This is a composite, illustrative scenario built from how an undisclosed related-party vendor typically surfaces, not an account of a named client. A vendor supplying packaging materials, with a name bearing no resemblance to the company or any of its known related parties, was identified as a related party only once its ownership was checked directly — one of the company's own directors held a significant shareholding in the vendor and sat on its board. The company's related-party list, maintained by matching vendor names against known related entities, had never been built to catch a connection that existed only in ownership records, not in naming.
Why name-matching alone would never have found this
A related-party identification process built around matching vendor names against a list of known related entities only catches relationships someone already knows about and named consistently. It structurally cannot catch a relationship that exists through ownership or directorship alone, with no naming overlap — which describes most deliberately or carelessly undisclosed related-party arrangements.
What was actually checked
- 01Pulled the top vendors by spend, regardless of whether any appeared relatedThis vendor ranked in the top fifteen by annual purchase value — large enough to be worth independent verification regardless of any suspicion.
- 02Checked the vendor's own incorporation and shareholding recordsAvailable from the public company registry. The vendor's shareholding pattern showed one of the client's own directors holding a meaningful stake.
- 03Cross-checked that director's declared interestsThe director's annual disclosure of interests under Companies Act requirements made no mention of this shareholding — a second gap, separate from the transaction disclosure itself.
- 04Checked the pricing and terms against comparable vendorsBroadly in line with two other packaging suppliers the client used, which mattered for assessing whether the relationship had actually been used to extract favourable terms, separate from the disclosure question.
What this actually was
| Gap | What it required |
|---|---|
| The transaction itself was never identified or disclosed as related-party | Retrospective identification, disclosure in the financial statements, and assessment of whether the approval process required under Section 188 had been followed |
| The director's own interest disclosure was incomplete | A separate matter for the board and company secretary — a compliance gap distinct from the financial statement disclosure, referred accordingly |
Common practice, not a requirement
Pricing being at arm's length does not remove the disclosure requirement. A related-party transaction on fair commercial terms is still a related-party transaction, and the Companies Act's approval and disclosure requirements apply regardless of whether the terms happen to be favourable, unfavourable, or entirely ordinary.
What went into the file
- The ownership evidence establishing the relationship — the shareholding record, not an assumption.
- The full year's transaction value with this vendor, for proper disclosure.
- An assessment of whether Section 188 approval had been obtained for transactions of this value and type — it had not, which is itself a compliance finding separate from the disclosure gap.
- A referral of the director's own incomplete interest disclosure to those charged with governance.
- A widened check of the remaining top vendors by spend, to see whether this was an isolated gap or part of a pattern — it was isolated; no other top vendor showed a similar ownership link.
How we think about this
Related-party completeness testing has to start from ownership data, not from a name-matching exercise against a list someone compiled from memory. This is the specific discipline behind matching every material vendor's own ownership and directorship records against the company's director and shareholder list, rather than relying on a related-party register the company itself maintains.
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 & 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.
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