Related Party Transactions Audit Risk in Australia: A 2026 Guide for Businesses

Related party transactions are among the highest-risk areas in any financial statement audit. In Australia, regulators including ASIC and the ATO have intensified their scrutiny of these transactions in recent years, recognising that they are frequently used — intentionally or inadvertently — to shift profits between entities, conceal losses, or circumvent proper corporate governance. For Australian businesses, understanding how auditors approach related party transactions, and what is required to satisfy both accounting standards and regulatory expectations, is essential for maintaining compliance and avoiding costly disputes.

Understanding Related Party Transactions in Australian Auditing

A related party transaction is any transfer of resources, services, or obligations between a reporting entity and a related party, regardless of whether a price is charged. Related parties include parent companies, subsidiaries, associates, joint ventures, key management personnel, and their close family members. In Australian accounting, related party disclosures are governed by AASB 124 Related Party Disclosures, which requires entities to identify all related party relationships and disclose the nature and amount of all material transactions.

The audit of related party transactions goes well beyond verifying that disclosures are complete. Under ASA 550 Related Parties, auditors are required to assess whether related party transactions have been conducted on arm's length terms, whether they have been properly authorised and approved, and whether they reflect the commercial substance of the arrangement rather than its legal form. This requires a level of professional scepticism that goes beyond standard audit procedures.

In 2026, the revised ASA 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of a Financial Report) — which applies to financial reporting periods commencing on or after 15 December 2026 — strengthens the requirement for auditors to treat undisclosed or unusual related party transactions as significant fraud risk indicators. This means auditors are expected to actively search for related party relationships that management has not disclosed, not merely verify those that have been identified.

Key Considerations for Businesses and Their Auditors

Australian businesses — particularly those operating through complex group structures, family-owned enterprises, or entities with significant founder or management ownership — should be aware of the following considerations when it comes to related party transactions:

• Completeness of disclosure — AASB 124 requires disclosure of all material related party transactions, not just those that management considers significant. Auditors will independently identify related parties through entity searches, director declarations, and review of board minutes.
• Arm's length pricing — Transactions between related parties must be conducted on terms that would be available to unrelated parties in similar circumstances. Where transactions are not at arm's length, this must be disclosed. The ATO also scrutinises related party pricing under transfer pricing rules for cross-border transactions.
• Authorisation and approval — Related party transactions should be approved by the board or an appropriate governance body, with the interested party excluded from the decision. Auditors will review board minutes and governance records to verify this.
• Documentation — Informal arrangements between related parties — common in family businesses and founder-led groups — are a significant audit risk. All related party transactions should be documented in writing, including the terms, pricing basis, and approval process.
• Substance over form — Auditors are required to assess the commercial substance of related party transactions, not just their legal form. A transaction that is structured to appear arm's length but lacks genuine commercial rationale will attract heightened scrutiny.
• Loans and advances — Loans between related parties, including Division 7A loans from private companies to shareholders or associates, are a particular focus area for both auditors and the ATO. Interest rates, repayment terms, and compliance with minimum repayment requirements must be carefully documented.

Common Mistakes and Red Flags

ASIC's audit surveillance program regularly identifies deficiencies in the audit of related party transactions. Common issues include:

• Incomplete identification of related parties — Auditors sometimes rely solely on management representations to identify related parties, without independently verifying the completeness of the list through entity searches and director declarations.
• Insufficient testing of arm's length terms — Auditors may accept management's assertion that a transaction is at arm's length without obtaining independent evidence, such as comparable market data or independent valuations.
• Failure to identify undisclosed transactions — Related party transactions that management has not disclosed — whether through oversight or intent — are a significant audit risk. Auditors must actively search for these through review of bank statements, contracts, and other records.
• Inadequate documentation of audit procedures — ASIC's audit file reviews have found that auditors sometimes perform appropriate procedures but fail to document them adequately, making it impossible to demonstrate that the work was done.
• Treating related party transactions as a disclosure exercise only — Some auditors focus on ensuring that disclosures are complete and accurate without adequately assessing the risk of material misstatement arising from the transactions themselves.
• Overlooking management override risk — Related party transactions are a primary vehicle for management override of internal controls. Auditors must specifically consider this risk and design procedures to address it.

Australian Regulatory Context

The regulatory framework governing related party transactions in Australia involves multiple overlapping regimes. Understanding this framework is essential for both businesses and their auditors.

ASIC enforces compliance with AASB 124 and the related party transaction provisions of the Corporations Act 2001. Chapter 2E of the Act imposes specific requirements on public companies regarding financial benefits to related parties, including shareholder approval requirements for certain transactions. ASIC's audit surveillance program regularly reviews audit files for compliance with ASA 550 and has taken enforcement action against auditors who have failed to adequately address related party risks.

The ATO scrutinises related party transactions under several regimes. Division 7A of the Income Tax Assessment Act 1936 treats certain loans, payments, and debt forgiveness by private companies to shareholders or associates as unfranked dividends. Transfer pricing rules under Subdivision 815-B of the Income Tax Assessment Act 1997 require cross-border related party transactions to be priced on arm's length terms. The ATO's data-matching program cross-references related party transaction data from tax returns, BAS lodgements, and third-party sources.

The Australian Auditing and Assurance Standards Board (AUASB) is currently consulting on revisions to international auditing standards, including ISA 500 (Audit Evidence) and ISA 330 (The Auditor's Responses to Assessed Risks), with comments due by 16 November 2026. These revisions are expected to strengthen requirements for audit evidence in high-risk areas, including related party transactions.

From 1 December 2026, the AUASB's standard-setting functions will transition to External Reporting Australia (ERA), the new body established by the Financial Reporting Council. Businesses and auditors should monitor ERA's communications for any changes to related party disclosure and audit requirements.

Questions to Ask When Choosing an Auditor

For Australian businesses with complex related party structures, choosing an auditor with the right expertise is critical. Key questions to ask include:

• What is your firm's approach to independently identifying related parties, beyond relying on management representations?
• How do you assess whether related party transactions are conducted on arm's length terms, and what evidence do you obtain?
• What procedures do you perform to identify undisclosed related party transactions?
• How do you address the risk of management override in the context of related party transactions?
• What is your experience with Division 7A compliance and ATO transfer pricing requirements for related party transactions?
• How do you document your related party audit procedures to satisfy ASIC's audit quality expectations?
• Are you familiar with the revised ASA 240 fraud standard and how it affects your approach to related party transactions?

How MyMoney® Can Help

The audit of related party transactions requires an auditor with deep technical knowledge of AASB 124, ASA 550, the Corporations Act, and the ATO's related party tax regimes. For businesses with complex group structures, family ownership, or significant management transactions, choosing the right auditor is not just a compliance decision — it is a risk management decision.

MyMoney® connects Australian businesses with qualified auditors who have the expertise to navigate complex related party environments. Whether you need an auditor for a statutory audit, an SMSF audit, or a specific related party review, the right professional can provide the assurance your stakeholders require.

Post a Brief on MyMoney® to receive proposals from experienced auditors, or Browse Auditors to find a specialist with the right expertise for your business. Engaging a qualified auditor early in the financial year — rather than at year-end — gives you the best opportunity to address related party issues before they become compliance problems.