Related Party Transaction FAQs: Ind AS 24 Audit Procedures [2026]

Published: April 5, 2026 | Category: FAQ | Read Time: 10 minutes | Author: CORAA Team

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Related Party Fundamentals

Q1: What is a "related party" per Ind AS 24?

A: Ind AS 24 (Related Party Disclosures) defines related parties as:

1. Key Management Personnel

• Directors
• CFO
• Audit committee members
• Their family members (spouse, children, dependents)

2. Entities with Common Control

• Parent company
• Subsidiary
• Associate
• Joint venture
• Other companies under common control

3. Family Members of Key Management

• Spouse, children, dependents of directors/key personnel
• Any entity controlled by them

Examples of RP Transactions:

• Sale of inventory to director's related company (at special price)
• Rental of property from director's family member
• Loan to employee at preferential rate
• Purchase of services from management company
• Guarantees provided for related party's obligations

Per Ind AS 24, auditors must identify ALL related parties and test transactions for arm's length pricing.

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Q2: Why do auditors focus so heavily on related party transactions?

A: Multiple reasons:

Audit Risk: High-risk area (potential for fraud, self-dealing)

Disclosure Risk: Frequently incomplete or inaccurate disclosures

NFRA Focus: Inspection reports consistently note RP transaction issues

Common Problems:

• Transactions not identified (hidden RP transactions)
• Pricing not at arm's length (unfavorable to company)
• Disclosures incomplete or inaccurate
• Lack of board approval documentation

Audit Relevance: RP transactions can significantly impact financial statements (revenue, expenses, balance sheet).

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RP Identification

Q3: How do we identify all related parties?

A: Systematic identification approach:

Step 1: Management Questionnaire

• Request RP list from management/CFO
• Ask about family relationships (spouse, children, dependents)
• Ask about entity interests/investments

Step 2: Board/Audit Committee

• Review board minutes for conflict-of-interest declarations
• Identify directors' related entities

Step 3: Organization Structure Review

• Identify parent, subsidiaries, associates
• Trace ownership of related entities
• Map common directors (indicate control)

Step 4: GL Analysis

• Review significant transactions (unusual customers/vendors)
• Identify transactions with entities having similar names to management

Step 5: Bank/Debt Confirmations

• Bank confirmations may reveal guarantees (RP exposure)
• Loan confirmations may show related party status

Step 6: Legal Review

• Review articles of association (ownership structure)
• Review minutes for related party transactions

Step 7: Subsequent Events

• Post year-end transactions may indicate RPs missed

Per ISA 550 (Related Parties), auditors must perform comprehensive RP identification.

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Q4: What happens if we miss a related party?

A: Audit risk and potential misstatement:

Example:

• Company makes ₹50L "sale" to "third party" customer
• Later discovered: "Third party" is owned by company director

Implications:

• Transaction may not be at arm's length (pricing favorable to director)
• Disclosure required under Ind AS 24 but omitted
• Financial statements misstated (if pricing was unfavorable to company)

NFRA Consequence:

• Audit file inspection shows missing RP identification
• Finding: "Auditor failed to identify related party transaction"
• Sanction: Reputation damage, potential inspection follow-up

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RP Transaction Testing

Q5: How do we test related party transactions for arm's length pricing?

A: Arm's length testing procedure:

RELATED PARTY TRANSACTION TESTING

Example: Company purchases ₹50L supplies from Director's Company

1. TRANSACTION IDENTIFICATION ✓
   ☐ Transaction obtained (PO, invoice, contract)
   ☐ Related party status confirmed (director owns company)
   ☐ Transaction type: Purchase of supplies

2. PRICING VERIFICATION ✓
   ☐ Price paid: ₹100/unit for 50,000 units = ₹50L
   ☐ Market comparison:
     - Standard supplier A: ₹95/unit
     - Standard supplier B: ₹110/unit
     - Market range: ₹95-110/unit
   ☐ Related party price: ₹100/unit (WITHIN market range) ✓

