Impact of changes to auditing standards - related parties
Auditing standards are changing - for accounting periods ending on or after 15 December 2010, UK auditors must work to the revised "Clarity" auditing standards.
The auditing standard covering related parties has become more onerous, reflecting that most of the recent big name company failures involved unusual/fraudulent related party transactions. Auditors will be required to understand the company's related party relationships and transactions and to be alert for related party information during the course of the audit. A broad definition of related parties, which applies to most financial reporting frameworks includes:
- entities which are directly, or indirectly, controlled by another company
- associates joint ventures key management personnel
- key management personnel of its parent company
- close family members of key management of the company or its parent
- retirement benefit schemes for the company or group's employees.
As a company, there is the need for further record keeping and also the need to keep the records up to date. Have you identified the key management personnel of your company? Under the standards, for most companies, this definition is wider than the directors registered at Companies House. Do you know your parent company's key management and their close family members?
To assist your auditors, and prevent you being asked too many personal questions, we would suggest that you prepare a list of related parties. This list should be updated regularly, at least on an annual basis.
Preparing lists of related party transactions will also help your auditors and may include printing intra-group nominal ledger codes and directors loan accounts movements. If your financial statements disclose the fact that transactions with related parties are conducted at arms length values, you will have to provide evidence to support this disclosure.
For further information, please contact your local office.
