30th Jan

kohlimaudit

How to Handle Related-Party Transactions Properly Before Your Audit

Related-party transactions are one of the most sensitive and frequently scrutinised areas in Singapore audits. They are also one of the most misunderstood. Many SMEs believe that related-party transactions are only a concern if something improper has happened. In reality, perfectly legitimate transactions can still create audit issues if they are poorly documented, incorrectly recorded, or inadequately disclosed.

This article explains what related-party transactions are, why auditors focus so heavily on them, and how Singapore companies can handle them properly before the audit begins—to avoid delays, adjustments, and uncomfortable board discussions.

1. Why Auditors Pay So Much Attention to Related-Party Transactions

Auditors treat related-party transactions as high risk because:

They are not conducted at arm’s length by default
They are susceptible to bias or preferential terms
They may not reflect economic reality
They can be used to shift profits, cash, or liabilities

From an audit perspective, related-party transactions are not presumed to be wrong—but they must be transparent, justifiable, and properly disclosed.

2. What Is a Related-Party Transaction (Plain English)

A related-party transaction is any transaction between the company and a person or entity that has a close relationship with the company.

This includes transactions with:

Directors
Shareholders
Key management personnel
Family members of directors or shareholders
Companies under common control
Associated or joint-venture entities

The transaction can be:

Financial (loans, advances, guarantees)
Commercial (sales, purchases, services)
Non-cash (asset transfers, rent-free use of property)

Even transactions at market rates are still related-party transactions.

3. Common Related-Party Transactions in Singapore SMEs

Auditors frequently encounter the following:

3.1 Director or Shareholder Loans

Examples:

Directors advancing funds to the company
Company advancing funds to directors
Long-outstanding “temporary” balances

These must be clearly classified, supported, and disclosed.

3.2 Management Fees Charged Between Related Companies

Common in group structures:

Holding company charging management fees
Shared services arrangements
Informal cost sharing

Without proper agreements, auditors may challenge substance.

3.3 Rent Paid to Directors or Related Entities

Examples:

Office rented from a director
Warehouse owned by a related company

Auditors assess:

Whether terms are reasonable
Whether agreements exist
Whether disclosures are complete

3.4 Sales and Purchases With Related Companies

Examples:

Trading with sister companies
Inter-company sales and purchases

Auditors will examine pricing, cut-off, and recoverability.

3.5 Expense Reimbursements to Directors

Examples:

Travel expenses
Personal expenses reimbursed by the company

Poor documentation here often leads to audit findings.

4. Why Related-Party Transactions Cause Audit Problems

Related-party transactions typically cause issues because of process failures, not intent.

Common problems include:

No written agreements
Balances carried for years without settlement
Unclear repayment terms
Incorrect classification
Incomplete disclosures
Management assuming “everyone knows about it”

Auditors cannot rely on assumptions or informal understanding.

5. What Auditors Are Trying to Conclude

When auditing related-party transactions, auditors are trying to confirm that:

Transactions are real and complete
They are properly authorised
They are recorded correctly
Terms are reasonable or explainable
Disclosures are complete and accurate

If any of these fail, adjustments or disclosures are required.

6. The Most Common Audit Adjustments for Related-Party Transactions

6.1 Reclassification of Balances

Examples:

Trade receivables reclassified as director advances
Inter-company balances reclassified as loans

This often affects balance sheet presentation and disclosures.

6.2 Recognition of Interest or Imputed Costs

If a related-party loan is:

Interest-free
Long-term
Material

Auditors may require:

Interest disclosure
Reassessment of substance
Clarification of terms

6.3 Write-Down of Unrecoverable Balances

Long-outstanding balances with related parties are often questioned.

Auditors assess:

Recoverability
Intent and ability to repay
Historical settlement behaviour

Unrecoverable balances may require write-offs or provisions.

6.4 Expanded Disclosure Requirements

Even when numbers are correct, auditors may require:

More detailed related-party disclosures
Breakdown by type of transaction
Explanation of relationships

Disclosure issues are among the most frequent audit findings.

