Term
| Who are related entities? |
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Definition
| Any individual, partnership, corporation or other organization that is personally or prefessionally related to a company or its executives, employees, directors or owners. |
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Term
| What is a natural check for non-related transactions? |
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Definition
| It takes two independent parties with their own conflicting interests to agree to an transaction. In related parties - they can have the same interest.. this is bad. |
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Term
| Example of abuse - Enron and Fastow's special purpose entities |
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Definition
| Enron created special purpose entities - didn't make apprpriate disclosures. Sold obsolete inventory to related parties for a gain. Booked gain and used it as a basis to value the rest of inventory |
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Term
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Definition
| Discount pharmacy chain. Kept two sets of books |
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Term
| Kozlowki's looting of Tyco |
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Definition
| Personal benefit - 2M b-day party, used 1M from Tyco claiming business purpose, Same party on both sides of transactions |
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Term
| What is critical to internal controls regarding related party transactions? |
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Definition
| Segregation of duties - Segregation between a buyer and a seller. |
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Term
| An auditor must ensure that proper controls are in place to: |
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Definition
1) identify
2) authorize
3) monitor
related party transactions. |
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Term
| SOX 402a: Prohibition on Personal Loans to Executives |
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Definition
| Public companies cannot make loans to execs or stockholders |
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Term
| SOX 403: Disclosures of Transactions involving management and principal stockholders |
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Definition
| Directors, officers, and 10% owners must report designated transaction by the end of the second business day following the day on which the transaction occured. No lag time. |
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Term
| If there are RP transactions - how can you eliminate the effect of this? |
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Definition
| Have 1 consolidated financial statement |
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Term
| 2 approaches for accounting for RP transactions |
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Definition
1) consolidated affiliate (parent-subsidy) or subsidiary-sub, it bust be ELIMINATED from the consolidated statements.
2) If the transaction is with a related entity that is not part of the consolidated reporting group, it need not be eliminated., but must be approved by the BOD, scrutinized by the auditor for reasonableness, and FULLY DISCLOSED in the notes to the f.s. |
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Term
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Definition
Requires publicly traded co's to disclose any buyer-seller relationships that account for mare than 10 % of recorded revenues.
There could also be key vendor relationships that warrant disclosure by a purchaser or retailer |
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Term
| How to approach RP transactions: |
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Definition
1) obtain list of all related entities and a list of all transactions with those parties during the period.
2) Examine all unusual transactions especially those near the end of a period, to determine whether they involved related entities. |
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