I. Identification of related parties
The difficulty of related party auditing is to find the related party relationship, as long as all the related parties are found, the audit will have a clear clue. CPA in the signing of the audit engagement letter and the development of the audit plan, to be a comprehensive understanding of the situation of the municipal units, and the implementation of the following procedures to determine the existence of the audited unit of known or potential related parties and their transactions:
1, review of the previous year's audit work papers. Related parties identified in the working papers of previous years are still considered to be related parties if no changes have occurred during the current period; while other enterprises not recorded as related parties in previous years may become related parties of the enterprise.
2. Understand and evaluate the auditee's procedures for identifying and dealing with related parties and their transactions.
3. Review the list of major investors and key management personnel, which will help the CPA properly determine the impact of their transactions with the enterprise on its profits.
4. Access to the minutes of shareholders' meetings, board of directors' meetings, and other important meetings enables the CPA to recognize related parties that control, ****same control, or exercise significant influence over the unit under review.
5, questioning the former CPA, thus improving the efficiency of the audit, but still have to review the results of the questioning.
6. Review significant investment operations or debt restructuring operations during the accounting period under review to confirm whether the nature of the investment and restructuring constitutes a new related party relationship.
7. Review the income tax return information. If the audited entity's tax return is too high or too low, it indicates that there may be related-party transactions on the grounds of profit transfer.
Two, the identification of related party transactions
The criterion for judging the existence of related party transactions is not the size of the amount, but the transfer of risks and rewards in accounting. Since the audited entity may intentionally conceal related parties, the CPA should implement specialized audit procedures to identify related party transactions.
1. Review the minutes of shareholders' meetings, board of directors' meetings and other important meetings.
2. Ask the relevant authorities about the specifics at the time of the significant transaction.
3. Review the management prospectus of the audited entity.
4. To understand the nature and scope of the audited entity's transactions with its major customers, suppliers and creditors and debtors.
5. To find out whether there are transactions that have occurred but have not been accounted for.
6. Check the accounting records for unusual or infrequent transactions of large amounts.
7. Review letters of inquiry regarding deposits and loans to check for guarantees.
3. Conducting compliance testing of the internal control system of the related party under review
1. Understanding and describing the internal control over related party transactions.
2. Identify and determine related party transactions authorized or proposed for authorization.
3. Examine a sample of original documents for related party transactions.
4. Examine all information provided by the Board of Directors and key management personnel to determine the completeness of related party transactions.
5. Examine the records of accounting recognition and measurement of purchases and sales such as machinery and equipment or buildings.
6. Review agency, leasing, and funds lending operations between related parties.
7. Review the amount and manner of compensation paid to key management personnel for unreasonableness.
8. Evaluate the related party internal control system. If the internal control over related party transactions of the audited entity is better, the substantive test can be reduced, otherwise the substantive test should be increased.
4. Substantive testing of related-party transactions of the unit under review
1. Review the purchase and sales activities, labor expenditures, and
leasing operations occurring between the unit under review and its related parties to determine whether the transaction price is fair and whether the relevant original documents are complete.
2. Review the contracts and documents relating to the financial transactions between the unit under review and its related parties, verify whether the funds are occupied without compensation, and check the authenticity, legality and completeness of the claims and debts.
3. Examine the relevant guarantee and collateral agreements and check whether the guarantee collateral exists.
4. Examine whether the research and development projects and their project transfer prices between the unit under review and its related parties deviate from the true prices.
5. Review whether the notes to the audited entity's accounting statements disclose related party transactions and whether the disclosure is complete.
5. Examine the recognized related party transactions.
Certified public accountants, before forming an audit opinion based on the purpose, nature, scope, and degree of impact on the statements of the audited entity's related party transactions, also need to check the significant related party transactions, and consider the implementation of additional auditing procedures:
1. Inquire with the related parties about the terms and amount of the transaction.
2. Examine the evidence held by the related parties.
3. Confirmation of issues with persons related to the economic operations.
4. Obtaining the solvency of the related parties of the audited entity from significant transactions and collaterals.
6. Obtain a statement of related parties and their transactions from the management of the audited entity to clarify the respective responsibilities of the CPA and the management of the audited entity.
VII. Formation of audit opinion. The CPA is required to form an unqualified audit opinion or a qualified opinion, a disclaimer of opinion, or an adverse opinion based on the results of the audit.