CARO's clause 3(xiii) requires the auditor to report whether all transactions with related parties are in compliance with Sections 177 and 188 of the Companies Act, where applicable, and whether the details have been disclosed in the financial statements as required by the applicable accounting standard (Ind AS 24). The clause deliberately checks two separate approval requirements together: Section 177 requires audit committee approval for related-party transactions at companies required to have one, and Section 188 separately requires board approval (and shareholder approval, above specified thresholds) for related-party transactions generally — a transaction can satisfy one and still fail the other.
The two provisions, checked separately
| Section 177 | Section 188 | |
|---|---|---|
| Who approves | The audit committee (where the company is required to have one) | The board, and shareholders by resolution above specified thresholds |
| What it covers | All related party transactions, including those in the ordinary course of business at arm's length (though the committee may give omnibus approval for repetitive transactions) | Specific categories of related-party transactions — sale/purchase of goods, property, availing/rendering services, and others named in the section — with exemptions for transactions in the ordinary course at arm's length |
| Threshold for shareholder approval | Not applicable at this level | Transactions exceeding prescribed value thresholds specific to each category require prior shareholder approval by resolution |
What audit review actually checks
- 01Confirm whether the company is required to have an audit committeeSection 177 applicability is itself a threshold question before checking compliance with it.
- 02Check every material related-party transaction against both provisionsAudit committee approval (or omnibus approval, where used, checked for whether it actually covers this specific transaction) and separately, Section 188 board/shareholder approval where the transaction category and value trigger it.
- 03Check the ordinary-course and arm's-length exemption was genuinely applicable, not assumedA transaction management labels "ordinary course, arm's length" to avoid the approval requirement needs the same scrutiny as any other classification claim — the label doesn't exempt it, the actual facts do.
- 04Confirm the Ind AS 24 disclosure matches what was actually approved and transactedA transaction correctly approved under both sections but incompletely disclosed in the notes is still a finding under this clause's disclosure half.
A related-party transaction approved by the board under Section 188 but never brought to the audit committee where one exists has not satisfied Section 177 — the two approvals are cumulative requirements where both provisions apply, not alternatives to each other.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Related parties & disclosuresSection 188 compliance: what an auditor checksSection 188 approval is a governance fact to verify against minutes, not an assumption to carry forward from last year's file.
- Related parties & disclosuresSA 550: related parties, and why the risk is completeness, not pricingThe hardest related-party risk to test for is the one that was never disclosed as a related party at all.
- Related parties & disclosuresThe vendor that turned out to be a director's own companyNothing in the vendor name suggested any connection. The director identification number on the vendor's own incorporation filing was a different story.
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- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
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- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.