3. COMMERCIAL SUBSTANCE ✓
   ☐ Were supplies actually delivered? YES (verified via receiving report)
   ☐ Were supplies of acceptable quality? YES
   ☐ Were payment terms standard? YES (net 30, industry standard)

4. DOCUMENTATION ✓
   ☐ PO signed by authorized person? YES
   ☐ Invoice matches terms? YES
   ☐ Board approval obtained? YES
   ☐ Disclosure documented? YES

5. CONCLUSION ✓
   Transaction tested:
   - Pricing at arm's length ✓
   - Commercial substance evident ✓
   - Board approved ✓
   - Properly disclosed ✓
   Conclusion: Transaction acceptable

AUDIT WORKPAPER:
Procedure: RP transaction testing (supplies purchase)
RP: Director's Company Ltd
Amount: ₹50L
Pricing: ₹100/unit vs. market ₹95-110/unit
Result: At arm's length; acceptable

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Q6: What if RP transaction pricing is NOT at arm's length?

A: Non-arm's length transaction example:

Example: Company purchases ₹50L supplies from Director's Company

Testing:
- Price paid: ₹150/unit
- Market price: ₹95-110/unit
- Pricing NOT at arm's length (150% above market) ✗

Audit Assessment:
- Transaction appears unfavorable to company
- Company paid premium to director's company
- Potential related party abuse

Auditor Action:
1. Investigate: Why was premium paid?
   - Possible answer: "Special quality/rush delivery"
   - Verify answer (was special quality/rush actually provided?)

2. Propose Adjustment:
   - Cost should be ₹50L (market rate)
   - Current cost ₹75L (premium paid)
   - Adjustment: ₹25L reduction to cost of goods sold

3. Escalate:
   - Significant RP pricing issue
   - Requires EQCM partner review
   - May require disclosure emphasis

Result: Adjustment proposed; financial statement impact: ₹25L

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Q7: When is board approval required for RP transactions?

A: Per Ind AS 24, disclosure required; per company law, approval often required:

Board Approval Requirements (Companies Act, 2013):

• Material RP transactions >₹1 crore (typically) require board approval
• Listed companies: Audit committee pre-approval required
• Unlisted: Board approval required

Audit Procedure:

• Identify material RP transactions (>materiality threshold)
• Obtain board minutes showing approval
• Verify decision-makers were independent (no RP conflicts)

Common Error: Company executes RP transaction without board approval (especially for transactions <₹1 crore).

Audit Finding: If material RP transaction lacks board approval, may require disclosure or adjustment.

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RP Disclosures

Q8: What RP disclosures are required under Ind AS 24?

A: Mandatory RP disclosures:

RELATED PARTY DISCLOSURES (Ind AS 24)

1. IDENTIFICATION OF RELATED PARTIES
   Key management personnel:
   - Ramesh Kumar (Chairman)
   - Priya Desai (Director)
   - Vikram Singh (CFO)
   [List all directors, key personnel, family]

2. RELATED PARTY TRANSACTIONS
   Transaction Type | Amount (₹L) | Terms
   Supplies purchase | 50 | Market rate, net 30
   Rent paid | 12 | FMV rate, annual
   Loan advanced to employee | 5 | 0% interest, unsecured
   [List all significant transactions]

3. OUTSTANDING BALANCES
   Receivable from RP: ₹2L (payment due 30 days)
   Payable to RP: ₹0
   Loan to RP: ₹5L (principal outstanding)

4. KEY MANAGEMENT COMPENSATION
   Salaries & bonuses: ₹50L (directors + key personnel)
   Post-employment benefits: ₹5L
   Other benefits: ₹2L
   Total: ₹57L

5. CONTINGENT LIABILITIES
   Guarantee provided to bank on behalf of RP: ₹20L

6. BOARD APPROVAL
   Related party transaction policy: [Details]
   Approvals obtained for: [List material transactions]

7. TRANSACTIONS WITH OTHER RELATED ENTITIES
   Parent company: Transactions ₹X
   Associate companies: Transactions ₹Y
   [Any other group transactions]

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Q9: What are common RP disclosure errors?

