Zgalat-Lоzynska Liubov, Doctor of Economic Sciences, Professor, Professor of the Department of Economic Theory, Accounting, and Taxation, Kyiv National University of Construction and Architecture, Kyiv, Ukraine

ORCID: 0000-0002-2063-5738
e-mail: zghalat-lozynska.lo@knuba.edu.ua

Ivanova Тetiana, Candidate of Economic Sciences, Associate Professor of the Department of Economic Theory, Accounting and Taxation, Kyiv National University of Construction and Architecture, Kyiv, Ukraine

ORCID: 0000-0001-8883-7881
e-mail: ivanova.tm@knuba.edu.ua

Shovkivska Victoria, Candidate of Economic Sciences, Associate Professor of the Department of Economic Theory, Accounting and Taxation, Kyiv National University of Construction and Architecture, Kyiv, Ukraine

ORCID: 0000-0002-2379-0362
e-mail: shovkivska.vv@knuba.edu.ua

Accounting Misstatements in Related Party Transactions, Business Combinations and Consolidated Financial Statements under IAS 24, IFRS 3 and IFRS 10

Abstract. Introduction. Corporate groups, business combinations, and complex ownership structures increase the risk of accounting misstatements in financial reporting. These distortions may result from errors in individual transactions, the failure to disclose related-party relationships, the incorrect assessment of control, improper accounting for business acquisitions, and incomplete consolidation adjustments. The growing importance of consolidated financial reporting requires financial information prepared in accordance with International Financial Reporting Standards (IFRS) to achieve greater transparency and reliability. In this context, ensuring the faithful representation of economic relationships and financial performance within corporate groups requires a comprehensive understanding of the interaction among IAS 24 Related Party Disclosures, IFRS 3 Business Combinations, and IFRS 10 Consolidated Financial Statements.

Purpose. This study aims to identify and analyse the key risks of accounting misstatements associated with the application of IAS 24, IFRS 3, and IFRS 10, as well as to develop audit procedures designed to improve the quality of consolidated financial statements. The research employs comparative analysis, systematisation, logical generalisation, and the modelling of consolidation adjustments. Particular attention is paid to identifying risk areas that may materially affect the completeness and reliability of consolidated financial reporting.

Results. The findings reveal several significant sources of accounting misstatements, including the failure to disclose related-party relationships, non-arm’s-length transactions, the overstatement of goodwill resulting from errors in purchase price allocation, the incorrect measurement of non-controlling interests, the failure to eliminate intra-group balances, and the incomplete elimination of unrealised profits. A model-based calculation demonstrates that the combined effect of several consolidation errors could overstate group assets by 5.68 million currency units and profit before tax by 0.98 million currency units. To mitigate these risks, the study proposes an audit-oriented framework incorporating a related-party register, a control assessment matrix, a purchase price allocation (PPA) file, a consolidation adjustment schedule, and a group audit evidence matrix.

Conclusions. The scientific novelty of the study lies in the development of a three-layer approach to detecting misstatements in group financial reporting, based on the identification of relationships, the verification of measurement and consolidation procedures, and the coordination of audit evidence. The practical significance of the research lies in integrating the accounting requirements of IAS 24, IFRS 3, and IFRS 10 into group audit methodology, thereby enhancing the reliability and transparency of consolidated financial statements.

Keywords: related parties; business combination; consolidated financial statements; goodwill; non-controlling interest; intra-group transactions; unrealized profit; group audit; audit evidence; material misstatement.

References:

1. IFRS Foundation. (n.d.). IAS 24 Related Party Disclosures. https://www.ifrs.org/issued-standards/list-of-standards/ias-24-related-party-disclosures/.
2. IFRS Foundation. (n.d.). IFRS 3 Business Combinations. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/.
3. IFRS Foundation. (2021). IFRS 10 Consolidated Financial Statements. https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ifrs-10-consolidated-financial-statements.pdf.
4. IFRS Foundation. (n.d.). IFRS 12 Disclosure of Interests in Other Entities. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-12-disclosure-of-interests-in-other-entities/.
5. International Auditing and Assurance Standards Board. (n.d.). ISA 550 Related Parties. https://www.iaasb.org/consultations-projects/related-parties-isa-550.
6. International Auditing and Assurance Standards Board. (2022). International Standard on Auditing 600 (Revised), Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors). https://www.iaasb.org/publications/international-standard-auditing-600-revised-special-considerations-audits-group-financial-statements.
7. International Auditing and Assurance Standards Board. (2019). International Standard on Auditing 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement. https://www.iaasb.org/publications/isa-315-revised-2019-identifying-and-assessing-risks-material-misstatement.
8. International Auditing and Assurance Standards Board. (2018). International Standard on Auditing 540 (Revised), Auditing Accounting Estimates and Related Disclosures. https://www.iaasb.org/publications/isa-540-revised-auditing-accounting-estimates-and-related-disclosures-9
9. Gordon, E. A., Henry, E., Louwers, T. J., & Reed, B. J. (2007). Auditing related party transactions: A literature overview and research synthesis. Accounting Horizons, 21(1), 81-102. https://doi.org/10.2308/acch.2007.21.1.81.
10. Al-Dhamari, R. A., Al-Gamrh, B., Ismail, K. N. I. K., & Ismail, S. S. H. (2018). Related party transactions and audit fees: The role of the internal audit function. Journal of Management and Governance, 22, 187-212. https://doi.org/10.1007/s10997-017-9376-6.
11. Habib, A., Jiang, H., & Zhou, D. (2015). Related-party transactions and audit fees: Evidence from China. Journal of International Accounting Research, 14(1), 59-83. https://doi.org/10.2308/jiar-51020.
12. Lo, A. W. Y., Wong, R. M. K., & Firth, M. (2010). Can corporate governance deter management from manipulating earnings? Journal of Corporate Finance, 16(2), 225-235. https://doi.org/10.1016/j.jcorpfin.2009.11.002.
13. Downey, D. H., & Bedard, J. C. (2019). Coordination and communication challenges in global group audits. Auditing: A Journal of Practice & Theory, 38(1), 123-147. https://doi.org/10.2308/ajpt-52016.
14. Downey, D. H., & Westermann, K. D. (2021). Challenging global group audits. Contemporary Accounting Research, 38(2), 1395-1433. https://doi.org/10.1111/1911-3846.12648.
15. Hellman, N., & Hjelstrom, T. (2023). The goodwill impairment test under IFRS. Journal of International Accounting, Auditing and Taxation, 52, 100558. https://doi.org/10.1016/j.intaccaudtax.2023.100558.
16. Public Company Accounting Oversight Board. (n.d.). AS 2410: Related Parties. https://pcaobus.org/oversight/standards/auditing-standards/details/AS2410.