Reference no: EM133043850

Question - Synergy Bhd (Synergy) was a KL-based energy and commodity company, located at Rawang Industrial Centre. The company is a very well established, and has been operating for the past 10 years. During a review of board minutes, performed as part of the planning of Synergy's audit, it was discovered that the company has paid RM 500,000 to one of its subsidiaries, Cubic Bhd (Cubic) during the year, in respect of property renovations. On further enquiry, it was also found that Cubic leases an office space from Synergy, under an informal arrangement between the two companies. The related parties misled the board, its audit committee, employees and the public. These fraudulent transactions between related parties finally resulted in the bankruptcy of Synergy, imprisonment of its officers, loss of pensions and savings of employees and shareholders. This led to the closure of Arthur & Co., Synergy's auditor, who was also found guilty of committing the fraud.

Required -

(a) Explain the inherent limitations which mean that auditors may not identify related parties and related party transactions.

(b) Recommend the audit procedures to be performed in relation to Synergy Bhd's transactions with Cubic Bhd.