Related Entity Transactions
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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.
Tyco is a conglomerate organization that had $36 billion in revenue. In a court trial, it was alleged that the CEO of the organization used corporate funds:
? For a private birthday party (over $1 million)
? To lavishly furnish an apartment in New York City
? To pay domestic help for taking care of the apartment
? To make loans to key executives that were subsequently forgiven by the CEO
(1) What audit procedures would have identified these transactions?
(2) Is it reasonable to expect an audit to uncover these types of transactions in a $36 billion company?
(3) Should the auditor look for these types of transactions in every audit? Is it reasonable for auditors to look for such transactions?
(4) What controls should an organization like Tyco implement to ensure that such transactions do not take place in the future?
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Solution Summary
This solution discusses the roles and responsibilities of an auditor in auditing a CEO using corporate funds for inappropriate transactions. It lists 5 details and documents the client must supply and also a 4-step audit procedure.
Solution Preview
The audit procedure to identify related firm transactions are as following:
Following detail from the client should be specifically asked and checked:
1.The document relating to sale and purchase of goods from the related firm.
2.The cross firm investment detail from firms having common Directors.
3.The resolutions of Board of Directors regarding the ...
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