PCAOB on related party transactions

Question 1

PCAOB auditing standards require the auditor to obtain an understanding of the company’s processes for three specific matters regarding related party issues. What are they?

Answer 1

1. )How the company identifies related parties and transactions with related parties
2. )How the company authorizes and approves transactions with related parties
3. )How the company accounts for and discloses relationships and transactions with related parties in the financial statements.

Question 2

PCAOB auditing standards suggest that the auditor should make certain inquiries of others (in addition to management or the audit committee). Identify some examples of such others to whom inquiry should be made.

Answer 2

Internal auditors
In-house legal counsel
Chief compliance or ethics officer
Director of human resources

Question 3

PCAOB auditing standards require the auditor to make certain inquiries of management about related-party issues. What are those specific matters about which the auditor should inquire of management?

Answer 3

1. )Names of the related parties, nature of the relationships, and changes from the prior period
2. )Background information about related parties, including location, industry, size, and so on
3. )Transactions involving related parties, including terms and business purposes
4. )Any related-party transactions not authorized according to the company’s established policies

Question 4

What are some examples of information that may indicate that related parties or transactions with related parties previously undisclosed to the auditor might exist?

Answer 4

1. )Purchasing or selling at significantly different than market prices
2. )Sales transactions that have unusual terms or transactions that lack economic substance
3. )Borrowing or lending at significantly different than normal terms
4. )Guarantees outside the normal course of business

Question 5

PCAOB auditing standards suggest that the auditor should make certain inquiries of the company’s audit committee (or its chair) about related-party issues. What matters should the auditor inquire about?

Answer 5

The audit committee’s understanding of the company’s relationships, significant related-party transactions, and whether any member of the audit committee has any concerns about related-party issues

Question 6

What should the auditor do when a related-party transaction is determined to be a significant risk?

Answer 6

1. )Read the underlying documents for consistency with other audit evidence about the business purpose.
2. )Determine whether the transaction has been authorized and approved in accordance with established policies and whether any exceptions to established policies were granted.
3. )Evaluate the financial capability of the related parties with respect to significant responsibilities.
4. )Perform other procedures as necessary.

Question 7

What is the auditor’s objective in connection with the PCAOB auditing standard entitled Related Parties?

Answer 7

The auditor’s objective is “to obtain sufficient appropriate audit evidence to determine whether related parties and relationships and transactions with related parties have been properly identified, accounted for, and disclosed in the financial statements.”

Question 8

What are some sources of information that may indicate that related parties or transactions with related parties previously undisclosed to the auditor might exist?

Answer 8

1. )Filings with the SEC and other regulatory agencies
2. )Confirmations and lawyer letters
3. )Internal reports (e.g., by the internal auditors or from a whistleblower program)
4. )Shareholder registers identifying major shareholders
5. )Contracts and other agreements involving significant unusual transactions