4 - Answers

Sisters Inc. beauty salon is a 100 percent subsidiary of Benefit Beauty Supply Inc., a beauty supply company. As a result of this relationship, there were several transactions between the two entities during the past year. Sisters rented retail space for its salon from Benefit Beauty during the past year. Sisters also purchased beauty supplies from Benefit Beauty. Lastly, Sisters has a noninterest-bearing loan owing to Benefit Beauty, and there are no repayment terms for this loan. Sisters is looking to expand next year and is seeking a new bank loan. As a result, it has asked Sol Newton, CPA, to audit its financial statements. In a preliminary discussion with management, Sol notes that most sales are on a cash basis, and therefore accounts receivable are not significant. Sisters holds an inventory of beauty supply products, including hair products and tools. It also has property, plant, and equipment that is being depreciated over the estimated useful lives. The auditor learns Sisters is being sued because one of the stylists at Sisters provided styling services for a wedding party and over-dyed the hair of the entire wedding party, resulting in it cracking off and impossible to put in updos. The lawsuit is for a significant amount as the bride is claiming damages for pain and suffering because she says her wedding and wedding pictures were ruined due to the disastrous styling from Sisters salon. Sisters Inc. prepares its financial statements using ASPE. Which of the following apply to this scenario? (Several choices may be correct.) Since Sisters is a 100% subsidiary of Benefit Beauty, all transactions between the two entities are related party transactions. All the related party transactions between the two entities need to be disclosed so users can evaluate what, if any, impact these transactions may have on the financial statements of Sisters. The fact that related parties exist increases the risk of material misstatement due to fraud or error. Related party transactions need to be disclosed only when they are not at fair value; therefore, the rent of retail space does not need to be disclosed. Sol Newton needs to perform some specific procedures to reduce this risk. The only audit procedures Sol Newton needs to perform are asking management if there are any other related parties they have done business with during the year and gaining an understanding of the policies and procedures in place to ensure all