Related party transactions
This query is : Resolved
07 August 2013
We are statutory auditors of two private companies which have same director. The first company sells some products a much lesser price than it sells to other companies. (Only 5% of price to other companies) What will be 5he consequences ?
07 August 2013
Then u need to check whether it has been disclosed this fact by the company you conducting audit as it falls under the defintion of related party transaction.
else you need to qualify in your Audit report.
else you need to qualify in your Audit report.
07 August 2013
Dear tushar please let me know where we have to qualify in our audit report...
However details of related party transactions will be disclosed in notes to accounts
However details of related party transactions will be disclosed in notes to accounts
08 August 2013
Thank you sir.
But I want to know that only disclosure of this transaction is sufficient? Because this is purely transfer of profit from one company to another one.
But I want to know that only disclosure of this transaction is sufficient? Because this is purely transfer of profit from one company to another one.
09 August 2013
refer CARO report format ganeshbabu u will get the ans.
21 July 2025
Here’s a clear explanation about the related party transaction (RPT) issue you mentioned, and how it affects your audit report and disclosures:
Situation Recap:
Two private companies share the same director.
Company A sells products to Company B at only 5% of the price it charges to others.
This is a clear related party transaction and may indicate a transfer of profits between entities.
1. Disclosure Requirement
AS-18 (Accounting Standard 18) mandates that all related party transactions must be disclosed in the Notes to Accounts.
Disclosure includes the nature of the relationship, transactions, and amounts.
So yes, at minimum, the transaction must be disclosed in the financial statements.
2. Is Disclosure Alone Sufficient?
Merely disclosing the RPT may not be enough, especially if the transaction is not at arm’s length and has the effect of transferring profits.
This could impact the fair presentation of financial statements, affecting shareholders or stakeholders.
3. Audit Reporting & Qualifications
The auditor should examine if:
The related party transaction has been properly authorized by the Board or shareholders.
The transaction is conducted at arm’s length.
Adequate disclosures are made as per AS-18.
If the RPT is not at arm’s length, and it results in material misstatement or misrepresentation, the auditor may need to qualify the audit report.
The CARO (Companies Auditor’s Report Order), 2013, specifically Clause 3(xi) requires reporting on transactions with related parties and whether they are in compliance with applicable laws and properly recorded.
If you believe the transaction unfairly transfers profits or is against the interests of the company or stakeholders:
You should qualify the report or add an emphasis of matter paragraph.
State the nature of the issue and the potential impact on the financials.
4. Where to Qualify?
The qualification can be included in the “Basis for Qualified Opinion” or “Emphasis of Matter” section of the auditor’s report.
Additionally, mention the issue in the “Management Responsibility” section or as a separate paragraph discussing related party transactions.
Summary
Aspect Action/Requirement
Disclosure of RPT Mandatory in Notes to Accounts (AS-18)
Arm’s length transaction check Essential; if not at arm’s length, audit impact
If non-arm’s length and material Qualify or emphasize in audit report
CARO 2013 relevance Clause 3(xi) – report related party transactions
Final Advice:
If the companies have not disclosed this clearly, or the transaction is grossly undervalued, you should discuss with management and get explanations and approvals. If unsatisfactory, then qualify your audit report.
Situation Recap:
Two private companies share the same director.
Company A sells products to Company B at only 5% of the price it charges to others.
This is a clear related party transaction and may indicate a transfer of profits between entities.
1. Disclosure Requirement
AS-18 (Accounting Standard 18) mandates that all related party transactions must be disclosed in the Notes to Accounts.
Disclosure includes the nature of the relationship, transactions, and amounts.
So yes, at minimum, the transaction must be disclosed in the financial statements.
2. Is Disclosure Alone Sufficient?
Merely disclosing the RPT may not be enough, especially if the transaction is not at arm’s length and has the effect of transferring profits.
This could impact the fair presentation of financial statements, affecting shareholders or stakeholders.
3. Audit Reporting & Qualifications
The auditor should examine if:
The related party transaction has been properly authorized by the Board or shareholders.
The transaction is conducted at arm’s length.
Adequate disclosures are made as per AS-18.
If the RPT is not at arm’s length, and it results in material misstatement or misrepresentation, the auditor may need to qualify the audit report.
The CARO (Companies Auditor’s Report Order), 2013, specifically Clause 3(xi) requires reporting on transactions with related parties and whether they are in compliance with applicable laws and properly recorded.
If you believe the transaction unfairly transfers profits or is against the interests of the company or stakeholders:
You should qualify the report or add an emphasis of matter paragraph.
State the nature of the issue and the potential impact on the financials.
4. Where to Qualify?
The qualification can be included in the “Basis for Qualified Opinion” or “Emphasis of Matter” section of the auditor’s report.
Additionally, mention the issue in the “Management Responsibility” section or as a separate paragraph discussing related party transactions.
Summary
Aspect Action/Requirement
Disclosure of RPT Mandatory in Notes to Accounts (AS-18)
Arm’s length transaction check Essential; if not at arm’s length, audit impact
If non-arm’s length and material Qualify or emphasize in audit report
CARO 2013 relevance Clause 3(xi) – report related party transactions
Final Advice:
If the companies have not disclosed this clearly, or the transaction is grossly undervalued, you should discuss with management and get explanations and approvals. If unsatisfactory, then qualify your audit report.
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