Which best describes a related party in an auditing context?

In an auditing context, the term "related party" refers to a principal owner or a party that is not independent of the entity being audited. This relationship can create significant risks for auditors, as transactions between related parties may not be conducted at arm's length and could potentially be used to manipulate financial statements or obscure the true financial position of the firm.

Related parties may include not only owners and principal shareholders but also management and their immediate family members or affiliates. The consideration of related party transactions is crucial for auditors to ensure transparency and integrity in financial reporting, as these transactions can present various risks of misstatement or fraud. Identifying and evaluating these relationships and transactions during the audit process is essential for forming an accurate view of the entity's financial health and compliance with relevant standards.