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Related Party Transactions - An Audit Perspective


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Related Parties could be any KMP (Key Managerial Personnel), stockholder or a related corporation. The existence of a large number of family owned business houses in India has also contributed to the natural occurrence of related party transactions. At their very outset, contracts or agreements with related parties are viewed sceptically, the reason being preconceived notion of being entered into on account of non-commercial considerations. After all, relationships do play an influential role in businesses as well.
Further, transactions with related parties are taken as one of the most common tool of 'tax management'. At times, the Company’s funds get diverted for personal gains of the directors & other related persons. Few cases such as Enron, Satyam and WorldCom have clearly highlighted the potential conflict of interests between the Company and its stakeholders as a result of undisclosed RPTs.
Though effective laws and regulations have now been implemented to ensure better transparency, but keeping a closer check over such transactions still remains the need of hour.Most of the provisions under the dealing Section 188 of the Companies Act 2013 are quite similar to the ones laid down under Sections 297 and 314 of the Companies Act, 1956. Some of the key changes envisaged in the Act 2013 include a broader ambit of transactions such as leasing of property of any kind, appointment of any agent for purchase and sale of goods, services or property. Compulsory disclosure requirements have now been laid down under the new Act, failing which, stricter provisions of penalty & imprisonment would be applicable.
Let us try to understand the audit perspective of identifying the checks & reporting of related party transactions under various Indian laws - Companies Act 2013, Accounting Standard 18, SEBI’s Corporate Governance norms and the Income Tax Act, 1961.

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Related Party Transactions - An Audit Perspective

  1. 1. RELATED PARTY TRANSACTIONS - An Audit Perspective JRA & Associates
  2. 2. JRA & Associates Companies Act, 2013 - Provisions - Notified Rules ICAI & MCA Recommendations - Accounting Standards (AS) - Guidance Note (GN) Income Tax Act, 1961 - Provisions SEBI Guidelines - Corporate Governance Norms What will be the guiding Regulations & Statutes . . . ???
  3. 3. JRA & Associates An Overview - Companies Act, 2013 Section 2(76) Scope of term ‘Related Party’ Section 184 Disclosure of interest by directors Section 188 Compliance Norms Section 189 Disclosure Requirements Income Tax Act, 1961 ICAI & MCA Recommendations Section 92 Transfer Pricing Norms Section 40A(2) Disallowed expenditure in respect of ‘specified persons’ (related parties) SEBI’s Guidelines Revised Clause 49 Listing Agreement – Corporate Governance Norms AS – 18, Ind AS – 24 Related Party Disclosures Guidance Notes • GN-27 (Remuneration paid to Key Managerial Personnel) • Guidance Note on Report u/s 92E of Income Tax Act
  4. 4. JRA & Associates Where to start from ? Preliminary Evaluation Concerning the likelihood of related-party transactions Preparation of Risk Assessment Questionnaire Understanding the structure of the entity and management responsibilities; Considering the control consciousness within the entity and controls over management activities Identification through Inquiry & Review Identifying material transactions on the basis of indications of previously undisclosed relationships for material transactions
  5. 5. JRA & Associates Pre-requisites for an AUDIT  Objectives  Scope  Methodology  Plan  Time Budget  Documentation Reporting Hierarchy Approval from Chief Audit Executive Discussed with Audit Committee Head Department Heads
  6. 6. JRA & Associates Has an enquiry being conducted about the management through Management Representation Letter? NoYes Have any transactions being entered into with these parties during the audit period? Does the entity have any defined procedures for identification and accounting of related party transactions? Yes No Is timely evaluation of the said procedures being done in the light of applicable regulations and statutes? Yes No  Are there any transactions which have been given inappropriate or no accounting recognition in the books?  Have any accounting, management or other services being received or rendered without any charge? Obtain the details
  7. 7. JRA & Associates Sample Checklist - S. No. Particulars Yes/No/NA Remarks i. Have any NPOs/trusts being established for the benefit of employees, officers or trustees of the units? ii. Are there any major stockholders absorbing large portion of corporate expenses? iii. Has the nature of business transacted with major customers, suppliers, borrowers & lenders being reviewed for any undisclosed relationships? iv. Is the disclosure of stockholder listings of closely held entities being made? v. Have the principal stockholders being identified? vi. Are there any unusual or large amount transactions entered into at the time of the closure of reporting period? vii. Is compliance with Ind AS 24 and FRS 8 being ensured?
  8. 8. JRA & Associates viii. Have all contractual arrangements with related parties being formalized? ix. Has a prior approval for all RTPs being obtained from the directors? x. Has special resolution being passed for loan granted to the directors and other specified persons? xi. Is timely review of the filings with SEBI and other regulatory agencies being done for names of related parties and for other businesses in which managers and directors occupy directorship or managerial positions? xii. Is any disallowed expenditure incurred in respect of ‘specified persons’ under Section 40A(2) of Income Tax Act, 1961 being claimed as deduction? xiii. Has the documentation being done in alignment with domestic & international transfer pricing guidelines? xiv. Does the entity ensure maintenance of register with particulars of all contracts or arrangements? xv. Is such register being placed in the Board and signed by all the directors present at the Board meetings? xvi. Does the Director’s Report disclose each related party transaction, irrespective of its arm’s length nature, along with the justification for entering into same?
  9. 9. JRA & Associates Please feel free to contact us at Any Suggestions / Queries ?