Best Practices for a Year-End Audit

Are you ready for your annual audit? Follow these tips to avoid pitfalls and issues during your year-end audit. Implementing these best practices will enhance the value your organization receives from the audit process and help you comfortably meet your deadline for distributing audited financial statements to your investors and other users.   

Key Takeaways:  

• Successful year-end audits require thorough preparation, including planning meetings with auditors, and understanding relevant new accounting pronouncements.
• Organizations should secure a year-end request list from auditors, review and verify the accuracy of financial schedules, and designate a point of contact to streamline audit communications.
• Timely preparation and submission of private investment valuations, bank and other audit confirmations, and the use of resources like the AICPA guide can enhance compliance and reduce audit complications. 

10 Steps Toward a Successful Year-End Audit  

Prepare Financial Statements   

It is the 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 establish an in-house accounting team capable of producing effective financial reporting, enabling management to prepare fairly presented financial statements.  

While management can outsource the accounting function to a third-party service provider to assist with financial statements, it’s important to keep in mind that management retains responsibility for the financial statements.     

Schedule a Planning Meeting with Your Auditor   

If you haven’t already set up a planning meeting with your auditor, set it up now to discuss annual updates. Matters of interest to your auditor include amendments to the partnership agreement and other fund documents, capital activity, fund performance, any new or private investments, and any other notable changes that occurred during the year in your operations and your internal controls. The audit planning meeting should also discuss the expected timing of audit fieldwork and completion. If you have outsourced your accounting function to an external fund administrator, plan to align timing with their schedule.    

Understand New Accounting Pronouncements   

Engage in discussions with your auditors regarding any new accounting pronouncements that apply to your organization as you prepare your annual financial statements. Timely communication between management and the auditor to discuss new accounting pronouncements enhances both audit quality and the overall quality of financial reporting. 

The following accounting pronouncement issued by the Financial Accounting Standards Board (FASB) is effective for nonpublic calendar year-end entities in 2025:  

• ASU 2022-03 Fair Value Measurement (Topic 820): Clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security. ASU 2022-03 also introduces new disclosure requirements. The guidance is effective for nonpublic calendar year-end entities for annual periods beginning after December 15, 2024, with early adoption permitted.  

The following accounting pronouncements issued by the FASB are effective for nonpublic calendar year-end entities in 2026, with early adoption permitted: 

• ASU 2024-01: Clarifies profits interest accounting and adds examples to illustrate when partnership “profits interest” awards fall under ASC 718. 
• ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures: Enhances tax footnotes by qualitatively disclosing the nature and effect of the specific categories of reconciling items and individual jurisdictions. A tabular rate reconciliation may be provided but is NOT required.  
• ASU 2025-05 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets: Introduces a practical expedient allowing companies to estimate expected credit losses on current accounts receivable by assuming current conditions remain constant over the life of the receivables (no complex future macro forecasts needed), thus simplifying the calculation. Private companies can elect to include cash collections received after the balance sheet date in their credit loss estimates, used alongside the practical expedient. 

Ask For Your Auditor’s Year-End Request List  

Also known as the 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 complete the audit. Ask your auditor to provide this list well in advance of your fiscal year-end. Knowing in advance which schedules and documents your auditors will need will help you keep them in mind during your year-end close process. Make sure 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 schedule you may be preparing for the auditors. If any of them are time-consuming for you or your external fund administrator to prepare, ask the auditors to explain why they need them. They may be able to get the same information from another resource.  

For continuing or repeat audits, it is worth saving copies of the current-year schedules and documents you’ve submitted to your auditor for future reference. Note the source within your accounting system and the methods you have used to extract specific customized reports that were part of the auditor’s current-year request list. Without significant changes in your business or operations, your auditor will most likely request those specific customized reports annually. Revisiting your notes from the prior-year audit reduces efforts when extracting reports for the current year. This step is helpful if you have had turnover in your accounting department and a new employee has taken over the responsibility of preparing and submitting information to your auditors.   

