Evaluate the appropriate financial statement measures for determining amounts likely to be considered material by users of the financial statements

DISCUSSION QUESTIONS AND PROBLEMS

8-27 (OBJECTIVES 8-2, 8-3, 8-4, 8-5) The following are various activities an auditor does during
audit planning.

1. Review accounting principles unique to the client’s industry

2. Determine the likely users of the financial statements

3. Evaluate the appropriate financial statement measures for determining amounts likely to be considered material by users of the financial statements

4. Identify whether any specialists are required for the engagement

5. Send an engagement letter to the client

6. Tour the client’s plant and offices

7. Specify materiality levels to be used in testing of accounts receivable

8. Compare key ratios for the company to those for industry competitors

9. Review management’s risk management controls and procedures

10. Identify potential related parties that may require disclosure

For each procedure, indicate which of the first four parts of audit planning the procedure primarily relates to (1) accept client and perform initial audit planning, (2) understand the client’s business and industry, (3) perform preliminary analytical procedures, (4) set preliminary judgment about materiality and performance materiality.
8-28 (OBJECTIVE 8-3) In your audit of Canyon Outdoor Provision Company’s financial state- ments, the following transactions came to your attention:

1. Canyon Outdoor’s operating lease for its main store is with MTS Properties, which is
a real estate investment firm owned by Andrei Mikhailov. Mr. Mikhailov is a member
of Canyon Outdoor’s board of directors.

2. One of Canyon Outdoor’s main suppliers for kayaks is Hessel Boating Company.
Canyon Outdoor has purchased kayaks and canoes from Hessel for the last 25 years
under a long-term contract arrangement.

3. Short-term financing lines of credit are provided by Cameron Bank and Trust.
Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor account.
Suzanne is the wife of the largest investor of Canyon Outdoor.

4. Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting ad-
venture vacations. The owner of Hillsborough Travel lives in the same neighborhood
as the CEO of Canyon Outdoor. They are acquaintances, but not close friends.

5. The board of directors consists of several individuals who own stock in Canyon
Outdoor. At a recent board meeting, the board approved its annual dividend payable
to shareholders effective June 1.
Required

a. Define what constitutes a “related party.”
b. Which of the preceding transactions would most likely be considered a related party
transaction?
c. What financial statement implications, if any, would each of the above transactions
have for Canyon Outdoor?
d. What procedures might auditors consider to help them identify potential related
party transactions for clients like Canyon Outdoor?