Document ID: chunk:federal_register_of_legislation:F2023C01132:reg:23:p19
Version: federal_register_of_legislation:F2023C01132
Segment Type: reg
Provision Reference: reg 23 (pt 19/23)
Character Range: 62258–65412

transaction:

                   + Is overly complex (for example, it may involve multiple related parties within a group).

                   + Has unusual terms of trade, such as unusual prices, interest rates, guarantees and repayment terms.

                   + Lacks an apparent logical business reason for its occurrence.

                   + Involves previously unidentified related parties.

                   + Is processed in an unusual manner.

           * Whether management has discussed the nature of, and accounting for, such a transaction with those charged with governance.

           * Whether management is placing more emphasis on a particular accounting treatment rather than giving due regard to the underlying economics of the transaction.

If management's explanations are materially inconsistent with the terms of the related party transaction, the auditor is required, in accordance with ASA 500,[27] to consider the reliability of management's explanations and representations on other significant matters.

A39.         The auditor may also seek to understand the business rationale of such a transaction from the related party's perspective, as this may help the auditor to better understand the economic reality of the transaction and why it was carried out.  A business rationale from the related party's perspective that appears inconsistent with the nature of its business may represent a fraud risk factor.

Authorisation and Approval of Significant Related Party Transactions (Ref: Para. 23(b))

A40.         Authorisation and approval by management, those charged with governance, or, where applicable, the shareholders of significant related party transactions outside the entity's normal course of business may provide audit evidence that these have been duly considered at the appropriate levels within the entity and that their terms and conditions have been appropriately reflected in the financial report.  The existence of transactions of this nature that were not subject to such authorisation and approval, in the absence of rational explanations based on discussion with management or those charged with governance, may indicate risks of material misstatement due to error or fraud.  In these circumstances, the auditor may need to be alert for other transactions of a similar nature.  Authorisation and approval alone, however, may not be sufficient in concluding whether risks of material misstatement due to fraud are absent because authorisation and approval may be ineffective if there has been collusion between the related parties or if the entity is subject to the dominant influence of a related party.

Considerations specific to smaller entities

A41.         A smaller entity may not have the same controls provided by different levels of authority and approval that may exist in a larger entity.  Accordingly, when 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