Imagine Rajesh & Co. Pvt. Ltd. sells goods worth ₹2 crores to a company owned by its own Managing Director — at half the market price. On paper, it looks like a normal sale. But it isn't. SA 550 (Related Parties) is the Standard on Auditing that tells you, as the auditor, how to sniff out exactly these situations and what to do about them.
A related party is anyone who has significant influence or control over the entity, or is controlled by it — think parent/subsidiary companies, KMP (Key Managerial Personnel), their close family members, and associates. The real danger is that related party transactions are often not at arm's length, meaning they don't reflect normal commercial terms. Management may deliberately hide these relationships to avoid disclosure, or to shift profits and losses between entities. SA 550 makes it the auditor's job to go beyond what management tells them.
The standard sets out a three-stage approach. First, during risk assessment (before fieldwork), the auditor inquires of management, reviews board minutes, scans shareholder registers, and uses knowledge of the industry to identify related parties and their transactions. Second, during the audit itself, the auditor stays alert for transactions that seem unusual — large round-number amounts, transactions with no clear business purpose, or entities in tax havens. These are red flags. If found, the auditor digs deeper: gets third-party confirmations, checks invoices, verifies that the transaction is disclosed properly in financial statements. Third, the auditor obtains written representations from management confirming that all related parties and transactions have been disclosed. This is crucial — it shifts some responsibility to management if something is hidden.
For exam purposes, focus on: (1) the auditor's responsibility to identify related parties independently — not just rely on management's list; (2) the concept of arm's length and why related party transactions carry higher inherent risk; (3) the requirement for adequate disclosure in financial statements under AS 18 / Ind AS 24; and (4) the specific audit procedures — inquiry, inspection of records, written representations. This topic is frequently tested as a 5–8 mark theory/scenario question.