Why do auditors audit related party transactions?

Why do auditors audit related party transactions?

Theoretically, related party transactions carry no higher risk to the financial statement if compared to those unrelated.

But why the auditor is so concerned about related party transactions?

This is because the nature of related party transactions may present a greater opportunity for collusion, concealment, or manipulation by management, resulting in a false result in the financial statements.

Responsibilities of auditor

The auditor shall: -

1. Identify and assess the Risks

2. Responses to the Risks

3. Evaluate the accounting treatment and disclosure

To conclude whether the related party transactions achieve fair presentation and are not misleading

Here are some examples of what auditor may need to inspect, which entity can generate internally: -

1. Minutes of meetings

2. Statements of conflicts of interest

3. Contracts and agreements

4. Invoices and correspondence from the entity’s professional advisors

5. Reports of the internal audit function

Source: https://www.mia.org.my/v2/downloads/handbook/standards/ISA/2018/06/01/ISA_550.pdf

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