Concepts and Standards - Related-Party Issues Flashcards
An example of a transaction which may be indicative of the existence of related parties is
Exchanging property for similar property in a nonmonetary transaction.
Why?
exchanging property for similar property in a nonmonetary transaction may indicate the existence of related parties (the exchange may or may not approximate what would occur in an arm’s-length transaction).
When auditing related-party transactions, an auditor places primary emphasis on
Evaluating the disclosure of the related-party transactions.
Note:
Auditor should view related-party transactions within the framework of existing pronouncements, placing primary emphasis on the adequacy of disclosure.
Professional standards state that the auditor should view related-party transactions within the framework of existing accounting pronouncements and places primary emphasis on the adequacy of disclosure.
Which of the following procedures most likely could assist an auditor in identifying related-party transactions?
Reviewing confirmations of compensating balance arrangements.
Note:
auditors review confirmations of compensating balance arrangements for indications that balances are or were maintained for (or by) related parties.
An auditor searching for related-party transactions should obtain an understanding of each subsidiary’s relationship to the total entity because
The business structure may be deliberately designed to obscure related-party transactions.
Note:
experience has shown that business structure and operating style are occasionally deliberately designed to obscure related-party transactions.
An auditor most likely would modify an unqualified opinion if the entity’s financial statements include a footnote on related-party transactions
Stating that a particular related-party transaction occurred on terms equivalent to those that would have prevailed in an arm’s-length transaction.
Which of the following events most likely would indicate the existence of related parties?
Selling real estate at a price significantly different from appraised value.
After identifying related-party transactions, an auditor most likely would
Determine whether the transactions were approved by the board of directors or other appropriate officials.
Why?
because the lack of “arm’s length transactions” creates a situation in which an auditor will attempt to determine whether the transactions have been approved by the board of directors or other appropriate officials.
The audit procedures directed toward identifying related-party transactions should include considering whether transactions are occurring, but are not being given proper accounting recognition.
Note:
The auditor would also obtain an understanding of the business purpose of the transaction.
Which of the following steps should an auditor perform first to determine the existence of related parties?
Request a list of all related parties from management.
Why?
The professional standards require that auditors first evaluate the company’s procedures for identifying such transactions and then ask management for a list of related parties.
After discovering that a related-party transaction exists, the auditor should be aware that the
Substance of the transaction could be significantly different from its form.
When auditing related-party transactions, an auditor places primary emphasis on
Evaluating the disclosure of the related-party transactions.
Which of the following most likely would indicate the existence of related parties?
Borrowing money at an interest rate significantly below the market rate.
Why?
One would not expect an unrelated entity to loan money at an interest rate significantly below the market rate.
Note: this is a unusual transaction with related parties
Reviewing confirmations of loans receivable and payable for indications of guarantees may reveal unusual transactions that involve related parties.
Which of the audit procedures listed below would be likely to disclose the existence of related-party transactions of a client during the period under audit?
- Reading “conflict-of-interest” statements obtained by the client from its management.
- Scanning accounting records for large transactions at or just prior to the end of the period under audit.
- Inspecting invoices from law firms.
Confirming large purchase and sales transactions with the vendors and/or customers involved is NOT
What likely would indicate the existence of related-party transactions?
- Making a loan with no scheduled date for the funds to be repaid.
- Maintaining compensating balance arrangements for the benefit of principal stockholders.
- Borrowing funds at an interest rate significantly below prevailing market rates.
An independent auditor finds that a corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding indicates the existence of
Related-party transactions.
