Which of the following statements best describes why auditors investigate related party transactions?

The substance of related party transaction may differ from their form More test answers on https://studyhippo.com/auditing-chapter-5/

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A) Management’s attempt to meet earnings per share growth rate goals B) The existence of related party transactions C) Managements disregard for internal control D) Lack of understanding of the potential client’s internal auditor’s computer-assisted audit techniques.

C) Managements disregard for internal control More test answers on https://studyhippo.com/auditing-ch-6/

Which of the following factors would most likely cause a CPA to decide not to accept a new audit engagement? A. Lack of understanding of the potential client’s internal auditors’ computer-assisted audit techniques. B. Management’s disregard for internal control. C. The existence of related party transactions. D. Management’s attempt to meet earnings per share growth rate goals.

B. Management’s disregard for internal control. More test answers on https://studyhippo.com/chapter-06-quiz-audit-planning-understanding-the-client-assessing-risks-and-responding/

To which of the following matters would materiality limits not apply when obtaining written client representations? a. Violations of state labor regulations. b. Instances of fraud involving management. c. Information about related party transactions. d. Disclosure of line-of-credit arrangements.

b. Instances of fraud involving management. Choice “b” is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that “we have no knowledge of fraud or suspected fraud involving management” (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management. Choice “a” is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations “whose effects should be considered for financial statement disclosure”−and only material effects would typically be considered for disclosure. More test answers on https://studyhippo.com/21-management-representations/

An independent auditor finds that Holdaway Corporation occupies office space, at no charge, in an office building owned by a shareholder. This finding likely indicates the existence of A. Management fraud B. Related party transactions C. Window dressing D. Weak internal control

B. Related party transactions More test answers on https://studyhippo.com/auditing-chapter-5-review/

A purpose of a management representation letter is to reduce: a. An auditor’s responsibility to detect material misstatements only to the extent that the letter is relied on. b. The possibility of a misunderstanding concerning management’s responsibility for the financial statements. c. Audit risk to an aggregate level of misstatement that could be considered material. d. The scope of an auditor’s procedures concerning related party transactions and subsequent events.

b. The possibility of a misunderstanding concerning management’s responsibility for the financial statements. Choice “b” is correct. A primary purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management’s responsibility for the financial statements. The first representation made in the letter states “we have fulfilled our responsibilities, as set out by the audit engagement dated [xxx], for the preparation and fair presentation of the financial statements in accordance with U.S. GAAP.” Choice “c” is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk. More test answers on https://studyhippo.com/21-management-representations/

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Related Party Transactions Flashcards, test questions and answers

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What is Related Party Transactions?

A related party transaction is a type of business deal that involves two parties who are closely related to each other. These transactions can occur between members of the same family, companies that are owned by the same person, or businesses with strong ties such as corporate officers and directors. The most common form of a related party transaction is an intra-group transaction which occurs when two companies or entities in the same group enter into a business agreement.Related party transactions can be beneficial for both parties involved as they usually offer better terms than those available in the open market. However, due to their close relationship there is also a potential for conflicts of interest, misuse of funds, and abuse of power. As such, it is important for all parties to ensure that any related party transaction is conducted in accordance with applicable laws and regulations so as to protect the interests of all involved. To ensure transparency and fairness in these types of transactions, many countries have enacted legislation requiring disclosure on all related party transactions including details about who was involved and how much money exchanged hands. This information must then be made available to shareholders so that they can evaluate whether or not these deals are being done in their best interests. In addition, some countries have established rules regarding what kinds of transactions may be considered acceptable between related parties. For instance, some governments may require approval from regulators before certain types of deals such as mergers or acquisitions can take place between companies owned by the same individual or entity. No matter what type of business arrangement you are engaging in with another company or person it’s important to remember that there may be legal implications if you’re entering into a related party transaction without proper disclosure or oversight from appropriate authorities. It’s always best practice to consult an attorney before entering into any kind agreement regardless if it involves an unrelated third-party or someone close to you personally.

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