Recognition of related parties and related party transactions

Client Substantiation File.

NZ IAS 24 and PBE IPSAS 20 require the disclosure of related party relationships and transactions. To meet the requirements of the standards, management is responsible to implement internal controls so that:

  • all related parties are identified;
  • all transactions with related parties are identified; and
  • all the disclosures required by the reporting framework are in the financial statements.

Systems for identifying and monitoring related parties and related party transactions

The internal controls that are put in place should include the following at a minimum:

  • processes to identify, account for and monitor related party relationships;
  • appropriate approval for transactions to be entered into with a related party;
  • monitoring controls to identify such transactions; and
  •  appropriate approval of significant transactions and arrangements outside the normal course of business.

This could involve employees within an entity declaring conflicts of interests on a regular basis. There could also be comparisons of the interest register with details of the company’s office and charities register. For this to be effective the entity and its employees must understand the definition of a related party.

To identify related parties, entities should consider the criteria mentioned above. When related parties are identified, there should be processes in place to monitor transactions with the related party for disclosure purposes.

Auditing related parties

Your auditor will need to make sure that all of the related party relationships and transactions that must be included in the financial statements have been included and that these have been presented in terms of the framework.

The audit team will need to understand your processes in place to identify these relationships and to identify all transactions with related parties. They will also make enquiries and perform procedures to check that all the relationships and transactions that need to be disclosed in the financial statements have been included. Refer to the link to what information your auditors will need from you.

There is also a related party questionnaire (Excel, 62kB) that you can complete. This will help your audit team to better understand you processes for identifying related party relationships and transactions. It can also help you identify any weaknesses that may exist in your processes.

Page created: 21 September 2018