The documentation a statutory auditor should expect to support arm's-length or market-term pricing on a related-party transaction is a comparison to an actual, contemporaneous external reference point — a quote obtained from an unrelated vendor for the same goods or services, a published rate card or price list the related party also offers to unrelated customers, an independent valuation for a one-off asset transfer, or a documented benchmarking study for recurring intercompany arrangements — and not merely the board or audit committee's resolution approving the transaction, since approval reflects a governance process, not pricing evidence.
What counts as pricing evidence, by transaction type
| Transaction type | Evidence to expect | Weak substitute to watch for |
|---|---|---|
| Purchase or sale of goods/services | At least one comparable unrelated-party quote or invoice for the same or similar item, obtained at or near the same time | A statement that the price is 'in line with market' with no comparable quote attached |
| Loan or guarantee | Comparison to the rate the related party or an equivalent borrower could obtain from an unrelated lender at that credit profile | A round-number interest rate with no reference to any external benchmark |
| Shared services / cost allocation | A documented allocation methodology (headcount, usage, revenue share) applied consistently, with the underlying cost base | A lump-sum management fee with no allocation basis shown |
| Asset transfer (property, business, IP) | An independent valuation report dated reasonably close to the transaction | An internally prepared valuation with no independent review, especially for a significant transaction |
Testing the documentation, not just confirming it exists
- Check the date of the comparable quote or valuation against the date of the actual transaction — a quote obtained eighteen months earlier for a fast-moving input price is not a reliable benchmark for a transaction priced today.
- Where the related party also transacts with unrelated parties for the same goods or services, pull the unrelated-party pricing directly from the sales register and compare it to the related-party pricing, rather than relying on the related party's own representation of its market pricing.
- For recurring arrangements, check whether the pricing basis has been revisited periodically rather than carried forward unchanged for years regardless of how market conditions or cost structures have moved.
Regulatory requirement
The arm's-length pricing requirement for related-party transactions arises both under the Companies Act provisions governing related-party contracts and, separately and more rigorously, under the transfer pricing provisions of the Income Tax Act for cross-border and specified domestic related-party transactions. The documentation standard expected differs between the two, so confirm which requirement is in play before assessing adequacy.
How we think about this
Board approval answers the governance question — was this transaction properly authorised by people independent of the interested party. It does not answer the pricing question — was the price itself fair. Both questions matter, and documentation for one should never be treated as satisfying the 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 & disclosuresRelated-party transaction testing under AS 18 / Ind AS 24Testing related-party transactions means proving the population is complete before checking what management already disclosed.
- Related parties & disclosuresTesting arm's-length pricing in related-party transactionsMost related-party transactions have no clean comparable. The honest audit response is to say so, not to manufacture a benchmark that does not exist.
- 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 & disclosuresRelated-party disclosure checklist for financial statementsA related-party note that lists transactions but not relationships, or balances but not terms, is an incomplete disclosure even if every number in it is correct.
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- Purchase register checkDuplicate payments, round-sum amounts, weekend-dated invoices, incomplete records.
- GSTR-2B reconcilerMatches your purchase register against GSTR-2B — missing invoices either side, amount mismatches.
- Bank reconciliation checkerMatches your cash book against a bank statement — what's outstanding on each side.
- Fixed asset register checkDuplicate asset codes, missing location or useful life, negative net book value.
- Payroll red-flag scannerBank accounts shared across employees, and records missing an ID, PAN or salary.
- CARO applicability checkerAnswer a few questions about the company and see which CARO 2020 clauses likely apply.
- MSME payment delay checkerMSME-flagged invoices paid — or still unpaid — beyond the 45-day Section 22 limit.
- Depreciation useful life checkerCompares a useful life in use against the Schedule II, Part C indicative figure.
- Materiality calculatorOverall and performance materiality against PBT, revenue, assets or equity, with reasoning shown.
- Sample size calculatorStatistical sample size for a test of controls or a substantive test of detail.