OUR THOUGHTS ON:

PCAOB Re-Proposes Amendments to Related-Party and Significant Unusual Transaction Auditing Standards

Audit|Public Companies

By Shawn Edwards

The Public Company Accounting Oversight Board (PCAOB) has re-proposed new auditing standards regarding related-party transactions and significant unusual transactions. In addition to the original matters that led to the formation of the PCAOB, recent financial reporting fraud has also been tied to related-party and significant unusual transactions. By updating and strengthening the auditor performance requirements for these transactions, the PCAOB believes that the risk of financial reporting fraud can be further reduced.

Related-party transactions can be difficult to audit due to measurement and recognition issues, asset misappropriation intentions, subjectivity and lack of supporting documentation. Accordingly, the PCAOB has proposed the addition of specific audit procedures, such as:
• Obtaining an understanding of a company’s relationships and transactions with its related parties,
• Performance of specific procedures for higher-risk related-party transactions,
• Evaluating the company’s identification of related parties and corresponding transactions, and
• Communication with the audit committee

Significant unusual transactions can be difficult to audit and result in complex financial reporting matters. These types of transactions can often occur at the end of a reporting period and can contain significant “substance over form” concerns. Companies frequently emphasize a need for these transactions to be accounted for in a manner contradictory to the substance of the transaction. Specific proposed audit standards include:
• Formal consideration of the company’s accounting treatment and financial statement disclosures, and
• Formal consideration of the business purpose of the transactions to determine the possibility of fraudulent financial reporting or misappropriation of assets.

The PCAOB believes that these two areas are closely linked and therefore determined that the proposal should include both. In addition, international auditing standards for related parties were updated in 2008; and the American Institute of Certified Public Accountants (AICPA) updated its related-party auditing standards in 2011. The PCAOB believes that the auditors, and therefore the investors, will benefit from these proposed auditing standards. Comments on this proposal are due July 8, 2013, and the amended standards could be applicable for audits of years beginning after December 15, 2013.

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© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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