VIETNAMESE STANDARDS ON AUDITING
STANDARD No. 550
RELATED PARTIES
(Issued in pursuance of the Finance Minister’s Decision No. 195/2003/QD-BTC dated 28 November 2003)
GENERAL PROVISIONS
- The purpose of this Vietnamese Standard on Auditing (VSA) is to establish standards and provide guidance on the auditor’s respon- sibilities when performing audit procedures regarding related parties and transactions with such parties during the course of an audit of financial statements.
- The auditor and the audit firm should perform audit procedures designed to obtain sufficient appropriate audit evidence regar- ding the identification and disclosure by management of related parties and the effect of related party transactions that are material to the financial statements. However, an audit cannot be expected to detect all related party transactions.
- As indicated in VSA 200 “Objective and General Principles Governing an Audit of Financial Statements,” in certain circums- tances there are limitations that may affect the persuasiveness of evidence available to draw conclusions on particular financial statement assertions. Because of the degree of uncertainty associated with the financial statement assertions regarding the completeness of related parties, the procedures identified in this VSA will provide sufficient appropriate audit evidence regarding those assertions in the absence of any circumstance identified by the auditor that:
- increases the risk of misstatement beyond that which would ordinarily be expected; or
- indicates that a material misstatement regarding related parties has occurred.
Where there is any indication that such circumstances exist, the auditor should perform modified, extended or additional procedures as are appropriate in the circumstances.
- This VAS applies to audits of financial statements and also applies to an audit of other financial information and related services rendered by the audit firm. The auditor and the audit firm shall comply with this VSA in conducting an audit of financial statements and rendering related services.
It is expected that the client entity and users of the audit report should possess essential knowledge as to the objective and general principles set out in this VSA in exercising their responsibility, working with the auditor and the audit firm, and dealing with the relations maintained during the audit.
In this VSA, the following terms have the meaning attributed below:
- Related party: parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions.
- Related party transactions: a transfer of resources or obligations between related parties, regardless of whether a price is charged.
- Significant influence represents the outcome of involvement in the development of financial and operating policies of an entity rather than controlling these policies.
Examples of significant influence include:
- Representation on the Board of Management.
- Participation in the policy making process.
- Participation in material inter-company transactions.
- Interchange on managerial personnel or independence of technical information.
- Share ownership under statute or agreement.
- Management is responsible for the identification and disclosure of related parties and transactions with such parties. This responsibility requires management to implement adequate accounting and internal control systems to ensure that transactions with related parties are appropriately identified in the accounting records and disclosed in the financial statements.
- The auditor needs to have a level of knowledge of the entity’s business and industry that will enable identification of the events, transactions and practices that may have a material effect on the financial statements. While the existence of related parties and transactions between such parties are considered ordinary features of business, the auditor needs to be aware of them because:
- VAS “Related parties” may require disclosure in the financial statements of certain related party relationships and transactions.
- The existence of related parties or related party transactions may affect the financial statements.
- The reliability of audit evidence depends on the source (inside or outside) of this evidence and each circumstance. The auditor’s assessment of reliability should be based on the following principles:
- A greater degree of reliance may be placed on audit evidence that is obtained from external resource than that from internal resource;
- A greater degree of reliance may be placed on audit evidence that is obtained from internal resource as accounting and internal control systems effectively operate;
- A greater degree of reliance may be placed on audit evidence that is obtained by the auditor than that provided by the entity.
- A related party transaction may be motivated by other than ordinary business considerations, for example, profit sharing or even fraud.
Contents of the VSA
Existence and Disclosure of Related Parties
- The auditor should review information provided by the directors and the Board of Management identifying the names of all known related parties and should perform the following procedures in respect of the completeness of this information:
- review prior year working papers for names of known related parties;
- review the entity’s procedures for identification of related parties;
- inquire as to the affiliation of the Board of Management members and directors;
- review shareholder records to determine the names of principal shareholders or, if appropriate, obtain a listing of principal shareholders from the share register;
- review minutes of the meetings of shareholders, directors and the Board of Management, control department and other relevant statutory records such as capital contribution of members or shareholders;
- inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and
- review the entity’s income tax returns and other information supplied to regulatory agencies.
If, in the auditor’s judgment, the risk of significant related parties remaining undetected is low, these procedures may be modified as appropriate.
- Where the VSA “Related Parties” requires disclosure of related party relationships, the auditor and the audit firm should be satisfied that the disclosure is adequate.
Transactions with Related Parties
- The auditor and the audit firm should review information provided by directors and the Board of Management identifying related party transactions and should be alert for other material related party transactions.
- When obtaining an understanding of the accounting and internal control systems and making a preliminary assessment of control risk, the auditor and the audit firm should consider the adequacy of control procedures over the authorization and recording of related party transactions.
- During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include:
- Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms.
- Transactions which lack an apparent logical business reason for their occurrence.
- Transactions in which substance differs from form.
- Transactions processed in an unusual manner.
- High volume or significant transactions with certain customers or suppliers as compared with others.
- Unrecorded transactions such as the receipt or provision of management services at no charge.
- During the course of the audit, the auditor and the audit firm carry out procedures which may identify the existence of transactions with related parties. Examples include:
- Performing detailed tests of transactions and balances.
- Reviewing minutes of meetings of the Board of Management and directors.
- Reviewing accounting records for large or unusual transactions or balances, paying particular attention to transactions recognized at or near the end of the reporting period.
- Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions.
- Reviewing investment transactions, for example, purchase or sale of an equity interest in a joint venture or other entity.
- During the course of the audit, the auditor and the audit firm carry out procedures which may identify the existence of transactions with related parties. Examples include:
Examining Identified Related Party Transactions
- In examining the identified related party transactions, the auditor and the audit firm should obtain sufficient appropriate audit evidence as to whether these transactions have been properly recorded and disclosed.
- Given the nature of related party relationships, evidence of a related party transaction may be limited, for example, regarding the existence of inventory held by a related party on consignment. Because of such limited availability, the auditor would consider performing procedures such as:
- Confirming the terms and amount of the transaction with the related party.
- Inspecting evidence in possession of the related party.
- Confirming or discussing information with persons associated with the transaction, such as banks, lawyers, guarantors and agents.
Management Representations
- The auditor and the audit firm should obtain a written repre- sentation from management concerning:
- the completeness of information provided regarding the identification of related parties; and
- the adequacy of related party disclosures in the financial statements.
Audit Conclusions and Reporting
- If the auditor and the audit firm are unable to obtain sufficient appropriate audit evidence concerning related parties and transactions with such parties or concludes that their disclosure in the financial statements is not adequate, the auditor should modify the audit report appropriately./.
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