The audience was held in the sitting room, a comfortable lived-in room with a desk and tables covered in the Queen's paperwork.
Although the Queen's dogs were not present for the audience, there were signs they were frequent visitors - several dog beds lay on the floor. She wore a skirt in Balmoral tartan.
Straight after the audience, the Key family were due to attend the formal dinner at Balmoral - which may mean Mr Key is unable to watch the America's Cup racing.
The Queen showed an interest in the America's Cup, saying she had just been reading about and asking about the racing today.
The group will also go to the Church service at the Royals nearby Crathie Kirk tomorrow morning, where media interest is likely to be high because Prince William, the Duchess of
Cambridge and Prince George are at Balmoral.
After lunch at the Castle following the Church Service, the Key family will leave to travel to Paris where Mr Key's meetings will continue.
Prime Minister David Cameron, whom Mr Key caught up with in London last week, is due to arrive in Balmoral tomorrow.
Before he went into Balmoral Mr Key said he expected to discuss the Christchurch Earthquake rebuild with the Queen - something she had raised with him in the past and which Mr Key said she got a lot of correspondence about.
"She's very knowledgeable about New Zealand, I think she's been there 16 or 17 times. She's very passionate about New Zealand."
The Commonwealth is also likely to have been discussed - the Queen will not attend this years Commonwealth Heads of Government meeting for the first time in about 40 years because it will be held in Sri Lanka.
Prince Charles will attend instead. Mr Key recently agreed to advocate for the Queen's role as head of the Commonwealth to pass down to her successors as of right and that may also have been raised.