Review the Schedules You Submit to Your Auditors  

Before providing any of the requested schedules, documents, or backups to your auditor, verify that the information agrees with your trial balance and/or internally prepared financial statements. For example, suppose you provide a schedule of partner contributions and withdrawals that do not reconcile with the corresponding amounts in your trial balance. Even if you provide a corrected schedule that agrees with the trial balance, your auditors will want to know what changed and the reasons for the mismatch. Any errors or reconciliations during the audit process can increase the audit cost. Reviewing the audit schedules in advance can save you time during the audit and help everyone focus on more critical issues.      

Designate an Audit Point-Of-Contact  

The audit schedules you submit to your auditors provide a good starting point for their audit. The auditors will have additional questions and will most likely need to speak with 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. A weekly or bi-weekly audit status meeting between management and auditors provides touch points to discuss progress and resolve any issues identified during the audit.     

Send Bank, Custody, and Other Audit Confirmations  

It is a standard procedure for auditors to request bank confirmation on account balances on all significant cash accounts. Other audit areas involving the confirmation process include investments and cash held with a qualified custodian, private investments, and capital activity, including contributions, withdrawals, and transfers of interests. Auditors must transmit the confirmation requests themselves directly to the bank, custodian, or investor. In turn, the auditors must receive confirmation directly from those parties for it to be valid. When inaccurate balances or incorrect information are provided on the audit confirmation, someone has to spend time following up to get the correct information. The best way to improve the accuracy of your confirmations is to prepare them as close to the confirmation date as possible. So, if your auditor needs confirmation as of December 31, make sure that you have either signed any paper or digital confirmation prior. The approved confirmation requests need to go out in the first week of January or as close to the year-end as possible.    

Request Advance Testing Selections or Interim Testing   

Auditors are required to include some element of “surprise” in their audit, so they are unable to disclose everything they plan to test. However, you can ask whether any test selections can be done in advance. Your auditor may plan to perform interim work covering transactions occurring in the first three quarters of the year. Interim procedures help avoid surprises at year-end as they provide an opportunity to look at your accounting records and recommend changes before the chaos of year-end hits you.    

Prepare Private Investment Valuations 

Valuations of private investments, referred to as level 3 investments, is critical to investors. It is often closely examined by auditors and their valuation specialists due to the measurement uncertainty and degree of judgment inherent in valuing such investments.   

Auditors expect management to prepare a comprehensive year-end valuation package for all private investments. 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 in the valuation package your rationale for any specific factors, such as discounts for lack of marketability or lack of control inputs. Providing a rationale for any changes in valuation methodology or inputs from prior valuation periods helps avoid follow-up questions from your auditors.   

Utilize AICPA’s Guide  

Management can use the American Institute of Certified Public Accountants (AICPA) accounting and valuation guide as a resource when preparing its private investments valuation package. This guide provides guidance and illustrations for preparers of financial statements, independent auditors, and valuations specialists regarding the accounting for and valuations of portfolio company investments of venture capital funds, private equity funds, and other investment companies. AICPA’s guide aims to provide user-friendly guidance, with case studies that can help managers reason through real-life situations.  

It might seem like your auditor is asking more questions and requesting more information for accounting estimates, such as level 3 valuations. This is by design and is the result of a new auditing standard that became effective for audits of 2024 financial statements and going forward. The new standard enhances guidance on understanding your organization and its environment, focusing on evaluating your internal controls relevant to preparing estimates, such as level 3 valuations. Therefore, expect increased auditor scrutiny and professional skepticism regarding your accounting estimates.      

Preparing for an Annual Audit?

Preparation for a successful annual audit requires ongoing efforts from management to establish and maintain a financial reporting system capable of generating accurate and reliable financial information throughout the period covered by the audit. The audit process is a two-way street requiring management and their auditors to fulfill their respective responsibilities. Discover how our financial services and audit team can support your needs, enhancing confident decision-making and organizational compliance. Contact our team below to start your journey toward a successful annual audit.