[tywebb85]

NINJA Question –

Having a hard time wrapping my head around the following question and explanation. The explanation seems to contradict the correct answer.

Question is asking when would you Modify an UNMOD opinion…The explanation says when Related Party transactions are substantiated (eg, equivalent to an arms-length trans) then an UNMOD opinion is good. But the correct answer to the question says, “stating a particular transaction is arms-length would Modify the opinion”

Can someone shed some light on the wording of this?

An auditor most likely would modify an unmodified opinion if the entity’s financial statements include a footnote on related party transactions:

A. disclosing loans to related parties at interest rates significantly below prevailing market rates.

B. describing an exchange of real estate for similar property in a nonmonetary related party transaction.

C. stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm’s-length transaction.

D. presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods.

You are correct, the answer is C.

An unmodified report opinion should only be issued in regard to related party transactions when related party transactions are substantiated (e.g., the related party transaction was equivalent to arm’s-length transactions). If the transactions are unsubstantiated with regard to related party transactions, a qualified or adverse opinion should be issued.

[If I can, u can too!]

I would scratch the explanation although I agree the answer should be C per AU-C 550.A46. I won't be too hang up on trying to have a deep understanding of the concept behind this question though.

“…although the auditor may be able
to confirm that a related party transaction has been conducted at a market
price, it may be impracticable to confirm whether other terms and conditions
of the transaction (such as credit terms, contingencies, and specific charges)
are equivalent to those that would ordinarily be agreed between independent
parties…”

Licensed CPA since Apr 16
Order in sequence of passing
FAR-71,71,79
BEC-80
REG-72,77
AUD-56,72,72,72,80! Thank you, thank you, thank you Lord!
FAR/BEC/AUD: Becker & Yaeger lectures (Wiley & Ninja MCQs). REG: Becker lectures (Ninja MCQs).

[Anonymous]

Usually when there are related parties, “it may be impracticable” (as mentioned by @hokinizeu) to determine whether or not the transactions were conducted at arms length. Typically therefore, the related party transactions are not evaluated for ‘arms length', but merely need to be disclosed.

However, if the disclosure SAYS they are arms length, that's a problem. Now the truth of that statement needs to be substantiated. If it can be substantiated, great, unmodified. If it can't be, then modified.

[Author]

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