AS 18: New Guidance for Auditing Related Party Transactions

• DOI: http://doi.org/10.1002/jcaf.22280
• Date: 01 July 2017
• Author: Paul M. Clikeman,Austin Liu
• Published date: 01 July 2017

23

© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22280

f

e

a

t

u

r

e

a

r

t

i

c

l

e

AS 18: New Guidance for Auditing

Related Party Transactions

Paul M. Clikeman and Austin Liu

The Public Com-

pany Account-

ing Oversight

Board (PCAOB)

recently issued Audit-

ing Standard (AS)

18, Related Parties,

to strengthen auditor

performance require-

ments for identify-

ing, assessing, and

responding to the

risks of material mis-

statement associated

with related party

transactions. This

article identifies the

audit risks associated

with related party

transactions and

describes procedures to provide

reasonable assurance that all

such transactions are properly

identified, accounted for, and

disclosed in the financial

statements.

RELATED PARTY

TRANSACTIONS

Related party transactions

are transactions between a

company and its subsidiaries,

affiliates, principal owners, offi-

cers or their families, directors

or their families, or entities

owned or controlled by its

officers or their families. Such

transactions are quite com-

mon among modern American

corporations. The Wall Street

Journal reported that 75% of

the 400 largest U.S. public com-

panies disclosed at least one

related-party transaction dur-

ing 2002–2003 (Emschwiller,

2003). Examples include Coca-

Cola, which sells much of its

soft drink syrup to bottling

companies partially owned

by Coca-Cola, and

ExxonMobil, which

employs the family

members of several

executive officers.

Although most

related party trans-

actions are nei-

ther improper nor

fraudulent, there is

potential for abuse.

Managers might

misappropriate

assets by having their

companies purchase

goods at inflated

prices from entities

the managers con-

trol. Alternatively,

managers might

enhance reported earnings by

selling goods at inflated prices

to affiliated companies.

Because of the potential

for self-dealing by corporate

executives, Accounting Stan-

dards Codification (ASC) 850,

Related Party Disclosures,

requires U.S. companies to

disclose material transactions

with related parties other

than compensation arrange-

ments, expense allowances,

and other similar items in the

normal course of business. The

Undisclosed related-party transactions played a

significant role in high-profile accounting scan-

dals such as Enron, Tyco, and Adelphia. Public

Company Accounting Oversight Board (PCAOB)

inspectors have discovered many shortcomings in

audit procedures applied to related party transac-

tions, and the Securities and Exchange Commis-

sion (SEC) has sanctioned numerous CPA firms for

failing to identify or disclose clients’ transactions

with affiliated entities. This article identifies the

risks associated with related party transactions

and describes audit procedures to provide rea-

sonable assurance that all such transactions are

properly identified, accounted for, and disclosed in

the financial statements. © 2017 Wiley Periodicals, Inc.

Editorial Review