Don't just survive your next audit—ace it. Our detailed checklist for auditors covers 8 critical areas for SaaS & service firms, from ASC 606 to controls.
for founders and CEOs at scaling SaaS, agency, or service firms, an upcoming audit feels like a high-stakes, unpredictable exam. Endless document requests, scrutiny over every transaction, and the risk of adjustments derail fundraising, strain your team, and erode investor confidence. The audit process, however, does not have to be a reactive scramble. You can turn it from a source of anxiety into a proactive validation of your financial health.
The key isn't just maintaining clean books; it's anticipating exactly what auditors will test and having the evidence organized before they even ask. This isn't generic advice. We are giving you the exact checklist for auditors they use internally, broken down into the critical phases of their engagement. This guide is tailored for scaling companies where complexities like ASC 606 revenue recognition, SOC 2 compliance, and investor-ready reporting are paramount.
By mastering this checklist, you transform the audit from a disruptive liability into a strategic advantage. It demonstrates rigorous financial discipline and proves your company is built on a rock-solid foundation, ready for its next growth stage, whether that's securing a Series A or preparing for an exit. Let's dive into the specific procedures and documentation you need locked down to ensure a smooth, efficient, and successful audit.
Bank reconciliation is the foundational process of matching the cash balances on your company’s balance sheet to the corresponding amounts on its bank statements. This isn't just about ticking boxes; it's a critical control for verifying your true cash position, identifying errors, and preventing fraud. for your SaaS or e-commerce business managing multiple payment gateways like Stripe, Shopify, or Square, this process confirms that every dollar collected actually made it to the bank.
This verification is a non-negotiable first step in any credible audit. Auditors view the cash account as a high-risk area because it is susceptible to errors and misappropriation. A clean, timely reconciliation signals strong financial hygiene and provides auditors with a reliable starting point. Neglecting this step introduces immediate doubt about the accuracy of all other financial data.
A common misconception is that bank reconciliation is a low-level bookkeeping task. In reality, it is a key management control. for example, a SaaS company with a Stripe integration reconciles its accounts and discovers $3,200 in duplicate deposits that mistakenly overstated revenue and cash. Without reconciliation, this error inflates financials presented to investors. Similarly, a professional services firm could identify $847 in unrecorded processor fees, correcting its gross margin calculations.
"Cash is the lifeblood of any business, but unverified cash is a liability. A monthly bank reconciliation is the first line of defense against both internal error and external fraud. It’s the simplest, most powerful financial control a founder can implement." - Financial Controller at Jumpstart Partners
To ensure your reconciliation process is audit-ready, follow these specific steps:
Revenue recognition under ASC 606 ensures that you record revenue when performance obligations are satisfied, not simply when cash is received. This is a critical distinction for SaaS and technology companies with subscription models, multi-year contracts, or variable fees. Proper compliance moves your financial reporting from a cash-basis afterthought to an accrual-basis tool for strategic decision-making.
for an auditor, ASC 606 compliance is a litmus test for your company’s financial maturity. Misinterpreting these rules leads to material misstatements, requiring costly restatements and damaging investor confidence. A robust revenue recognition policy is a non-negotiable component of any credible audit and a core element in our checklist for auditors.
Many founders mistakenly believe booking revenue is as simple as sending an invoice. Under ASC 606, it’s a multi-step process that demands careful judgment.
Worked Calculation Example: Your SaaS company signs a $24,000 annual contract with a one-time $5,000 implementation fee.
"ASC 606 isn't just an accounting rule; it's a narrative about how your company delivers value. Getting it right provides investors and auditors with a clear, consistent story of your growth. Getting it wrong creates a story of unreliability." - Senior Manager, Transaction Advisory Services
To build an audit-proof revenue recognition process, focus on these key actions:
Accounts payable (AP) and accrual verification is the audit process of confirming that your company’s liabilities are recorded accurately, completely, and in the correct accounting period. This goes beyond simply paying bills; it involves scrutinizing your AP aging report to ensure liabilities are current and identifying unrecorded expenses that must be accrued. for a scaling company, a strong AP process prevents overpayments, ensures accurate financial reporting, and maintains positive vendor relationships.
Auditors focus heavily on the completeness of liabilities, as understating expenses and payables is a common way financial performance is overstated. A well-maintained AP ledger and a diligent accrual process demonstrate robust internal controls, assuring auditors that your balance sheet liabilities are not understated. Failing to properly manage AP hides significant cash flow issues and distorts key metrics like gross margin and net income.
