Document ID: chunk:federal_register_of_legislation:F2023C01132:reg:23:p20
Version: federal_register_of_legislation:F2023C01132
Segment Type: reg
Provision Reference: reg 23 (pt 20/23)
Character Range: 65138–68286

auditing a smaller entity, the auditor may rely to a lesser degree on authorisation and approval for audit evidence regarding the validity of significant related party transactions outside the entity's normal course of business.  Instead, the auditor may consider performing other audit procedures such as inspecting relevant documents, confirming specific aspects of the transactions with relevant parties, or observing the owner‑manager's involvement with the transactions.

Assertions That Related Party Transactions Were Conducted on Terms Equivalent to Those Prevailing in an Arm's Length Transaction (Ref: Para. 24)

A42.         Although audit evidence may be readily available regarding how the price of a related party transaction compares to that of a similar arm's length transaction, there are ordinarily practical difficulties that limit the auditor's ability to obtain audit evidence that all other aspects of the transaction are equivalent to those of the arm's length transaction.  For example, although the auditor may be able to confirm that a related party transaction has been conducted at a market price, it may be impracticable to confirm whether other terms and conditions of the transaction (such as credit terms, contingencies and specific charges) are equivalent to those that would ordinarily be agreed between independent parties.  Accordingly, there may be a risk that management's assertion that a related party transaction was conducted on terms equivalent to those prevailing in an arm's length transaction may be materially misstated.

A43.         The preparation of the financial report requires management to substantiate an assertion that a related party transaction was conducted on terms equivalent to those prevailing in an arm's length transaction.  Management's support for the assertion may include:

           * Comparing the terms of the related party transaction to those of an identical or similar transaction with one or more unrelated parties.

           * Engaging an external expert to determine a market value and to confirm market terms and conditions for the transaction.

           * Comparing the terms of the transaction to known market terms for broadly similar transactions on an open market.

A44.         Evaluating management's support for this assertion may involve one or more of the following:

           * Considering the appropriateness of management's process for supporting the assertion.

           * Verifying the source of the internal or external data supporting the assertion, and testing the data to determine their accuracy, completeness and relevance.

           * Evaluating the reasonableness of any significant assumptions on which the assertion is based.

A45.         Some financial reporting frameworks require the disclosure of related party transactions not conducted on terms equivalent to those prevailing in arm's length transactions.  In these circumstances, if management has not disclosed a related party transaction in the financial report, there may be an implicit assertion that the transaction was conducted on terms equivalent to those prevailing