Authored by Monica Blocker, Director, Houlihan Capital & Herbert M. Chain, CPA, Director, CBIZ Advisors
As the year-end audit season approaches, proactive planning for the annual financial statement audit is essential. The audit process can be complex and demanding, but with careful preparation, your investment firm can not only meet reporting deadlines, but also make the process less “painless”. Below are practical insights and strategies to help you lay the groundwork for an effective and efficient audit.
Build a Robust Audit Timeline and Checklist
A well-structured deliverables calendar is your roadmap for audit success. Start by collaborating with your auditor to identify key milestones, then work backwards from your intended audit completion date. Include deadlines for scheduling onsite visits, confirming balances, preparing valuation support for complex holdings, and completing drafts of financial statements.
For funds with Level 3, illiquid, or otherwise complex investments, incorporating valuation timelines into the audit calendar—rather than treating valuation as a downstream task—can significantly reduce execution risk. Early engagement with valuation specialists allows management to align on scope, methodologies, and key assumptions well in advance of audit fieldwork.
Circulate this checklist among your team and the auditor, and revisit it regularly to make sure all parties are aligned and deadlines are on track. Maintaining an effective audit calendar with clear milestone dates can minimize missed deliverables and confusion. If your technology permits, consider using an application such as SharePoint to share the schedule among parties for real-time tracking and status queries.
A couple of notes: if you are an SEC RIA relying on private fund audits to comply with the custody rule, use a PCAOB-registered, regularly inspected firm and meet investor distribution deadlines (generally 120 days after year end or 180 days for fund of fund vehicles). Private/family offices should follow LPA/board/lender expectations; deadlines can be more flexible but should be documented.
Assign Clear Roles and Responsibilities
Having the right coverage across your accounting, finance, and operations teams is essential. Use tools such as the auditor’s portal to assign each deliverable to a specific owner. This avoids overlap and ensures accountability.
Where third-party valuation providers are engaged, clearly delineating responsibilities is critical. Management retains ownership of valuation conclusions and assumptions, while valuation specialists support the development of valuation methodologies, model construction, documentation, technical analysis, and valuation opinions—helping auditors efficiently evaluate evidence without independence concerns.
For smaller firms, ensure that there is a backup for critical tasks so bottlenecks are minimized. Explicitly mapping responsibilities ensures that nothing will fall through the cracks and keeps the process moving forward.
Collaborate and Communicate Regularly
While auditor independence is critical, your approach should be cooperative and communicative. Schedule regular meetings, weekly or more often if needed, to share status updates and address questions. Open, ongoing communication with your auditor helps both teams stay aligned and fosters transparency, reducing the risk of last-minute surprises.
Do not wait until the start of auditor fieldwork to engage with your auditors. By sharing new investment documentation and transaction walkthroughs ahead of time, you reduce deadline pressures and permit your auditors to resolve potential issues early. Consider scheduling an early meeting with your auditor to review all positions held on December 31 (or the relevant year-end date), any significant or unusual investment dispositions and the ensuing carried interest computation, if applicable, as well as any meaningful capital activity during the year. In future years, this can and should be performed at an interim date before year end.
Coordinate and communicate with your external or internal valuation services providers, and encourage early discussions with your auditor, especially if any valuations are more complex or if the methodologies have changed from prior year.
Early three-way alignment among management, valuation providers, and auditors—particularly when methodologies, assumptions, or capitalization structures change—can materially streamline audit review and reduce iterative comment cycles later in the process.
Discuss your firm’s changes since last year’s audit with your auditors. Have you launched new funds or invested in new asset classes? Did last year’s audit highlight any process gaps or reporting challenges? Have you addressed any control deficiencies, significant deficiencies or material weaknesses in internal control that were reported in the prior year?
Many firms use cloud-based portals, digital workflow solutions, and automated documentation to streamline the gathering and sharing of audit documentation, analyses, account reconciliations, evidence and financial statement drafts. This enables effective deliverables tracking, version control, and document security.
