It is common for an entity to have transactions with related entities?some of which are fully owned, some of which share common ownership, but are not otherwise related, and others where ownership is small but there is control.
a. Define related entity transactions and describe the appropriate accounting for
related entity transactions. In your answer consider the following:
? Parent-subsidiary transactions
? Affiliated entity transactions?owned by same owner (not a corporation)
? Joint venture transactions
? Special purpose entity transactions
? Entity transactions with CEO (other than payroll)
b. There are two basic approaches to auditing related entity transactions. Describe
the two approaches and evaluate the strengths and weaknesses of each approach.
APPROPRIATE RELATED ENTITY TRANSACTIONS
Related party transactions and transactions with related parties such as controlled entitled, principal stockholder or the management can carry out transactions that wrongly increase the profits by hiding their financial nature or warp the results that are given, or can even cheat the company by transferring funds to related parties and to finally to their architect in the company. In other words an undisclosed part can be a dangerous tool in the hands of a dishonest person.
If there is a transaction between a parent and a subsidiary it can be identified if the transaction details come to the notice of the auditor. However in cases like entities owned by the same owner, special ...
This solution talks about related entity transactions. It also explores the approaches that the auditor should take with respect to related entity transactions.