Expertise Beyond the Numbers

What to Expect During Your Investment Fund Audit

Whether you are preparing for your first investment company audit, or just need a refresher as to what your auditor should be looking for, the following information will be helpful in setting your expectations.

Your auditors should send the engagement letter, pre-audit communication to those in charge of governance, and information request lists in advance of fieldwork. Fieldwork may be done remotely if both the auditor and fund personnel are willing and able to correspond well remotely. The auditors may divide the audit into two pieces: preliminary fieldwork and final fieldwork.

Preliminary fieldwork would be conducted before the fund’s year end and include the planning phases of the audit. Preliminary procedures may include: understanding the entity, assessing the risks of the fund, documenting the internal control processes, walking through key controls to ensure they are operating effectively, performing preliminary analytical procedures, preparing audit confirmations (such and cash, investment, and legal confirmations), and getting a head start on some of the substantive testing. If preliminary fieldwork is not performed separately, it would be combined with final fieldwork.

It is important to provide the auditors with the fund documents, including creation documents, partnership agreements, operating agreements, private placement memorandums, service agreements, lease agreements, any other important documents, and amendments to such documents.

During the testing of the year end financials, your auditors will determine the nature and scope of testing based on their risk assessments.  As such, the capital account activity, investments balances, and investment activity will likely be the main focus. Capital contributions, capital distributions and redemptions, management fees, carried interest, and performance allocations are generally tested. Be prepared to provide supporting subscription and redemption requests, bank statements, and other calculation worksheets.

In testing investments, the auditor will test and evaluate management’s processes for determining fair values. The auditor will evaluate the reasonableness and consistency of assumptions, models, and calculations used, as well as the completeness, accuracy, and relevance of underlying data used. The auditor may develop an independent estimate using the same or alternative assumptions and inputs. But it is important to remember that assigning fair value to investments is the responsibility of management, not the auditors. Subsequent events and transactions that occur after year end but before the auditor’s report date will be considered and discussed.

There will likely be inquiries, discussion, and requests related to the following auditor requirements:

  • Investigate and walk through internal controls
  • Testing the data, assumptions, and models used in fair valuation calculations
  • Independent testing of your prices and values using their own separate pricing services
  • Assessment of any goodwill impairment (potentially testing the forecasts and inputs used in your assessments)
  • Testing of fair value disclosure items, including the levels assessed in the fair value hierarchy

The financial statements may be prepared by you or your administrator and provided to the auditor for the audit. Alternatively, if there is no SEC or PCAOB restriction, the preparation of the financial statements by the auditor may be permitted as long as management takes full responsibility for the financial statements and provides oversight.

If you have any questions on the audit process or would like to discuss SC&H Group’s Audit practice and approach, please don’t hesitate to Contact Us.