Related Parties: Why Normal-Looking Transactions Can Carry Higher Risk

Related Parties: An Ordinary Invoice Can Still Need a Different Audit Question

A familiar invoice format and a plausible price do not explain the relationship behind a transaction. An auditor needs to understand who can influence the parties, what the arrangement achieves and whether the accounting and disclosures reflect it appropriately.

Consider an original fictional distributor that purchases logistics services. Its CFO is a member of key management and controls the logistics supplier. The supplier issues ordinary invoices, deliveries take place and payment follows the contract. Those facts may support parts of the transaction, but they do not remove the relationship from consideration.

Map the relationship before judging the price

The case contains three distinct connections: the CFO serves as key management of the reporting entity; the CFO controls the supplier; the reporting entity buys services from that supplier. The map helps the reviewer ask questions that a vendor ledger alone may not reveal.

Under IAS 24, relevant relationships can arise through control and key management, among other circumstances. A transaction can require consideration even without a charged price. The applicable reporting framework determines the detailed definition and disclosures; this example is not a complete catalogue of related parties.

The relationship is not proof of wrongdoing. Related-party arrangements may have legitimate commercial purposes. Conversely, the fact that services were delivered does not, by itself, establish complete disclosure, appropriate authorization or the accuracy of every recorded term.

Separate relationship, terms and disclosure

Ask three questions independently. Is the supplier a related party under the applicable definition? What are the actual terms and business purpose? What accounting and disclosure are required for the relationship, transactions and relevant balances or commitments?

For the fictional distributor, inspect how the supplier entered the vendor master and who reviewed the relationship declaration. Compare the contract with invoices, delivery evidence and payment terms. Investigate whether other services, guarantees or balances exist outside the initial invoice listing.

These questions can produce different answers. A valid relationship classification does not establish that a price is fair. A reasonable price does not make the relationship disappear. A correctly recorded expense does not establish that the disclosure is complete.

Test a claim about market-equivalent terms

Suppose management states that the logistics arrangement uses terms equivalent to an independent-party transaction. A price comparison needs an appropriate basis. Route, volume, service obligations, credit period, guarantees, capacity commitments and other conditions may differ.

A comparison that matches the headline rate while ignoring a long credit period or an unusual commitment can be misleading. Establish what the claim means, what evidence supports it and what limitations remain. ISA 550 specifically addresses audit evidence for management's assertion about equivalent arm's-length terms; the invoice alone does not resolve that assertion.

The example provides no benchmark price or conclusion that the arrangement is improper. Those would require actual facts and an engagement-specific evaluation.

Look for what the first list misses

Management's related-party register is a starting point to evaluate, not a substitute for understanding the business. In this fictional case, the audit team might compare relevant declarations, ownership evidence, approval records and significant contracts, using lawful and appropriate access.

An unfamiliar name or shared address is a lead to investigate, not a confirmed relationship. The auditor should establish the underlying facts and consider whether undisclosed arrangements or transactions affect the risk assessment. Avoid both extremes: accepting a register without question and labelling every unusual transaction as related-party fraud.

Make the conclusion specific

Document which relationship was established, which transactions and balances were considered, how the evidence supports the conclusion and what remains unresolved. Evaluate the effect on the financial statements in context. Transaction value alone does not settle the question.

For practice, draw the three connections in this case. Then identify one piece of evidence for each connection and one limitation of a price-only review. That exercise connects the relationship map to a practical evidence need.

This is an original fictional case, not an allegation about a real company or person. References are the IFRS Foundation's IAS 24 overview and ISA 550 in the IAASB 2026 Handbook. Determine the applicable framework, auditing requirements, effective dates and local rules for an actual engagement.

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