Related Party Transactions (RPTs) are one of the most governance-sensitive areas in a statutory audit.Even when commercially genuine, poor identification, weak approvals, or inadequate disclosure can result in audit qualifications and regulatory exposure.
This article explains how auditors audit related party transactions, what they examine, and where businesses commonly fail.
1. Introduction — Why RPTs Attract High Audit Scrutiny
Related parties are not independent of management control.This creates inherent risk of:
Non-arm’s-length pricing
Profit shifting
Fund diversion
Disclosure suppression
In RPTs, governance failure is viewed more seriously than monetary value.
2. Objective of Related Party Transactions Audit
The audit objective is to:
Identify all related parties
Ensure completeness of transactions
Assess arm’s-length nature
Verify statutory approvals
Ensure proper disclosure
Transparency is the core audit objective.
3. Identification of Related Parties
Auditors identify related parties through:
Shareholding and control analysis
Directors / partners / KMP data
Prior year audit records
Management representations
Failure to identify a related party is itself an audit weakness.
4. Understanding the Nature of Transactions
Auditors evaluate:
Type of transaction
Commercial rationale
Frequency and volume
Pricing mechanism
Transactions without clear business logic raise audit concerns.
5. Arm’s Length Assessment
Auditors assess whether:
Pricing aligns with third-party benchmarks
Terms are commercially reasonable
Non-arm’s-length terms increase tax and audit risk.
6. Approvals and Governance
Auditors verify:
Board / partner approvals
Compliance with internal DOA
Compliance with applicable law
Informal or post-facto approvals weaken audit defensibility.
7. Accounting and Disclosure
Auditors examine:
Proper recording in books
Correct classification
Mandatory disclosures
Disclosure lapses are among the most common RPT audit observations.
8. Confirmations and Documentation
Auditors may obtain:
Balance confirmations
Agreements / contracts
Supporting workings
Oral explanations are insufficient.
9. Common Issues Observed
Undisclosed related parties
Informal advances
Netting-off of balances
Inadequate disclosures
These issues delay audit closure.
10. Practical Guidance for Businesses
Maintain updated related party register
Formalise all arrangements
Obtain approvals in advance
Review disclosures carefully
11. CABTA Insight
“In audit, transparency in related party transactions outweighs transaction size.”