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CS Professional · Internal and Forensic Audit · Special Points relating to Internal Audit in various Entities

In an LLP, the internal auditor notes that the designated partners regularly approve payments to a firm owned by a relative of one designated partner at rates higher than market quotes, with no disclosure to other partners. Which audit response is most appropriate?

The auditor should treat the payments as a related-party and conflict-of-interest risk, compare the rates with market quotes, check the LLP agreement for disclosure and approval rules, and report to the partners. Ignoring it, reporting externally on one's own, or halting the audit is inappropriate.

  1. ATreat it as a routine commercial decision outside audit scope
  2. BEvaluate it as a related-party transaction and conflict of interest, compare with market quotes, check the LLP agreement for disclosure and approval requirements, and report findings to the partnersCorrect
  3. CImmediately inform the Registrar of Companies
  4. DStop the audit until the partner resigns

Explanation

Transactions with a partner's relative, at above-market rates and undisclosed, indicate possible conflict of interest and a fraud risk. The auditor should test pricing, review the LLP agreement for approval and disclosure rules, and report to the partners. Direct external reporting or halting the audit exceeds the internal auditor's role, and calling it routine ignores the risk.

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