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Your answer is incorrect. Try again. Sisters Inc. beauty salon is a 100% subsidiary of Benefit Beauty Supply Inc., a beauty supply company. As a result of this relationship, there were several transactions between the two entities during the last year. Sisters rented retail space for its salon from Benefit Beauty during the past year at a rate that is determined to be fair market value. Sisters also purchased beauty supplies from Benefit Beauty. Lastly, Sisters has a non-interest-bearing loan owing to Benefit Beauty, and there are no repayment terms for this loan. Sisters is looking to expand next year and is seeking a new bank loan. As a result, it has asked Sol Newton, CPA, to audit its financial statements. Which of the following apply to this scenario? Since Sisters is a 100% subsidiary of Benefit Beauty, all transactions between the two entities are related party transactions. All the related party transactions between the two entities need to be disclosed so users can evaluate what, if any, impact these transactions may have on the financial statements of Sisters. The fact that related parties exist increases the risk of material misstatement due to fraud and error. Related party transactions need to be disclosed only when they are not at fair value; therefore, the rent of retail space does not need to be disclosed. Sol Newton needs to perform some specific procedures to reduce this risk. The only audit procedures Sol Newton needs to perform are asking management if there are any other related parties they have done business with during the year and gaining an understanding of the policies and procedures in place to ensure all related party transactions are recorded and disclosed appropriately. Click if you would like to Show Work for this question: Open Show Work
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In case of audit of related party transactions following applies to the scenario:
1.Since Sisters is 100% subsidiary of Benefit Beauty, all transactions between the parties are related party transactions.
2.All the related party transactions needs to be disclosed in the financial statements so that users can evaluate what, if any, impact these transactions have on the financial statements of Sisters.
3.The fact that related parties exists increases the risk of material misstatements due to fraud and error due to greater opportunity for collusion, concealment and manipulation by management as management is aware of all related party relationships and transactions.
4.All the related party transactions should be disclosed in the financial statements whether or not those are on fair value.
5.Sol Newton needs to perform specific procedures to reduce the risk and maintain professional skepticism throughout the audit period.
6.Obtaining management representation is not the only audit procedure to be followed by Sol Newton, but one of audit procedure. Sol Newton besides enquiring the management and obtaining understanding of the policies and procedures in place to ensure related party transactions are recorded and disclosed appropriately, shall also consider other sources such as third party confirmations, minutes of meetings of shareholders and TCWG and any other records as necessary.
So the correct options are 1,2,3, and 5.(6 is partially correct).
