Disclosure of related parties is essential in financial reporting because:
A) related parties cannot be trusted;
B) there are certain limits imposed on entities in regards to how many related party transactions they could have;
C) related parties have the potential to affect an entity's profit or loss and financial position that might not otherwise occur;
D) a high number of corporate collapses are caused by related party transactions.

Question

Quizplus · Accepted Answer

Related parties have the potential to affect an entity's profit or loss and financial position that might not otherwise occur. It is important to disclose related party transactions to provide transparency and avoid potential conflicts of interest.

Answer: B (but less correct than C)
 While there are certain limits imposed on entities in regards to how many related party transactions they could have, this is not the main reason why disclosure of related parties is essential in financial reporting.

Answer: A and D are incorrect
 Related parties cannot be trusted is not a valid reason why disclosure of related parties is essential in financial reporting. Additionally, while some corporate collapses may be caused by related party transactions, this is not the primary reason why disclosure of related parties is essential in financial reporting.

Disclosure of Related Parties Is Essential in Financial Reporting Because