\ud83d\udd0d Auditing Related Party Transactions \u2014 Disclosures and Red Flags for 2026<\/p>\n
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.<\/p>\n
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. \ud83d\udea8<\/p>\n
For auditors, the biggest challenge is often not checking the arithmetic of a related party transaction\u2014it 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.<\/p>\n
This article explains the key disclosures, audit procedures and practical red flags businesses and auditors should watch for in 2026.<\/p>\n
\ud83d\udccc What Is a Related Party Transaction?<\/p>\n
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.<\/p>\n
Common examples include:<\/p>\n
\ud83c\udfe2 Sale or purchase between group companies
\n
\ud83d\udcb0 Loans or advances to directors or related entities
\n
\ud83c\udfe0 Rent paid to a director or promoter-related entity
\n
\ud83d\udc68\u200d\ud83d\udcbc Remuneration and payments to key management personnel
\n
\ud83e\udd1d Services provided to subsidiaries or associates
\n
\ud83d\udce6 Purchase of goods from promoter-controlled entities
\n
\ud83c\udfe6 Guarantees given for related parties<\/p>\n
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.<\/p>\n
\u2696\ufe0f Key Compliance Framework for RPT Audits<\/p>\n
Related party transactions may need to be examined from multiple perspectives.<\/p>\n
\ud83e\uddfe 1. Accounting Disclosure<\/p>\n
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.<\/p>\n
\ud83c\udfe2 2. Companies Act Compliance<\/p>\n
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.<\/p>\n
\ud83d\udd0d 3. Audit Requirements<\/p>\n
SA 550 \u2013 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.<\/p>\n
\ud83d\udcca 4. Listed Entity Requirements<\/p>\n
Listed companies may also have additional obligations under the SEBI LODR framework relating to related party transactions and disclosures.<\/p>\n
\ud83e\udde0 Why Are Related Party Transactions High-Risk?<\/p>\n
RPTs can be used for legitimate business purposes, such as operational efficiency within a group.<\/p>\n
However, they may also create opportunities for:<\/p>\n
\u26a0\ufe0f Diversion of funds
\n
\u26a0\ufe0f Artificial revenue recognition
\n
\u26a0\ufe0f Excessive expenses
\n
\u26a0\ufe0f Transfer of assets at non-commercial values
\n
\u26a0\ufe0f Undisclosed liabilities
\n
\u26a0\ufe0f Concealment of transactions through intermediaries
\n
\u26a0\ufe0f Management override of internal controls
\n
\u26a0\ufe0f Conflicts of interest<\/p>\n
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”.<\/p>\n
\ud83d\udd0d Step 1 \u2014 Identify All Related Parties<\/p>\n
The first step in an RPT audit is creating a complete related party universe.<\/p>\n
Auditors should review information from multiple sources, such as:<\/p>\n
\ud83d\udcc4 Register of directors and KMPs
\n
\ud83d\udcc4 Declarations of interest by directors
\n
\ud83d\udcc4 Board and shareholder meeting minutes
\n
\ud83d\udcc4 Register of contracts and arrangements
\n
\ud83d\udcc4 Previous year’s financial statements
\n
\ud83d\udcc4 Group structure and shareholding records
\n
\ud83d\udcc4 Major vendor and customer lists
\n
\ud83d\udcc4 Loan and investment records
\n
\ud83d\udcc4 Legal agreements and contracts<\/p>\n
A major audit risk arises when the auditor relies only on the management-prepared related party list.<\/p>\n
The best audit question is often: “What related party has management not told us about?” \ud83d\udd0e<\/p>\n
SA 550 specifically focuses on obtaining an understanding sufficient to identify related party relationships, transactions and related fraud-risk factors.<\/p>\n
\ud83d\udccb Step 2 \u2014 Reconcile the Related Party List With the Books<\/p>\n
Once related parties are identified, the auditor should search for transactions with them in the accounting records.<\/p>\n
Check:<\/p>\n
Related Party Master List \u2194 Ledger Accounts \u2194 Bank Statements \u2194 Agreements \u2194 Financial Statements<\/p>\n
The auditor should investigate whether transactions have been recorded under:<\/p>\n
Different trade names
\n
Group entities
\n
Personal names of promoters\/directors
\n
Family-controlled businesses
\n
Temporary or miscellaneous ledgers<\/p>\n
A related party may not always appear in the books under an obvious name.<\/p>\n
\ud83d\udcb0 Step 3 \u2014 Review the Nature and Commercial Purpose<\/p>\n
For every material or unusual RPT, ask:<\/p>\n
Why was this transaction entered into?
\n
Is it in the ordinary course of business?
