statements captures disclosures related to the entity's ability to continue as a
going concern.

In accordance with ISA 200 (Revised June 2016), the auditor shall maintain
professional skepticism throughout the audit and in particular when reviewing
future cash flow relevant to the entity's ability to continue as a going concern.
 REPORTING

There are three situations that ISA 570 identifies in terms of the going concern
assumption:
• Use of the going concern assumption is appropriate but a material
uncertainty exists
• Use of the going concern assumption is inappropriate
• Management unwilling to make or extend its assessment.
• Use of the going concern assumption is appropriate but a material
uncertainty exists
o Make disclosure of the fact in the financial statements that there are uncertain
future transactions/events that may result in the entity being unable to continue in
business in the foreseeable future.
o The auditor will consider the adequacy of the disclosures made in the financial
statements by Management.
o If the auditor considers the disclosures to be adequate, then the audit report will
be modified by the inclusion of an Emphasis of Matter paragraph.
o The Emphasis of Matter paragraph will follow immediately after the opinion
paragraph and will always cross-reference the reader’s attention to the relevant
disclosure in the financial statements, and the opinion will be unmodified.
o If the auditor concludes that the disclosures are inadequate, or if management
have not made any disclosure at all and management refuse to remedy the
situation, the opinion will be qualified or adverse, and the opinion paragraph will
be qualified ‘except for’ or express an adverse opinion.
• Use of the going concern assumption is inappropriate
o If the directors do not make adequate disclosure of the material uncertainty, the
auditor must express an adverse opinion.
o An adverse opinion states that the financial statements do not present fairly (or
give a true and fair view).
o This opinion will be expressed regardless of whether or not the financial
statements include disclosure of the inappropriateness of management’s use of
the going concern assumption.

• Management unwilling to make or extend its assessment

o There are situations that may arise when the auditor may request management to
make an assessment, or extend their original assessment of going concern. If
management refuse to make, or extend, an assessment of going concern the
auditor will consider the implications for the report.
ISA 560 Subsequent
Events
Effective date 15 December 2019
 DEFINITION
ISA 560 has outlined the following terms;

• Date of the financial statements

• Date of approval of the financial statements
• Date of the auditor’s report
• Date the financial statements are issued
• Subsequent events 

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 DEFINITION
• Date of the financial statements
“ The date of the end of the latest period covered by the
financial statements “.
Or in simple terms “ Year End “
• Date of approval of the financial statements
“ The date when management of the company signed the
financial statements “.
 DEFINITION
• Date of the auditor’s report
“ The date when Auditor signed the Auditor’s Report on
financial statements ( ISA 700 ) “
• Date the financial statements are issued
“ The date when the auditor’s report along with audited
financial statements are made available to third parties “
 DEFINITION
• Subsequent events
“A subsequent event is an event that occurs after a
reporting period, but before the financial statements
for that period have been issued or are available to be
issued. Depending on the situation, such events may
or may not require disclosure in an organization’s
financial statements.“
 SCOPE
• ISA 560 deals with subsequent events and “ Auditor’s and
Management responsibilities with regards to such events ”.

• Where as IAS 10 Events after Balance Sheet date deals with “

identification of adjusting and non-adjusting events”.

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Types of Subsequent Events
• There are 2 types of Subsequent events

• Adjusting Events
“ Those that provide evidence of conditions that existed at the
date of the financial statements “

• Non-Adjusting Events
“ Those that provide evidence of conditions that arose after
the date of the financial statements “.
 MANAGEMENT
RESPONSIBILITIES
“ Disclose to the auditor all events subsequent to the balance
sheet date, that require Adjustment
OR
Disclosure in the Financial Statements ”
 AUDITORS
RESPONSIBILITIES
“ Perform Procedures to ensure that All events have been
Identified
AND
Financial Statements have been amended accordingly “
 OBJECTIVES
Under ISA 560 objectives of the Auditor are ;
• To obtain sufficient appropriate audit evidence about whether events
occurring between the date of the financial statements and the date of the
auditor’s report that require adjustment of, or disclosure in, the financial
statements are appropriately reflected in those financial statements in
accordance with the applicable financial reporting framework; and
• To respond appropriately to facts that become known to the Auditor after
the date of the Auditor’s report, that, had they been known to the
Auditor at that date, may have caused the Auditor to amend the Auditor’s
report.
 ISA 560 divides the Auditors Responsibilities into
“ Three Stages “

Date of Date of Date of FS are

Date of AR
FS approval FS issued

Perform Audit Procedures to No obligation to perform any audit

obtain sufficient and appropriate procedures. However if,
evidence After FS is issued, fact becomes
known to auditor that, it’s been
Require Disclosure known to auditor at the date of AR,
Adjustment in FS may have caused the auditor to
amend the auditor’s report
 How an Auditor can identify subsequent
event?
Some of the Audit procedures used to identify subsequent
events are;
• Read minutes of meetings of the board of directors
Stockholders
• Other authoritative groups held after year-end
• Read interim financial statements; investigate significant
changes
ISA 520 Analytical
Procedures
 DEFINITION
ISA 520 means evaluations of financial information through:

• Analysis of plausible relationships among both financial and

non-financial data.
• Analytical procedures also encompass such investigation as it
is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from
expected values by a significant amount.

