Question

Marcie, a member of the audit team, discovers during a conversation with a client that the marketing agency used by the client is owned by the spouse of the VP of Operations. Recognizing this as a related party relationship, Marcie and the audit team must exercise professional skepticism and identify all of the following risks EXCEPT?

1) material risk
2) disclosure risk
3) risk that the relationship and related transactions were not properly authorized
4) fraud risk

Answer 1

Marcie and her audit team need to consider the possibility of material risk, disclosure risk, authorization risk, and fraud risk when discovering a related party relationship, as professional skepticism requires a thorough examination of all potential risks.

Step-by-step explanation:

When Marcie, a member of the audit team, learns in a conversation with a client about a related party relationship involving the client's VP of Operations and a marketing agency, she must indeed proceed with a high level of professional skepticism. However, not all the risks you mention are relevant in this context. While material risk, disclosure risk, and the risk that the relationship and related transactions were not properly authorized are certainly valid concerns that the audit team needs to consider, fraud risk is not excluded by default. Professional skepticism demands that the auditors investigate the possibility of fraud whenever there are indications that related party transactions may not have been conducted at arm's length or in the usual course of business. Thus, all four risks mentioned may potentially apply, and Marcie and her team should be alert to these risks throughout the audit process.