A first audit is a test of whether the books can stand on their own. Private companies are usually audited because someone asks: a lender, a later-stage investor, a strategic customer or a buyer. The work is far easier when the books were kept on GAAP from the start and every balance has support.
What the auditor needs to conclude
The auditor issues an opinion on whether the financial statements are presented fairly, in all material respects, under GAAP. For private companies in the United States, audits follow the AICPA's auditing standards. To get there, the auditor tests:
- Revenue, almost always the highest-risk area: contracts, ASC 606 policy, deferred revenue and cutoff
- Cash, through bank confirmations
- Opening balances, which in a first audit need their own evidence
- Equity, including the cap table, SAFEs and stock compensation
- Accruals, payables and subsequent payments
- Related parties and commitments
The readiness checklist
| Area | Ready means |
|---|---|
| Revenue | Written ASC 606 policy; every contract on file; deferred revenue roll-forward ties to the ledger |
| Cash | Every account reconciled monthly, with no unexplained items |
| Receivables | Aging ties to the ledger; allowance documented |
| Fixed and intangible assets | Register ties; capitalized software supported by time records |
| Prepaids and accruals | Schedules with support for each balance |
| Equity | Cap table ties to legal documents and the ledger; 409A reports on file |
| Stock compensation | Grant listing, valuation inputs and expense calculation |
| Leases | ASC 842 schedules if leases exist |
| Taxes | Income tax provision and deferred taxes calculated |
The PBC list
Auditors send a "prepared by client" request list. It typically includes the trial balance, account reconciliations, a sample selection of invoices and contracts, payroll registers, board minutes, legal letters and the cap table. Responding fully and on time is the single biggest lever on audit length and cost.
Opening balances
In a first-year audit, the auditor must get evidence that opening balances are free of material misstatement. If the prior year was not audited, expect testing of prior-year balances that affect the current year, such as deferred revenue, fixed assets and equity. Clean prior-year books shorten this considerably.
A timeline
- Three to six months before year end: readiness review, policy memos (revenue, capitalization, stock compensation), cleanup.
- Year end: a disciplined close, with every reconciliation complete.
- After year end: fieldwork, responses to sample requests, management representation letter.
- Report: draft financial statements and footnotes, review, signed opinion.
Common first-audit adjustments
- Revenue recognized on invoice instead of over the service period
- Missing accruals for bonuses, commissions or legal fees
- Stock compensation not recorded
- SAFEs classified as equity without analysis
We run readiness reviews, prepare the policy memos and schedules, and manage the PBC list with your auditor so your team is not pulled into it.
Sources
Questions founders ask
When does a startup need an audit?
Common triggers are a lender covenant, an investor requirement in a later round, a large enterprise customer's vendor review, or preparation for an acquisition. It is a contractual or strategic need, not a legal one, for most private companies.
How long does a first audit take?
Fieldwork often takes several weeks, and the whole process, from engagement to signed report, commonly runs two to four months. Readiness work done beforehand shortens it.