7. How Auditors Identify Related-Party Transactions

Auditors do not rely only on what management tells them.

They identify related-party transactions by:

Reviewing shareholder registers
Reviewing director declarations
Examining unusual balances
Analysing transactions near year-end
Comparing disclosures year-to-year

If a transaction exists but is not disclosed, auditors will usually find it.

8. How to Handle Related-Party Transactions Properly (Before the Audit)

8.1 Maintain a Related-Party Register

At minimum, maintain a list of:

Related persons
Related entities
Nature of relationships

Update this whenever:

Directors change
Shareholders change
Group structure changes

This single step prevents many audit issues.

8.2 Document Agreements Clearly

For recurring transactions, have:

Written agreements
Clear terms
Defined pricing or fee basis
Repayment schedules (for loans)

Even simple agreements are better than none.

8.3 Keep Transactions Arm’s Length Where Possible

Auditors do not require perfection—but they do expect reasonableness.

Where possible:

Benchmark prices
Apply consistent terms
Avoid preferential treatment without explanation

If terms are not arm’s length, document why.

8.4 Settle Balances Regularly

Long-outstanding balances raise red flags.

Best practice:

Settle inter-company balances periodically
Avoid letting “temporary” balances run indefinitely

Settlement demonstrates substance.

8.5 Review Related-Party Transactions Before Year-End

Before the audit:

Review all related-party balances
Confirm accuracy and classification
Prepare explanations and documentation

This avoids last-minute audit stress.

9. Board and Director Approval: Why It Matters

Related-party transactions should be:

Reviewed by the board
Approved where appropriate
Documented in board minutes

This demonstrates oversight and protects directors.

10. Disclosure: The Area Most Businesses Get Wrong

Many companies assume:

“If the amount is small, we don’t need to disclose it.”

This is incorrect.

Disclosure is based on:

Nature of relationship
Type of transaction
Aggregate significance

Auditors expect full disclosure, even if amounts are not material individually.

11. Regulatory and Director Responsibility

Directors are responsible for ensuring that financial statements contain proper related-party disclosures before filing with Accounting and Corporate Regulatory Authority.

Failure to disclose related-party transactions is viewed as:

A governance weakness
A transparency issue
A potential compliance breach

Even unintentional omissions can create regulatory risk.

12. When Related-Party Transactions Signal Deeper Issues

Frequent or poorly controlled related-party transactions may indicate:

Weak segregation between personal and company finances
Cashflow stress
Poor governance discipline
Over-reliance on informal arrangements

In such cases, accounting fixes alone are insufficient.

13. How Auditors View Transparency vs Perfection

Auditors do not expect:

Zero related-party transactions
Perfect documentation from day one

They do expect:

Honesty
Transparency
Willingness to correct issues
Improvement year-to-year

Transparency builds credibility far more than defensive explanations.

14. How Proper Handling Improves Audit Outcomes

Companies that manage related-party transactions well experience:

Faster audits
Fewer adjustments
Reduced audit fees over time
Better relationships with auditors and banks
Lower director risk

This is one of the highest-impact areas to get right.

15. Practical Checklist Before the Audit Starts

Before your audit, ask:

Do we know all our related parties?
Are all related-party transactions recorded correctly?
Are balances reasonable and recoverable?
Are agreements documented?
Are disclosures complete?

If you can answer “yes” to all five, you are well-prepared.

16. Final Thoughts: Related-Party Transactions Are About Trust

Related-party transactions are not inherently bad. They are common in owner-managed and group-structured businesses. What matters is how they are handled.

Auditors, regulators, and stakeholders are looking for:

Transparency
Fairness
Documentation
Oversight

Singapore companies that handle related-party transactions properly do not just avoid audit issues—they demonstrate maturity, discipline, and strong governance.

In audits, nothing undermines trust faster than undisclosed related-party transactions.
Handled well, they become a non-issue.

Categories: Uncategorized