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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Evidence and testing considerations

Auditor Pieter Vos is auditing Kestrel Group. During the audit he discovers that a significant sale to a company controlled by a director's spouse was not disclosed by management as a related party transaction. Which response is most consistent with ISA 550?

The auditor should tell the engagement team, ask management to identify all transactions with the newly found related party, perform appropriate procedures, reassess the risk of other undisclosed related parties and consider fraud implications. The auditor does not ignore it, amend the statements himself, or automatically withdraw.

  1. AIgnore it, since only transactions identified by management need to be audited
  2. BCommunicate the information promptly to the engagement team, request management to identify all transactions with that party, and consider the implications for fraud risk and the rest of the auditCorrect
  3. CRemove the transaction from the financial statements himself
  4. DWithdraw from the engagement immediately without further procedures

Explanation

ISA 550 requires that when previously unidentified related parties or transactions are found, the auditor communicates this to the team, asks management to identify all transactions with the party, performs substantive procedures, reconsiders the risk of undisclosed related parties, and evaluates non-disclosure, including the possible intent to deceive. The auditor cannot amend the statements and withdrawal is not an automatic step.

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