French Commercial code
In forceThe professional practice standard relating to the audit of the opening balance sheet of the first financial year certified by the statutory auditor, approved by the Minister of Justice, is shown below:
NEP-550. Relationships and transactions with related parties
Introduction
01. Many related party transactions are part of the entity's ordinary activities and do not present a greater risk of material misstatement than transactions of a similar nature with unrelated parties. However, in certain circumstances, the nature of the relationships and transactions with related parties may increase this risk, particularly where:
transactions with related parties are part of a complex scheme or organisation;
information systems do not allow the transactions carried out between the entity and related parties and the corresponding accounting balances to be identified;
some transactions with related parties are not carried out under normal market conditions, for example, when they do not give rise to consideration or remuneration.
02. Due to the limitations of the audit, there is a risk that the auditor will not detect all material misstatements contained in the accounts. Where there are relationships and transactions with related parties, this risk is higher because:
the entity's management does not necessarily have knowledge of all existing related parties or of all transactions carried out with related parties;
-these relationships are likely to give rise to a risk of collusion, concealment or manipulation by management.
03. In this context, it is particularly important for the statutory auditor to exercise critical thinking throughout the audit and to take into account the fact that the existence of related parties may lead to material misstatements in the accounts.
04. The purpose of this standard is to define the audit procedures that the statutory auditor performs on relationships and transactions with related parties as part of his audit of the financial statements with a view to their certification. In particular, it specifies, with regard to the risk of material misstatement of the financial statements resulting from the existence of related parties and transactions with related parties, how to apply the professional practice standards relating to:
-understanding the entity and its environment and assessing the risk of material misstatement of the accounts;
-procedures implemented by the statutory auditor following its risk assessment;
-considering the possibility of fraud when auditing the accounts.
Definitions
05. The definition of "related parties" provided in the accounting standards applicable in France to the financial statements certified by the Statutory Auditors pursuant to Article L. 823-9 is that set out in the international accounting standards adopted by Commission Regulation (EC) No 2238/2004 of 29 December 2004, in particular the part of its appendix IAS 24 entitled "Purpose of related party disclosures", as well as any Community regulation that may amend it.
An entity may use another definition of "related parties" when it prepares financial information outside its legal obligations, in accordance with an accounting framework other than those applicable in France or in accordance with agreed criteria.
06. For the purposes of this standard, an arm's length transaction is one entered into on terms and conditions similar to those between a willing buyer and a willing seller who are not related and who are acting independently of each other and in each other's best interests.
Procedures for assessing the risks of material misstatement of the financial statements
07. In order to obtain appropriate information about the identification of risks of material misstatement of the financial statements due to relationships and transactions with related parties, the statutory auditor performs the audit procedures described below in paragraphs 8 to 13.
Getting to know the entity's relationships and transactions with related parties
08. The statutory auditor shall enquire of management:
the identity of related parties and any changes since the previous financial year;
the nature of the relationships between the entity and these related parties;
the existence of transactions entered into with these related parties during the financial year and, where applicable, the nature of the transactions and the objectives pursued.
09. The statutory auditor shall question management and any competent person within the entity, with knowledge of relationships and transactions with related parties, on the controls put in place by management in order to:
identify and record relationships and transactions carried out with related parties and, where appropriate, assess the normal nature of the conditions granted;
provide in the notes to the financial statements the information required by the accounting standards applicable to the entity;
authorise and approve material transactions and agreements entered into with related parties;
authorise and approve material transactions and agreements outside the scope of the entity's ordinary activities.
It performs such other procedures as it considers necessary to complete its understanding of these controls.
Exchange of information on related parties within the audit team
10. When becoming aware of relationships and transactions with related parties, the members of the audit team discuss, as provided for in the professional practice standards, the risks of material misstatement of the accounts due to errors or fraud resulting from relationships and transactions with related parties.
11. These discussions continue, if necessary, during the engagement.
Vigilance when examining accounting records and documents
12. During the course of the audit, the statutory auditor remains alert to agreements and other information that may indicate the existence of relationships and transactions with related parties that management has not identified or disclosed to the statutory auditor.
To this end, it examines the following:
the responses obtained from banks and lawyers as part of the audit procedures;
the minutes of meetings held by the deliberative body and those held by the administrative or supervisory body and, where applicable, by the specialised committee referred to in Article L. 823-19;
-any document it deems necessary given its knowledge of the entity and its environment.
13. When in the course of its audit, and in particular when performing the procedures described in paragraph 12, the statutory auditor identifies significant transactions outside the scope of the entity's ordinary activities, it shall make inquiries of the entity's management:
about the nature and basis of those transactions;
and about the possible involvement of related parties.
