CPA Exam — AUDPerforming Further Procedures and Obtaining EvidenceMedium
An auditor is using Audit Data Analytics (ADA) to identify potential related party transactions that might not have been properly disclosed. Which of the following ADA techniques would be MOST effective for this purpose?
- AAnalyzing vendor and customer master files for common addresses, phone numbers, or tax identification numbers with known related parties or management personnel.
- BPerforming a general ledger analysis to identify unusual account balances or large, infrequent transactions.
- CComparing current year transaction volumes with prior year volumes for significant fluctuations.
- DUsing natural language processing (NLP) to review board meeting minutes and legal correspondence for mentions of related party names.
Show answer & explanationAnswer & explanation
Correct answer: A. Analyzing vendor and customer master files for common addresses, phone numbers, or tax identification numbers with known related parties or management personnel.
Analyzing master files for common identifiers is a direct and efficient way to uncover undisclosed relationships between the client and its vendors or customers. Common addresses, phone numbers, or tax IDs can strongly indicate a related party connection.
Why the other options are wrong
- B. While useful for identifying unusual transactions, this technique doesn't directly identify the 'related party' aspect of the transaction.
- C. Comparing transaction volumes might highlight unusual activity, but it doesn't reveal the nature of the relationship (i.e., whether it's a related party) without further investigation.
- D. NLP can be useful, but it relies on explicit mentions and might miss indirect or unstated relationships. It's also more complex to implement than master file analysis for this specific purpose.
ADA for Related Parties
The application of Audit Data Analytics techniques to identify undisclosed related party transactions by analyzing various data sources for common characteristics or relationships that suggest a lack of arm's-length dealings.
- Aims to uncover transactions with parties not explicitly identified as related.
- Often involves comparing identifiers across different databases.
- Helps ensure proper disclosure and arms-length pricing.
Memory trick: Related parties often leave digital FINGERPRINTS.