A: Frequent findings:

Error 1: Incomplete RP List

• Auditor identifies RP transactions but list doesn't include those RPs
• Example: Director's spouse owns supplier; spouse not listed as RP

Error 2: Missing Transaction Details

• Transactions listed but amounts/terms missing
• Example: Disclosure states "Rent paid to RP" but amount not stated

Error 3: Inaccurate Amounts

• Disclosed amount doesn't match GL testing
• Example: Disclosure states ₹50L but GL shows ₹75L

Error 4: Missing Contingent Liabilities

• Guarantees provided for RP not disclosed
• Example: Company guaranteed director's personal loan; not mentioned

Error 5: Missing Compensation Disclosure

• Key management compensation incomplete
• Example: Only salary shown; benefits/bonuses omitted

Audit Procedure: Cross-verify disclosures to GL and transaction testing.

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Listed Company RP Considerations

Q10: What additional RP requirements apply to listed companies?

A: Listed companies have heightened RP requirements:

Per SEBI Regulations (Listed Companies):

1. Audit Committee Review

   • RP transaction approval by audit committee (pre-approval)
   • Material RP transactions require detailed review

2. Disclosure in Board Report

   • Form AOC-2 (RP transactions summary)
   • Particulars of every material RP transaction

3. Arm's Length Certification

   • Company must certify transactions are at arm's length
   • OR: Exceptions disclosed (with reasons)

4. Related Party Policy

   • Board-approved policy on RP transactions
   • Policy must specify approval thresholds

5. Quarterly Disclosures

   • Listed companies disclose RP transactions quarterly (not just year-end)

Audit Implication: Listed company audits require enhanced RP testing and disclosure review.

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RP Testing & NFRA Defensibility

Q11: What NFRA expects in RP testing?

A: NFRA inspection focus areas:

NFRA Inspector Expectations:

1. Comprehensive RP Identification

   "Auditor identified all related parties through questionnaire, board minutes review, organizational structure analysis. No hidden RP transactions missed."

2. Arm's Length Testing

   "For each material RP transaction, auditor verified pricing against market comparables. Documented that pricing was at arm's length. Obtained supporting evidence."

3. Board Approval Verification

   "Auditor obtained board minutes showing approval for material RP transactions. Verified approvals were obtained before transaction execution."

4. Disclosure Completeness

   "Disclosed RP transactions reconciled to GL. Amounts accurate. Key management compensation fully disclosed. Form AOC-2 properly prepared (for listed)."

5. Documentation

   "Audit file contains RP identification summary, transaction testing workpapers, disclosure review checklist. All judgments documented."

Common NFRA Findings:

• Incomplete RP identification
• RP pricing not verified as arm's length
• Board approval not evidenced
• Disclosure inaccuracies

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Q12: How do we document RP testing comprehensively?

A: Recommended audit file documentation:

RELATED PARTY TESTING - AUDIT FILE

1. RP IDENTIFICATION SUMMARY
   Date: [Date]
   Procedures performed:
   - Management questionnaire (attached)
   - Board minutes review (filed as ref)
   - Organization structure review (documented)
   - GL analysis (top 10 customers/vendors reviewed)

   RPs Identified (Final List):
   1. Ramesh Kumar (Chairman)
   2. Priya Desai (Director)
   3. Kumar Associates (Owned by Chairman)
   [Complete list]

2. MATERIAL RP TRANSACTIONS TESTED
   | RP | Transaction | Amount | Pricing | Board Approval | Disclosure |
   | --- | --- | --- | --- | --- | --- |
   | Kumar Associates | Supplies | ₹50L | At arm's length ✓ | YES ✓ | YES ✓ |
   | Chairman (Family) | Rent | ₹12L | At FMV ✓ | YES ✓ | YES ✓ |
   | CFO | Loan | ₹5L | 0% (disclosed) ✓ | YES ✓ | YES ✓ |

3. ARM'S LENGTH VERIFICATION
   Transaction: Supplies purchase (₹50L)
   Price paid: ₹100/unit
   Market comparables:
   - Supplier A: ₹95/unit
   - Supplier B: ₹110/unit
   Range: ₹95-110
   Conclusion: AT ARM'S LENGTH ✓