Assessment of the risk of material misstatement of the financial statements resulting from the existence of relationships and transactions with related parties
14. In identifying and assessing the risks of material misstatement of the financial statements, the statutory auditor identifies and assesses the risks of material misstatement due to relationships and transactions with related parties and determines whether they relate to a high inherent risk that requires a particular audit approach. In this context, it considers that significant transactions with related parties outside the scope of the entity's ordinary activities increase this risk.
15. Where the statutory auditor identifies fraud risk factors arising from the existence of related parties, he shall take this information into account in his assessment of the risk of material misstatement of the financial statements as a result of fraud, carried out in accordance with the professional practice standard "Consideration of the possibility of fraud in an audit of financial statements". The existence, among related parties, of individuals with a dominant influence may constitute a fraud risk factor.
Responses to the assessment of the risk of material misstatement of the financial statements due to the existence of relationships and transactions with related parties
16. When applying the professional practice standard "Audit procedures implemented by the statutory auditor following a risk assessment", the statutory auditor designs and performs audit procedures to address the risks of material misstatement of the financial statements resulting from relationships and transactions with related parties. Such audit procedures include those set out in paragraphs 17 to 20.
Related parties or significant transactions between the entity and related parties not previously identified or disclosed
17. Where the statutory auditor identifies agreements or information that are indicative of the existence of related parties or transactions with related parties that management has not identified or reported to the statutory auditor, the statutory auditor shall assess whether there is other evidence to confirm their existence.
18. Where such existence is confirmed, the statutory auditor:
quickly inform the other members of the audit team;
-request management to identify all existing transactions with the newly identified related parties so that he can update his risk assessment;
-analyse the reasons why the controls put in place by the entity were not able to identify or report the relationships or transactions with the newly identified related parties;
-assesses the risk that other related parties or significant transactions with related parties may not be identified or reported and performs further audit procedures if it considers it necessary;
-implements substantive controls over the newly identified related parties or significant transactions identified with such related parties;
-assesses, where appropriate, the audit consequences of management's intentional omission of related party information.
Material transactions identified with related parties outside the scope of the entity's ordinary activities
19. With regard to significant transactions identified with related parties not falling within the scope of the entity's ordinary activities, the statutory auditor:
-analyses the contracts or agreements concerned and assesses whether:
-the lack of economic justification for these transactions does not constitute an indication of misappropriation of assets or intentional acts that undermine the true and fair view of the accounts or are likely to mislead the user of these accounts;
-the terms and conditions of these transactions are consistent with management's explanations;
-these transactions have been properly accounted for and disclosed in the notes to the financial statements in accordance with the applicable accounting framework;
-verify that these transactions have been duly authorised and approved.
Assertion that transactions with related parties have been carried out on an arm's length basis
20. Where management makes an assertion that certain transactions with related parties are carried out on an arm's length basis and uses that assertion for the purposes of preparing the accounts, the statutory auditor shall collect sufficient and appropriate evidence to support that assertion. In doing so, the auditor performs tests, the extent of which is determined by the auditor's assessment of the design and implementation of management's controls over related party transactions.
Examination of the accounting treatment of relationships and transactions with related parties
21. In order to base his opinion on the financial statements, the statutory auditor assesses whether:
relationships and transactions with related parties are subject to accounting treatment and disclosure in the notes that complies with the specific provisions of the applicable accounting standards relating to the recognition of balances and transactions with related parties and the disclosures to be made in the notes in respect of related parties;
the presentation of the effects of relationships and transactions with related parties does not call into question the true and fair view that the financial statements must give of the results of operations for the past financial year and of the financial position and assets and liabilities of the entity or group at the end of that financial year.
Written statements
22. As part of the provisions set out in the professional practice standard relating to management declarations, the statutory auditor shall request written declarations from the legal representative and, if he considers it necessary, from the members of the bodies referred to in Article L. 823-16, confirming that to the best of their knowledge :
the information they have given to the statutory auditor on the identity of related parties and on the relationships and transactions concerning them is complete;
the accounting treatment of relationships and transactions with related parties complies with the provisions of the applicable accounting standards;
-all transactions with related parties not disclosed in the notes to the financial statements are not material or have been entered into under normal market conditions, where the applicable accounting framework provides for disclosure in the notes to the financial statements only of transactions with related parties that are material and not entered into under normal market conditions.
Communications with the bodies mentioned in Article L. 823-16
23. The statutory auditor shall apply the provisions of the professional practice standard relating to communications with the bodies mentioned in Article L. 823-16 to items relating to related parties identified during the audit.
Documentation
24. Without prejudice to the provisions relating to documentation set out in other professional practice standards, the statutory auditor shall record in his file the identity of related parties and the nature of their relationship with the entity.
