Reference no: EM132828726

Sisters Inc. beauty salon is a 100% subsidiary of Benefit Beauty Supply Inc., a beauty supply company. As a result of this relationship, there were several transactions between the two entities during the last year. Sisters rented retail space for its salon from Benefit Beauty during the past year at a rate that is determined to be fair market value. Sisters also purchased beauty supplies from Benefit Beauty. Lastly, Sisters has a non-interest-bearing loan owing to Benefit Beauty, and there are no repayment terms for this loan.

Sisters is looking to expand next year and is seeking a new bank loan. As a result, it has asked Sol Newton, CPA, to audit its financial statements.

Which of the following apply to this scenario?

Since Sisters is a 100% subsidiary of Benefit Beauty, all transactions between the two entities are related party transactions.

All the related party transactions between the two entities need to be disclosed so users can evaluate what, if any, impact these transactions may have on the financial statements of Sisters.

The fact that related parties exist increases the risk of material misstatement due to fraud and error.

Related party transactions need to be disclosed only when they are not at fair value; therefore, the rent of retail space does not need to be disclosed.

Sol Newton needs to perform some specific procedures to reduce this risk.

The only audit procedures Sol Newton needs to perform are asking management if there are any other related parties they have done business with during the year and gaining an understanding of the policies and procedures in place to ensure all related party transactions are recorded and disclosed appropriately.