## SA 550: Related Parties

### Who Is a Related Party?

A related party is a party that is:

Limb 1 — Per the applicable FRF: As defined in the financial reporting framework (in India, AS 18 — Related Party Disclosures issued by ICAI).

Limb 2 — Where FRF has minimal/no RP requirements: Any person or entity that:

Has control or significant influence over the reporting entity (directly or indirectly)
Is controlled or significantly influenced by the reporting entity, OR
Is under common control through:
Common controlling ownership
Owners who are close family members
Common key management

> Exception: Entities under common state (government) control are NOT related parties unless they engage in significant transactions or share resources to a significant extent.

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### Auditor's Two Objectives

1. Obtain sufficient understanding of RP relationships & transactions to recognise fraud risk factors

2. Where FRF establishes RP requirements: obtain SAAE that RP relationships & transactions have been appropriately identified, accounted for, and disclosed in FS

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### Risk Assessment Procedures — Three Parallel Activities

```

Understanding RP Alertness when Share RP Info

Relationships ←→ reviewing records ←→ with Audit Team

& Transactions / documents

```

#### Activity 1: Understanding RP Relationships

Inquire from management:

Identity of related parties (and changes from prior period)
Nature of relationships between entity and RP
Type & purpose of transactions during the period

Also assess whether management has controls to:

Identify, account for, and disclose RP relationships & transactions
Authorise and approve significant RP transactions/arrangements

#### Activity 2: Identifying Significant RP Transactions Outside Normal Business

For unusual transactions, inspect underlying contracts and evaluate:

1. Business rationale — does it suggest fraudulent financial reporting or misappropriation of assets?

2. Consistency — are transaction terms consistent with management's explanations?

3. Proper accounting — accounted for and disclosed per FRF?

Also obtain evidence of proper authorisation and approval.

#### Activity 3: Maintaining Alertness When Reviewing Records

Watch for undisclosed RP information in:

Bank, legal, and third-party confirmations
Minutes of shareholder meetings and TCWG meetings
Any other records the auditor considers necessary

Worked example

### Example 1

During the audit of ABC Ltd., the auditor notices cash payments to XYZ Pvt. Ltd. that were not listed as a related party. On reviewing TCWG meeting minutes, the auditor finds XYZ is wholly owned by the Managing Director's spouse → previously undisclosed related party identified through alertness (Activity 3).

### Example 2

A manufacturing company sells goods to its wholly-owned subsidiary at prices well below market rate. The auditor (i) inspects the sales agreement, (ii) evaluates whether the pricing suggests fraudulent financial reporting, (iii) checks whether the terms match management's stated rationale ('intra-group transfer pricing policy'), and (iv) verifies disclosure in FS per AS 18.

### Example 3

An entity and a state-owned utility are both controlled by the central government. The auditor notes this but does NOT treat them as related parties — unless they have significant transactions with each other or share resources materially.

⚠️ Common exam mistakes

Treating all state-controlled enterprises as related parties — they are related parties only if they engage in significant transactions or share resources significantly.
Forgetting to inquire about changes in RP relationships from the prior period — new related parties can emerge mid-year through acquisitions, family marriages, or management changes.
Relying solely on management's written list of related parties without maintaining alertness during record review — SA 550 requires independent vigilance.
Confusing 'control' with 'significant influence' — both make an entity a related party, but the threshold and implications differ.

Bare-Act text Para 15 · SA 550 - Related Parties (ICAI) · click to expand

The auditor shall remain alert, when inspecting records or documents, for arrangements or other information that may indicate the existence of related party relationships or transactions that management has not previously identified or disclosed to the auditor.

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Meaning of Related Party, Auditor's Objectives, and Risk Assessment Procedures

Worked example

⚠️ Common exam mistakes