PCAOB on Related Parties

Question 1

What needs to be communicated with the audit committee?

Answer 1

• Evaluation of identification and related parties
• Related party issues undisclosed to the auditor
• Transactions not authorized by established policies
• Transactions lacking appropriate business purpose
• Management assertions that related party transactions were equivalent to arm-length transaction

Question 2

Does the auditor needs to evaluate the financial capability of the related parties with respect to their significant responsibilities in connection with the transactions?

Answer 2

YES

Question 3

Do auditors need to make sure the transactions have been authorized and approved in accordance with the companies policies on related party transactions?

Answer 3

YES

Question 4

Do auditors need to read applicable underlying documents for consistency with explanations about the business purpose obtained from inquiries and other procedures performed?

Answer 4

YES

Question 5

Do auditors need to obtain written representation from the company’s lawyers that related-party transactions comply with applicable laws and regulations?

Answer 5

NO

Question 6

How can auditors identify undisclosed related party transactions?

Answer 6

1) Purchasing or selling at significantly different than market prices
2) sales transactions that have unusual terms (bill and hold)
3) Borrowing and lending at significantly different than normal terms
4) Advancing funds that are used to pay for otherwise uncollectible receivables
5) Guarantees outside the normal course of business