Providing your clients with top-notch financial advice is not only your means of making a living, but it’s your passion, craft, and challenge. However, there might come a time when you find yourself in need of a financial statement audit, whether it’s from investor demand or regulatory oversite. In this case, what do you need to know as a registered investment adviser (RIA) when preparing for your first audit? Here’s a list of the key items you should be prepared for in order to facilitate an efficient first-time audit:
- Assess and document your internal controls: This is an integral part of any financial statement audit. Your auditors will want to obtain a thorough understanding of your internal controls as well as walk through your key controls.
- Familiarize yourself with the regulatory requirements: It’s best to arm yourself with the knowledge of these requirements prior to your auditor’s request. If you’re familiar with the regulations (as set by the SEC or other regulatory bodies) for RIAs, you’ll be well prepared when an auditor makes this request.
- Work with your auditor ahead of time to generate a list of items they will be looking for: The more time spent discussing what is needed up front, the more time you will save on the backend. It is vital to take the necessary steps to understand what your auditor will need to eliminate surprises and late requests.
- If applicable, introduce your fund administrator to your auditor: If you utilize a fund administrator, it’s in your best interest to introduce them to the audit firm before the audit. They can assist you in preparing the key documents you’ll be asked to provide and even draft the financials for you.
- Support for the valuation of your investments: If most of your investments are actively traded, such as equity securities, this is not a heavy lift. The auditor will test the valuation by looking to quoted prices in active markets for identical assets or liabilities. However, if you invest in private operating companies, such as special-purpose vehicles, management typically must provide a valuation memo defending why the investment is valued at cost, impaired, or written up.
- Implications of SEC independence rules applying to the audit: If these rules apply, your auditor may not assist you in drafting, editing, or even assembling the financial statements. Your auditor will only issue an auditor’s opinion. For a first-time audit, this can be a daunting process as the number of editing rounds provided by your auditor can be quite high. Rest assured, this is an “onboarding” pain that is avoided in subsequent years.
- Discussions are not audit evidence: A common misconception is that a topic is “put to bed” after discussed with a member of the audit team. You should plan on follow-up documentation requests to support the discussion. As the audit progresses, there may be more inquiries on the topic as the work proceeds through the audit firm’s levels of review.
It is vital for investment advisers to understand the above steps to properly prepare for their first-time audit. These key items will allow the process to run smoothly and efficiently while complying with requirements. If you have any questions regarding your first financial statement audit, reach out to a member of Wolf’s Audit and Tax teams.
