We examine research relevant to auditing related party transactions to contribute to the PCAOB project on this topic and to provide other policy makers, auditors, and academics with an overview of relevant literature. Specifically, we report on the challenges associated with the identification, examination, and disclosure of related party transactions. Additionally, we address issues and research evidence related to nondisclosure and reliance on management assertions, risk assessment, materiality, fraud detection, the effect of related party transactions on corporate governance, and international auditing issues. Overall, we believe that the findings in academic research and the significance of related party transactions in recent prominent fraud cases are consistent with the PCAOB's reconsideration of auditing of related party transactions. We conclude with implications for further research.

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This study investigates the demand f o r audit quality f o r the firms being audited by Laventhol and Honvath (LH) at the time LH declared bankruptcy. The demand f o r audit quality by the former LH clients is inferred from their decisions to select Big Six or non-Big Six auditors. Because the change in auditors was involuntary. the sample avoids self-selection issues associated with voluntary auditor switches. LH clients that selectedBig Six auditors tended to be more highly leveraged, have less management ownership, and issue more securities in the year after selecting the new auditor than LH clients that selected non-Big Six auditors.

SUMMARY: After several high-profile frauds involving related-party transactions, regulators have raised questions as to whether current auditing standards remain appropriate. In this study, we examine 43 SEC enforcement actions against auditors related to the examination of related-party transactions. We conclude that the audit failures in these fraud cases were more the result of a lack of auditor professional skepticism and due professional care than any deficiency in current auditing standards. In other words, revised auditing standards would likely not have prevented these auditing failures, raising questions about the need for auditing standard revision for related-party transactions at this time. Despite this finding, we conclude with some suggestions to improve the auditing of related-party transactions, such as including the discussion of related-party transaction abuse during SAS No. 99 mandated fraud awareness “brainstorming” sessions.

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