Statement on Auditing Standards, Related Parties (Redrafted)

1. Supersedes the “Related Parties” section of SAS No. 45, Omnibus Statement on Auditing Standards—1983 (AICPA, Professional Standards, vol. 1, AU sec. 334). It represents the redrafting of the “Related Parties” section of SAS No. 45 to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with International Standards on Auditing (ISAs).

2. Effective for audits of financial statements for periods ending on or after December 15, 2012.

3. Changes From Existing Standards

a) Extant AU section 334 is premised on the related party requirements in Financial Accounting Standards Board (FASB) Statement No. 57, Related Party Disclosures. Therefore it is focused on auditing the amounts and disclosures pursuant to GAAP the United States and is centered on the provisions of FASB Statement No. 57.

b) This SAS is framework neutral so it includes all approved financial reporting frameworks, including special purpose frameworks described in the SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.

c) The applicability of the objectives, requirements, and definitions in the SAS are irrespective of whether the framework establishes such requirements.

4. Scope

a) Addresses the auditor’s responsibilities relating to related party relationships and transactions in an audit of financial statements.

b) Expands on how the SASs Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (Redrafted), Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained (Redrafted), and Consideration of Fraud in a Financial Statement Audit (Redrafted) are to be applied in relation to risks of material misstatement.

c) The SAS Forming an Opinion and Reporting on Financial Statements requires the auditor to evaluate whether the financial statements achieve fair presentation.

d) The SAS Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks requires that the auditor (1) evaluate whether the financial statements include informative disclosures similar to those required by generally accepted accounting principles (GAAP), and (2) evaluate whether additional disclosures beyond those specifically required by the framework and related to matters that are not specifically identified on the face of the financial statements or other disclosures may be necessary for the financial statements to achieve fair presentation. Thus, this SAS applies to all audits of financial statements.

5. The SAS contains sections on:

a) Nature of Related Party Relationships and Transactions—Many related party transactions are in the normal course of business and they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties. However, the nature of related party relationships and transactions may give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties.

b) Responsibilities of the Auditor:

(1) Because related parties are not independent of each other, financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions, and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements. Therefore, 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.

(2) An understanding of the entity’s related party relationships and transactions is relevant to the auditor’s evaluation of whether one or more fraud risk factors are present, as required by the SAS Consideration of Fraud in a Financial Statement Audit (Redrafted), because fraud may be more easily committed or disguised through related parties.

c) An audit has inherent limitations, so an unavoidable risk exists that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with US GAAS. In the context of related parties, the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater because management may be unaware of the existence of all related party relationships and transactions. Related party relationships may present a greater opportunity for collusion, concealment, or manipulation by management.

d) Planning and performing the audit with professional skepticism–The SAS Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards, requires the auditor to plan and perform the audit with professional skepticism. It is in context, given the potential for undisclosed related party relationships and transactions.

6. Requirements

a) Risk Assessment Procedures and Related Activities

b) Identification and Assessment of the Risks of Material Misstatement Associated With Related Party Relationships and Transactions

c) Responses to the Risks of Material Misstatement Associated With Related Party

d) Relationships and Transactions Evaluation of the Accounting for, and Disclosure of, Identified Related Party Relationships and Transactions

e) Communication With Those Charged With Governance

f) Documentation