related party transaction

Yes it means the director owes money to the company – that could be because the director has bought goods from the company – so is a trade receivable – or because the company has lent money to the director – i.e. a loan receivable. The latter may be prohibited (e.g. by companies act legislation).

Basic audit procedures are no different to it the transaction was with a third party – e.g. obtain external confirmation, confirm after-date receipt of cash, etc.

The main difference arises from the minimum disclosures (IAS 24) that must be made because this is regardless of monetary materiality. So if any allowance is needed against the amount owing (or any amount written off), these are disclosable – as are the terms and conditions, including whether a loan is secured, etc. If the disclosure asserts that the transactions were conducted on terms equivalent to an arm’s length transaction, the auditor should verify that.

Obtaining written representation that management has disclosed all related parties/RPTs to the auditor would also be relevant.

As for any debt it should be written off or an allowance for the expected credit loss made if there are doubts about its recovery. So in accounting terms it may not only be appropriate but a requirement. If the director cannot pay because he doesn’t have the means to settle his debt there may be legal proceedings (e.g. in the UK) that could be taken against him to have him disqualified as a statutory director. (And he can be removed as a director by ordinary resolution of the shareholders in general meeting.)

You’re welcome!