Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these facts, which one of the following should be most carefully examined?
a. Transactions that result in healthy revenues
b. Large market capitalization
c. Loans and other financing transactions between related entities
d. Dividend paid out in the previous year
c
FEEDBACK: a. Incorrect. The facts do not suggest that revenue transactions are particularly at risk.
b. Incorrect.
c. Correct. If the company is already highly leveraged and wants more debt, any type of related party transactions regarding debt should be carefully examined.
d. Incorrect.
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