NRS & Associates, Chartered Accountants, were conducting the statutory audit of Perry Industries Limited for the year ended 31st March, 2026.…
CA Intermediate · Auditing and Ethics · MTP · September 2026
NRS & Associates, Chartered Accountants, were conducting the statutory audit of Perry Industries Limited for the year ended 31st March, 2026. During the audit, the auditor identified several transactions entered into by the company with its related parties, including sale of goods, rendering of management services and inter-corporate financing arrangements. The management contended that most of these transactions were undertaken in the ordinary course of business and were similar to transactions entered into with unrelated parties. However, the auditor observed that the company had a large number of group entities operating through a complex organisational structure. Further, certain transactions were not readily identifiable from the accounting system and some transactions appeared to have been entered into without adequate consideration. The audit team discussed whether related party transactions always involve a higher risk of material misstatement and the circumstances in which such risk may increase. In the light of the above facts, explain the risks associated with related party relationships and transactions. State whether such transactions always involve a higher risk of material misstatement and illustrate, with examples, the circumstances in which such risk may increase.
Suggested Answer and Working Notes:
Many related party transactions are in the normal course of business. In such circumstances, they may carry no higher risk of material misstatement of the financial statements than similar transactions with unrelated parties. However, the nature of related party relationships and transactions may, in some circumstances, give rise to higher risks of material misstatement of the financial statements than transactions with unrelated parties. For example (A) Related parties may operate through an extensive and complex range of relationships and structures, with a corresponding increase in the complexity of related party transactions. (B) Information systems may be ineffective at identifying or summarising transactions and outstanding balances between an entity and its related parties. (C) Related party transactions may not be conducted under normal market terms and conditions; for example, some related party transactions may be conducted with no exchange of consideration. In the given case of Perry Industries Limited, although many related party transactions may have been entered into in the normal course of business, the existence of a complex group structure, difficulties in identifying related party transactions through the information system and transactions without adequate consideration increase the risk of material misstatement. Therefore, the auditor should exercise heightened professional skepticism and perform appropriate audit procedures in relation to such related party relationships and transactions.
Topics: Audit Evidence
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