Related Party Transactions

FR – L2 – Q59 – Related Party Disclosures

Define related party transactions, provide examples, and state conditions for related entities per IAS 24.

Question

(a) The determination of related party status depends on the substance of the relationship, not just the legal form.

Required:

(i) Define a related party transaction and state any TWO examples of such transactions. (3 marks)

(ii) Based on IAS 24 Related Party Disclosures, state any FOUR conditions under which an entity can be said to be related to another.

(b) Cedar Plc has two subsidiaries, Sycamore Ltd and Birch Ltd. The share capital of Cedar Plc is held by Alan and Akwasi at 60% and 40%, respectively. Alan is the Chair of Cedar Plc, while Akwasi is the Managing Director.

Sycamore Ltd is wholly owned by Cedar Plc. On 31 December 20X4, Sycamore Ltd sold a parcel of land it vacated some years back to Birch Ltd for GH¢2m. The latter company, owned and managed by Alan’s son, intends to develop the potential of the site as a location for an events center. The carrying amount at that date was estimated to be GH¢5m. This sale has not been reflected in the Financial Statements of Sycamore Ltd for the year ended 31 December 20X4.

Outline how the above transactions should be recorded in the financial statements of Sycamore Ltd and the consolidated financial statements of Cedar Plc for the year ended 31 December 20X4. (8 marks)

Answer

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Tags: Consolidated Financial Statements, Financial Disclosures, IAS 24, Related Party Transactions
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

Question

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.

Answer

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Tags: Audit Risk, Consignment Inventory, Financial Statement Assertions, Going Concern, Internal Audit, Inventory, Provisions, Related Party Transactions, Retail Audit, Revenue Recognition
Level: Level 3

Topic: Audit Evidence, Planning

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

Question

Kumasi Playthings is a prestigious toy retailer trading from a single urban retail district. The accounts and administration offices are above the shop. The company is the wholly-owned subsidiary of a prominent retail group. Kumasi Playthings is headed by its dynamic managing director, Kofi Mensah, aged 70.

At Kofi Mensah’s insistence, your firm, as local to Kumasi Playthings, has recently been appointed as the auditor. Kumasi Playthings is now the only group company not to be audited by the group auditors.

The following matters have come to light during the preliminary discussions with Kofi Mensah and those members of his staff to whom he has allowed you access:

(1) The parent company wishes Kumasi Playthings to develop operations in a number of out-of-town shopping centres. Kofi Mensah regards this as unacceptable because it would destroy the goodwill and prestige built up over 150 years of quality retailing.

(2) The company has approximately 30,000 lines of inventory. Contrary to group accounting instructions, no physical count is planned for the year end. The company intends to rely on the continuous inventory system which commenced operation in March 20X8. Two major problems have occurred with the system to date. Firstly, a trainee failed to enter all the inventory lines before the system went live. Secondly, due to a dispute with the IT provider, there has been no maintenance service for five months.

(3) Kofi Mensah has just returned from a toy fair at which he placed an order for 50,000 dolls produced by a little-known youth cooperative led by his only niece. The chief buyer is said to be fuming over the incident.

(4) In the year to 31 January 20X8, Kofi Mensah received a bonus of C2m, but you were unable to obtain any information in respect of the calculation and authorization of the bonus. No other director of Kumasi Playthings received a bonus in that year and the next highest paid director received a total emoluments package of C300,000.

(5) There is a dispute with a major supplier over the credit facilities offered to Kumasi Playthings. The supplier manufactures and supplies 30% of Kumasi Playthings’ purchases and claims that Kumasi Playthings has continually exceeded its credit period and that its accounting staff are impatient and incompetent.

(6) The company’s overdraft limit of C2.5m is due for renegotiation in April 20X5.

Required
Identify the potentially high risk areas of the audit.

Answer

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Tags: Audit Risk, Control Risk, Financial Statement Assertions, Going Concern, Inventory, Management Override, New Client, Related Party Transactions, Retail Audit, Substantive Procedures
Level: Level 3

Topic: Audit Evidence, Planning

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FR – L2 – Q59 – Related Party Disclosures

Define related party transactions, provide examples, and state conditions for related entities per IAS 24.

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

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FR – L2 – Q59 – Related Party Disclosures

Define related party transactions, provide examples, and state conditions for related entities per IAS 24.

You're reporting an error for "FR – L2 – Q59 – Related Party Disclosures"

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

You're reporting an error for "AAA – L3 – Q27 – Audit Evidence"

AAA – L3 – Q26 – Audit Planning and Risk Analysis

Identify high-risk areas in the audit of Kumasi Playthings, a toy retailer with inventory and management issues.

You're reporting an error for "AAA – L3 – Q26 – Audit Planning and Risk Analysis"

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