Auditing related party transactions — disclosures and red flags for 2026

🔍 Auditing Related Party Transactions — Disclosures and Red Flags for 2026

Related Party Transactions (RPTs) are common in modern businesses. A company may purchase goods from a group entity, take a loan from a director, pay rent to a promoter-related entity or provide services to an associate company.

These transactions are not automatically wrong or illegal. However, because the parties involved may have control, influence or common ownership, RPTs carry a higher risk of bias, conflict of interest, improper pricing and financial statement misstatement. 🚨

For auditors, the biggest challenge is often not checking the arithmetic of a related party transaction—it is ensuring that all related parties and transactions have actually been identified. Standard on Auditing (SA) 550 requires auditors to understand related party relationships sufficiently to identify fraud risks and obtain appropriate audit evidence regarding identification, accounting and disclosure.

This article explains the key disclosures, audit procedures and practical red flags businesses and auditors should watch for in 2026.

📌 What Is a Related Party Transaction?

A related party transaction generally involves the transfer of resources, services or obligations between parties that have a specified relationship, whether or not a price is charged.

Common examples include:

🏢 Sale or purchase between group companies

💰 Loans or advances to directors or related entities

🏠 Rent paid to a director or promoter-related entity

👨‍💼 Remuneration and payments to key management personnel

🤝 Services provided to subsidiaries or associates

📦 Purchase of goods from promoter-controlled entities

🏦 Guarantees given for related parties

Under the Companies Act, 2013, Section 188 covers specified contracts and arrangements with related parties, including transactions involving goods, property, leasing, services, agency arrangements, office or place of profit and underwriting.

⚖️ Key Compliance Framework for RPT Audits

Related party transactions may need to be examined from multiple perspectives.

🧾 1. Accounting Disclosure

Companies following the applicable financial reporting framework need to consider Ind AS 24 or AS 18, as applicable, for related party identification and disclosures. ICAI’s updated educational material on Ind AS 24 emphasises disclosures relating to relationships, transactions, outstanding balances and commitments.

🏢 2. Companies Act Compliance

Section 188 and the applicable rules may require Board approval and, for transactions crossing prescribed thresholds, shareholder approval. The rules also require relevant information such as the related party’s name, relationship, transaction details, duration, value and pricing terms to be placed before the Board.

🔍 3. Audit Requirements

SA 550 – Related Parties requires the auditor to identify and assess risks associated with related party relationships and transactions and obtain sufficient appropriate evidence regarding proper identification, accounting and disclosure.

📊 4. Listed Entity Requirements

Listed companies may also have additional obligations under the SEBI LODR framework relating to related party transactions and disclosures.

🧠 Why Are Related Party Transactions High-Risk?

RPTs can be used for legitimate business purposes, such as operational efficiency within a group.

However, they may also create opportunities for:

⚠️ Diversion of funds

⚠️ Artificial revenue recognition

⚠️ Excessive expenses

⚠️ Transfer of assets at non-commercial values

⚠️ Undisclosed liabilities

⚠️ Concealment of transactions through intermediaries

⚠️ Management override of internal controls

⚠️ Conflicts of interest

Therefore, an auditor should apply professional scepticism and not assume that a transaction is acceptable simply because management describes it as being “within the group”.

🔍 Step 1 — Identify All Related Parties

The first step in an RPT audit is creating a complete related party universe.

Auditors should review information from multiple sources, such as:

📄 Register of directors and KMPs

📄 Declarations of interest by directors

📄 Board and shareholder meeting minutes

📄 Register of contracts and arrangements

📄 Previous year’s financial statements

📄 Group structure and shareholding records

📄 Major vendor and customer lists

📄 Loan and investment records

📄 Legal agreements and contracts

A major audit risk arises when the auditor relies only on the management-prepared related party list.

The best audit question is often: “What related party has management not told us about?” 🔎

SA 550 specifically focuses on obtaining an understanding sufficient to identify related party relationships, transactions and related fraud-risk factors.

📋 Step 2 — Reconcile the Related Party List With the Books

Once related parties are identified, the auditor should search for transactions with them in the accounting records.

Check:

Related Party Master List ↔ Ledger Accounts ↔ Bank Statements ↔ Agreements ↔ Financial Statements

The auditor should investigate whether transactions have been recorded under:

Different trade names

Group entities

Personal names of promoters/directors

Family-controlled businesses

Temporary or miscellaneous ledgers

A related party may not always appear in the books under an obvious name.

💰 Step 3 — Review the Nature and Commercial Purpose

For every material or unusual RPT, ask:

Why was this transaction entered into?

Is it in the ordinary course of business?

Is there a genuine commercial purpose?

