Audit objective
Verify that all related parties have been identified completely, that transactions with them have been approved per the applicable governance requirement (Audit Committee, Board, or shareholders, depending on materiality and arm's-length status), that pricing is at arm's length or the deviation is justified and disclosed, and that disclosure under IND AS 24, Schedule III, and CARO 2020 is complete. Unlike most balance sheet areas, the central audit risk is identification, a related party that management does not disclose is invisible to every other audit procedure.
Relevant framework
- IND AS 24 · Related Party Disclosures · definition, disclosure requirements, key management personnel compensation
- AS 18 · Related Party Disclosures for non-IND AS entities, narrower definition than IND AS 24
- Section 2(76) · Definition of "related party" · director, KMP, their relatives, firms/private companies where director or relative is a partner/member, holding/subsidiary/associate/fellow subsidiary companies, and any person under whose advice/directions a director or manager is accustomed to act
- Section 2(77) · Definition of "relative" · members of a HUF, spouse, and specified blood/marriage relations
- Section 177(4)(iv) · Audit Committee approval and subsequent modification of all related party transactions
- Section 188 · Board (and shareholder, where thresholds exceeded) approval for specified contracts/arrangements with related parties: sale/purchase of goods or property, leasing of property, appointment of agents, related party's appointment to office/place of profit, underwriting of securities
- Section 188(1) proviso · Nothing applies to transactions entered in the ordinary course of business and at arm's length, the two-pronged exemption test
- Section 184 · Director's disclosure of interest in contracts/arrangements
- Schedule III Div I & II · Related party disclosure cross-reference to AS 18 / IND AS 24
- Whether all transactions with related parties are in compliance with Sections 177 and 188 of the Companies Act, where applicable, and details have been disclosed in the financial statements as required by the applicable accounting standards
- SA 550 · Related Parties · the dedicated standard; requires obtaining an understanding of related party relationships, identifying significant transactions outside the normal course, and evaluating business rationale
- SA 315 · Identifying and Assessing Risks of Material Misstatement
- SA 240 · Fraud · related parties are a recognised fraud risk vector (concealment of related party relationships)
- SA 500 · Audit Evidence
- SA 580 · Written Representations · management representation on completeness of related party disclosure is explicitly required
- SA 600 · Group audit, for related party transactions across the group structure
- Section 40A(2) · Disallowance of excessive or unreasonable payments to specified persons, including related parties
- Section 92 to 92F · Transfer Pricing provisions, arm's length price determination for international and certain specified domestic transactions with associated enterprises
- Form 3CEB · Accountant's report for international transactions and specified domestic transactions with associated enterprises
- Regulation 23 · Materiality threshold for related party transactions, Audit Committee and shareholder approval requirements for listed entities, omnibus approval mechanics
- Guidance Note on Related Party Transactions, addressing identification challenges and audit procedures · ICAI AASB
Who counts as related
The definition spans two frameworks that don't fully overlap: Section 2(76) for Companies Act compliance and approval mechanics, and IND AS 24 for disclosure. A party can trigger one without the other, build the related party list against both.
Section 2(76)(i) & (iv)
Directors, KMP, and their relatives per Section 2(77): spouse, parents, siblings, children, and specified marriage relations forming part of a HUF
Section 2(76)(ii) & (iii)
Firms where a director/relative is a partner; private companies where a director/relative is a director or member
Section 2(76)(v) to (viii)
Holding, subsidiary, associate, fellow subsidiary companies, and investing companies/venturers of the reporting entity
Section 2(76)(ix)
Any person under whose advice, directions, or instructions a director or manager is accustomed to act, excluding purely professional advice
Post-employment benefit entities
IND AS 24 also pulls in post-employment benefit plans for employees, and entities with joint control or significant influence, beyond the Companies Act list
Non-executive / promoter entities
Entities controlled by promoters who hold no formal director designation are frequently missed, since the vendor master shows no director linkage on paper
Section 188 · approval matrix
The compliance question for every related party transaction reduces to two tests run in sequence. Get the order right, ordinary-course-and-arm's-length is checked first, because if both are true, Section 188 doesn't apply at all.
Test before you look for an approval resolution
Is the transaction in the ordinary course of business AND at arm's length? If yes to both, Section 188 does not apply. Document the basis, don't just assert it.
