Related Party

Identification of related parties -Difficulties

• Related parties and associated transactions are often difficult to identify, as it can

 be hard to establish exactly who, or what, are the related parties of an entity. FRS

124 Related Party

• Disclosures contains definitions which in theory serve to provide a fraewor! for

identifyin" related parties, but decidin" whether a definition is et can be

coplex and sub#ective. For exaple, related party status can be obtained viasi"nificant interest, but in reality it can be difficult to establish the extent of

influence that potential related parties can actually exert over a copany.

• $he directors ay be reluctant to disclose to the auditors the existence of related

 parties or transactions. $his is an area of the financial stateents where

!nowled"e is lar"ely confined to ana"eent, and the auditors often have little

choice but to rely on full disclosure by ana"eent in order to identify related parties. $his is especially the case for a close faily eber of those in control or

havin" influence over the entity, whose identity can only be revealed by

ana"eent.

Identification of material related party transactions-Difficulties

• Related party transactions ay not be easy to identify fro the accountin"

systes. %here accountin" systes are not capable of separately identifyin"

related party transactions, ana"eent need to carry out additional analysis,

which if not done a!es the transactions extreely difficult for auditors to find.

For exaple sales ade to a related party will not necessarily be differentiatedfro &noral' sales in the accountin" systes.

• Related party transactions ay be concealed in whole, or in part, fro auditors

for fraudulent purposes. ( transaction ay not be otivated by noral business

considerations, for exaple, a transaction ay be reco"nised in order to iprove

the appearance of the financial stateents by &window dressin"'. )learly if theana"eent is deliberately concealin" the true nature of these ites it will be

extreely difficult for the auditor to discover the rationale behind the transaction

and to consider the ipact on the financial stateents.

• Finally, ateriality is a difficult concept to apply to related party transactions.

*nce a transaction has been identified, the auditor ust consider whether it is

aterial. +owever, ateriality has a particular application in this situation. (

-- Related Parties states that the auditor should consider the effect of a related party transaction on the financial stateents. $he proble is that a transaction

could occur at an abnorally sall, even nil, value. Deterinin" ateriality

 based on onetary value is therefore irrelevant, and the auditor should instead bealert to the unusual nature of the transaction a!in" it aterial.