A company owner lent money to his own business during a tight month. He never wrote it down. He simply moved funds between accounts and carried on.
At the audit, the auditor asked about it first. The transfer was not wrong. But it was not documented either.
What a Related Party Is
A related party is someone with a close connection to the business. That often includes owners, directors, close family members, and companies they also control.
In small businesses, these connections are very common. That is why these dealings come up in many small-business audits.
Why Auditors Look Closely
Related-party dealings do not always happen on normal commercial terms. A friendly rent, an interest-free loan, or a sale at a special price is easy to arrange between people who know each other.
Because of that, auditors want to understand what happened and why. Depending on the reporting framework, these dealings may also need to be disclosed clearly in the financial statements.
Common Examples in Small Businesses
- An owner lending money to the business, or taking money out without a record
- The business paying rent on a property the owner personally holds
- Sales or purchases between the business and a company owned by a relative
- Salaries or payments to family members working in the business
- Shared costs between the business and another company under the same owner
None of these is wrong in itself. The point is to record them properly, on terms that can be explained.
What This Looks Like in Practice
In the owner’s case, the loan itself was fine. The issue was the missing paper trail. There was no agreement, no note of repayment terms, and no clear entry in the books.
The auditor had to ask several follow-up questions. Reconstructing the story took time. It also slowed the audit down.
A Second Example: The Family Supplier
A different company bought most of its stock from a supplier owned by the director’s brother. The prices were fair. But nothing in the records showed that.
The auditor asked how the prices compared with other suppliers. Because the company had kept quotes on file, the question was answered quickly. Without them, it would have taken much longer.
What Happens After the Auditor Raises a Question
Once an auditor asks about a related-party dealing, the next steps are usually straightforward. The business explains the purpose of the transaction. It then shows the supporting evidence.
That evidence might be an agreement, a bank record, a note of approval, or a set of comparison quotes. The more of it that exists, the shorter the conversation tends to be.
If the evidence does not exist, the auditor may ask for more explanations or extra checks. That is where time and cost can build up.
Common Mistakes to Avoid
- Moving money between the owner and the business without a written record
- Assuming fair dealings do not need documentation
- Forgetting to list related parties when the auditor asks
- Setting terms informally, with no agreement on repayment or price
A Simple Habit to Build
Keep a short list of your related parties and update it each year. For every dealing with them, keep a written agreement or a clear note.
It does not need to be complicated. A one-page agreement and a proper entry in the books can save a lot of questions later.
Ask each person involved to sign the note. It keeps everyone clear on the terms.
Why This Matters Beyond the Audit
Clear records of related-party dealings help in other ways too. Banks, investors, and buyers often want to know how a business deals with its owners.
A clean paper trail shows that the business is run as a separate entity. It also protects the owner. If a question ever comes up, there is a record to point to.
How JS Morlu Gambia Can Help
JS Morlu Gambia helps you prepare for audits by reviewing how dealings between owners, family members, and the business are recorded. We help you put clear documentation in place. When a formal audit is needed, we connect you with a licensed, independent audit partner.