If Test 1 fails, or regardless of Test 1 for listed entities under SEBI LODR, Audit Committee approval (or omnibus approval within set limits) is required under Section 177(4)(iv)
Board resolution required at a meeting (not by circular resolution) for transactions falling within Section 188, with the interested director excluded from voting
Required where the transaction exceeds prescribed materiality thresholds (turnover or net worth based, per Companies (Meetings of Board and its Powers) Rules); related party members cannot vote
CARO 3(xiii) asks whether transactions comply with both Section 177 and 188, so a transaction that skipped Audit Committee approval is a CARO matter even if Board approval was obtained.
Risk areas by assertion
Risks below are mapped to financial statement assertions per SA 315. Completeness of identification is the dominant risk, since every other assertion depends on a transaction first being recognised as related-party.
Completeness Dominant
- Related party not disclosed because no formal director designation exists (de facto control missed)
- Transactions routed through an intermediary to obscure the related party relationship
- New related parties arising during the year (new subsidiary, new KMP) not added to the master list
- Relatives of directors not captured per the full Section 2(77) definition
Existence / Occurrence
- Disclosed related party transactions that did not actually occur, used to justify fund movement
- Round-tripping transactions between group entities with no commercial substance
Valuation / Accuracy
- Pricing not benchmarked against arm's-length comparables
- Interest-free or below-market loans to related parties not adjusted for the financing benefit
- Corporate guarantees given on behalf of related parties not valued or disclosed
Rights & Obligations
- Approval obtained from the wrong authority (Board instead of shareholders where threshold exceeded)
- Interested director not excluded from voting on the Board resolution
- Omnibus approval limits exceeded without fresh specific approval
Cut-off
- Related party transactions timed around period-end to manage reported results
- Approval obtained after the transaction was entered into, rather than before (ratification used as a substitute for prior approval)
Presentation & Disclosure
- IND AS 24 disclosure incomplete: nature of relationship, transaction amount, outstanding balance, terms and conditions
- KMP compensation not disaggregated into short-term, post-employment, and other categories per IND AS 24
- CARO 3(xiii) non-compliance not flagged where Audit Committee approval was skipped
- SEBI LODR Regulation 23 disclosure to stock exchange not made for material RPTs (listed entities)
Documents to request
Hand this to the client at the start of the engagement. Item 1 is the foundation, everything else is tested against it.
- Related party master list as identified by management, with basis of identification for each entry
- Register of contracts in which directors are interested, maintained under Section 189
- Disclosure of directors' interest (MBP-1 forms) filed during the year
- Shareholding pattern showing promoter and promoter group holdings
- Group structure chart with holding, subsidiary, associate, and JV relationships
- Audit Committee minutes for the year, specifically related party transaction approvals and omnibus approval limits set
- Board minutes approving related party transactions under Section 188
- Shareholder resolutions (if any) approving related party transactions exceeding materiality thresholds
- Related party transaction register / ledger, with transaction-wise detail for the year
- Pricing benchmarking or comparable analysis for significant related party transactions, if performed
- Loans, advances, guarantees, or securities given to or on behalf of related parties, with terms
- KMP compensation details, disaggregated by component (salary, bonus, post-employment benefits, ESOP)
- Transfer pricing study / Form 3CEB, if applicable (international or specified domestic transactions)
- Management representation letter on completeness of related party disclosure
- SEBI LODR Regulation 23 disclosures filed with stock exchanges, if a listed entity
- Bank confirmations or statements for transactions routed through related party bank accounts
Fieldwork procedures
Procedures are grouped by assertion. Per SA 550, the identification step should be performed independently of management's list, not merely accepted as complete.