Are the terms comparable with independent parties?

Is the transaction supported by proper documentation?

For example, if a company pays a very high consultancy fee to a promoter-related entity, the auditor should understand:

📌 What services were provided?

📌 Is there an agreement?

📌 Is there evidence of service delivery?

📌 How was the fee determined?

📌 Is the pricing commercially reasonable?

📊 Step 4 — Test Arm’s Length Nature and Pricing

A related party transaction may require scrutiny because the relationship can influence pricing.

Auditors should review:

Comparable third-party transactions

Quotations and market rates

Pricing policies

Gross margins

Service agreements

Board-approved terms

Supporting calculations

For example:

Company pays unrelated consultant → ₹2 lakh

Company pays promoter-related consultant for similar work → ₹10 lakh

This difference does not automatically prove wrongdoing, but it creates a clear audit red flag requiring further investigation.

SA 550 defines an arm’s length transaction as one conducted on terms similar to those between independent parties acting in their own interests.

📝 Step 5 — Verify Required Approvals

For transactions covered under Section 188, the auditor should review the applicable approval process.

Depending on the transaction and circumstances, this may involve:

✔️ Board approval

✔️ Shareholder approval, where required

✔️ Audit Committee review, where applicable

✔️ Disclosure of interested directors

✔️ Proper minutes and supporting documents

The prescribed information for Board consideration includes details of the related party, relationship, transaction, duration, material terms, transaction value, advances and the basis used for determining pricing and commercial terms.

📑 Step 6 — Check Financial Statement Disclosures

Proper disclosure is one of the most important areas of an RPT audit.

Depending on the applicable accounting framework, disclosures may include:

📌 Nature of the relationship

📌 Nature of transactions

📌 Transaction amounts

📌 Outstanding balances

📌 Commitments

📌 Key management personnel-related information

📌 Other disclosures required by the applicable standard

Ind AS 24 specifically focuses on transparency regarding related party relationships and transactions because these relationships can affect the users’ understanding of financial position, performance and cash flows.

🚨 Top Red Flags in Related Party Transactions

🚩 1. Transactions Not Included in the Related Party Register

If an auditor discovers a related party through bank records, vendor data or corporate records that was not included in management’s list, this is a major warning sign.

It may indicate:

Weak internal controls

Incomplete declarations

Intentional concealment

🚩 2. Large Round-Sum Payments

Payments such as:

₹10,00,000

₹25,00,000

₹50,00,000

without clear invoices, contracts or business justification should receive increased scrutiny.

The issue is not the round number itself—it is the lack of evidence supporting the transaction.

🚩 3. Unusual Year-End Transactions

Transactions entered into close to the reporting date can affect:

📊 Revenue

💰 Profit

🏦 Assets and liabilities

📈 Financial ratios

Auditors should carefully examine significant transactions recorded just before or after year-end, particularly where related parties are involved.

🚩 4. Excessive Outstanding Balances

A large receivable from a related party that remains unpaid for several years may indicate:

⚠️ Recoverability concerns

⚠️ Possible diversion of funds

⚠️ Improper classification

⚠️ Need for impairment/provision assessment

Similarly, a large payable that remains outstanding without demand may require investigation.

🚩 5. Loans Without Clear Terms

Loans or advances involving related parties should be reviewed for:

Interest rate

Repayment period

Security

Actual repayment

Commercial purpose

The Schedule III framework also contains specific disclosure requirements for certain loans or advances in the nature of loans granted to promoters, directors, KMPs and related parties, including those repayable on demand or without specified repayment terms.

🚩 6. Circular Movement of Funds 🔄

Example:

Company A → Related Party B → Another Entity → Company A

Circular movement of funds can potentially conceal the true nature of transactions.

Auditors should trace:

💳 Source of funds

➡️ Movement of funds

➡️ End use

➡️ Counterparty relationship

🚩 7. Transactions Outside the Normal Course of Business

A manufacturing company suddenly:

❌ Gives a large interest-free advance

❌ Buys unrelated property from a director’s entity

❌ Provides a major guarantee without business justification

These transactions deserve increased audit attention.

SA 550 recognises significant transactions outside the normal course of business as important for identifying related party relationships and assessing risks of material misstatement.

🚩 8. Management Cannot Explain Pricing

If management says:

“It is a group company, so we charged whatever amount was convenient.”

🚨 This is a serious concern.

Pricing should have a reasonable commercial basis and adequate documentation.

🚩 9. Same Address, Bank Account or Contact Details

Auditors should investigate unusual connections between vendors/customers and directors, promoters or employees.

For example:

Same registered address

Same contact details

Common directors

Common signatories

Common control

Such indicators may reveal an undisclosed relationship.