A common misconception is that AP management is a simple, back-office payment function. In reality, it is a critical component of financial control and cash management. for instance, a SaaS startup reviewing its AP aging discovers $8,400 in duplicate payments to a cloud infrastructure vendor, recovering cash that directly impacts its runway. Similarly, a digital agency’s month-end accrual review identifies $12,000 in uninvoiced contractor work, preventing a material understatement of expenses on its income statement.
"Your accounts payable ledger tells a story about your operational discipline. An auditor can spot a company with weak financial controls in minutes by looking at stale, unvetted payables. Clean AP isn't just about paying bills on time; it's about validating every dollar you owe." - Senior Auditor, Financial Services
To ensure your AP and accrual processes are audit-ready, implement these specific controls:
Payroll is one of your largest expenses and an area of significant regulatory risk. Audit procedures for payroll verify that wages are calculated correctly per employment agreements, all employees are properly recorded, and payroll taxes are withheld and remitted accurately. for your growing business using systems like Gusto or ADP, this testing ensures accurate expense reporting and protects you from costly compliance failures.
Auditors focus heavily on payroll because errors lead to material misstatements in your financial statements and significant liabilities from tax authorities. They will test to confirm that your payroll expenses are real, accurately calculated, and that you are meeting your obligations for federal, state, and local withholdings. A clean payroll audit demonstrates strong internal controls over a critical business function.
Many founders view payroll as an automated, "set-it-and-forget-it" process. This assumption is a frequent source of audit findings and IRS penalties. for example, an audit of a digital agency with remote staff across eight states finds state tax remittance errors in two of those states, requiring back-payments and penalties. Another common issue is contractor misclassification. An auditor identifies three contractors who should be classified as W-2 employees, preventing an IRS audit that could have resulted in over $18,000 in penalties.
"Payroll isn't just about paying your team; it's a complex compliance function. Auditors look at payroll as a direct indicator of a company's commitment to regulatory adherence. Getting it right prevents tax headaches and builds trust with investors and regulators alike." - Lead Payroll Specialist at ScalePEO
To prepare your payroll records for scrutiny and ensure they are audit-ready, implement these specific controls:
This combined audit procedure verifies the accuracy of your balance sheet's core long-term accounts. Auditors scrutinize fixed assets to ensure they are recorded correctly, depreciated using appropriate methods, and that disposals are properly derecognized. Simultaneously, they test debt and lease obligations to confirm that borrowings are accurately stated and reconciled, with special attention to covenant compliance and the complex rules of ASC 842 for leases.
for your growth-stage company acquiring assets, securing financing, or leasing equipment, this area is critical. Proper accounting ensures an accurate balance sheet presentation, prevents costly debt covenant violations, and maintains lender and investor confidence. Failing an audit in this area jeopardizes financing and calls into question the integrity of your entire financial reporting process.
Mistakes in these accounts have a material impact. for example, a SaaS company’s fixed asset testing reveals $65,000 in software licenses that were incorrectly capitalized instead of expensed, a correction that significantly alters net income. An e-commerce company’s asset disposal testing finds missing journal entries for equipment sales, causing both the asset and gain/loss accounts to be misstated.
"Your balance sheet tells the story of what your company owns and owes. Getting fixed assets, debt, and leases wrong isn't just a compliance issue; it’s a narrative flaw that can unravel investor confidence. Accurate schedules and reconciliations are non-negotiable." - Senior Audit Manager, BDO
To prepare these accounts for audit scrutiny, implement the following controls:
Accounts receivable (AR) testing verifies that your customer invoices are recorded accurately, your aging report is current, and your allowance for doubtful accounts is reasonable. This process is not just an accounting formality; it is a critical assessment of your asset quality and revenue integrity. for your SaaS company with tiered subscriptions or your digital agency managing project milestones, this testing ensures the revenue you’ve earned is actually collectible.
Auditors scrutinize AR because an overinflated receivables balance directly overstates your assets and net income. A clean, well-supported AR aging report and a methodically calculated bad debt reserve demonstrate strong credit and collections controls. Failing to properly manage and reserve for uncollectible accounts misleads stakeholders about your company's true financial health and liquidity.
Many founders view AR as a simple list of unpaid invoices. In reality, it is a direct reflection of your customer relationships and operational efficiency. for instance, a B2B SaaS company analyzes its AR aging and uncovers $34,000 in duplicate invoices sent to eight customers due to a billing system glitch. Without this testing, revenue would be overstated, and customer relationships damaged. Similarly, a digital agency identifies an $87,000 invoice from a client in dispute, signaling a need to increase its bad debt reserve immediately.
