An auditor is performing an audit of a nonissuer and identifies a related party transaction that was not previously disclosed to the auditor. Which of the following is the auditor's FIRST responsibility?

Answer options:

Request management to cancel the transaction.

Issue a qualified opinion due to the omission.

Determine whether the transaction was authorized and approved, and inquire why it was not disclosed.

Report the transaction to the audit committee as fraud.

How to approach this question

Undisclosed Related Party found? 1. Ask 'Why didn't you tell me?' 2. Check if it was approved. 3. Re-evaluate risk.

Full Answer

C.Determine whether the transaction was authorized and approved, and inquire why it was not disclosed.✓ Correct

When the auditor identifies related party transactions that management has not previously identified or disclosed, the auditor should promptly communicate the information to the engagement team, request management to identify all transactions with the newly identified related party, and inquire as to why the entity's controls failed to identify or disclose the related party relationship.

Common mistakes

Assuming automatic fraud (Option D).

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