Most auditors assess inherent risk as high for related parties and related- party transactions because:
A) of the lack of independence between the parties.
B) of the accounting disclosure requirement.
C) both A and B
D) it is required by generally accepted accounting principles.

Question

Quizplus · Accepted Answer

Related parties often have a close relationship and therefore may have conflicts of interest. This lack of independence increases the risk of material misstatements in the financial statements. Additionally, accounting disclosure requirements for related parties and related-party transactions are designed to provide transparency to users of the financial statements. Therefore, both A and B contribute to auditors assessing inherent risk as high for related parties and related-party transactions. It is not required by generally accepted accounting principles to assess inherent risk as high for related parties and related-party transactions, but it is a common practice among auditors.

Most Auditors Assess Inherent Risk as High for Related Parties