Reconcile your Accounts; Prepare Relevant Documentation; Prioritize High-Complexity Areas
Closing process and account reconciliation: Prior to the auditor beginning fieldwork, finalize the close; reconcile cash, positions, pricing, corporate actions; tie the GL to administrator reports; and prepare investor capital rollforwards and the schedule of investments. Independently recalculate management and performance fees, waterfalls/carry, offsets, and shared expenses and document how they comply with your governing documents and disclosures.
Inventory custodial accounts/signers; reconcile holdings to statements; arrange for the efficient preparation of confirmations to be mailed under the auditors’ control; document and provide evidence for subscriptions/redemptions and investor statement reviews. List and document all affiliates, co-invests, principal transactions, cross trades, expense-sharing, and every side-letter term, and test operations and disclosures against them.
Internal control matters: Update and finalize process narratives and control walkthroughs (i.e., for significant areas such as cash disbursements, investment transactions and valuation, NAV oversight and the financial close); maintain an issues log; plan timely remediation if adjustments arise.
Obtain and review SOC 1 Type II reports (plus bridge letters) for your external service providers: administrators, custodians, pricing services, etc., and document complementary user controls and how exceptions were handled. Evaluate and document your technology infrastructure as regards data protection and security.
Address complex accounts and transactions up front. Level 3 investments, private assets, and illiquid holdings often require detailed valuation support and can slow down an audit if addressed late.
Independent valuation support can help management prepare audit-ready analyses for these assets, including well-documented valuation memos, calibrated models, sensitivity analyses, and clear rationale for judgmental assumptions. This enables auditors to focus on review rather than re-performance, often accelerating audit completion.
Compile valuation policies, model documentation, calibration/back-tests, price-challenge logs, Level 3 memos, committee minutes, and any third-party valuation reports. Experienced valuation specialists can also assist management in responding to auditor inquiries related to comparable company selection, weighting methodologies, use of averages versus medians, and fully diluted versus basic capitalization approaches.
Be ready to provide updated valuations, comprehensive DCF models, and well-documented rationale for any significant adjustments.
Discuss with senior management and other signers of the auditor’s management representation letter any unusual items or new items to be included and ensure that they understand their responsibilities. (This should be discussed in your planning meeting (s) with your auditors.)
Draft Financial Statements and Disclosures Early
Drafting financial statements, including detailed footnotes, before the formal start of the audit can highlight gaps or new disclosure requirements, such as changes in accounting standards and/or disclosures relating to new investment activity.
Early involvement of valuation specialists can further enhance the consistency and quality of valuation-related disclosures, including fair value hierarchy classifications, valuation techniques, and significant unobservable inputs—often reducing late-stage audit comments and revisions.
Advance drafts give auditors a chance to review formatting, content, and new note disclosures early, saving valuable time. Finalize and document workflows surrounding preparation of the financial statements (i.e., who will prepare, who will review, and who will steward the process up to financial statement issuance).
Note that if you are an RIA, SEC independence rules do not permit your auditor to draft your financial statements.
Perform a Post-Audit Review
Finally, use the completion of this year’s audit as a springboard for process improvement. Capture lessons learned and document challenges faced and share feedback with both your internal team and auditor. Including valuation providers in post-audit debriefs can help identify recurring auditor questions or documentation gaps and inform improvements to valuation processes ahead of the next reporting cycle. This closes the loop and supports even smoother audits in the years ahead.
In Conclusion
Audit success is more than ticking boxes—it is a function of thorough planning, timely execution, clear communication, and continuous improvement. By following these best practices, asset management organizations can ensure a more efficient and less stressful year-end audit process.
Remember, to quote Benjamin Franklin, “if you fail to plan, you are planning to fail.”
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To discuss how our valuation team can support your audit preparedness efforts, please contact:
Director, Business Development
mblocker@houlihancapital.com
