Transactions that are not at arm’s length

Due to the prevalence of fraud over the past few years, the IRBA issued a staff audit practice alert in June 2020 to provide auditors with guidance and considerations, with respect to transactions that are not at arm’s length, and the possible audit responses to the resulting audit risks.
This article provides a summary of the key aspects addressed in the IRBA staff audit practice alert and encapsulates the message in simpler terms. Please remember to also consult the International Standards on Auditing when encountering an issue regarding an engagement in this regard.


Transactions that are not at arm’s length pose potential risks in an audit of financial statements. If such transactions are not identified by management or the auditor, it may lead to unaddressed risks that could result in misstatements in the financial statements.

If such transactions are identified during the audit, auditors should consider whether these transactions are with related parties (apply ISA 550 requirements) or not (addressed in this article).

Identifying transactions that are not at arm’s length

When performing risk assessment procedures during planning (enquiries, analytical procedures, observation and inspection), auditors must be on the lookout for transactions that are not at arm’s length and apply their professional scepticism to the circumstances. Possible indicators of such transactions include the following and may also be indicative of the existence of related parties:

• Significant involvement of family members
• Trust arrangements
• Those charged with governance sensitive to disclosures
• Transactions with no readily ascertainable market value
• Business property trading
• An inappropriate approval process
• Loans at nil or reduced interest rates, unsecured loans or loans on unusually favourable terms
• Overly complex joint venture arrangements or special purpose vehicles for financing
• Management charges and management services
• Unknown business relationships
• Entertainment costs
• Collusive relationships with business contacts
• Limited documentation
• Complex equity transactions and restructurings without a clear business rationale
• Suspense accounts with long-standing uncleared items
• Going-concern issues, due to cash flow or liquidity pressures
• Unclear rationale for splitting the group audit between two or more firms.

Considerations to determine the audit implications of such transactions

Once transactions that are not at arm’s length have been identified, the auditor needs to determine the audit implications by exercising professional judgment in the circumstances. The following considerations provide some guidance in this regard, in terms of the relevant ISAs:

Audit consideration References to relevant ISAs
Obtain an understanding of the control environment relevant to the audit. ISA 315 para. 12
Consider overall audit responses to addressing the assessed risk of material misstatement at financial statement level. ISA 330 para. 5 & A1
Obtain an understanding of non-compliance with laws and regulations relevant to the audit. ISA 250
Consider whether the transaction underwent the appropriate approval process within the entity. ISA 500
Make enquiries of personnel other than management. ISA 315 para. 6(a)
Consider whether the transaction is an industry practice/norm. ISA 315
Consider the business rationale of the transaction. ISA 240 para. 33(c)
Consider the need to use the work of a management expert. ISA 500 para. 8
Consider the need to use an auditor’s expert. ISA 620
Consider economic pressures on the entity’s management. ISA 240
Consider going-concern pressures. ISA 570
Consider whether there has been any publicly available negative media coverage, in respect of the entity, such as SENS announcements.
  • ISA 315 para. 11(a), 11(d), 26(a), A41, A133, Appendix 2
  • ISA 240 para. 13, 15, 24, 39
  • ISA 220 para. 13
Confirm the terms of the transaction with the counterparty, if deemed necessary. ISA 505
Consider reporting responsibilities regarding non-compliance with laws and regulations.
  • ISA 250
  • Section 360 of the IRBA Code of Professional Conduct for Registered Auditors (Revised November 2018)
Identify and report reportable irregularities as required by the Auditing Profession Act.
  • Section 45 of the Auditing Profession Act
  • Revised Guide for Registered Auditors: Reportable Irregularities, in terms of the Auditing Profession Act
Consider the possible impact on the audit opinion.
  • ISA 450
  • ISA 700

Illustrative procedures

Appendix A of the IRBA Staff Audit Practice Alert 5 provides illustrative procedures which may be used for risk assessment, as well as further procedures for transactions with the entity that might not be at arm’s length.

In summary

Auditors need to be scrupulous in applying their professional scepticism when performing an audit to identify transactions that are not at arm’s length, since these potentially pose an additional risk of material misstatement to the financial statements, which needs a proper response. LEAF will gladly assist and guide you along the way.


1. IRBA: Staff Audit Practice Alert 5, The auditor’s considerations with respect to transactions that are not at arm’s length, June 2020.

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