🚩 10. Frequent Journal Entries Between Related Parties

Manual journal entries should be reviewed for:

📌 Timing

📌 Approval

📌 Supporting documentation

📌 Business purpose

Especially where entries are passed near the year-end or reverse in the following period.

🔍 Practical Audit Procedures for RPTs

A professional RPT audit may include:

1️⃣ Obtain Management Representation and Related Party List

Start with the entity’s formal identification of related parties.

2️⃣ Review Prior-Year Information

Compare current-year relationships and transactions with previous years.

3️⃣ Review Director Interest Declarations

Check declarations and statutory registers.

4️⃣ Analyse General Ledger

Search for transactions involving directors, group companies and unusual parties.

5️⃣ Review Board Minutes

Identify transactions discussed but potentially not recorded or disclosed.

6️⃣ Perform Bank Statement Analysis

Trace large or unusual payments and receipts.

7️⃣ Review Agreements

Verify commercial terms, duration, pricing and approvals.

8️⃣ Test Transactions

Examine invoices, delivery evidence and payment records.

9️⃣ Confirm Outstanding Balances

Where appropriate, obtain external confirmations.

🔟 Review Subsequent Events

Check whether year-end balances were settled shortly after the reporting date.

1️⃣1️⃣ Evaluate Disclosures

Ensure all required disclosures are complete and consistent with the financial statements.

📊 RPT Audit Working Paper — Suggested Format

A useful audit schedule can include:

Particular Details

Related Party Name

Relationship

Type of Transaction

Transaction Amount

Opening Balance

Closing Balance

Agreement Available Yes/No

Approval Required Yes/No

Approval Verified Yes/No

Arm’s Length Review Completed/Pending

Disclosure Checked Yes/No

Audit Red Flag Yes/No

This creates a clear audit trail and helps ensure that no major related party is missed. 📋

⚠️ Management Override — A Major Risk Area

Related party transactions often involve people with significant influence over the company.

Therefore, auditors should pay particular attention to:

⚠️ Senior management instructions to bypass procedures

⚠️ Last-minute accounting entries

⚠️ Missing documentation

⚠️ Pressure not to question transactions

⚠️ Unusual transactions involving promoters

Where management override is suspected, audit procedures should be strengthened and the matter should be appropriately evaluated and communicated under the applicable audit framework.

🧾 Disclosures vs Approval — Don’t Confuse Them

One common compliance mistake is believing:

“The transaction was approved, so there is no need to disclose it.”

❌ Incorrect.

Approval and financial statement disclosure are separate requirements.

Similarly:

“The transaction is disclosed, so approval was not required.”

❌ Also incorrect.

A transaction may require:

Proper Identification → Appropriate Approval → Correct Accounting → Complete Disclosure → Audit Verification

Each stage must be independently reviewed.

🎯 RPT Audit Checklist for 2026

Before completing the audit, confirm:

☑ Complete related party list obtained

☑ Director/KMP interests reviewed

☑ Group structure examined

☑ Related party register checked

☑ General ledger searched for unidentified parties

☑ Significant transactions tested

☑ Unusual year-end transactions reviewed

☑ Agreements verified

☑ Commercial rationale assessed

☑ Pricing/arm’s length basis evaluated

☑ Required approvals checked

☑ Outstanding balances reconciled

☑ Loans and advances reviewed

☑ Financial statement disclosures verified

☑ Management representations obtained

☑ Red flags documented and resolved

💡 Key Takeaways

Auditing related party transactions requires more than simply matching invoices with payments.

The auditor must focus on three critical questions:

🔎 Have all related parties been identified?

💰 Are the transactions genuine and commercially supported?

📑 Have the transactions been correctly accounted for, approved and disclosed?

The most serious RPT issues often arise from transactions that were never properly identified or disclosed, rather than transactions that were openly presented to the auditor.

A strong RPT audit therefore combines:

Corporate Records + Ledger Analysis + Transaction Testing + Commercial Review + Disclosure Verification 📊

🏁 Conclusion

Related party transactions are a normal part of many businesses, especially promoter-led companies, family businesses and corporate groups. However, their very nature creates a heightened risk of conflicts of interest and financial misstatement.

For 2026 audits, businesses should maintain a complete related party master, properly document transactions, obtain required approvals and ensure accurate financial statement disclosures.

For auditors, the focus should be on professional scepticism: looking beyond the management-provided list and actively searching for undisclosed relationships, unusual transactions and non-commercial arrangements.

Identify → Verify → Test → Approve → Disclose → Document

That is the foundation of a strong related party transaction audit. 🔍📚