Document ID: chunk:federal_register_of_legislation:F2023C01132:reg:23:p16
Version: federal_register_of_legislation:F2023C01132
Segment Type: reg
Provision Reference: reg 23 (pt 16/23)
Character Range: 53350–56542

or those charged with governance are financially involved.

Identification and Assessment of the Risks of Material Misstatement Associated with Related Party Relationships and Transactions

Fraud Risk Factors Associated with a Related Party with Dominant Influence (Ref: Para. 19)

A29.         Domination of management by a single person or small group of persons without compensating controls is a fraud risk factor.[24]  Indicators of dominant influence exerted by a related party include:

           * The related party has vetoed significant business decisions taken by management or those charged with governance.

           * Significant transactions are referred to the related party for final approval.

           * There is little or no debate among management and those charged with governance regarding business proposals initiated by the related party.

           * Transactions involving the related party (or a close family member of the related party) are rarely independently reviewed and approved.

    Dominant influence may also exist in some cases if the related party has played a leading role in founding the entity and continues to play a leading role in managing the entity.

A30.         In the presence of other risk factors, the existence of a related party with dominant influence may indicate significant risks of material misstatement due to fraud.  For example:

           * An unusually high turnover of senior management or professional advisors may suggest unethical or fraudulent business practices that serve the related party's purposes.

           * The use of business intermediaries for significant transactions for which there appears to be no clear business justification may suggest that the related party could have an interest in such transactions through control of such intermediaries for fraudulent purposes.

           * Evidence of the related party's excessive participation in or preoccupation with the selection of accounting policies or the determination of significant estimates may suggest the possibility of fraudulent financial reporting.

Responses to the Risks of Material Misstatement Associated with Related Party Relationships and Transactions (Ref: Para. 20)

A31.         The nature, timing and extent of the further audit procedures that the auditor may select to respond to the assessed risks of material misstatement associated with related party relationships and transactions depend upon the nature of those risks and the circumstances of the entity.[25]

A32.         Examples of substantive audit procedures that the auditor may perform when the auditor has assessed a significant risk that management has not appropriately accounted for or disclosed specific related party transactions in accordance with the applicable financial reporting framework (whether due to fraud or error) include:

           * Confirming or discussing specific aspects of the transactions with intermediaries such as banks, law firms, guarantors, or agents, where practicable and not prohibited by law, regulation or ethical rules.

           * Confirming the purposes, specific terms or amounts of the transactions with the related