Question

During December 20X1, TWD signed a contract to lease disposal equipment from an entity owned by Mead's parents. This related party transaction is not disclosed in TWD's notes to its 20X1 financial statements. The audit risk would:

A)Increase, as the lack of disclosure raises concerns about transparency and completeness.
B)Decrease, as the related party transaction is inconsequential to TWD's financial statements.
C)Remain unchanged, as the audit risk is not impacted by related party transactions.
D)Fluctuate, depending on the financial impact of the related party transaction on TWD's financial statements.

Answer 1

The lack of disclosure of a related party transaction in TWD's financial statements raises concerns about transparency and completeness, increasing the audit risk.

Step-by-step explanation:

The correct answer is A) Increase, as the lack of disclosure raises concerns about transparency and completeness.

Related party transactions refer to transactions between a company and its related parties, such as its owners or their family members. The lack of disclosure of a related party transaction in TWD's notes to its financial statements raises concerns about transparency and completeness, as it may indicate a potential conflict of interest or bias in the transaction. This increases the audit risk, as the auditor needs to ensure that the financial statements are free from material misstatement and accurately represent the financial position and performance of the company.

Therefore, A) Increase is the correct answer as the lack of disclosure of the related party transaction raises concerns about the transparency and completeness of TWD's financial statements, which in turn increases the audit risk.