Related party transactions are risky for an auditor because the other side is not an independent buyer or seller. Management may set the price, skip the paperwork or leave the deal out of the list entirely. SA 550 asks the auditor to find the related parties, understand the deals, test the approvals, and gather evidence before accepting any statement that a deal was at arm's length.
Last reviewed: 17 October 2026. Facts checked. We opened a web search for SA 550 and got ICAI training slides (dated 2013) and commentary, not the current ICAI text of the standard. We could not open the text of section 188 or section 177(4) of the Companies Act, or Rule 6A; the approval points below come from secondary summaries. Check paragraph numbers, the exact proviso to section 188 and any listed-company rules in the official texts before quoting. No monetary thresholds are given here because we could not source them.
Why the auditor treats these deals differently
An ordinary sale is priced by a market. A sale to a director's firm may be priced by the director. That is why SA 550 treats related party deals as an area where the risk of misstatement can be significant, especially where the structure is complex, the entity's systems do not flag related parties, or the terms are not arm's length. Fraud risk factors linked to related parties are also part of the assessment.
For the legal side of approvals and disclosures, see our guide to related party transactions under the Companies Act and SEBI LODR. This post is about what the auditor does with the file.
The five steps
1. Get the list, then doubt it
Ask management for the names of related parties and the nature of dealings. Then compare that list with other sources: the directors' disclosures of interest, the register of contracts, the shareholder register, prior-year files and the minutes. Look for parties that appear in the ledger with unusual patterns: a creditor paid early every time, a debtor that is never chased, a vendor whose address matches a director's.
2. Understand each significant relationship
Record what the party does, why the company deals with it, and who negotiated. A related party that supplies a service the company could buy elsewhere is not wrong, but the file should say why it does not.
3. Test the approvals
Match each transaction to the approval route the company's own policy and the law require. Secondary sources describe an audit committee review, an omnibus approval valid for one financial year in the cases the rules allow, and board approval unless the deal is in the ordinary course at arm's length. Verify the exact conditions in the Act and Rules, then check the minutes, dates and whether an interested director voted.
4. Challenge the arm's length statement
If the financial statements say a deal was on arm's length terms, SA 550 asks for enough appropriate evidence to support that claim. Management's word is not evidence. Comparable invoices, quotations from independent suppliers, a valuation report or a transfer pricing study can be.
5. Check disclosure and completeness
Compare the note with the ledgers: names, nature, amounts and balances outstanding. Also run a reverse check. Search the ledger for large or round-sum entries to parties not on the list.
Worked example
A manufacturing company, Meridian Components Pvt Ltd, buys packing material. During the audit the team finds that one vendor, Shree Pack, received payments of Rs 1.8 crore in the year. The vendor is not on the related party list.
- Identify. The vendor's registered address matches the residential address in a director's KYC on file. Searching the MCA master data for the vendor shows a director's spouse as a partner in the firm.
- Ask. Management says the relative has no role in pricing and the vendor was chosen on quality.
- Approval. No board or audit committee minute mentions the vendor.
- Price test. The team collects two independent quotations for the same specification. Shree Pack's rate is higher than both, by a gap management cannot explain with delivery terms.
- Conclusion. The team asks management to add the party and the transactions to the related party note, discusses the approval gap with those charged with governance, considers the effect on the audit report and evaluates whether the pricing points to a wider issue. It also reviews the written representations covering related parties; see our note on the management representation letter under SA 580.
The figures are invented for illustration. The method is the point.
Common mistakes in the file
- Copying the prior-year list without refreshing it.
- Treating Ind AS 24 and the Companies Act definitions as the same. They overlap but are not identical; the Ind AS 24 related party checklist shows the Ind AS side.
- Accepting a "market rate" note with no comparator attached.
- Not recording who the auditor spoke to about interested directors.
Frequently Asked Questions
Does SA 550 apply to every audit?
It applies to audits of financial statements under the Standards on Auditing. The depth depends on risk and the reporting framework.
Is a related party transaction illegal?
No. The law and standards require approval and disclosure, not avoidance.
Can an auditor accept "arm's length" on management's say-so?
No. If the claim is made in the financial statements, the auditor needs evidence to support it.
What if management hides a related party?
The auditor treats it as a possible fraud risk, extends procedures and considers the effect on the report. Seek advice on reporting duties; see the section 143 powers and duties guide.
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