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 SCOPE
Evaluation of financial information is done at three stages:

• Risk Assessment as part of Planning stage

• Analytical procedures also encompass such investigation as it

is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or  that differ from
expected  values by a significant amount.

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 OBJECTIVE
The objectives of the auditor are:

• To obtain relevant and reliable audit evidence when using

substantive analytical procedures; and

• To design and perform analytical procedures near the end of

the audit that assist the auditor when forming an overall
conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.

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 REQUIREMENTS
ISA 520 requires Auditors to, in respect of designing and performing
analytical procedures to ;
• Determine the suitability of particular substantive analytical
procedures for given assertions, taking account of the assessed
risks of material misstatement and tests of details, if any, for these
assertions;
• Evaluate the reliability of data from which the auditor’s
expectation of recorded amounts or ratios is developed,
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• Taking account of source, comparability, and nature and
relevance of information available, and controls over
preparation;
• Develop an expectation of recorded amounts or ratios and
evaluate whether the expectation is sufficiently precise to
identify a misstatement that, individually or when aggregated
with other misstatements, may cause the financial statements
to be materially misstated; and
• Determine the amount of any difference of recorded amounts
from expected values that is acceptable without further
investigation.
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 INVESTIGATING
RESULTS OF
inconsistent with ANALYTICAL
ISA 520 require auditors to identify fluctuations or relationships that are
other relevant information or that differ from expected
values by a significant amount, the auditor shall investigate such differences
by: PROCEDURES
• Inquiring of management and obtaining appropriate audit evidence
relevant to management’s responses; and
• Performing other audit procedures as necessary in the circumstances.
 Question 1: ISA 550
a) A major shareholder of an entity A, Mr. Jones has a wife who owns an entity B. An
entity B is a sole customer of an entity A, but there is no ownership of an entity B
by an entity A or vice versa. Who are related parties of an entity A?

b) A major shareholder of an entity A, Mr. Jones has a wife who owns an entity B. An
entity B is a sole customer of an entity A, but there is no ownership of an entity B
by an entity A or vice versa. Who are related parties of an entity A?
 Q1.a ANSWER
Major shareholder and his wife are related parties, because they are a person
or a close family member of that person (wife) who control the entity A.
Entity B is a related party of an entity A, because it is controlled by close
family member of a major shareholder of A (not because it is the sole
customer).
 Q1.b ANSWER
• The joint venture C is a related party to A, because it is under joint control of
A.
• The company B is NOT a related party to A.
 Q2 ISA 570
Mercury Motoring Co (Mercury) specializes in manufacturing engine parts for motor cars and the company has
a diverse customer base but seven significant customers. The company’s year end was 30 September 2015.
During the year, a number of the company’s significant customers have experienced a fall in sales, and
consequently they have purchased fewer items from Mercury. As a result, Mercury has paid a number of its
suppliers later than usual and some of them have withdrawn credit terms meaning the company must pay cash
on delivery. One of Mercury’s main suppliers is threatening legal action to recover the sums owing. As a result
of the increased level of payables, the company’s current ratio has fallen below 1 to 0·9 for the first time.
Mercury has produced a cash flow forecast to 30 June 2016 and this shows net cash outflows until May 2016.
Mercury has a loan of $2·3 million which is due for repayment in full by 30 September 2016.
The finance director has just informed the audit manager that there is a possible change in legislation which
will result in one of Mercury’s top product lines becoming obsolete as it will not comply with the proposed
law. The prepared cash flow forecasts do not reflect this possible event.
Give 6 indicators that Mercury is not a going concern.
 Q2 Indicators:
Answer
1. Fall in Sales. There is a risk that if Mercury’s customers continue to reduce the level of their
purchases, this will reduce Mercury’s sales and future cash flows. In addition, Mercury may
need to reduce their prices in order to boost sales volumes, which will impact profits and cash
flows.
2. Late payment to Suppliers, withdrawal of Credit from some. This puts additional pressure on
the company’s cash flow. This is because the company has to pay for goods in advance but it
may not receive cash from its receivables until some time later.
3. Legal action by one of the Suppliers. If this occurs, then Mercury will have legal costs in
addition to the amounts already owed and this will further increase the pressure on cash flows.
In addition, other suppliers may hear about the legal action and, as a result, stop supplying
goods to the company.
4. Fall of Current Ration below 1 to 0·9. The current ratio is showing that the current assets are
not sufficient to pay the current liabilities. This is another indication of the worsening liquidity
position of the company.
5. Significant loan due for repayment in full by 30 September 2016. The company only has
nine months to raise the $2·3 million and with falling levels of sales and negative cash flows
forecast until May 2016, it is difficult to see how they will be able to raise alternative finance
to pay this amount.
6. Possible change in legislation which will result in one of its top product lines becoming
obsolete. Whilst this is only a possible change in the law, if it does come into force then the
inventory for this product may have to be scrapped, resulting in a large write off and possible
reduced sales, profit and cash flows.
7. Cash flow forecast to 30 June 2016 and this shows net cash outflows until May 2016. If the
company continues to have cash outflows, then it will put further pressure on the company’s
cash flows and there is the risk that it will start to run out of available cash.
 Q3 ISA 560
A. Which of the following events occurring after the reporting period are classified as
adjusting, if material?
1. The sale of inventories valued at cost at the end of the reporting period for a figure in excess of cost.
2. A valuation of land and buildings providing evidence of an impairment in value at the year end.
3. The issue of shares and loan notes.
4. The insolvency of a customer with a balance outstanding at the year end.

