The related party exists — but the real question is what the auditor does NEXT During the audit of O

The related party exists — but the real question is what the auditor does NEXT

During the audit of Orchid Ltd., management provides the auditor with a list of related parties. The list does not include Gamma Pvt. Ltd.

During the audit, the auditor discovers information indicating that Gamma is controlled by the brother of the company’s CFO and that significant transactions took place between Orchid and Gamma.

Management explains:

“We were unaware that Gamma was controlled by the CFO’s brother. Since the relationship was not identified during management’s procedures, the transactions can continue to be audited under the normal procedures applicable to unrelated parties.”

The engagement partner asks the audit team to determine the appropriate response under SA 550.

Which ONE of the following is most appropriate?

A. The auditor should first determine whether the relationship falls within the applicable definition and, if so, obtain further information concerning transactions with Gamma and assess the implications for the audit.

B. The auditor may accept management’s explanation because the primary responsibility for identifying related parties rests with management, and additional procedures are ordinarily necessary only where intentional concealment is suspected.

C. The auditor should treat Gamma as an unrelated party for substantive testing purposes because the transactions were entered into before the auditor identified the relationship and management did not classify them as related-party transactions.

D. The auditor should automatically presume that all transactions with Gamma are fraudulent because an undisclosed relationship involving a key management person’s relative represents sufficient evidence of intentional management concealment.