QUESTION TWO

 

Hint (read chapter 8 of the reference book)

 

In your audit of Canyon Outdoor Provision Company's financial statements, the following transactions came to your attention:

1.     Canyon Outdoor's operating lease for its main store is with York Properties, which is a real estate investment firm owned by Travis Smedes. Mr. Smedes is a member of Canyon Outdoor's board of directors.

2.     One of Canyon Outdoor's main suppliers for kayaks is Hessel Boating Company. Canyon Outdoor has purchased kayaks and canoes from Hessel for the last 25 years under a long-term contract arrangement.

3.     Short-term financing lines of credit are provided by Cameron Bank and Trust. Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor account. Suzanne is the wife of the largest investor of Canyon Outdoor.

4.     Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting adventure vacations. The owner of Hillsborough Travel lives in the same neighbourhood as the CEO of Canyon Outdoor. They are acquaintances, but not close friends.

5.     The board of directors consists of several individuals who own stock in Canyon Outdoor. At a recent board meeting, the board approved its annual dividend payable to shareholders effective June 1.

 

Required

a.      Define what constitutes a "related party."

b.     Which of the preceding transactions would most likely be considered a related party transaction?

c.      What financial statement implications, if any, would each of the above transactions have for Canyon Outdoor?

d.     What procedures might auditors consider to help them identify potential related party transactions for clients like Canyon Outdoor?