CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
A client has entered into several significant related party transactions during the year, including sales of inventory and loans to officers. Which of the following audit procedures would be most effective in identifying undisclosed related party transactions?
- AConfirming balances with major customers and vendors.
- BExamining bank confirmations for loan covenants.
- CPerforming analytical procedures on revenue and expense accounts.
- DReviewing minutes of board of directors' and shareholders' meetings.
Show answer & explanationAnswer & explanation
Correct answer: D. Reviewing minutes of board of directors' and shareholders' meetings.
Minutes of board of directors' and shareholders' meetings often contain discussions and approvals of significant transactions, including those with related parties, or disclosures of relationships that could lead to related party transactions. This makes reviewing them a highly effective procedure for identifying undisclosed related party transactions.
Why the other options are wrong
- A. While helpful for known parties, it's less effective for *undisclosed* related parties.
- B. Bank confirmations primarily verify balances and loan terms, not typically the nature of relationships involved in transactions.
- C. Analytical procedures might highlight unusual transactions, but won't inherently identify the 'related party' nature if not disclosed.
Identifying Undisclosed Related Parties
Procedures aimed at detecting related party transactions or relationships that management has not explicitly identified or disclosed to the auditor.
- Focus on governance communications and unusual transactions.
- Requires professional skepticism.
- Often involves reviewing legal and financial documents.
Memory trick: Look for the hidden connections in the official records.