CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceHard
An auditor is using Audit Data Analytics (ADA) to identify potential related party transactions. Which of the following ADA techniques would be most effective for this purpose?
- AStratification of accounts receivable by customer credit rating.
- BTrend analysis of revenue and expense accounts over several years.
- CRecalculating depreciation expense for fixed assets.
- DComparing vendor addresses and employee addresses for unusual matches.
Show answer & explanationAnswer & explanation
Correct answer: D. Comparing vendor addresses and employee addresses for unusual matches.
Related party transactions often involve individuals or entities with close ties to the company. Comparing vendor addresses and employee addresses (or other master file data) can reveal undisclosed relationships or unusual transactions with employees or their associated entities.
Why the other options are wrong
- A. Stratification by credit rating helps assess collectibility but does not identify related party transactions.
- B. Trend analysis helps identify unusual fluctuations but is less direct in identifying specific related parties.
- C. Recalculating depreciation tests the accuracy of fixed asset expense; it has no direct relevance to related parties.
ADA for Related Parties
Using Audit Data Analytics techniques to identify potential undisclosed related party relationships or transactions by analyzing patterns and connections within various data sets (e.g., master files, transaction logs).
- Focuses on identifying unusual relationships or transactions.
- Often involves comparing data across different master files.
- Helps overcome the challenge of related parties being intentionally concealed.
Memory trick: DATA: Detect Anomalies, Target Areas, Analyze Transactions, Uncover Relationships.