\n
Is there a genuine commercial purpose?
\n
Are the terms comparable with independent parties?
\n
Is the transaction supported by proper documentation?<\/p>\n
For example, if a company pays a very high consultancy fee to a promoter-related entity, the auditor should understand:<\/p>\n
\ud83d\udccc What services were provided?
\n
\ud83d\udccc Is there an agreement?
\n
\ud83d\udccc Is there evidence of service delivery?
\n
\ud83d\udccc How was the fee determined?
\n
\ud83d\udccc Is the pricing commercially reasonable?<\/p>\n
\ud83d\udcca Step 4 \u2014 Test Arm’s Length Nature and Pricing<\/p>\n
A related party transaction may require scrutiny because the relationship can influence pricing.<\/p>\n
Auditors should review:<\/p>\n
Comparable third-party transactions
\n
Quotations and market rates
\n
Pricing policies
\n
Gross margins
\n
Service agreements
\n
Board-approved terms
\n
Supporting calculations<\/p>\n
For example:<\/p>\n
Company pays unrelated consultant \u2192 \u20b92 lakh<\/p>\n
Company pays promoter-related consultant for similar work \u2192 \u20b910 lakh<\/p>\n
This difference does not automatically prove wrongdoing, but it creates a clear audit red flag requiring further investigation.<\/p>\n
SA 550 defines an arm’s length transaction as one conducted on terms similar to those between independent parties acting in their own interests.<\/p>\n
\ud83d\udcdd Step 5 \u2014 Verify Required Approvals<\/p>\n
For transactions covered under Section 188, the auditor should review the applicable approval process.<\/p>\n
Depending on the transaction and circumstances, this may involve:<\/p>\n
\u2714\ufe0f Board approval
\n
\u2714\ufe0f Shareholder approval, where required
\n
\u2714\ufe0f Audit Committee review, where applicable
\n
\u2714\ufe0f Disclosure of interested directors
\n
\u2714\ufe0f Proper minutes and supporting documents<\/p>\n
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.<\/p>\n
\ud83d\udcd1 Step 6 \u2014 Check Financial Statement Disclosures<\/p>\n
Proper disclosure is one of the most important areas of an RPT audit.<\/p>\n
Depending on the applicable accounting framework, disclosures may include:<\/p>\n
\ud83d\udccc Nature of the relationship
\n
\ud83d\udccc Nature of transactions
\n
\ud83d\udccc Transaction amounts
\n
\ud83d\udccc Outstanding balances
\n
\ud83d\udccc Commitments
\n
\ud83d\udccc Key management personnel-related information
\n
\ud83d\udccc Other disclosures required by the applicable standard<\/p>\n
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.<\/p>\n
\ud83d\udea8 Top Red Flags in Related Party Transactions
\n
\ud83d\udea9 1. Transactions Not Included in the Related Party Register<\/p>\n
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.<\/p>\n
It may indicate:<\/p>\n
Weak internal controls
\n
Incomplete declarations
\n
Intentional concealment
\n
\ud83d\udea9 2. Large Round-Sum Payments<\/p>\n
Payments such as:<\/p>\n
\u20b910,00,000
\n
\u20b925,00,000
\n
\u20b950,00,000<\/p>\n
without clear invoices, contracts or business justification should receive increased scrutiny.<\/p>\n
The issue is not the round number itself\u2014it is the lack of evidence supporting the transaction.<\/p>\n
\ud83d\udea9 3. Unusual Year-End Transactions<\/p>\n
Transactions entered into close to the reporting date can affect:<\/p>\n
\ud83d\udcca Revenue
\n
\ud83d\udcb0 Profit
\n
\ud83c\udfe6 Assets and liabilities
\n
\ud83d\udcc8 Financial ratios<\/p>\n
Auditors should carefully examine significant transactions recorded just before or after year-end, particularly where related parties are involved.<\/p>\n
\ud83d\udea9 4. Excessive Outstanding Balances<\/p>\n
A large receivable from a related party that remains unpaid for several years may indicate:<\/p>\n
\u26a0\ufe0f Recoverability concerns
\n
\u26a0\ufe0f Possible diversion of funds
\n
\u26a0\ufe0f Improper classification
\n
\u26a0\ufe0f Need for impairment\/provision assessment<\/p>\n
Similarly, a large payable that remains outstanding without demand may require investigation.<\/p>\n
\ud83d\udea9 5. Loans Without Clear Terms<\/p>\n
Loans or advances involving related parties should be reviewed for:<\/p>\n
Interest rate
\n
Repayment period
\n
Security
\n
Actual repayment
\n
Commercial purpose<\/p>\n
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.<\/p>\n
