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Auditing Standard No. 18

Related Parties

APPENDIX A—Examples of Information and Sources of Information That May Be Gathered During the Audit That Could Indicate That Related Parties or Relationships or Transactions with Related Parties Previously Undisclosed to the Auditor Might Exist

A1. This Appendix contains examples of information and sources of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist. Specifically, paragraph A2. of this Appendix contains examples of information that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist. Similarly, paragraph A3. contains examples of sources that could contain such information. The examples contained in this Appendix are not intended to represent a comprehensive listing.

A2. The following are examples of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist:

  • Buying or selling goods or services at prices that differ significantly from prevailing market prices;
  • Sales transactions with unusual terms, including unusual rights of return or extended payment terms generally not offered;
  • "Bill and hold" type transactions;
  • Borrowing or lending on an interest-free basis or with no fixed repayment terms;
  • Occupying premises or receiving other assets or rendering or receiving management services when no consideration is exchanged;
  • Engaging in a nonmonetary transaction that lacks commercial substance;
  • Sales without economic substance (e.g., funding the other party to the transaction to facilitate collection of the sales price, or entering into a transaction shortly prior to period end and unwinding that transaction shortly after period end);
  • Loans to parties that, at the time of the loan transaction, do not have the ability to repay and possess insufficient or no collateral;
  • Loans made without prior consideration of the ability of the party to repay;
  • A subsequent repurchase of goods that indicates that at the time of sale an implicit obligation to repurchase may have existed that would have precluded revenue recognition or sales treatment;
  • Advancing company funds that are used directly or indirectly to pay what would otherwise be an uncollectible loan or receivable;
  • Sales at below market rates to an intermediary whose involvement serves no apparent business purpose and who, in turn, sells to the ultimate customer at a higher price, with the intermediary (and ultimately its principals) retaining the difference;
  • Guarantees and guarantor relationships outside the normal course of business; or
  • Transactions between two or more entities in which each party provides and receives the same or similar amounts of consideration (e.g., round-trip transactions).

A3. The following are examples of sources of information that may be gathered during the audit that could indicate that related parties or relationships or transactions with related parties previously undisclosed to the auditor might exist:

  • Periodic and current reports, proxy statements, and other relevant company filings with the SEC and other regulatory agencies;
  • Disclosures contained on the company's website;
  • Confirmation responses and responses to inquiries of the company's lawyers;
  • Tax filings and related correspondence;
  • Invoices and correspondence received from the company's professional advisors, for example, attorneys and consulting firms;
  • Relevant internal auditors' reports;
  • Conflicts-of-interest statements from management and others;
  • Shareholder registers that identify the company's principal shareholders;
  • Life insurance policies purchased by the company;
  • Records of the company's investments, pension plans, and other trusts established for the benefit of employees, including the names of the officers and trustees of such investments, pension plans, and other trusts;
  • Contracts or other agreements (including, for example, partnership agreements and side agreements or other arrangements) with management;
  • Contracts and other agreements representing significant unusual transactions;
  • Significant contracts renegotiated by the company during the period under audit;
  • Records from a management, audit committee, or board of directors' whistleblower program;
  • Expense reimbursement documentation for executive officers; or
  • The company's organizational charts.