You are the auditor of Browning, Inc., a manufacturer of plastic products. In reviewing the balance...

You are the auditor of Browning, Inc., a manufacturer of plastic products. In reviewing the balance sheet of the company, you notice several receivables from the officers of the company. You report your findings to the president of the company and inform him that these receivables will be considered related party transactions for purposes of financial accounting and reporting. The president seems somewhat annoyed by your comments and asks you to explain what you mean by "related party" transactions and how the financial statements will be affected by these transactions. Prepare a brief response to the president's question.

The response should be at least 350 words.

Solutions

Expert Solution

Meaning of related party:

Related Party is an entity or person related to the reporting entity. For Instance, a relative of a person who has contol or joint control in the reporting entity is a related party to reporting entity.

Meaning of related party transactions:

Any transaction with related party is termed as Related party transaction.

Effect of related party transactions on financial statements:

Related parties may enter into transactions which in normal course of business any unrelated parties do not enter.

Related parties may not make transactions at same amounts as unrelated parties would do. So this may effect the profits of reporting entity and also the credibility of reporting entity.

Normally related parties may be given loans without guarantees or security and there is possibility that the reporting entity may end up not recovering those loans.

This may effect the interest of stakeholders and the company share price will be at stake and many more legal regulations comes into play.

So to curb these transactions and make the companies to operate in normal course of business the law of state requires the company to disclose all the related party transactions.

It also requires the auditors to check whether the disclosed related party transactions are true and fair and auditor should also check whether any transactions discovered during the process of audit require disclosure as related party transactions.

ekkarill92 answered 1 year ago

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