\ud83d\udea9 6. Circular Movement of Funds \ud83d\udd04<\/p>\n
Example:<\/p>\n
Company A \u2192 Related Party B \u2192 Another Entity \u2192 Company A<\/p>\n
Circular movement of funds can potentially conceal the true nature of transactions.<\/p>\n
Auditors should trace:<\/p>\n
\ud83d\udcb3 Source of funds
\n
\u27a1\ufe0f Movement of funds
\n
\u27a1\ufe0f End use
\n
\u27a1\ufe0f Counterparty relationship<\/p>\n
\ud83d\udea9 7. Transactions Outside the Normal Course of Business<\/p>\n
A manufacturing company suddenly:<\/p>\n
\u274c Gives a large interest-free advance
\n
\u274c Buys unrelated property from a director’s entity
\n
\u274c Provides a major guarantee without business justification<\/p>\n
These transactions deserve increased audit attention.<\/p>\n
SA 550 recognises significant transactions outside the normal course of business as important for identifying related party relationships and assessing risks of material misstatement.<\/p>\n
\ud83d\udea9 8. Management Cannot Explain Pricing<\/p>\n
If management says:<\/p>\n
“It is a group company, so we charged whatever amount was convenient.”<\/p>\n
\ud83d\udea8 This is a serious concern.<\/p>\n
Pricing should have a reasonable commercial basis and adequate documentation.<\/p>\n
\ud83d\udea9 9. Same Address, Bank Account or Contact Details<\/p>\n
Auditors should investigate unusual connections between vendors\/customers and directors, promoters or employees.<\/p>\n
For example:<\/p>\n
Same registered address
\n
Same contact details
\n
Common directors
\n
Common signatories
\n
Common control<\/p>\n
Such indicators may reveal an undisclosed relationship.<\/p>\n
\ud83d\udea9 10. Frequent Journal Entries Between Related Parties<\/p>\n
Manual journal entries should be reviewed for:<\/p>\n
\ud83d\udccc Timing
\n
\ud83d\udccc Approval
\n
\ud83d\udccc Supporting documentation
\n
\ud83d\udccc Business purpose<\/p>\n
Especially where entries are passed near the year-end or reverse in the following period.<\/p>\n
\ud83d\udd0d Practical Audit Procedures for RPTs<\/p>\n
A professional RPT audit may include:<\/p>\n
1\ufe0f\u20e3 Obtain Management Representation and Related Party List<\/p>\n
Start with the entity’s formal identification of related parties.<\/p>\n
2\ufe0f\u20e3 Review Prior-Year Information<\/p>\n
Compare current-year relationships and transactions with previous years.<\/p>\n
3\ufe0f\u20e3 Review Director Interest Declarations<\/p>\n
Check declarations and statutory registers.<\/p>\n
4\ufe0f\u20e3 Analyse General Ledger<\/p>\n
Search for transactions involving directors, group companies and unusual parties.<\/p>\n
5\ufe0f\u20e3 Review Board Minutes<\/p>\n
Identify transactions discussed but potentially not recorded or disclosed.<\/p>\n
6\ufe0f\u20e3 Perform Bank Statement Analysis<\/p>\n
Trace large or unusual payments and receipts.<\/p>\n
7\ufe0f\u20e3 Review Agreements<\/p>\n
Verify commercial terms, duration, pricing and approvals.<\/p>\n
8\ufe0f\u20e3 Test Transactions<\/p>\n
Examine invoices, delivery evidence and payment records.<\/p>\n
9\ufe0f\u20e3 Confirm Outstanding Balances<\/p>\n
Where appropriate, obtain external confirmations.<\/p>\n
\ud83d\udd1f Review Subsequent Events<\/p>\n
Check whether year-end balances were settled shortly after the reporting date.<\/p>\n
1\ufe0f\u20e31\ufe0f\u20e3 Evaluate Disclosures<\/p>\n
Ensure all required disclosures are complete and consistent with the financial statements.<\/p>\n
\ud83d\udcca RPT Audit Working Paper \u2014 Suggested Format<\/p>\n
A useful audit schedule can include:<\/p>\n
Particular\tDetails
\n
Related Party Name
\n
Relationship
\n
Type of Transaction
\n
Transaction Amount
\n
Opening Balance
\n
Closing Balance
\n
Agreement Available\tYes\/No
\n
Approval Required\tYes\/No
\n
Approval Verified\tYes\/No
\n
Arm’s Length Review\tCompleted\/Pending
\n
Disclosure Checked\tYes\/No
\n
Audit Red Flag\tYes\/No<\/p>\n
This creates a clear audit trail and helps ensure that no major related party is missed. \ud83d\udccb<\/p>\n
\u26a0\ufe0f Management Override \u2014 A Major Risk Area<\/p>\n
Related party transactions often involve people with significant influence over the company.<\/p>\n
Therefore, auditors should pay particular attention to:<\/p>\n
\u26a0\ufe0f Senior management instructions to bypass procedures
\n
