An Auditor Searching for Related-Party Transactions Should Obtain an Understanding

question 30

Multiple Choice

An auditor searching for related-party transactions should obtain an understanding of each subsidiary's relationship to the total entity because:

• A)intercompany transactions may have been consummated on terms equivalent to arm's length transactions.
• B)this might reveal whether particular transactions would have taken place if the parties had not been related.
• C)the business structure may be deliberately designed to obscure related-party transactions.
• D)this might permit the audit of intercompany account balances to be performed as of concurrent dates.

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Definitions:

Post-Closing Trial Balance

A list of all accounts and their balances after closing entries are made, showing only balance sheet accounts.

Temporary Accounts

Accounts that are closed at the end of each accounting period. These include revenue, expense, and dividend accounts.

Permanent Accounts

Accounts that carry their ending balances over to the next accounting period and are not closed out.

Adjusting Entries

Journal entries made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.