Audit of related party transactions

What the auditor tests

• completeness of the identified related parties — through equity participation, common management, arrangements and other ability to influence decisions;
• the register of affiliated persons and notifications of affiliation (for JSCs);
• significant transactions outside the normal course of business and transactions on non-market terms;
• actual performance: whether the actual receipt of goods and services is confirmed;
• consistency of intra-group balances on both sides;
• completeness of disclosure in the notes to the financial statements.

Disclosure in the financial statements

Under IAS 24 «Related Party Disclosures», entities disclose relationships between parents and subsidiaries, compensation of key management personnel, and the nature of the relationships, transaction amounts and outstanding balances with related parties. In financial statements under national standards, this information is provided in the explanatory notes.

Transactions with affiliated persons in a JSC

• An affiliated person notifies the company in writing of its affiliation no later than three business days after the grounds arise; the company keeps records of affiliated persons and publishes their list annually (Article 105).
• For a proposed transaction, the affiliated person sends a notification specifying the parties, the subject matter and the material terms (Article 86).
• The transaction is reviewed by the executive body (within three business days) and by the internal audit function, with the results recorded in minutes (Article 87).
• The supervisory board decides no later than 15 days from the date the notification is received; the affiliated person does not vote (Article 88).
• A transaction amounting to 10% or more of net asset value is approved with its terms reviewed by an independent external audit firm, taking into account the market value of the property as appraised (Article 88).
• Information on transactions with affiliated persons is included in the company's annual report (Article 86).

The tax side

For tax purposes, persons are treated as interrelated if the specifics of their relationship may affect the terms or results of transactions (Article 37 of the Tax Code); transactions between them are treated as controlled transactions (Article 180). Transfer pricing is covered in more detail in a separate article.

Typical findings

• related parties identified only by direct equity participation;
• interest-free loans to shareholders and affiliated companies with no repayment schedule;
• transactions approved in breach of procedure — without review minutes or with the interested party voting;
• unreconciled intra-group balances;
• no disclosure of management compensation.