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PSA 550. RELATED PARTIES
Auditing and Assurance Services

 Related Parties

Nature of Related Party Relationships & Transactions (parag. 2)

Overly Complex Related parties may operate through an extensive and complex range of
Transactions relationships and structures
 Related-party relationships may be concealed, as they present a
greater opportunity for collusion, concealment, or manipulation by
management
Relationships and  The entity’s information systems may be ineffective at identifying or
Transactions Not Identified summarizing transactions and outstanding balances between the
entity and its related parties
 Management may be unaware of the existence of all related-party
relationships and transactions
Related-party transactions may not be conducted under normal market
Not conducted in the
terms and conditions such as above; below fair values; or even with no
Normal Course of Business
exchange of consideration at all.
Obtain an understanding of the entity’s related-party relationships and
transactions sufficient to:
 Recognize fraud risk factor, if any, arising from related-party
Applicable Financial relationships and transactions that are relevant to the
Reporting Framework identification and assessment of RMM due to frau; and
Establishes Minimal or No  Conclude, based on the audit evidence obtained, whether the
Requirements financial statements, insofar as they are affected by those
relationships and transactions, achieve fair presentation (for fair
presentation frameworks); or are not misleading (for compliance
frameworks)
Applicable Financial In addition to the steps described above, obtain sufficient appropriate
Reporting Framework Sets audit evidence to comply with the specific accounting and disclosure
Out the Requirements requirements for related-party relationships, transactions, and balances
Auditor is responsible to…
Address Description
Where Auditor Identifies  Determine whether underlying circumstances confirm their existence;
Arrangements or  Promptly communicate the information to the engagement team;
Information that Suggests  Request management to identify all transactions with the related-party;
Existence of Related-Party  If related-party was not previously identified, ask why, consider:
Relationships or  Failure of any related-party identification controls, and
Transactions  Fraud (non-disclosure by management appears intentional)
 Reconsider the risk that other undisclosed related parties or significant
related-party transactions may exist, and perform additional audit
procedures as necessary; and
 Perform appropriate substantive audit procedures
Significant Related-Party  Inspect underlying contract or agreements, if any,a nd evaluate
Transactions Outside whether:
Normal Course of Business  Rationale suggests possible fraudulent financial reporting or
concealment of misappropriated assets
 Terms are consistent with management’s explanations, and
 Transactions are accounted for and disclosed in accordance with
the applicable financial reporting framework; and
 Ensure transactions have been appropriately authorized and approved
Management’s Assertions Obtain sufficient appropriate audit evidence about management’s
assertions about the nature and extent of related-party transactions
Consider whether external confirmation of the balances would provide
reliable evidence
Consider the collectability and valuation of period-end balances
Document and Report  Document the names of the identified related parties and the nature of
the related-party relationships; and
 Communicate with those charged with governance any significant
matters arising during the audit in connection with related parties
Obtain Management Obtain written representations from management (and those charged with
Representation governance) that:
 All related parties and transactions have been disclosed; and
 Such relationships and transactions have been appropriately
accounted for and disclosed in the financial statements
Determine if the Audit Modify the auditor’s report if:
Opinion Needs to be  It is not possible to obtain sufficient appropriate evidence
Modified concerning related parties and transactions; or
 Management’s disclosure in the financial statements (as required by
the financial framework) is not considered adequate

Risk Assessment Risk Response Conclusion & Reporting

Perform RAP (risk assessment
procedures) to identify & assess
RMM including significant risks &
fraud risks.
- discussions w/ audit team
- inquiry of management
Perform FAP (further audit Obtain written representation
procedures) considering the about completeness of
nature, timing & extent to obtain accounting and disclosures of
evidence about RMM of related related parties in the financial
parties. statements
-Request identification of all RP
transactions
-Inquire why, other unusual
transactions
-Perform substantive test to
 identified RP
Remain alert for indication of Perform additional procedures Document results and findings
related parties when inspecting for significant risks related to Form opinion
records or documents. Related Party transactions
-Bank/legal confirmation - outside the normal course of
Minutes of the meetings -Other business. Obtain evidence about
records assertion that RP transactions are
arm’s length transactions.

DISCLOSURE REQUIREMENTS
No disclosure of transactions is required on the following:
(a) In consolidated financial statements in respect of intra-group transactions
(b) In parent financial statements when they are made available or published with the consolidated
financial statements
(c) In financial statements of a wholly-owned subsidiary, if its parent is incorporated in the same
country and provides consolidated financial statements in that country, and
(d) In financial statements of state-controlled enterprises of transactions with other state-controlled
enterprises.

