Are You Ready for Your Annual Audit?


It’s that time of the year! As we are in the fourth quarter and move closer to year-end, there are some best practices to follow to avoid pitfalls and issues while undergoing your year-end audit. Implementing these best practices will enhance the value your organization receives from the audit process and will help you to comfortably meet your deadline for distributing audited financial statements to your investors.


It is management’s responsibility to prepare financial statements and to design, implement and maintain internal controls relevant to the preparation and fair presentation of financial statements. Management’s first step is to have an in-house accounting team who are capable of achieving effective financial reporting which enables management to prepare financial statements that are fairly presented. While management can alternatively outsource the accounting function to a third-party service provider (for example, an external fund administrator) who can assist with preparation of the financial statements, it is important to keep in mind that management retains responsibility for the financial statements.


With nine months of the fiscal year behind us, the fourth quarter is the ideal time to set up a planning meeting to discuss and provide an update to your auditor about what has occurred so far during the year. Matters of interest to your auditor will include amendments to the partnership agreement and other fund documents, capital activity, fund performance, any new or difficult-to-value investments, and any other notable changes that occurred during the year. Expected timing of interim and final fieldwork and audit completion should also be discussed at the audit planning meeting. If you have outsourced your accounting function to an external fund administrator, ensure that the expected timing fits into their schedule. Ask your auditors if they are aware of any new accounting pronouncements that are applicable to you that you should be considering while preparing your annual financial statements. Address any concerns with auditors now!

ASK FOR THE AUDITOR’S YEAR-END REQUEST LIST (also known as PBC or “Prepared by Client” list)

It is a standard practice for auditors to provide their clients with a list of items they will need to get the audit rolling. Ask for this list well in advance of your fiscal year-end. Knowing ahead of time about some of the schedules and documents your auditors are going to need will help you keep these items in mind when you are going through the process of your year-end close. Ensure that you share the list with your external fund administrator and agree on the expected timing of any audit schedules that they can help prepare. Carefully consider each of the schedules you may be preparing for the auditors. If any of them are considerably time consuming for you or your external fund administrator to prepare, ask the auditors to explain why they need them. It is possible that they could get the same information from another resource.


Before providing any of the requested schedules, documents, or back up to your auditor, check to make sure that the information agrees with your trial balance and/or internally prepared financial statements. As an example, if you provide a schedule of partner contributions and withdrawals that does not reconcile to the corresponding amounts recorded in your trial balance, you will have opened up a whole can of worms. Even if you ultimately end up providing a corrected schedule that agrees to the trial balance, your auditors would want to know what changed and the reasons for the mismatch. Any errors and/or reconciliations during the audit process add to the cost of the audit. Reviewing the audit schedules in advance can save you time during the audit and helps everyone focus on more important issues.


The audit schedules that you submit to your auditors provide a good data point for them to begin their audit. The auditors will have additional questions and most likely need to talk to you and/or your external fund administrator throughout the audit process. Designating an individual to handle all audit-related requests and to provide timely responses to all their questions will ensure an efficient audit.


It is standard procedure for auditors to request confirmations from banks on account balances on all significant cash accounts. Other audit areas involving the confirmation process include investments and cash held at a qualified custodian, private investments, whether or not held at a qualified custodian, and capital activity including contributions, withdrawals and transfers of interests. Auditors are required to transmit the confirmation requests themselves directly to the bank, custodian or investor and in turn, the auditors must receive the confirmation reply directly from those parties in order for it to be valid. When inaccurate balances or incorrect information is provided on the audit confirmation, someone has to spend the time following up to get corrected information. The best chance at improving the accuracy of your confirmations is to prepare them as close to the confirmation date as possible. So if your auditor needs a confirmation as of December 31, make sure that you have either signed any paper confirmations, or given electronic approval before this date. The approved confirmation requests need to go out in the first week of January or as close to the year-end as possible.


Auditors are required to include some element of “surprise” in their audit, so they are unable to tell you in advance absolutely everything that they plan to test. However, you can ask if there are any tests or testing selections that can be done ahead of time. Most accounting firms perform interim work covering transactions occurring in the first three quarters of the year. Purchase and sale of investments, realized gains and losses on sale of investments and capital activity are the most common audit areas that get covered during interim work. Interim procedures are the best way to avoid surprises at year-end as they provide your independent auditor an opportunity to look at your accounting records and provide recommendations way before the chaos of year-end hits you.


Valuation of hard-to-value investments is of critical importance to investors and is often an area that is closely looked at by auditors and their valuation specialists. Your valuation policies and procedures should establish methodologies for various classes of investments, address effective alleviation of potential conflicts of interests, and provide for appropriate disclosures. You should also consider including qualified valuation professionals in your team who can contribute to implementation of your valuation policies and procedures. Most auditors will expect that the management will prepare a comprehensive year-end valuation package for all hard-to-value assets they hold. The valuation package should provide a comprehensive write-up for each private investment being valued, including references to applicable support and documentation included within the valuation package. Clearly explain within the valuation package your rationale for any specific factors such as discounts due to lack of marketability or lack of control inputs. Providing substantial rationale for any changes in valuation methodology or inputs that have changed from prior valuation periods helps avoid follow up questions from your auditors.


Asset Management Intelligence - Q4 2016

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