The purpose of this PSA is to establish standards and provide guidance

on the auditor’s responsibilities and audit procedures regarding related

parties and transactions.

[READ OBJECTIVES 1]
The auditor needs to have a sufficient understanding of the entity and
its environment to enable identification of the events, transactions and
practices that may result in a risk of material misstatement regarding
related parties and transactions with such parties.
[READ OBJECTIVES 2]
The auditor should perform audit procedures designed to obtain
sufficient appropriate audit evidence regarding the identification and
disclosure by management of related parties and the effect of related
party transactions that are material to the financial statements.

[Definition]
ARM’S LENTGTH TRANSACTION
A transaction conducted on such terms and conditions as between a
willing buyer and a willing seller who are unrelated and are acting
independently of each other and pursuing their own best interests.
In other words, An arms length transaction involves two independent
parties and each is attempting to get the best deal possible.

RELATED PARTY
It is a person or entity that is related to the entity and has the ability to
control the other party. Control, in which the related party has the
power to govern the financial and operating policies of an entity so as
to acquire benefits. Second is when a party has the ability to exercise
significant influence over the other party where in the party has the
power to participate in the financial and operating policy decision of an
entity. And lastly has a joint control over the entity.

Examples of related parties are affliates, subsidiaries, close family

members, associates and more.

[AUDITOR’S RESPOSIBLITY]
the auditor has a responsibility to perform audit procedures to identify,
assess and respond to the risks of material misstatement arising from
the entity’s failure to appropriately account for or disclose related party
relationships, transactions or balances in accordance with the
requirements of the framework.

This Auditing Standard establishes mandatory requirements and

provides explanatory guidance on the auditor’s responsibilities and
audit procedures regarding related parties and transactions with such
parties. This requires the auditor to:
(a) consider the risk of material misstatements in the financial
report resulting from the existence of related parties and related party
transactions, when performing audit procedures and when evaluating
and reporting the results of such procedures;
(b) assess the risk that related parties and related party
transactions will not be identified, or appropriately disclosed and/or
measured;

(c) be alert for unusual transactions which may indicate the

existence of previously unidentified related parties or related party
transactions; and

(d) communicate with those charged with governance on

significant related party relationships and related party transactions.

Let’s talk about Fair presentation

Fair presentation, in simple terms can ONLY be achieved if the entity uses IFRS, IFRS for SMEs or
AASB standards. Departure from adhering to a specific IFRS requirement is permitted but
under extremely rare circumstances and only if compliance with that requirement would negatively
affect fair presentation. So for these engagements, the Auditors’ opinion basically says that the
financial statements fairly present the true state of affairs of the entity because,
1. The Auditor is required to, not only look at the financials and its adherence to IFRS
2. The Auditor is also required to look at the company as a whole and then confirm that the financial
statements provide an accurate picture.
So it goes beyond just adherence to the reporting requirements.

Compliance framework
The use of ANY other framework (i.e. other than IFRS, IFRS for SMEs or AASB standards) for the
preparation of financial statements is not considered fair presentation. These would thus, be
considered compliance frameworks. Here, all the Auditor is required to do is confirm that the
financials have been prepared in accordance with the rules of that framework. The Auditor is not
required to look at the company as a whole nor is the Auditor required to confirm that the financials
gives a true picture of the state of affairs.