SEC Approves PCAOB’s Auditing Standard No. 18, Related Parties

On October 21, 2014, the SEC approved Auditing Standard No. 18, Related Parties of the Public Company Accounting Oversight Board (PCAOB), as well as amendments to certain PCAOB auditing standards regarding significant unusual transactions and other related amendments to PCAOB auditing standards. Auditing Standard No. 18 supersedes the PCAOB’s auditing standard AU sec. 334, Related Parties, which was issued in 1983. Auditing Standard No. 18 is designed to “strengthen auditor performance requirements for identifying, assessing, and responding to the risks of material misstatement associated with a company’s relationships and transactions with its related parties.”

The new auditing standard requires the auditor to:

  • Perform specific procedures to obtain an understanding of the nature of the relationships between the company and its related parties and of the terms and business purposes, if any, of transactions involving related parties.
  • Evaluate whether the company has properly identified its related parties and relationships and related party transactions by testing the accuracy and completeness of management’s identification, taking into account information gathered during the audit.
  • Perform specific procedures if the auditor determines that a related party or relationship or transaction with a related party previously undisclosed to the auditor exists.
  • Perform specific procedures regarding each related party transaction that is either required to be disclosed in the financial statements or determined to be a significant risk (i.e., a “risk of material misstatement that requires special audit consideration”).
  • Communicate to the audit committee the auditor’s evaluation of the company’s identification of, accounting for, and disclosure of its relationships and transactions with related parties, and other significant matters arising from the audit regarding the company’s relationships and transactions with related parties.

The new auditing standard and amendments are effective for audits of financial statements for fiscal years beginning on or after December 15, 2014.

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