Question

It is often argued that to properly assess the performance of an entity, knowledge of related –party transaction is required. What is a possible basis for such an argument?

Answer 1

Related parties, by virtue of their ability to exert control or significant influence, may be in a position to exert dominant influence over the entity or its management. It is also relevant for idetifying and assessing the risk of fraud.

The nature of related party transaction and relationships may , in some circumstances, give rise to higher risk of material mistatement of the financial statements than transactions with unrelated parties. for example some related party tranasaction may not be conducted under normal market conditions and terms, like some related party transactions may be conducted with no exchange of consideration.

while assessing the performance of entity ,the objective of obtaining knowledge and understanding of related parties is as follows

# to recognise fraud risk factors , if any , arising from related party relationships and transactions that are relevant to the identification and assessment of ris of material mistatements due to fraud, and;

# to conclude whether the financial statements , insofar as they are affected by those relationship and transactions :

a. Acheive a true and fair presentation or

b. are not misleading