{"id":103883,"date":"2025-02-22T18:56:55","date_gmt":"2025-02-22T18:56:55","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/preparing-for-your-first-financial-audit-a-checklist-for-startups\/"},"modified":"2025-02-22T18:56:55","modified_gmt":"2025-02-22T18:56:55","slug":"preparing-for-your-first-financial-audit-a-checklist-for-startups","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=103883","title":{"rendered":"Preparing for Your First Financial Audit: A Checklist for Startups"},"content":{"rendered":"


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Growing a startup comes with a potentially heady mix of near-endless opportunities surrounded by countless pitfalls. While the freedom that comes with scaling up the business is exciting, sometimes it\u2019s nice to know you\u2019re on the right track as verified by outside sources.\u00a0<\/span><\/p>\n

Enter: a financial audit. This tool gives you a way to validate that your company is following proper accounting practices and that your books are accurate. Whether you\u2019re facing an external trigger (like an audit request from an investor or bank) or you\u2019re ready to have an outside expert look over your books, your startup can probably benefit from an audit.\u00a0<\/span><\/p>\n

That\u2019s not to say that audits aren\u2019t burdensome. Fortunately, though, taking some steps to prepare now makes this whole process a lot easier. Here\u2019s your checklist to get ready for your startup\u2019s first financial audit.\u00a0<\/span><\/p>\n

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#1: Adhere to GAAP<\/span><\/h3>\n

Aligning your books with national standards makes the audit run much more smoothly, and limits the amount of rework you\u2019ll need to do during it. For U.S.-based companies, that means adhering to <\/span>generally accepted accounting principles (GAAP)<\/span><\/a>.\u00a0<\/span><\/p>\n

As a startup, aligning with GAAP usually means starting with accrual-based accounting. This means recognizing revenue<\/a> as you actually earn it, rather than as customers pay it. In other words, if a customer pays for you for an annual subscription, this part of GAAP means recording one-twelfth of that annual fee in each of the twelve months for which that subscription is active.\u00a0<\/span><\/p>\n

Accrual accounting can be somewhat complicated, especially for software as a service (SaaS) companies, so we have <\/span>a guide to help you better understand it<\/span><\/a>.\u00a0<\/span><\/p>\n

There\u2019s another similar component of GAAP that\u2019s relatively new and applies to many startups: lease accounting. As of 2022, all U.S. companies need to adhere to <\/span>Accounting Standards Codification (ASC) 842<\/span><\/a>. That means that all year-long leases need to be reported over 12 months on your balance sheet.\u00a0<\/span><\/p>\n

If you don\u2019t implement proper accrual-based and lease accounting using GAAP now, you\u2019re probably going to be dealing with cutoff errors during your audit. These occur when revenue or expenses are recorded in the wrong period, and they can be a big headache during an already burdensome process.\u00a0\u00a0<\/span><\/p>\n

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#2: Account for stock-based compensation<\/span><\/h3>\n

This piece technically falls under the GAAP umbrella as well, but because it\u2019s such a key part of many startup\u2019s accounting, we want to specifically call it out.\u00a0<\/span><\/p>\n

Granting equity in your company gives you a valuable way to scale up without immediately increasing your overhead. Any stock your company has issued needs to be accounted for during your audit, though.\u00a0<\/span><\/p>\n

And this isn\u2019t just an audit-specific to-do. You should already be accounting for your stock-based compensation in your annual income statement because this is <\/span>a requirement<\/span><\/a> from the Financial Accounting Standards Board.\u00a0<\/span><\/p>\n

Calculating this compensation means using the latest financial reporting value that you have for your company (e.g., your 409A valuation), so be sure you have that number. Then, apply it to calculate your equity compensation. Finally, make sure that the resulting expense is properly allocated across your income statement.\u00a0<\/span><\/p>\n

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#3: Organize your documents<\/span><\/h3>\n

When you hire an auditor, they\u2019ll give your startup a provided-by-client (PBC) list. This names documents you need to hand over to them. Doing some legwork now should get you to the point where you have the majority of the required paperwork ready to go.\u00a0<\/span><\/p>\n

Usually, auditors will use the PBC list to ask for:<\/span><\/p>\n