ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is typically considered a condition for significant risks?

1. The absence of unusual transactions

2. Minor transactions of low complexity

3. Relationships with related parties

4. Routine transactions with no anomalies

The correct answer is: Relationships with related parties

Significant risks often arise from transactions or events that have the potential for material misstatement in the financial statements. In this context, relationships with related parties are particularly relevant because they can result in complex transactions that may not be conducted at arm's length. Such arrangements are prone to manipulation or misrepresentation, which means they require greater scrutiny during an audit. Transactions with related parties can involve various risks due to potential conflicts of interest, lack of transparency, and the nature of the agreements that often differ significantly from typical market transactions. Auditors must assess the nature of these relationships and the transactions that arise from them, as they could significantly affect the financial statements. In contrast, other conditions such as minor transactions of low complexity, routine transactions with no anomalies, and the absence of unusual transactions are generally not indicators of significant risks. These scenarios typically represent lower-risk areas that do not require as much detailed audit focus compared to the complexities and potential manipulations associated with related-party transactions.