Common-control entities raise audit risk because a single promoter running several unlisted companies or LLPs can move funds, goods and obligations between them with far less friction than would exist between genuinely independent parties, and almost none of the market discipline that would normally surface an unusual flow. The specific risks worth testing for are round-tripping of funds between group entities, and inter-company current account balances used as a flexible pool rather than settled on commercial terms.
Why common control changes the risk profile
An unrelated counterparty has its own board, its own auditor, and its own interest in getting paid on time, all of which create friction that tends to surface problems early. A group entity under the same promoter has none of that friction by default. The same person can approve a payment on both sides of a transaction, the terms can be whatever is convenient this month, and a balance that would trigger a recovery call between strangers can simply sit on the books for years without anyone outside the promoter's circle objecting.
This does not mean every common-control group is engaged in anything improper — most are not, and legitimate reasons for inter-company funding, shared services, and cross-holding are routine in Indian mid-market groups. It means the audit has to supply the scrutiny that the market would otherwise provide, because in a common-control structure nothing else will.
Round-tripping risk
Round-tripping, in the audit sense relevant here, is funds moving out of the client to a group entity and back again, sometimes through more than one hop, in a way that creates the appearance of genuine business activity — sales, loans, investments — without a real change in the group's overall economic position. It is relevant to an auditor for several distinct reasons: it can inflate reported turnover or asset values, it can be used to meet a loan covenant or a bank's end-use certification, and it can obscure where cash generated by the client actually ends up.
- Sales to a group entity followed by a purchase of a similar value from the same or another group entity within a short window, with no clear commercial rationale for routing the goods or services through two companies.
- A loan given to a group entity that is, within weeks, invested back into the client as share capital or a loan from a different group entity.
- Advances for "future supply" to a group entity that are never adjusted against an actual delivery, and instead get refunded or rolled into a different head.
- Circular guarantee structures where group entities guarantee each other's borrowings in a closed loop, inflating the apparent strength of each entity's financial position in isolation.
Round-tripping is rarely provable from the client's books alone, because each individual leg can look like an ordinary transaction. The signal is usually in the pattern and the timing across several legs, which is why reviewing fund flows across the group — not just within the client entity — matters more here than almost anywhere else in the audit.
Testing inter-company current account balances
- 01List every group entity the client has a current or running account withUse the group structure built during related-party identification, not only the entities that appear in the trial balance under an obviously related-party head.
- 02Plot each balance through the year, not just at the reporting dateA balance that swings from a large payable to a large receivable and back within the year is being used as a working capital pool between entities rather than settled commercially. The closing figure alone will not show this.
- 03Check for a settlement patternGenuine inter-company trading usually settles in a reasonably consistent cycle. A balance with no discernible settlement pattern, growing steadily over several years, functions as permanent financing that should be examined and disclosed as such.
- 04Confirm balances directly with the counterparty entity where you canA confirmation from the group entity's own books, ideally audited by a different engagement team or firm, is independent evidence the client's own ledger cannot provide on its own.
- 05Trace large movements to their underlying transactionA current account movement should be traceable to an invoice, a loan agreement, or a board-approved transfer. A movement with no identifiable underlying document is the clearest single red flag in this area.
- 06Check whether interest is charged on the running balance and at what rateAn interest-free running balance between group entities is common in practice but still needs to be identified and disclosed as a related-party transaction on its actual, interest-free terms.
- 07Look at recoverability, not just existenceA receivable from a group entity that is itself loss-making or thinly capitalised raises a recoverability question independent of whether the transaction underlying it was genuine.
| Signal | Why it matters |
|---|---|
| Balance grows every year with no repayment | Functions as indefinite financing rather than trade credit |
| Large movement shortly before year end, reversed shortly after | Consistent with temporary balance-sheet management rather than ordinary trading |
| No interest charged on a materially large, long-outstanding balance | Needs disclosure as an interest-free related-party arrangement; also a recoverability question if the counterparty is weak |
| Counterparty entity has going-concern doubts of its own | Direct bearing on recoverability of the receivable in the client's books |
| Movements cannot be traced to an invoice, agreement, or board approval | No underlying documentation to support what the movement represents |
Common practice, not a requirement
Where a common-control group is large enough, it is worth building a simple group fund-flow picture for the year — who sent what to whom, and when — even though no single standard requires a document in exactly that form. It is often the fastest way to see a pattern that a transaction-by-transaction review of the client entity alone would miss entirely.
How we think about this
Plotting every inter-company balance through the year, flagging swings and unexplained movements, and matching each to an underlying document is a pattern-detection task that should be run across the complete ledger, not a sample of it. Deciding whether a pattern reflects ordinary group treasury management or something that needs escalating is a judgement that stays with the auditor, made with the full picture in front of them rather than a handful of month-end snapshots.
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 & disclosuresIdentifying related parties: the audit starting pointA client declaration is a starting point for the related-party list, not evidence of it. How to build and cross-check the list independently.
- Related parties & disclosuresAuditing loans to directors and connected personsThe riskiest loans to directors are rarely booked as loans. They show up as unsettled expense advances and drifting current-account balances.
- Related parties & disclosuresUndisclosed related parties: red flags to test forThe counterparties that most need scrutiny are the ones nobody flagged as related. Here is what actually surfaces them.
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