B. Adjusting or Non – Adjusting?

Clogs Co has proposed dividends of $10,000 after the end of the reporting period. Do you;
o Disclose in a note to the financial statements
o Adjust for the dividends
o Do nothing

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 Q3 ISA 560
C. Which of the following would be a non-adjusting event after the reporting period when
preparing financial statements at 30 September 20X0
1. An insurance claim is agreed on 10 October 20X0 for compensation for a fire in September which
destroyed part of the warehouse inventory
2. A decision is made on 9 October 20X0 to sell the group's major trading activities in Eastern Europe
3. Inventory valued at $30,000 is judged no longer saleable
4. Notification received on 11 October 20X0 that a customer owing $50,000 as at 30 September 20X0
has gone into liquidation.

D. Adjusting or Non-Adjusting?
A receivable has been written off as irrecoverable. However, the customer suddenly pays the written
off amount after the end of the reporting period.
 Q3 ISA 560
E. How shall this situation be reflected in the financial statements for the year ended 31
December 20X1?
XYZ has a trade debtor that owes CU 50 million on 31 December 20X1.
On 21 January 20X2, the debtor goes into liquidation. XYZ is informed that it will receive nothing
from the liquidation.
XYZ is unable to raise funds to recover from this loss, and is certain to be liquidated.

F. How shall this transaction be reported in the financial statements for the year ended 31
December 20X1?
KLM has prepared its financial statements for the year ended 31 December 20X1.
On 30 January 20X2, KLM’s directors declare dividends amounting to CU 2 million.
 Q3 Answer
A. 2 & 4.
B. Disclose in a note to the financial statements
C. A decision is made on 9 October 20X0 to sell the group's major
trading activities in Eastern Europe.
D. Adjusting.
E. The financial statements to 31 December 20X1 should be produced
on a liquidation basis, not a going-concern basis.
F. This is a non-adjusting event. KLM does not change the figures in its
financial statements for the year 20X1, but discloses the post-
reporting-period dividends in the note on retained earnings.
 Q4 ISA 520 – Analytical Procedures?
Bronze operate several chemical processing factories across the country, it manufactures 24 hours a day, seven days a week and
employees work a standard shift of eight hours and are paid for hours worked at an hourly rate. Factory employees are paid weekly, with
approximately 80% being paid by bank transfer and 20% in cash; the different payment methods are due to employee preferences and
Bronze has no plans to change these methods. The administration and sales teams are paid monthly by bank transfer.
Factory staff are each issued a sequentially numbered clock card which details their employee number and name. Employees swipe their
cards at the beginning and end of the eight-hour shift and this process is not supervised. During the shift employees are entitled to a 30-
minute paid break and employees do not need to clock out to access the dining area. Clock card data links into the payroll system, which
automatically calculates gross and net pay along with any statutory deductions. The payroll supervisor for each payment run checks on a
sample basis some of these calculations to ensure the system is operating effectively.
Bronze has a human resources department which is responsible for setting up new permanent employees and leavers. Appointments of
temporary staff are made by factory production supervisors. Occasionally overtime is required of factory staff, usually to fill gaps caused
by staff holidays. Overtime reports which detail the amount of overtime worked are sent out quarterly by the payroll department to
production supervisors for their review.
To encourage staff to attend work on time for all shifts Bronze pays a discretionary bonus every six months to factory staff; the
production supervisors determine the amounts to be paid. This is communicated in writing by the production supervisors to the payroll
department and the bonus is input by a clerk into the system.
For employees paid by bank transfer, the payroll manager reviews the list of the payments and agrees to the payroll records prior to
authorizing the bank payment. If any changes are required, the payroll manager amends the records.
For employees paid in cash, the pay packets are prepared in the payroll department and a clerk distributes them to employees; as she
knows most of these individuals she does not require proof of identity.
 Q4 Answer
Substantive analytical procedures to confirm payroll expense
• Compare the total payroll expense to the prior year and investigate any significant
differences.
• Review monthly payroll charges, compare this to the prior year and budgets and
discuss with management any significant variances.
• Compare overtime pay as a percentage of factory normal hours pay to investigate
whether it is at a similar level to the prior year and within an acceptable range.
Investigate any significant differences.
• Perform a proof in total of total wages and salaries, incorporating joiners and
leavers and any pay increase. Compare this to the actual wages and salaries in the
financial statements and investigate any significant differences.