SA 550 Related Parties explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
SA 550 explains what an auditor must do about related party relationships and transactions: find them, assess the risks they bring, test the significant ones and check that they are accounted for and disclosed. Related parties are not independent of each other, so the standard treats them with particular care.
SA 550, as effective for audits of financial statements for periods beginning on or after 1 April 2010, applies to every audit. ICAI may revise standards, so check icai.org for the current text. A reviewed related party register, of the kind built in financial and legal due diligence, answers most auditor questions. The law on related party transactions is in Section 188 of the Companies Act, 2013 (see Section 188: related party transactions); accounting and disclosure follow Ind AS 24 or AS 18, as the case may be.
The auditor must understand the entity's related parties well enough to recognise fraud risk factors and to conclude that the statements give a true and fair view or are not misleading, and, where the framework has related party rules, to get evidence that relationships and transactions are identified, accounted for and disclosed. The auditor stays alert to undisclosed related parties, treats significant transactions outside the normal course of business as significant risks, tests arm's length assertions, obtains written representations and tells those charged with governance.
Why related parties need special care (paragraphs 1-9)
Many related party transactions are ordinary, but some carry higher risk: complex structures, systems that cannot identify or summarise related party balances, or transactions on terms that are not market terms, sometimes with no consideration at all (paragraph 2). The auditor has a responsibility to respond to risks of misstatement from failures to account for or disclose them where the framework has rules (paragraph 3). Even where the framework has minimal rules, the auditor needs enough understanding to conclude that the statements give a true and fair presentation or are not misleading (paragraph 4).
The text adds two cautions. Fraud may be easier to commit through related parties (paragraph 5). And the inherent limits of an audit bite harder here, because management may not know of all related parties, and relationships create room for collusion or concealment (paragraph 6). Professional skepticism is therefore especially important (paragraph 7).
| Term (paragraph 10) | Plain meaning |
|---|---|
| Arm's length transaction | A transaction on terms that would apply between a willing buyer and a willing seller who are unrelated and acting independently |
| Related party | A party defined as related in the applicable framework or, where the framework has minimal or no rules, someone who controls or significantly influences the entity, an entity it controls or significantly influences, or an entity under common control |
A footnote to paragraph 10 says that in the Indian context the definitions in AS 18 apply for this standard and that they meet the tests in paragraph 10(b)(ii). The standard is as printed; for entities following Ind AS, check the corresponding Ind AS and the Companies Act.
Understanding relationships (paragraphs 11-17)
The procedures in paragraphs 12-17 are part of the risk assessment procedures required by SA 315 and SA 240 (paragraph 11).
| Step | What the auditor does | Paragraph |
|---|---|---|
| Team discussion | Includes the risk of fraud or error from related party relationships and transactions | 12 |
| Inquiry of management | Identity of related parties and changes from the prior period; nature of relationships; transactions during the period and their type and purpose | 13 |
| Inquiry on controls | Controls to identify, account for and disclose related parties and transactions; to authorise significant transactions; to authorise those outside the normal course | 14 |
| Alertness in records | Stays alert to arrangements or information pointing to unidentified relationships; specifically inspects bank, legal and third-party confirmations, minutes of shareholder and board meetings, and other records | 15 |
| Unusual transactions | Where significant transactions outside the normal course are seen, asks about their nature and whether related parties could be involved | 16 |
| Sharing | Shares related party information with the whole engagement team | 17 |
The application material adds practical points. Where the framework has related party rules, management is likely to hold a comprehensive list, and in a repeat audit the auditor compares it with the related parties recorded in earlier years (A11). Where it has no such rules, management may not know of every related party, so the auditor draws on the ownership, investments and financing of the entity (A12).
Assessing and responding to risk (paragraphs 18-24)
The auditor identifies and assesses risks associated with related parties and determines which are significant. Identified significant related party transactions outside the normal course of business must be treated as giving rise to significant risks (paragraph 18). Fraud risk factors, including a related party with dominant influence, are considered in the fraud risk assessment under SA 240 (paragraph 19). Further procedures include those in paragraphs 21-24 (paragraph 20).
