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. This answer is correct because the auditor should be aware that for related-party transactions, the substance of a particular transaction may differ significantly from its form, and that
the financial statements should recognize the substance rather than merely its legal form. 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. This answer is correct because relationships with principal shareholders of this nature are considered related-party transactions. 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. Which of the following events least likely would indicate the existence of related-party transactions? Writing off obsolete inventory to net realizable value just before
year-end. Which of the following procedures
most likely could assist an auditor in identifying related-party transactions? Reviewing confirmations of
compensating balance arrangements. This answer is correct because auditors review confirmations of compensating balance arrangements for indications that balances are or were maintained for (or by) related parties. Which of the following auditing procedures most likely would assist an auditor in identifying related-party transactions? Reviewing confirmations of loans receivable and payable for indications of
guarantees. The requirement is to identify the auditing procedure that would most likely assist an auditor in identifying related-party transactions. Answer (c) is correct because reviewing confirmations of loans receivable and payable for indications of guarantees may reveal unusual transactions that involve related parties. See AU-C 550 for procedures related to identifying transactions with related parties. Answer (a) is incorrect because inspecting the correspondence with lawyers for
evidence of unreported contingent liabilities does not generally relate directly to related-party transactions. Answer (b) is incorrect because nonrecurring transactions are more indicative of related-party transactions. Answer (d) is incorrect because analytical procedures performed to identify possible financial difficulties do not relate directly to related-party transactions. 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. 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. This answer is correct because 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. Which of the following most likely would indicate the existence of related parties? Borrowing money at an interest rate significantly below the market rate. When auditing related-party transactions, an auditor places primary emphasis on Evaluating
the disclosure of the related-party transactions. 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. This answer is correct 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. 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. Selling real estate at a price significantly different from appraised value. Evaluating the disclosure of the related-party transactions. This answer is correct because the auditor should view related-party transactions within the framework of existing pronouncements, placing primary emphasis on the adequacy of
disclosure. After determining that a related-party transaction has, in fact, occurred, an auditor should Obtain an understanding of the business purpose of the transaction. The requirement is to determine an auditor's responsibility after having determined that a related-party transaction has occurred. Answer (c) is correct because after identifying the existence of such an act, the auditor should obtain an
understanding of the business purpose of the transaction. See AU-C 550 for this and other responsibilities. Answer (a) is incorrect because the mere existence of a related-party transaction may or may not lead to audit report modification. Answer (b) is incorrect because the performance of analytical procedures is not required. Answer (d) is incorrect because except for routine transactions, it will generally not be possible to determine whether the transaction would have taken place, or whether
it was consummated on terms equivalent to an arm's-length transaction. Which of the audit procedures listed below would be least likely to disclose the existence of related-party transactions of a client during the period under audit? Confirming large purchase and sales transactions with the vendors and/or customers involved. In auditing related-party transactions, an auditor ordinarily places primary emphasis on The adequacy of the disclosure of the related-party transactions. 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. The auditor's primary concern with regard to related party transactions is disclosure. After identifying related party transactions, the auditor should examine the transactions in order to determine the purpose, nature, and extent of the transactions and their effects on the financial statements. In that process, the auditor would look to see if the transactions were properly authorized by the board of directors. What is the primary purpose of reviewing conflict-of-interest statements signed by members of management? To identify transactions with related parties Correct! Reviewing conflict-of-interest statements signed by management would provide the auditor with information about potential relationships with related parties that might warrant additional disclosure in the financial statements. In auditing related-party transactions, an auditor ordinarily places primary emphasis on The adequacy of the disclosure of the related-party transactions. Which of the following events most likely indicates the existence of related parties? Making a loan with scheduled terms for repayment of the funds. Transactions considered to indicate the existence of related parties include making loans with no scheduled terms for repayment of the funds. Such terms, or the lack thereof, appear more favorable than loans made independently between unrelated parties. Making a loan with specific scheduled terms for repayment would not be indicative of a related party transaction. When auditing related party transactions, an auditor places primary emphasis on Evaluating the disclosure of the related party transactions. When auditing related party transactions, the auditor is primarily concerned with the adequacy of disclosure. After determining that a related party transaction has, in fact, occurred, an auditor should Obtain an understanding of the business purpose of the transaction. After determining that a related party transaction has occurred, the auditor should obtain an understanding of the business purpose of the transaction. The auditor should apply the procedures considered necessary to determine the purpose, nature, and extent of the related party transactions and their effects on the financial statements. When auditing related party transactions, an auditor places primary emphasis on Evaluating the disclosure of the related party transactions. Which of
the following auditing procedures would be most likely to assist an auditor in identifying related party transactions? Reviewing confirmations of loans receivable and payable for indications of guarantees. Reviewing confirmation of loans receivable and payable for indications of guarantees is one of the auditing procedures that will assist the auditor in identifying related party transactions. Which of the following audit procedures would most likely assist the auditor in identifying related party transaction?Reviewing confirmation of loans receivable and payable for indications of guarantees is one of the auditing procedures that will assist the auditor in identifying related party transactions.
Which of the following audit procedures would assist an auditor in identifying conditions and events that may indicate substantial doubt?Which of the following audit procedures is most likely to assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern? - Review management's plans to dispose of assets.
What auditing procedures can be used to identify related party transactions?Audit procedures that target related-party transactions include 1) testing how related-party transactions are identified and coded in the company's enterprise resource planning (ERP) system, 2) interviewing accounting personnel responsible for reporting related-party transactions in the company's financial statements, ...
Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may?Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity's ability to continue as a going concern? Review of compliance with terms of debt agreements.
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