NFRA proposes to tighten audit of related-party transactions
March 31, 2025
NFRA proposes tighter audit standards for related-party transactions to enhance audit quality and address concerns raised in inspections of major audit firms, ensuring transparency in financial reporting.
To strengthen the overall audit quality, the National Financial Reporting Authority (NFRA) has released a third paper from its 7-part series addressing critical areas of statutory audits. The paper focusses on the potential questions that the audit committees at companies might raise with the auditors in areas like related party relationships, transactions and disclosures.
Recently, the NFRA inspection reports on Big Five audit firms like SR Batliboi & Co, Deloitte Haskins & Sells and Walker Chandiok & Co have raised concerns on the audit procedures being followed by these firms as auditors for public interest entities.
“Related party relationships and transactions have been a source of major frauds in the corporate history and some of the modus operandi continues to be seen in recent corporate frauds as well. In some cases, transactions with unrelated parties have the purpose and effect of benefiting related parties,” the paper said.
The major related party transactions (RPTs) can be classified into loans and advances, investments, supplying goods and services, and remuneration of key management personnel.
NFRA paper said that when a company’s management make an assertion in the financial statements that a RPT was conducted on terms equivalent to those prevailing in an arm’s length transaction, the auditor shall obtain sufficient appropriate audit evidence about the assertion.
“The auditor is required to evaluate whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework. Also, the auditor is required to obtain written representations from management that they have disclosed to the auditor the identity of the entity’s related parties and all the related party relationships and transactions of which they are aware,” the paper said.
Previously, the auditing regulator had brought out papers on income tax, and audit strategy and planning. In mid-January, NFRA sources had told FE that seven such papers are planned for release over the next three months.
[The Financial Express]