4. BOARD APPROVAL VERIFICATION
   Meeting minutes dated: [Date]
   Transactions approved:
   - Supplies purchase ✓
   - Rent payment ✓
   - Loan advanced ✓

5. DISCLOSURE REVIEW
   Form AOC-2 Prepared? YES ✓
   RP transactions reconciled to GL? YES ✓
   Key management compensation disclosed? YES ✓
   Contingent liabilities disclosed? YES ✓
   Amounts match GL testing? YES ✓

CONCLUSION:
- All material RP transactions tested and found at arm's length
- Board approvals evidenced
- Disclosures complete and accurate
- No audit issues identified

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Implementation Questions

Q13: What tools can help with RP identification and testing?

A: Available tools:

Tool 1: Spreadsheet-Based

• Manual RP list maintenance
• Transaction tracking spreadsheet
• Pricing comparison calculator

Tool 2: Audit Software Features

• RP questionnaire templates
• RP transaction flagging
• GL filtering for suspicious transactions

Tool 3: NLP/AI Tools

• Scan contracts for RP language
• Identify high-risk transactions automatically
• Flag unusual amounts/terms

Tool 4: Specialized RP Software

• Company-specific RP policies
• Transaction monitoring
• Disclosure automation

Recommendation: Start with spreadsheet; migrate to software as volume grows.

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Q14: How long does RP testing take?

A: Time estimate depends on complexity:

Small Company (No Material RPs):

• RP identification: 5 hours
• Testing: 5 hours
• Disclosure review: 3 hours
• Total: 13 hours

Medium Company (5-10 Material RPs):

• RP identification: 10 hours
• Testing: 15 hours
• Disclosure review: 5 hours
• Total: 30 hours

Large/Listed Company (10+ Material RPs):

• RP identification: 20 hours
• Testing: 40 hours
• Disclosure review: 10 hours
• Total: 70 hours

With AI Tools: Reduce by 30-40% (automated RP flagging, contract scanning).

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Best Practices

Q15: What are best practices for RP testing?

A:

1. Start Early

   • Begin RP identification at planning phase
   • Build time into audit schedule

2. Be Comprehensive

   • Don't skip family member identification
   • Review all GL transactions for potential RPs
   • Use multiple identification methods

3. Document Thoroughly

   • Audit file shows all identification procedures
   • Testing workpapers show arm's length verification
   • Disclosure review checklist completed

4. Escalate Issues

   • Non-arm's length transactions → Propose adjustment
   • Missing disclosures → Require disclosure addition
   • Missing board approvals → Require explanation

5. Verify Disclosures

   • Cross-verify disclosed RP list to identified RPs
   • Reconcile disclosed amounts to GL
   • Ensure all transaction details included

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Key Takeaways

1. RP identification is comprehensive. Multiple procedures required (questionnaire, minutes, GL analysis, structure review).

2. ALL material RP transactions tested for arm's length pricing. Comparison to market pricing required.

3. Board approval required for material transactions. Auditor must evidence approval.

4. Disclosures are extensive. RP list, transactions, compensation, contingencies all required.

5. Listed companies have heightened requirements. Audit committee pre-approval, Form AOC-2, quarterly disclosures.

6. NFRA focus area. Inspection reports consistently note RP transaction audit issues.

7. Documentation is critical. Audit file must show comprehensive procedures and conclusions.

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Related Resources

• Related Party Transaction Procedures: AI Verification
• Audit Risk Scorer: Assessment Framework
• Contract NLP: Lease Identification & Testing

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About CORAA

CORAA helps Indian audit firms test related party transactions per Ind AS 24. From comprehensive RP identification to arm's length verification to disclosure compliance, ensure thorough RP audit with our Ind AS 24 framework.

Learn more: Visit our website

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Sources

• Ind AS 24: Related Party Disclosures
• ISA 550: Related Parties
• Companies Act, 2013: Related Party Transactions
• SEBI Listing Regulations: Related Party Transactions