Testing related-party outstanding balance confirmations means obtaining written confirmation of the balance from the related party, assessing whether the person who actually signed it has genuine knowledge of and independence from the transaction, and then treating a confirmed balance as evidence that the two ledgers agree — not as evidence that the balance is recoverable, correctly classified, or struck on arm's length terms. That last set of questions needs separate procedures entirely.
Why this is tested differently from a trade debtor confirmation
A third-party debtor confirmation relies on the recipient having no particular reason to agree with a wrong balance, because the two entities have adverse interests on the amount owed. A related party frequently has shared management, a shared finance function, or a shared incentive to keep both books aligned, which weakens exactly the independence that makes a confirmation persuasive in the first place. The procedure in debtors-confirmation-procedure assumes the independence this one cannot assume.
The testing sequence
- 01Obtain the complete related-party population and the balance outstanding with eachStart from the related-party identification working paper, not from a list the client volunteers, so the confirmation population is not pre-filtered to the balances management expects to confirm easily.
- 02Identify who will actually sign the confirmation at the related partyWhere the counterparty is a subsidiary, associate or group entity audited by another firm, address the confirmation request to that entity's management, and separately consider whether to request it through, or corroborate it with, that entity's own auditor.
- 03Assess whether the signatory has independent knowledge of the balanceA director who sits on the board of both entities, or a shared accounts team that posts entries on both sides of the same intercompany ledger, can sign a confirmation that is procedurally complete and substantively weak. Note this assessment in the working paper rather than treating every signed confirmation as equally persuasive.
- 04Send the confirmation request directly, under the auditor's controlThe same control requirements as any external confirmation apply — the auditor selects the balance, controls the request and the return address, and does not let the client relay the request or receive the reply first.
- 05Reconcile any difference between the confirmed balance and the booksRelated-party reconciling items — unrecorded invoices, timing differences on intercompany recharges, netting conventions that differ between the two entities' books — are common and should each be resolved and aged individually.
- 06Corroborate with the component auditor where the related party is audited separatelyWhere another audit firm audits the counterparty, request confirmation of the balance, the terms, and any impairment or recoverability view directly from that firm, in addition to or instead of a management confirmation.
- 07Test recoverability and classification as separate proceduresA confirmed balance still needs testing for recoverability — the counterparty's financial position, its ability to settle, and whether an expected credit loss allowance is required — and for classification — whether a balance presented as trade is in substance a loan, which changes its disclosure and its Companies Act implications entirely.
| Established by confirmation | Not established by confirmation |
|---|---|
| The two ledgers agree on the balance as at the date confirmed | Whether the balance is recoverable |
| The counterparty acknowledges the amount as recorded | Whether the terms are arm's length |
| Any reconciling items, once investigated | Whether the balance is correctly classified as trade versus a loan |
A related-party confirmation signed by the same individual who approved the underlying transaction, or who controls the accounting at both entities, carries materially less weight than the auditor's working paper file sometimes implies by simply filing it as a confirmed balance like any other.
How we think about this
Reconciling the confirmed figure to the books is a mechanical matching exercise. Judging how much weight the confirmation itself deserves, given who signed it and what they actually know, is not mechanical at all, and skipping that judgement is how a related-party balance ends up looking more solid on the file than it is in substance.
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
- Revenue, receivables & cut-offDebtors confirmation procedure: balance confirmation in practicePositive versus negative confirmation, selection criteria, handling non-responses and disputes, and the alternative procedures that cover the gap when confirmations fail.
- 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 & disclosuresHow to test related-party loan classification (loan vs advance vs investment)Read the actual terms of the arrangement rather than the label the client used, test repayment behaviour against those terms, and check the classification against what it actually triggers.
- Audit documentationSA 505: what the external confirmation standard requires, beyond bank and debtor lettersSA 505's rules on non-responses and negative confirmations apply just as much to a lawyer's letter or a lender confirmation as they do to a bank or debtor one.
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