Previously undisclosed related parties
If arrangements suggest unidentified relationships or transactions, the auditor first determines whether they exist (paragraph 21). If they do, the auditor must:
- promptly tell the rest of the team;
- where the framework has related party requirements, ask management to identify all transactions with the newly found parties, and ask why controls failed to identify or disclose them;
- perform appropriate substantive procedures on them;
- reconsider the risk that other undisclosed related parties exist and extend procedures as needed; and
- if non-disclosure looks intentional, evaluate the implications for the audit, since it points to a risk of fraud (paragraph 22).
Significant transactions outside the normal course
For these, the auditor inspects the contracts and evaluates whether the business rationale, or lack of it, suggests the transaction was done to commit fraudulent financial reporting or conceal misappropriation, whether the terms match management's explanation, and whether it is correctly accounted for and disclosed. The auditor also gets evidence that it was properly authorised and approved (paragraph 23). Approval by management, governance or shareholders shows the transaction was considered at the right level, but it is not enough alone to rule out fraud risk, since approval may be ineffective where there is collusion or dominant influence (A40). In smaller entities, with fewer layers of approval, the auditor may rely less on approval and look at documents, confirm with the other party or observe the owner-manager's involvement (A41).
Arm's length assertions
If management asserts in the statements that a related party transaction was on arm's length terms, the auditor obtains sufficient appropriate evidence for it (paragraph 24). The difficulty is that price can often be compared, but other terms such as credit period, contingencies and charges are harder to compare (A42). Management is responsible for substantiating the assertion, for example by comparing with similar transactions with unrelated parties, using an external expert or comparing with market terms (A43). The auditor evaluates management's process, tests the data and assesses significant assumptions (A44). Where the framework requires disclosure only of non-arm's-length transactions, silence may carry an implicit assertion that terms were arm's length (A45).
Evaluation, representations, communication and documentation (paragraphs 25-28)
When forming the opinion under SA 700, the auditor evaluates whether identified relationships and transactions are properly accounted for and disclosed, and whether their effects prevent the statements from giving a true and fair view or make them misleading (paragraph 25).
Where the framework has related party requirements, the auditor obtains written representations that management has disclosed the identity of related parties and all relationships and transactions they know of, and has accounted for and disclosed them properly (paragraph 26). See SA 580. Indian additions to the international text include that a representation may cover management's responsibility for an arm's length assertion (note on A48).
Unless all those charged with governance are involved in managing the entity, the auditor communicates significant matters about related parties to them (paragraph 27); A50 lists examples such as unapproved significant transactions that may suggest fraud, disagreement on accounting or disclosure, non-compliance with laws restricting related party dealings and difficulty identifying the ultimate controller. The audit documentation includes names of identified related parties and the nature of the relationships (paragraph 28).
For the clause in the Companies (Auditor's Report) Order covering related parties, see CARO clauses 3(xii) to 3(xvi).
Illustrative example
Riverstone Agro Pvt Ltd is an invented company; all figures are illustrative. Management lists three related parties. While reading board minutes, the auditor notices a loan of Rs 60 lakh made to a supplier whose director shares a surname with Riverstone's managing director. The auditor asks management and learns the supplier is owned by the managing director's brother. This is a previously undisclosed related party, so the auditor tells the team, asks management for all transactions with the supplier, asks why the register missed it, and tests purchases from the supplier against market prices. Because the loan is outside the normal course, it is a significant risk; the auditor reads the loan agreement, checks board approval and considers whether it is intentional non-disclosure.
Need help with related party records?
A reliable related party register, updated with directors' declarations and transaction summaries, answers most of what an auditor will ask. TaxClue's financial and legal due diligence team can help you review relationships and transactions and prepare documentation before the audit.
Key takeaways
- The auditor needs a reliable list of related parties and the nature of each relationship.
- Board minutes, confirmations and other records are read for hints of unlisted related parties.
- Significant related party transactions outside the normal course are treated as significant risks.
- An arm's length statement needs evidence; price comparison alone may not cover all terms.
- Written representations and communication with those charged with governance are required.
Read next
- SA 240 part 1: fraud risk assessment
- SA 580: written representations
- SA 560: subsequent events
- Section 188: related party transactions
Disclaimer: Based on the Standards on Auditing and quality standards issued by the Institute of Chartered Accountants of India, in the versions named in the article, and ICAI's announcement of 31 March 2026 on SQM 1 and SQM 2, as consulted on 3 October 2026. ICAI revises standards from time to time; check the current text and effective dates on icai.org. This article is general information, not legal advice; check the official text before acting.