Auditing Related-Party Transactions: A Finding Framework

Finding the connection in master data

Compare the supplier master to the register of directors — shared addresses, shared contact numbers, shared bank accounts. A vendor set up and approved by a single person, with no second approval on file, is a segregation-of-duties gap that makes exactly this kind of undisclosed connection possible in the first place.

Two separate questions: disclosed, and fair

A related-party finding is really two distinct questions, and they need to stay separate. Was it disclosed? That can be proven directly from the records. Were the terms fair? That needs evidence and a comparison — and it’s not something to assume an answer to before checking.

On terms: if two independent vendors on the same routes charge roughly ₹38,000–39,000 a trip, and the director-linked vendor charges ₹47,000, that’s a real, measurable gap — not proof of wrongdoing on its own, but a fact that needs explaining.

A loan disguised as a supplier advance

An unexplained “advances to suppliers” balance is worth vouching to its underlying contracts. A worked case: of a ₹3.4 crore advances balance, ₹1.5 crore turns out not to be an advance for goods or services at all — it’s a loan to a company owned by a director’s family, with no mention in the board minutes. The correction reclassifies the amount (debit loans to related parties, credit advances to suppliers) — profit doesn’t move, but the related-party disclosure now has to appear in the notes, since ₹1.5 crore is well above overall materiality.

Three checks for arm’s-length terms

• —Price against other suppliers for the same service, route, or product.
• —Terms against other suppliers — credit period, penalties, volume discounts.
• —Process — were quotes obtained, and did someone independent of the director approve it?

If price is comparable, terms are normal, and the process was proper, the transaction can simply be disclosed and left alone. If not, that’s a conversation for the board.

What a properly approved related-party loan leaves behind

Four documents: a board minute approving it, with the interested director not voting. A loan agreement covering amount, rate, repayment, and security. Interest calculations and invoices showing commercial terms. A repayment record. In the worked case, none of the four existed for the ₹1.5 crore loan — the absence of all four is itself the finding.

Four outcomes, matched to four situations

• —A loan recorded as a supplier advance — reclassify and disclose it.
• —A related-party supplier charging normal, properly approved rates — disclose only; nothing is wrong, the reader just needs to know.
• —A related-party supplier charging well above market — disclose, and evaluate the excess; it may be a misstatement, or point to a deeper control override.
• —A related party missing from management’s list, with no transactions — update the list, but also consider what an incomplete list says about management’s other representations.

When a representation letter turns out to be wrong

If management signs a representation stating all related parties have been disclosed, and two undisclosed ones turn up anyway, the response isn’t to simply get the letter re-signed. One demonstrably wrong statement calls the reliability of the other statements in the same letter into question — that discussion belongs with the partner, not a quiet correction.

Mistakes that undermine related-party testing

• —Treating any related-party deal as automatically wrong, instead of asking about terms and disclosure.
• —Checking disclosure but never checking price.
• —Accepting a label like “advance” without vouching to the underlying contract.
• —Not asking who actually approved the transaction.