Study Unit 4: Strategic Planning Issues | Subunit 3: Related Parties

Which of the following events most likely would indicate the existence of related party transactions? A.Insuring the lives of key executives and listing the entity as beneficiary. B.Selling real estate at a price that differs significantly from its appraised value. C.Making a loan with specific scheduled terms for repayment of the funds. D.Granting stock options to key executives at favorable prices.

.B.Selling real estate at a price that differs significantly from its appraised value

Which of the following would not necessarily be a related party transaction? A.A sale to another corporation with a similar name. B.A purchase from another corporation that is controlled by the corporation's chief shareholder. C.Loan from the corporation to a major shareholder. D.Sale of land to the corporation by the spouse of a director.

A.A sale to another corporation with a similar name.

As part of risk assessment procedures for an audit of a nonissuer, an auditor would most likely perform which of the following procedures concerning related-party transactions? A.Evaluate the entity's procedures for identifying related-party transactions. B.Confirm related-party transaction amounts and terms with the other party. C.Perform a direct test of related-party account balances. D.Examine receiving and shipping records between the client and its affiliates.

A.Evaluate the entity's procedures for identifying related-party transactions.

An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a note on related party transactions A.Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties. B.Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from that used in the prior period.C.Explaining the business purpose of the sale of real property to a related party.D.Disclosing compensating balance arrangements maintained for the benefit of related parties.

A.Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.

For a reporting entity that has participated in related party transactions that are material, disclosure in the GAAP-based financial statements should include A.The nature of the relationship and the terms and manner of settlement. B.Details of the transactions within major classifications. C.A statement to the effect that a transaction was consummated on terms equivalent to those that prevail in arm's-length transactions. D.A reference to deficiencies in the entity's internal control.

A.The nature of the relationship and the terms and manner of settlement.

The existence of a related party transaction may be indicated when another entity A.Sells real estate to the corporation at a price that is comparable to its appraised value. B.Absorbs expenses of the corporation. C.Borrows from the corporation at a rate of interest equal to the current market rate. D.Lends to the corporation at a rate of interest equal to the current market rate.

B.Absorbs expenses of the corporation.

Which of the following steps should an auditor perform first to determine the existence of related parties? A.Examine invoices, contracts, and purchasing orders. B.Inquire about the existence of related parties from management. C.Review the company's business structure. D.Review proxy and other materials filed with the SEC.

B.Inquire about the existence of related parties from management.

What is the primary purpose of reviewing conflict-of-interest statements signed by members of management? A.To obtain an understanding of business processes. B.To identify transactions with related parties. C.To assess control risk. D.To consider limitations of internal control.

B.To identify transactions with related parties.

When auditing related party transactions, an auditor places primary emphasis on A.Confirming the existence of the related parties.B.Verifying the valuation of the related party transactions.C.Assessing the risks of material misstatement of related party transactions.D.Ascertaining the rights and obligations of the related parties.

C.Assessing the risks of material misstatement of related party transactions

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.

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

After identifying a significant related party transaction outside the entity's normal course of business, an auditor should A.Add an emphasis-of-matter paragraph to the auditor's report to explain the transaction.B.Perform analytical procedures to identify similar transactions that were not recorded.C.Evaluate the business purpose of the transaction.D.Substantiate that the transaction was consummated on terms equivalent to those of an arm's-length transaction.

C.Evaluate the business purpose of the transaction.

Which of the following events most likely indicates the existence of related parties? A.Borrowing a large sum of money at a variable rate of interest.B.Selling real estate at a price that differs significantly from its carrying amount.C.Making a loan without scheduled terms for repayment of the funds.D.Discussing merger terms with a company that is a major competitor.

C.Making a loan without scheduled terms for repayment of the funds.

Which of the following procedures would most likely assist an auditor in identifying related party transactions? A.Evaluate the reasonableness of management's accounting estimates that are subject to bias. B.Retest ineffective internal control activities for evidence of management override. C.Review the minutes of the meetings of the board of directors and its committees. D.Send second requests for unanswered positive confirmations of accounts receivable.

