CIA Question of the Day: Related-Party Transaction Assessment

Quiz Yazan Ibrahim
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CIA exam practice question — CIA Question of the Day: Related-Party Transaction Assessment

CIA exam practice question: daily practice for the Certified Internal Auditor (CIA) exam — domain: Part 3: Business Knowledge for Internal Auditing.

Question

During a routine review of vendor payments, an internal auditor finds several large payments to a company owned by a relative of the CEO. The transactions are not disclosed in financial notes and appear to have non–arm’s-length terms. What is the most appropriate next step for the internal auditor?

  • A. Notify the audit committee promptly, recommend an independent valuation or specialist review, and expand audit procedures to determine extent, disclosure compliance, and control weaknesses.
  • B. Accept management’s explanation that the arrangements predate current policies, document the rationale, and limit further work to routine sample testing.
  • C. Prepare a formal adverse opinion on the financial statements and report the transactions directly to external regulators without further internal escalation.
  • D. Request additional supporting documentation from management and defer reporting the matter to the next scheduled audit committee meeting to allow time for management to respond.
Show the answer and explanation

Correct answer: A. Notify the audit committee promptly, recommend an independent valuation or specialist review, and expand audit procedures to determine extent, disclosure compliance, and control weaknesses.

Option 1 is best because undisclosed, non–arm’s-length related-party transactions can indicate material misstatement, conflicts of interest, or fraud. Professional internal auditing standards require prompt communication of significant risks to those charged with governance, use of specialists (e.g., valuation experts) when needed, and expansion of procedures to assess extent, disclosures, and control weaknesses. Option 2 is wrong because relying solely on management assurances and limited testing fails to exercise professional skepticism and may miss material issues. Option 3 is wrong because internal auditors do not issue audit opinions and should escalate internally before involving regulators unless there is clear evidence of illegal acts. Option 4 is wrong because delaying reporting to governance risks concealment and prevents timely remediation.

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