Related-Party Transaction Question

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    Topic
  • #165000
    Morganf
    Member

    After identifying related party transactions, an auditor most likely would:

    A: Substantiate that the transactions were consummated on terms equivalent to those prevailing in arm’s-length transactions.

    B: Discuss the implications of the transactions with third parties, such as the entity’s attorneys and bankers.

    C: Determine whether the transactions were approved by the board of directors or other appropriate officials.

    D: Ascertain whether the transactions would have occurred if the parties had not been related.

    *taken from Wiley Online Test Bank. Curious if anyone else disagrees with the answer.

    My answer: A

    Wiley answer: C

    It seems the most important & first thing you would do is see if the transaction seems fair & at arms-length. I also would have guessed that many related-party transactions would be conducted under management’s authorization and not involve the board. Everything about Wiley’s answer surprises me.

    BEC - 88
    AUD - 69, 74, 93
    FAR - 78
    REG - 79

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  • #320425
    katelyn
    Participant

    I hope I am not violating any copyrights, but it's educational, right? This is how my study course explained why A is wrong:

    It is usually not possible for the auditor to ascertain whether the transactions would have occurred had the relationship not been present. As a result, it is difficult to determine whether or not such transactions were consummated on terms equivalent to those prevailing in arms-length transactions.

    And this is why C is right:

    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 effect on the financial statements. In that process, the auditor would look to see if the transactions were properly authorized by the board of directors.

    When I was studying AUD I made the same mistake you did, but these explanations helped. Maybe they are a little different from how Wiley explained them and will help you out.

    AUD: 92 (10/2011)
    BEC: 82 (7/2011)
    FAR: 55 (8/2010); 88 (8/2011)
    REG: 62 (8/2009); 87 (1/7/12)
    DONE!

    #320426
    jenuno01
    Member

    I ruled out A right away simply because the question says that you have already identified a related party transaction, so in essence, you have no doubt the transaction is NOT fair and did NOT occur @ an arm's length.

    AUD questions are worded so tricky!

    Class of 2012

    #320427
    yankeeaccountant
    Participant

    @morganf

    that question tripped me up the first time I got that one too. My first reaction was A as well. But like jenuno and katelyn said, disclosure is always the promiment assertion that this relates to. Basically, that was how I made sense of it. None of the other choices related to a assertion that made sense.

    #320428
    Morganf
    Member

    Thanks for the responses. I follow and understand the initial thought of disclosure ( transactions >20%sales disclosed ).

    However, I still don't understand why there isn't similar logic applied as the situation:

    “when discovering something after the audit issue date, that existed at the time of the balance sheet, what's the first thing you do?” (answer: alternative procedures / consider the effect on the opinion issued).

    Also, other questions mention “most related-party transactions are routine & in the ordinary course of business.” How does that translate to “related-party transactions need special Board authorization/approval? (Answer C implies that it is a problem not having board approval for ALL related-party transactions, not just the non-recurring, unordinary related-party transactions.)

    BEC - 88
    AUD - 69, 74, 93
    FAR - 78
    REG - 79

    #320429
    Morganf
    Member

    I feel like my confusion here illustrates why I have a 74 🙁

    This might be one i just remember simply as “the one i distinctly never understood”

    BEC - 88
    AUD - 69, 74, 93
    FAR - 78
    REG - 79

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