Skip to content
Show
Audit Procedures with Related-Party Transactions Ultimately, people typically prefer to do business with people they know, like and trust. But related-party transactions can provide opportunities for individuals to act in a way that creates confusion between the concerns of the entities and
shareholders. This is why auditors exert ways to classify and properly address related-party transactions. What is a related party? Accounting Standards Codification (ASC) Topic 850 defines a related-party transaction as one that takes place between:
What’s the risk? Related-party transactions sometimes involve contracts for goods or services that are priced at less (or more) favorable terms than those in similar arm’s length transactions between unrelated third parties. For example, a spinoff business might lease office space from its parent company at below-market rates. Or a closely held manufacturer might pay the owner’s son an above-market salary and various perks that aren’t available to unrelated employees. How do auditors address these transactions? Given the potential for double dealing with related parties, auditors spend significant time hunting for undisclosed related-party transactions. Examples of documents and data sources that can help uncover these transactions are:
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, and 3) analyzing presentation of related-party transactions in financial statements. Accurate, complete reporting of these transactions requires robust internal controls. A company’s vendor approval process should provide guidelines to help accounting personnel determine whether a supplier qualifies as a related party and mark it accordingly in the ERP system. Without the right mechanisms in place, a company may inadvertently omit a disclosure about a related-party transaction. Get it right Undisclosed related-party transactions can raise a red flag to lenders and investors — and may even require a business to restate its financial results. Our auditors are committed to finding, disclosing and reporting these transactions in a transparent manner that complies with U.S. Generally Accepted Accounting Principles (GAAP). Contact Froehling Anderson for help. Share This Story, Choose Your Platform!Related PostsPage load linkWhat are the auditor's responsibilities for related parties and related party transactions?For such related party transactions, AU sec. 316.67 requires that the auditor evaluate whether the business purpose (or the lack thereof) of the transactions indicates that the transactions may have been entered into to engage in fraudulent financial reporting or conceal misappropriation of assets.
What are the auditor's responsibilities for related parties and related party transactions quizlet?The auditor's responsibility is to make a reasonable effort to determine the related parties. Related party transactions are not in the audit scope.
When dealing with related parties what is needed by the auditor?Auditors are required to focus on three areas: identification of previously unidentified or undisclosed related parties or transactions; • significant related party transactions outside the normal course of business; • assertions that related party transactions are at arm's length.
Why do auditors care about related party transactions?Business owners generally prefer to work with entities they know and trust. But related-party transactions can provide opportunities for individuals to act in a manner that's inconsistent with the interests of shareholders. That's why auditors take pains to identify and properly address related-party transactions.
|