\u26a0\ufe0f Last-minute accounting entries
\n
\u26a0\ufe0f Missing documentation
\n
\u26a0\ufe0f Pressure not to question transactions
\n
\u26a0\ufe0f Unusual transactions involving promoters<\/p>\n
Where management override is suspected, audit procedures should be strengthened and the matter should be appropriately evaluated and communicated under the applicable audit framework.<\/p>\n
\ud83e\uddfe Disclosures vs Approval \u2014 Don’t Confuse Them<\/p>\n
One common compliance mistake is believing:<\/p>\n
“The transaction was approved, so there is no need to disclose it.”<\/p>\n
\u274c Incorrect.<\/p>\n
Approval and financial statement disclosure are separate requirements.<\/p>\n
Similarly:<\/p>\n
“The transaction is disclosed, so approval was not required.”<\/p>\n
\u274c Also incorrect.<\/p>\n
A transaction may require:<\/p>\n
Proper Identification \u2192 Appropriate Approval \u2192 Correct Accounting \u2192 Complete Disclosure \u2192 Audit Verification<\/p>\n
Each stage must be independently reviewed.<\/p>\n
\ud83c\udfaf RPT Audit Checklist for 2026<\/p>\n
Before completing the audit, confirm:<\/p>\n
\u2611 Complete related party list obtained<\/p>\n
\u2611 Director\/KMP interests reviewed<\/p>\n
\u2611 Group structure examined<\/p>\n
\u2611 Related party register checked<\/p>\n
\u2611 General ledger searched for unidentified parties<\/p>\n
\u2611 Significant transactions tested<\/p>\n
\u2611 Unusual year-end transactions reviewed<\/p>\n
\u2611 Agreements verified<\/p>\n
\u2611 Commercial rationale assessed<\/p>\n
\u2611 Pricing\/arm’s length basis evaluated<\/p>\n
\u2611 Required approvals checked<\/p>\n
\u2611 Outstanding balances reconciled<\/p>\n
\u2611 Loans and advances reviewed<\/p>\n
\u2611 Financial statement disclosures verified<\/p>\n
\u2611 Management representations obtained<\/p>\n
\u2611 Red flags documented and resolved<\/p>\n
\ud83d\udca1 Key Takeaways<\/p>\n
Auditing related party transactions requires more than simply matching invoices with payments.<\/p>\n
The auditor must focus on three critical questions:<\/p>\n
\ud83d\udd0e Have all related parties been identified?
\n
\ud83d\udcb0 Are the transactions genuine and commercially supported?
\n
\ud83d\udcd1 Have the transactions been correctly accounted for, approved and disclosed?<\/p>\n
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.<\/p>\n
A strong RPT audit therefore combines:<\/p>\n
Corporate Records + Ledger Analysis + Transaction Testing + Commercial Review + Disclosure Verification \ud83d\udcca<\/p>\n
\ud83c\udfc1 Conclusion<\/p>\n
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.<\/p>\n
For 2026 audits, businesses should maintain a complete related party master, properly document transactions, obtain required approvals and ensure accurate financial statement disclosures.<\/p>\n
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.<\/p>\n
Identify \u2192 Verify \u2192 Test \u2192 Approve \u2192 Disclose \u2192 Document<\/p>\n
That is the foundation of a strong related party transaction audit. \ud83d\udd0d\ud83d\udcda<\/p>\n","protected":false},"excerpt":{"rendered":"
Learn how to audit related party transactions in India for 2026, including SA 550 requirements, Ind AS 24 disclosures, Section 188 compliance, audit procedures and major red flags.<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_bbp_topic_count":0,"_bbp_reply_count":0,"_bbp_total_topic_count":0,"_bbp_total_reply_count":0,"_bbp_voice_count":0,"_bbp_anonymous_reply_count":0,"_bbp_topic_count_hidden":0,"_bbp_reply_count_hidden":0,"_bbp_forum_subforum_count":0,"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[1],"tags":[967,969,486,968],"class_list":["post-1719","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-audit","tag-ind-as-24","tag-related-party-transactions","tag-sa-550"],"_links":{"self":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/1719","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/comments?post=1719"}],"version-history":[{"count":0,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/1719\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/media?parent=1719"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/categories?post=1719"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/tags?post=1719"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}