During the risk assessment phase for a new client, you have been assigned the task of identifying related parties. You need to refresh your memory regarding why identifying related parties is necessary in the audit.

Required

Access the Clarified Statements on Auditing Standards at the AICPA website (www.aicpa.org). Navigate to AU-C 550 and answer the following questions:

a. What is an “arm’s-length transaction” as defined by the standard?

b. Identify examples of how related party relationships and transactions may give rise to higher risks of material misstatement than transactions with unrelated parties.