Most auditors assess the risk of material misstatement as high for related parties and related-party transactions because
A) of the unique classification of related-party transactions required on the balance sheet.
B) of the lack of independence between the parties.
C) of the unique classification of related-party transactions required on the income statement.
D) it is required by generally accepted accounting principles.

Question

Quizplus · Accepted Answer

Auditors consider related parties and related-party transactions to be at high risk of material misstatement because of the lack of independence between the parties involved. Related-party transactions may not reflect arm's length transactions, and there may be incentives for the parties to manipulate transactions to their advantage. As a result, auditors need to perform additional procedures to ensure that related-party transactions are properly accounted for and disclosed in the financial statements. The unique classification of related-party transactions on the balance sheet or income statement is not the primary reason for assessing the risk of material misstatement as high.

Most Auditors Assess the Risk of Material Misstatement as High