In any audit engagement, an auditor is concerned that financial statements reflect properly the economic substance of material related party transactions. To achieve this objective, auditors attempt to determine the existence of related parties and the nature of transactions entered into between the audit client and the related parties. During the course of an audit engagement, you have identified two potential related party transactions.

The first involves a significant shareholder who has borrowed cash to purchase a new home. The second is an affiliated company that has agreed to supply your audit client with raw materials.

Required: 

Describe how each of the two potential related party transactions should be structured so that the legal form of the transaction accurately reflects the economic substance. Include the items an auditor would review to assure that the transactions were made at "arm's length."