How does an audit treat director loans and related-party transactions?

Why they are sensitive Related-party and director balances are not done at arm's length by default, can hide personal spending, and the accounts must disclose them.

What the auditor typically asks for

• A ledger of the director's current account with the movements for the year.
• Agreements, board approvals and repayment terms for loans.
• Details of connected parties: companies owned by the same people, family members and key management.
• Explanations for large or unusual transactions, such as payments with no business purpose.

Disclosure The notes to the financial statements must disclose loans, quasi-loans and other dealings in favour of directors, companies they control and connected entities, alongside directors' emoluments (s.383(1)(d)).

The law on director loans A company must not lend to a director, or to a company the director controls, without the prescribed approval of its members, subject to exceptions such as aggregate amounts up to 5% of net assets (Part 11, ss.500 and 505). A loan made in breach is voidable at the company's instance (s.513).

HKSA 550 The auditor asks management who the related parties are, what they transacted and why, then evaluates whether these are accounted for and disclosed under the reporting framework (paras 13 and 25).

Management's role Management will be asked for a written representation that all related-party relationships and transactions have been disclosed (HKSA 550 para 26 and HKSA 580).

Tip Keep personal and business payments separate and record each director payment in the books at the time, with a reason.