The purpose of this study is to examine the effect of related party transactions (RPTs) on modified audit opinion (MAO). The nature of RPTs, in some circumstances, potentially lead to higher risk of material misstatement of the financial statements rather than transactions with third parties. Since material misstatements are related to the audit risk, therefore company will receive MAO from the auditor if their financial statements provide high audit risk that indicated by high material misstatements. This study identifies RPTs from related party sales, related party purchase, related party receivables and related party payables. While MAO is described as audit opinion other than unmodified one. This study uses purposive sampling method by employing some criteria, which consist of 150 sample companies listed in Indonesian Stock Exchange from 2011 until 2015 obtained from Osiris database. Indonesian stock market is a unique setting for deeper understanding the RPTs as RPTs is common in Asian region and conglomeration firms are still dominating the Indonesian market. Logistic regression analysis with STATA is used as the data analysis technique. The results show that the related party sales, purchase and payable have positive influence and are statistically significance at 5 percent level towards the issuance of MAO. However, related party receivables have no influence on MAO. It is implied that related party receivables are not considered as a high-risk for auditor. Further implication of this study is that it is critical from auditors to have a comprehensive knowledge on the nature of the RPTs of audit clients as RPTs are considered as a high-risk area. The auditing standards should put more emphasize on understanding the nature of RPTs particularly in the audit planning.

Keywords: MAO, RPTs, Related party sales, Related party purchase, Related party receivables, Related party payables, ROA, firm size, financial distress, public accounting firms.