Related-party transaction testing under AS 18 or Ind AS 24 has two distinct halves: establishing that the population of related-party transactions is complete — not just testing what management already disclosed — and then, for the transactions identified, assessing pricing and terms against arm's-length comparables where any genuinely exist. The completeness half is usually under-resourced relative to the pricing half, even though it carries the larger risk of a misstatement going undetected.
What counts as a related-party transaction
AS 18 and Ind AS 24 both capture a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. That catches categories teams routinely under-scope: interest-free loans, free use of premises or equipment, shared employees not cross-charged, guarantees given on a related party's borrowing, and management or technical fees that may be nominal or waived. A transaction with no consideration is still a related-party transaction requiring disclosure; it is simply priced at nil, and that nil price is itself a fact the notes need to state.
- Sales and purchases of goods or services, at any price including nil.
- Loans and advances given or taken, and the interest terms attached, including nil interest.
- Leases and sharing of premises, vehicles or equipment.
- Guarantees and collateral given on behalf of, or received from, a related party.
- Management, royalty, technical or brand fees.
- Investments made in or by related parties, and transfers of assets.
- Remuneration to KMP, and any waiver of remuneration otherwise due.
Testing completeness of the population
Start from the independently built related-party list, not from the transactions management has already flagged. Then run that list against the transaction data, not the other way round.
- 01Match the related-party list against vendor, customer and loan mastersUse the names, PANs, and group entity list built during identification. Flag every transaction with a counterparty appearing on that list, whether or not management separately disclosed it.
- 02Search the general ledger for related-party names outside the usual trade accountsRelated-party movements often sit in current accounts, loans and advances, or miscellaneous income and expense heads rather than in sales and purchases, and a search scoped only to trade ledgers misses them.
- 03Review board minutes and resolutions for transactions not yet reflected as related-party in the booksMinutes approving a lease, a loan, or a guarantee to a group entity are often the first place a transaction surfaces, sometimes before the accounting entry is even posted.
- 04Check journal entries involving related-party ledger codesJournals are a common route for related-party adjustments — write-offs, reclassifications, inter-company settlements — that bypass the normal sales or purchase cycle controls entirely.
- 05Confirm balances directly with group entities where practicableA confirmation of the inter-company balance from the counterparty's own books is one of the few pieces of evidence that does not depend on the client's own records being complete.
- 06Reconcile opening to closing related-party balancesOpening balance plus transactions during the year should equal closing balance for each related party. A reconciling item that cannot be explained is often an unrecorded transaction.
Testing only the transactions on management's disclosed list and stopping there is the single most common gap in related-party work. It tests whether the disclosed figures are accurate, which is necessary, but says nothing about whether the disclosed list is complete, which is the risk that actually matters.
Comparing pricing and terms
Once the population is reasonably complete, the second half of the work is comparing the price and terms of each material related-party transaction against what an unrelated party would have agreed. This is realistic for some transaction types and not for others.
| Transaction type | Comparability | Practical approach |
|---|---|---|
| Rent for standard commercial premises | Reasonably comparable | Local market rate per square foot for similar property |
| Interest on inter-company loans | Reasonably comparable | Bank lending rate for a borrower of similar credit standing, adjusted for tenor |
| Purchase/sale of standard, commoditised goods | Reasonably comparable | Price charged to or by unrelated customers/suppliers for the same goods in the same period |
| Management or technical fees | Often not comparable | No clean external benchmark; focus on consistency, board approval, and disclosure rather than a pricing conclusion |
| Brand or royalty fees | Rarely comparable | Usually beyond ordinary audit evidence; flag and reference, do not attempt an independent valuation |
| Guarantees given without a fee | Not comparable in the usual sense | Confirm disclosure of the guarantee and the contingent exposure; a fee comparison is not the point |
Common practice, not a requirement
Where a transaction type genuinely has no external comparable, auditors commonly limit the conclusion to confirming the transaction was approved through the applicable governance process and is disclosed with its actual terms, rather than attempting to opine on whether the price itself was fair. That is a defensible, common scope limitation, not a shortcut, provided it is stated plainly in the working paper rather than left implicit.
Documenting the work
- The source of the transaction population tested — the independently built list matched to the ledgers, not only management's disclosure.
- For each material transaction: the terms, the comparable used (if any), and the conclusion reached.
- Transaction types for which no comparable exists, with the alternative procedure performed stated explicitly.
- Any transaction found that was not on management's original disclosure, and how it was resolved.
How we think about this
Matching a transaction population against a related-party list across every ledger and every journal line is a completeness check that software should run exhaustively, not sample. Judging whether a given management fee is arm's-length when no clean comparable exists is not something a tool should ever be asked to conclude on; that judgement belongs to the auditor, stated as a judgement.
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 & 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 & 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.
- 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.
Free tools, no signup
Each one reads a file entirely in your browser — or, for two of them, just answers a few questions — and nothing is ever uploaded.
- 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.