Related Party Transactions

Question 1

What is meant by the term “arm’s length transaction”?

Answer 1

A transaction conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests

Question 2

What is meant by the term “related party”?

Answer 2

One party that controls or can significantly influence the management or operating policies of another party

Question 3

List audit procedures used to identify the existence of related parties.

Answer 3

1. )Inquire of management as to the existence of related entities.
2. )Review prior year’s audit documentation.
3. )Review any applicable Securities and Exchange Commission filings (for a public company).
4. )Inquire of predecessor auditors if applicable.
5. )Review stockholder listings of closely held companies to identify major stockholders.

Question 4

List three audit procedures that an auditor might use to identify an entity’s transactions with a related party.

Answer 4

1. )Review minutes of board of directors’ meetings (those charged with governance) for activities with related parties.
2. )Inquire of management as to such transactions.
3. )Examine underlying documents for unusual or large transactions or transactions with terms or conditions that are inconsistent with prevailing market conditions.

Question 5

What is the primary focus of the auditor regarding an entity’s transactions with related parties?

Answer 5

Evaluating the adequacy of disclosure about the related party transactions

Question 6

Identify three responsibilities of the auditor when related party transactions have been identified.

Answer 6

1. )Obtain an understanding of the business purpose of the related party transaction.
2. )Determine if the related party transaction was authorized by board of directors (those charged with governance).
3. )Evaluate the adequacy of the disclosures of the related party transactions.