Which of the following is NOT a red flag of related party transaction that may be a sham?
The CEO of a privately-held company sold a plot of land to the company. It will be used for the company's new distribution center. The purchase price was based on an independent appraisal. The transaction was approved by independent board members. |
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The CEO of a privately-held company sold a plot of land to the company. The land is a summer vacation home that the CEO uses for corporate entertaining. The CEO's family uses the property for vacations in the summer. The agreements state that the purchase price is fair market value. The sale price was within the CEO's authority, so no board vote was taken on the transaction. |
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Company A has invested in a joint venture with Company B. The Joint Venture is a separate legal entity. Company A sells products to the Joint Venture company. At the same time, the Joint Venture Company also provides services to the Company A. The sales to the Joint Venture are more profitable than most of Company A's business. |
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A software company sells English-language publishing software. Near the end of the quarter, they entered into a partnership agreement with a Bulgarian distributor. The distributor will provide a substantial up front payment for the rights to sell the software in Bulgaria. The sale is material to the quarterly results. |
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All of these are red flags of potential sham transactions. |
The correct answer is:
The CEO of a privately-held company sold a plot of land to the company. The land is a summer vacation home that the CEO uses for corporate entertaining. The CEO's family uses the property for vacations in the summer. The agreements state that the purchase price is fair market value. The sale price was within the CEO's authority, so no board vote was taken on the transaction.
This is due to the fact that CEO has complete authority over setting the fair market value and there were no double checks on his authority, which usually falls down to the board, which in this case were not carried out.
Which of the following is NOT a red flag of related party transaction that may be a sham? The CEO of a privately-h...
Auditing Related Party Transactions ABSTRACT As part of the risk assessment of a client firm, auditors are required to evaluate the risks of material misstatement associated with related party transactions. Related party transactions may be evaluated at a higher risk of material misstatement as they may not occur under normal market settings or they may be motivated by an intent to perpetrate fraud. This case presents information about the related party transactions and other facts surrounding the audit of a...
Auditing Related Party Transactions ABSTRACT As part of the risk assessment of a client firm, auditors are required to evaluate the risks of material misstatement associated with related party transactions. Related party transactions may be evaluated at a higher risk of material misstatement as they may not occur under normal market settings or they may be motivated by an intent to perpetrate fraud. This case presents information about the related party transactions and other facts surrounding the audit of a...