C.Review the minutes of the meetings of the board of directors and its committees.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? A.Retesting ineffective internal control procedures previously reported to the audit committee. B.Sending second requests for unanswered positive confirmations of accounts receivable. C.Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date. D.Inspecting communications with law firms for evidence of unreported contingent liabilities.

C.Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.

Which of the following procedures most likely could assist an auditor in identifying related party transactions? A.Performing tests of controls concerning the segregation of duties. B.Evaluating the reasonableness of management's accounting estimates. C.Reviewing confirmations of compensating balance arrangements. D.Scanning the accounting records for recurring transactions.

C.Reviewing confirmations of compensating balance arrangements.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions? A.Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.B.Vouching accounting records for recurring transactions recorded just after the balance sheet date.C.Reviewing confirmations of loans receivable and payable.D.Performing analytical procedures for indications of possible financial difficulties.

C.Reviewing confirmations of loans receivable and payable.

Transactions indicative of the existence of related parties include all of the following except A.Selling real estate at a price significantly different from the appraised value. B.Making loans with no scheduled terms for repayment. C.Selling real estate at a price significantly different from the carrying amount. D.Borrowing or lending interest-free or at a rate significantly different from prevailing market rates at the time of the transaction.

C.Selling real estate at a price significantly different from the carrying amount.

An auditor most likely modifies the opinion if the entity's financial statements include a note on related party transactions A.Disclosing loans to related parties at interest rates significantly below prevailing market rates.B.Describing an exchange of real estate for similar property in a nonmonetary related party transaction.C.Stating without substantiation that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.D.Presenting the dollar volume of related party transactions and the effects of any change from prior periods in the method of establishing terms.

C.Stating without substantiation that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.

Which of the following most likely would indicate the existence of related parties? A.Writing down obsolete inventory just before year end.B.Failing to correct previously identified internal control deficiencies.C.Depending on a single product for the success of the entity. D.Borrowing money at an interest rate significantly below the market rate.

D.Borrowing money at an interest rate significantly below the market rate.

Which of the following events most likely would indicate the existence of related parties? A.Granting stock options to key executives at favorable prices. B.High turnover of senior management and members of the board of directors. C.Failure to correct internal control weaknesses on a timely basis. D.Selling real estate at a price significantly different from appraised value.

D.Selling real estate at a price significantly different from appraised value.

In auditing related party transactions, an auditor ordinarily places primary emphasis on A.The probability that related party transactions will recur. B.Confirming the existence of the related parties. C.Verifying the valuation of the related party transactions. D.The adequacy of the disclosure of the related party transactions.

D.The adequacy of the disclosure of the related party transactions.

Which of the following statements is true about related party transactions? A.In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. B.An auditor should determine whether a particular transaction would have occurred if the parties had not been related. C.An auditor should substantiate that related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. D.The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

D.The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because A.This may permit the audit of interentity account balances to be performed as of concurrent dates. B.Interentity transactions may have been consummated on terms equivalent to arm's-length transactions. C.This may reveal whether particular transactions would have taken place if the parties had not been related. D.The business structure may be deliberately designed to obscure related party transactions.

D.The business structure may be deliberately designed to obscure related party transactions.

Which of the following audit procedures is an auditor most likely not to perform related to newly identified related party transactions outside the normal course of business? A.Verify the terms and conditions of the transactions.B.Evaluate the business purpose of the transactions.C.Analyze accounting records for transactions.D.Understand the controls over authorization and approval of such transactions.

D.Understand the controls over authorization and approval of such transactions.

Which of the following events least likely would indicate the existence of related party transactions? A.Making a loan with no scheduled date for the funds to be repaid.B.Exchanging property for the benefit of a principal shareholder.C.Borrowing funds at an interest rate significantly below prevailing market rates. D.Writing off obsolete inventory to net realizable value just before year end.

D.Writing off obsolete inventory to net realizable value just before year end.

An auditor has set the materiality level for the financial statements as a whole at $125,000. Which of the following misstatements would the auditor most likely consider material?

The client did not disclose $45,000 of related party transactions in the footnotes.