- Independently build or challenge the related party list: review shareholding pattern, MCA director/KMP filings, MBP-1 disclosures, and prior year audit file for continuity
- Inquire of management, those charged with governance, and where appropriate, component auditors, about related party relationships not previously identified
- Review minutes of Board and Audit Committee meetings for the year for references to related party arrangements
- Scan the general ledger for large or unusual balances with common counterparty names matching the related party list or director/promoter surnames
- Review bank statements and loan agreements for guarantees given on behalf of, or received from, related parties
- For group entities, obtain confirmation from component auditors that their related party identification is consistent with the group list
- Vouch a sample of related party transactions to underlying contracts, invoices, and delivery/service evidence
- Evaluate the business rationale for significant related party transactions that are outside the entity's normal course of business
- For round-trip or back-to-back transactions between group entities, assess substance over form
- For significant related party transactions, obtain or perform a comparison against arm's-length pricing (third-party quotes, published price lists, comparable transactions)
- For interest-free or concessional-rate loans to related parties, assess whether a financing benefit should be recognised per IND AS 109 / IND AS 24
- Verify corporate guarantees given on behalf of related parties are valued and disclosed as contingent liabilities
- Recompute KMP compensation disaggregation against payroll and ESOP records
- For each Section 188 transaction, verify the correct approval authority was used based on the materiality threshold calculation (turnover/net worth basis)
- Verify the interested director was excluded from the vote and from being counted in quorum, where applicable
- Verify omnibus approvals (where used) stayed within the value and time limits set by the Audit Committee
- For listed entities, verify shareholder approval excluded related party votes per SEBI LODR Regulation 23
- Verify approval was obtained prior to entering into the transaction, not as a post-facto ratification, except where explicitly permitted
- Review related party transactions occurring near period-end for unusual timing or volume
- Verify the IND AS 24 note includes nature of relationship, transaction type and amount, outstanding balances, and terms for each related party category
- Verify KMP compensation is disaggregated into short-term, post-employment, and other long-term benefit components
- For CARO 3(xiii), verify each related party transaction's compliance status against both Section 177 and Section 188, and document the conclusion for each significant transaction tested
- For listed entities, verify Regulation 23 disclosures to stock exchanges match the audited financial statement disclosure
- Obtain the written representation under SA 580 confirming completeness of related party disclosure from management
Common findings and red flags
The most common observations encountered in Related Party fieldwork. Each line is a working-paper trigger.
Sample conclusion language
Use these as starting drafts. Adapt to engagement-specific facts and your firm's house style. All language is illustrative.
"Based on our procedures, which included independent verification of the completeness of the related party list, evaluation of the business rationale for significant related party transactions, review of Audit Committee and Board approvals under Sections 177 and 188 of the Companies Act, 2013, and verification of disclosures under IND AS 24, the related party transactions for the year ended 31 Mar XXXX have been identified, approved, and disclosed completely and in accordance with the applicable requirements. No material misstatement was noted."
"As reported under CARO 2020 Clause 3(xiii), transactions with [related party name] aggregating to Rs. XX lakhs during the year were not placed before the Audit Committee for approval as required under Section 177(4)(iv) of the Companies Act, 2013, although Board approval under Section 188 was obtained. This is a CARO reporting matter."
"We noted that the Company has classified transactions with [related party name] aggregating to Rs. XX lakhs as being in the ordinary course of business and at arm's length, exempting them from Section 188 approval. However, no comparable pricing benchmark or documented basis was available to support the arm's-length assertion. We have recommended that management maintain contemporaneous documentation supporting this classification. [Assess materiality and consider implications for Section 188 compliance.]"
"During our review, we noted that [entity name], in which a promoter holds significant beneficial control without a formal directorship, had not been included in the Company's related party master list, despite transactions aggregating to Rs. XX lakhs during the year. We have recommended that the Company strengthen its related party identification process to capture de facto control relationships under Section 2(76)(ix), beyond formal director and KMP designations."
Linked AuditAIKit tools
Three-Way Match
Vendor risk scoring can surface unusual concentration of transactions with a single counterparty, a useful screen for unidentified related parties.
Live · SA 530 CompliantAudit Sampling Engine
Select samples of related party transactions for substantive testing and approval verification.
PlannedRelated Party Network Mapper
Cross-reference vendor/customer master against director, KMP, and shareholding data to surface undisclosed relationships.
Sources & references
Every reference in this playbook traces to an official source. Open the link to verify the exact wording in force as at the last review date.
| Reference | Source | Link |
|---|---|---|
| Companies Act, 2013 · Sec 2(76), 2(77), 177, 184, 188, 189, Sch III | MCA | mca.gov.in |
| Companies (Meetings of Board and its Powers) Rules | MCA | mca.gov.in |
| IND AS 24 | ICAI / MCA notification | icai.org |
| CARO 2020 Order · 25 Feb 2020 | MCA | mca.gov.in |
| SA 240, 315, 500, 550, 580, 600 | ICAI AASB | icai.org |
| Guidance Note on Related Party Transactions | ICAI AASB | icai.org |
| Income Tax Act · Sec 40A(2), 92 to 92F; Form 3CEB | Income Tax Dept | incometax.gov.in |
| SEBI (LODR) Regulations · Regulation 23 | SEBI | sebi.gov.in |