Identifying related parties: the audit starting point

Related-party identification means building the list of entities and individuals related to the client under AS 18 or Ind AS 24 from primary sources — the shareholding pattern, the register of directors and their other directorships, and group structure charts — and then testing the client's own declaration against that independently built list rather than accepting it as given. Where the two disagree, the gap itself is the finding.

Why the declaration cannot be the starting point

Almost every audit file contains a related-party declaration signed by management, usually produced once a year, often by someone in accounts rather than by the promoter. It is a representation under SA 580 and a useful document to have on file. It is not audit evidence that the list is complete, because the person signing it frequently does not know the full structure — who holds shares in which entity through which family member, which directorship a promoter picked up two years ago in an unrelated company, or which entity a KMP's spouse quietly incorporated. Treating the declaration as the population, and testing transactions against it, only ever finds what management already chose to disclose.

Building the list from primary sources

1. 01Pull the shareholding patternStart with the client's own shareholding register and, for group entities, the MGT-7/annual return filings and shareholding patterns of each entity you can identify. Anyone holding a significant stake, directly or through a holding structure, is a candidate related party, and so is any entity in which the client's promoters hold a significant stake.
2. 02List every director and KMP, and their other directorshipsUse the DIN-linked director master available through the MCA portal, or the director's own disclosure under section 184, to list every other company and LLP each director or KMP sits on. Each of those entities is a related party candidate regardless of whether the client has ever transacted with it.
3. 03Map immediate relativesAS 18 and Ind AS 24 both pull in close family members of key management personnel and directors — spouse, children, and dependants in the client's own disclosures. This is the hardest category to verify independently; it depends substantially on what management tells you, cross-checked where possible against common surnames and addresses turned up elsewhere.
4. 04Trace the group structure, not just the client entityDraw the group chart: holding company, subsidiaries, associates, joint ventures, and fellow subsidiaries under common promoters. In most mid-market groups this chart exists only in the promoter's head and has to be reconstructed from ROC filings, board resolutions referring to "group companies", and prior-year working papers.
5. 05Check entities that have exited the structure during the yearA subsidiary disposed of mid-year, or a director who resigned, remains a related party for the portion of the year the relationship existed. Transactions in that window still need disclosure.

Cross-checking against the vendor and customer masters

Once you have an independently built list, run it against the client's vendor and customer masters rather than only checking named entities for transactions. This surfaces related parties that transact with the client under a name nobody flagged.

• Match PAN across the vendor/customer master and the director and shareholder PANs you have collected. A matching PAN between a "vendor" and a director or shareholder is conclusive, not merely suggestive.
• Match registered addresses. Vendors or customers sharing an address with the client, a director, or a known group entity are a strong signal even where names differ completely.
• Match bank account details where available in payment records. The same account number receiving payments under two different vendor names is one of the more reliable indicators of an undisclosed relationship.
• Look for vendors or customers incorporated in the same period a director resigned from, or shortly after a group restructuring — timing that lines up with a relationship changing form rather than ending.
• Check for common contact details — phone numbers or email domains — between nominally unrelated counterparties and the client's own staff or group entities.

What to document

• The independently built list, with the source for each entry (shareholding pattern, DIN record, prior year, cross-match).
• The management declaration, filed alongside, with every difference between the two lists noted and resolved.
• The date the list was built and the date it was refreshed before final review.
• Entities considered and excluded, with the reason for exclusion recorded rather than left implicit.