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 where ownership is small but there is control.
A. Devine related-entity transactions and describe the appropriate accounting for related-entity transactions. In your answer consider the following:
- Parent-subsidiary transactions
- Affiliated entity transactions - owned by some owner (not a corporation)
- Joint venture transactions
- Special purpose entity transactions
- Entity transactions with CEO (other than payroll)
B. There are two basic approaches to auditing related-entity transactions. Describe the approaches and evaluate the strengths and weaknesses of each approach.
C. Tyco is a conglomerate organization that had $36 billion in revenue. In a court trail, 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
1. What audit procedures would have identified these transactions?
2. It is reasonable o expect an audit to uncover these types of transactions in a $36 billion company?
3. Should the auditor look for these types of transactions in every audit? Is it reasonable for auditors to look or such transactions?
4. What controls should an organization like Tyco implement to ensure that such transactions do not take place in the future?