SA 550 requires the auditor to perform procedures to identify, assess and respond to the risks of material misstatement arising from related-party relationships and transactions — including the risk that management did not identify or disclose all of them, intentionally or otherwise. The standard's framing matters: the greater risk in most engagements is not that a disclosed related-party transaction was priced unfairly, it's that a related party or a transaction with one was never identified as such in the first place, because related-party status depends on ownership, control and influence, which don't always show up in a vendor name or a transaction description.
What "identification" actually requires
- 01Obtain the related-party list from management, and treat it as a starting point, not a conclusionManagement's own list reflects what management chose to disclose — useful, but not independently verified.
- 02Inquire about the nature of relationships with the entity's major shareholders, directors and key managementDirect inquiry, not just a review of existing documentation, since an undisclosed relationship by definition won't appear in the documentation.
- 03Review significant transactions outside the ordinary course of businessUnusual terms, unusual timing, or transactions with no clear business rationale are a common way an undisclosed related-party transaction surfaces.
- 04Review board and audit committee minutes for related-party discussionsApprovals, waivers or discussions referencing a connected party that never made it onto the formal related-party list.
- 05Share relevant information with other members of the engagement teamA related-party relationship found by the team member working on one balance (bank confirmations, say) is relevant to every other area of the audit, not only the one it was found in.
A related-party identification process that only matches vendor or customer names against a list management provided will never catch a relationship that exists through ownership or directorship with no naming overlap — which describes most undisclosed related-party arrangements, deliberate or not.
Once a related-party transaction is identified
| Requirement | Why |
|---|---|
| Understand the business rationale | A transaction with no plausible ordinary-course rationale is a risk signal, regardless of its stated pricing |
| Evaluate whether it was properly authorised and approved per the entity's own policy and applicable law | Approval status is itself evidence about whether the transaction is being handled appropriately, separate from its financial terms |
| Evaluate whether the accounting and disclosure comply with the applicable financial reporting framework | Correct terms don't matter if the transaction is disclosed incorrectly or not identified as related-party in the notes at all |
Common practice, not a requirement
Pricing a related-party transaction at arm's length does not remove the identification, approval and disclosure requirements. A fairly priced related-party transaction that was never disclosed as one is still a finding under SA 550 and under the applicable company-law disclosure requirements.
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 & 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.
- Related parties & disclosuresThe vendor that turned out to be a director's own companyNothing in the vendor name suggested any connection. The director identification number on the vendor's own incorporation filing was a different story.
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.