CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesEasy
An auditor is performing an audit for a non-issuer. During the planning phase, the auditor identifies several related party transactions that appear to be outside the normal course of business. Which of the following is the auditor's primary responsibility regarding these transactions?
- AAssume the transactions are fraudulent due to their unusual nature.
- BDetermine if the transactions were properly authorized and accounted for.
- CDisclose the transactions in the auditor's report.
- DAdvise the client to reverse the transactions to avoid audit complications.
Show answer & explanationAnswer & explanation
Correct answer: B. Determine if the transactions were properly authorized and accounted for.
The auditor's primary responsibility regarding related party transactions is to ensure they are properly identified, authorized, and accounted for in accordance with the applicable financial reporting framework. Disclosure is a client responsibility, guided by the auditor's findings.
Why the other options are wrong
- A. Assuming fraud without evidence is inappropriate and violates professional skepticism standards.
- C. Disclosure is primarily management's responsibility; the auditor ensures adequate disclosure.
- D. Advising reversal of transactions is management's prerogative and outside the auditor's role.
Related Party Transactions
Transactions between parties that have a relationship that permits one party to influence the other, or both parties to be influenced by a third party.
- Often involve economic substance over legal form.
- Require special attention due to potential for manipulation.
- Auditor's role is to ensure proper identification, authorization, and accounting.
Memory trick: Related parties need careful eyes, to ensure no hidden lies.