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 wher ownership is small but there is control.
Required:
a. What is a related-entity transaction? Provide examples of the parties involved in these types of transactions.
b. There are two basic procedures used iin auditing related-entity transactions. Describe these procedures and evaluate the strengths and weaknesses of each approach.
c. 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
(i) What audit procedures would have identified these transactions?
(ii) Is it reasonable to expect an audit to uncover these types of transactions in a $36 billion company?
(iii) Should the auditor look for these types of transactions in every audit? Is it reasonable for auditors to look for such transactions?
(iv) What controls should an organization like Tyco implement to ensure that such transactions do not take place in the future?