How should intercompany real estate transactions and balances be audited, and what are typical risks?

• A. Ignore intercompany balances if you trust management.
• B. Confirm intercompany balances, review transfer pricing, ensure elimination on consolidation; risks include overstatement of revenue, misallocation of costs, and non-arm's-length terms.
• C. Record all intercompany transactions only in the parent company; do not require eliminations.
• D. Intercompany balances require no confirmations.

Answer: (B)

Auditing intercompany real estate transactions and balances hinges on ensuring that related-party arrangements are accurately captured and properly eliminated in consolidation, with pricing that reflects arm’s-length terms. Start by mapping every intercompany real estate arrangement—rental agreements, leasebacks, transfers of property, and any intercompany charges for property management or services—and gather the corresponding balances. Obtain confirmations from the counterparties for intercompany receivables and payables and reconcile these to the general ledger and intercompany schedules to catch timing differences or missing entries.

Then review the underlying terms: lease calculations, rent accruals, transfer pricing policies, and any intercompany sale or transfer of real estate to ensure charges and allocations are market-based and consistently applied. Verify that consolidation eliminations are complete and correctly posted, so intercompany revenues, expenses, assets, and liabilities do not appear in the group figures twice. Pay attention to timing cut‑offs at period end and any unrealized profits on intragroup transfers.

Typical risks include revenue or asset overstatement if intercompany transactions are treated as third-party, misallocation of costs across entities, terms that are not at arm’s length (which can affect profitability and tax outcomes), and failures or errors in the consolidation eliminations, leading to inflated consolidated results. Adequate disclosures about related party relationships and intercompany arrangements are also essential to mitigate these risks.