Document ID: chunk:federal_register_of_legislation:F2023C01132:reg:23:p13
Version: federal_register_of_legislation:F2023C01132
Segment Type: reg
Provision Reference: reg 23 (pt 13/23)
Character Range: 44078–47443

related party relationships and transactions within some entities may be deficient or non‑existent for a number of reasons, such as:

           * The low importance attached by management to identifying and disclosing related party relationships and transactions.

           * The lack of appropriate oversight by those charged with governance.

           * An intentional disregard for such controls because related party disclosures may reveal information that management considers sensitive, for example, the existence of transactions involving family members of management.

           * An insufficient understanding by management of the related party requirements of the applicable financial reporting framework.

           * The absence of disclosure requirements under the applicable financial reporting framework.

    Where such controls are ineffective or non‑existent, the auditor may be unable to obtain sufficient appropriate audit evidence about related party relationships and transactions.  If this were the case, the auditor would, in accordance with ASA 705,[22] consider the implications for the audit, including the opinion in the auditor's report.

A19.         Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively.[23]  The risk of management override of controls is higher if management has relationships that involve control or significant influence with parties with which the entity does business because these relationships may present management with greater incentives and opportunities to perpetrate fraud.  For example, management's financial interests in certain related parties may provide incentives for management to override controls by (a) directing the entity, against its interests, to conclude transactions for the benefit of these parties, or (b) colluding with such parties or controlling their actions.  Examples of possible fraud include:

           * Creating fictitious terms of transactions with related parties designed to misrepresent the business rationale of these transactions.

           * Fraudulently organising the transfer of assets from or to management or others at amounts significantly above or below market value.

           * Engaging in complex transactions with related parties, such as special‑purpose entities, that are structured to misrepresent the financial position or financial performance of the entity.

Considerations specific to smaller entities

A20.         Controls in smaller entities are likely to be less formal and smaller entities may have no documented processes for dealing with related party relationships and transactions.  An owner‑manager may mitigate some of the risks arising from related party transactions, or potentially increase those risks, through active involvement in all the main aspects of the transactions.  For such entities, the auditor may obtain an understanding of the related party relationships and transactions, and any controls that may exist over these, through enquiry of management combined with other procedures, such as observation of management's oversight and review activities, and inspection of available relevant documentation.

Authorisation and approval of significant transactions and arrangements (Ref: Para. 14(b))

A21.         Authorisation involves