 PSA 550. Other Important Paragraphs

SCOPE OF THIS PSA
1. This Philippine Standard on Auditing (PSA) deals with the auditor’s responsibilities regarding
related party relationships and transactions when performing an audit of financial statements.
Specifically, it expands on how PSA 315 (Redrafted), PSA 330 (Redrafted), and PSA 240
(Redrafted) are to be applied in relation to risks of material misstatement associated with related
party relationships and transactions.

Responsibilities of the Auditor

6. 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

7. Planning and performing the audit with professional skepticism as required by PSA 200 (Revised
and Redrafted) is therefore particularly important in this context, given the potential for
undisclosed related party relationships and transactions

OBJECTIVES
(a) Irrespective of whether the applicable financial reporting framework establishes related party
requirements, to obtain an understanding of related party relationships and transactions
sufficient to be able:
(i) To recognize fraud risk factors, if any, arising from related party relationships and
transactions that are relevant to the identification and assessment of the risks of material
misstatement due to fraud; and
(ii) To conclude whether the financial statements, insofar as they are affected by those
relationships and transactions:
a. Achieve fair presentation (for fair presentation frameworks); or
b. Are not misleading (for compliance frameworks); and
 (b) In addition, where the applicable financial reporting framework establishes related party
requirements, to obtain sufficient appropriate audit evidence about whether related party
relationships and transactions have been appropriately identified, accounted for and disclosed in
the financial statements in accordance with the framework.

DEFINITIONS
 Arm’s length transaction – A transaction conducted on such terms and conditions as between a
willing buyer and a willing seller who are unrelated and are acting independently of each other
and pursuing their own best interests.
 Related party – A party that is either:
(i) A related party as defined in the applicable However, entities that are under common
financial reporting framework; or control by a state (i.e., a national, regional
(ii) Where the applicable financial reporting or local government) are not considered
framework establishes minimal or no related party related unless they engage in significant
requirements: transactions or share resources to a
a. A person or other entity that has control or significant extent with one another.
significant influence, directly or indirectly
through one or more intermediaries, over the
reporting entity;
 Related party transaction - a
b. Another entity over which the reporting
transfer of resources or obligations
entity has control or significant influence,
between related parties, regardless of
directly or indirectly through one or more whether a price is charged. (PAS#24,
intermediaries; or paragraph 20)
c. Another entity that is under common control
with the reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.

A4. Many financial reporting frameworks discuss the concepts of

control and significant influence. Although they may discuss these
Considerations:
concepts using different terms, they generally explain that:
• Representation in the board of
(a) Control is the power to govern the financial and operating
directors
policies of an entity so as to obtain benefits from its
• Participation in policy making
activities; and
processes
(b) Significant influence (which may be gained by share
• Material transactions between
ownership, statute or agreement) is the power to
the investor & investee
participate in the financial and operating policy decisions of
•Interchange of managerial
an entity, but is not control over those policies.
personnel
•Provision of essential technical
A5. The existence of the following relationships may indicate the
information
presence of control or significant influence:
(a) Direct or indirect equity holdings or other financial interests
in the entity.
(b) The entity’s holdings of direct or indirect equity or other
financial interests in other entities.
(c) Being part of those charged with governance or key
management (i.e., those members of management who have
the authority and responsibility for planning, directing and
controlling the activities of the entity).
(d) Being a close family member of any person referred to in
subparagraph (c).
(e) Having a significant business relationship with any person
referred to in subparagraph (c).
REQUIREMENTS
Understanding the Entity’s Related Party Relationships and Transactions
13. The auditor shall inquire of management regarding:
(a) The identity of the entity’s related parties, including changes from the prior period;
(b) The nature of the relationships between the entity and these related parties; and
(c) Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.
14. The auditor shall inquire of management and others within the entity, and perform other risk
assessment procedures considered appropriate, to obtain an understanding of the controls, if any,
that management has established to: (Ref: Para. A15-A20)
(a) Identify, account for, and disclose related party relationships and transactions in accordance
with the applicable financial reporting framework;
(b) Authorize and approve significant transactions and arrangements with related parties; and
(Ref: Para. A21)
(c) Authorize and approve significant transactions and arrangements outside the normal course
of business.