$17-3$ Related$-$Party Transactions

In any audit engagement, an auditor is concerned that financial statements reflect properly the economic substance of material related$-$party transactions. To achieve this objective, auditors attempt to determine the existence of related parties and the nature of transactions entered into between the audit client and the related parties. During the course of an audit engagement, you have identified two potential related$-$party transactions. The first involves a significant shareholder who has borrowed cash to purchase a new home. The second is an affiliated company that has agreed to supply your audit client with raw materials.

Required: Describe how each of the two potential related$-$party transactions should be structured so that the legal form of the transaction accurately reflects the economic substance. Include the items an auditor would review to assure that the transaction is made at $$arm$$s length.$$

$17-4$ Drafting a Related$-$Parties Footnote

Subsidiaries of First of America, a major commercial bank, have made loans to First of America directors and executive officers. The loans totaled $$56,965,000$ at December $31,2007(3\mathrm{.}6$ percent of total shareholders$$ equity$),$ and $$42,405,000$ at December $31,2006.$ During $2007,$ $$39,201,000$ in new loans were made, and repayments and other reductions totaled $$24,641,000.$ Management believes that the loans do not affect materially the financial condition of First of America, that the loans are consistent with sound business practice in the banking industry, and that the loans do not impose more than the normal risk of collectability. There is every reason to believe the loans were made at nonpreferential terms and rates, and no reason to believe the loans were made to immediate members of the directors$$ families or violated either corporate policy or applicable laws and regulations.

Required: Draft a related$-$parties footnote for First of America$$s December $31,2007,$ financial statements.