"Your accounts receivable aging is more than a collections tool; it's a leading indicator of customer satisfaction and future cash flow. An uncollectible receivable is a symptom of a deeper problem, either in your product, your service delivery, or your credit policies." - Seasoned CFO at a Series B Tech Firm
To ensure your AR and allowance processes are audit-ready, implement these specific controls:
Intercompany audit procedures verify that transactions between your related entities (subsidiaries, branches, holding companies) are recorded consistently and eliminated properly in consolidated financial statements. This isn't just an accounting exercise; it's a critical process for any business with multiple legal entities to present a true and fair view of its overall financial health, ensuring you aren't artificially inflating revenue or assets. for a PE-backed platform with several portfolio companies, this testing confirms the consolidated balance sheet and income statement are not distorted by internal activities.
This area is a major focus in any sophisticated audit, especially for growing companies. Auditors scrutinize intercompany accounts to ensure compliance with standards like FASB ASC 810 (Consolidations) and to verify that transfer pricing meets tax authority requirements. A failure to properly eliminate these transactions immediately undermines the integrity of your consolidated financials, which is a major red flag for investors and lenders.
Many founders underestimate the complexity of intercompany accounting until an audit looms. The risk is that internal transactions obscure the true performance of the consolidated group. for instance, a PE-backed platform consolidating five subsidiaries discovers $234,000 in unreconciled intercompany payables and receivables. Without a proper eliminating adjustment, both assets and liabilities would be overstated on the consolidated balance sheet. Similarly, a holding company that charges management fees to its subsidiaries without proper transfer pricing documentation creates a significant tax risk if challenged by the IRS.
"Consolidation is where financial narratives get messy. Without disciplined intercompany reconciliation and elimination, you're not looking at a true picture of the business-you're looking at a funhouse mirror. Get this wrong, and every consolidated metric, from net income to total assets, is unreliable." - Lead M&A Diligence Accountant
To ensure your intercompany accounting is audit-ready, implement these rigorous controls:
Internal controls are the policies and procedures you implement to prevent, detect, and correct financial statement errors and fraud. Testing these controls is how auditors verify that your financial governance is not just designed well on paper but is actively working. for companies preparing for an audit, investor due diligence, or SOC 2 certification, demonstrating effective controls is non-negotiable proof of a well-managed organization.
This process moves beyond simply looking at the final numbers; it scrutinizes the system that produces them. Auditors assess whether your controls are robust enough to ensure the integrity of your financial reporting. A company with strong, tested internal controls signals reliability and significantly reduces the perceived audit risk, leading to a smoother, more efficient audit process.
A common misconception is that internal controls are bureaucratic overhead reserved for large public companies. In reality, they are essential safeguards for any scaling business. for example, your SaaS company can implement a user access control that restricts who can create journal entries. An auditor’s test then validates that no unauthorized entries were made, confirming the integrity of the general ledger. Similarly, an e-commerce brand with a control requiring manager approval for refunds over $500 prevents revenue leakage and protects margins.
"Effective internal controls are the guardrails of financial integrity. They aren’t about restricting the business; they are about enabling scalable, trustworthy growth. An auditor’s opinion on your controls is a direct reflection of your company's operational maturity." - Lead Auditor, a Big Four Accounting Firm
To ensure your internal controls are robust and audit-ready, follow these specific steps:
Auditors are trained to look for anomalies. Certain red flags will cause them to dig deeper, expanding the scope and cost of your audit. Be prepared to defend these areas vigorously:
| Red Flag | Why It's a Problem | How to Mitigate It |
|---|---|---|
| Significant Year-End Manual Journal Entries | Indicates weak controls and potential for management to manipulate earnings. | Implement automated subsystems for revenue, payroll, etc. Require detailed support and senior approval for all manual entries. |
| High Executive Turnover (especially in Finance) | Suggests instability, a poor "tone at the top," or underlying issues management is trying to hide. | Document clear handover procedures. Ensure your financial processes are system-dependent, not people-dependent. |
| Complex, Round-Dollar Transactions | Large, even-numbered transactions lack the appearance of a normal business transaction and can signal fraud. | Maintain meticulous documentation for all non-standard transactions, including business purpose, approval, and third-party evidence. |
| Poorly Documented Revenue Contracts | If auditors can't understand the performance obligations from the contract, they cannot verify your ASC 606 treatment. | Standardize contract templates. Create a contract summary sheet for every deal that clearly outlines deliverables and pricing. |
You now have the comprehensive playbook auditors follow. This detailed checklist for auditors is more than a simple list; it is a strategic blueprint that demystifies the audit, transforming it from a dreaded scramble into a proactive demonstration of your company's financial integrity. By systematically addressing each area, you are not just preparing for an audit; you are building a resilient, transparent financial infrastructure.
Audit readiness is not a seasonal activity. It is a continuous state of discipline. Mastering cash reconciliation, ASC 606 revenue recognition, and internal controls is not about satisfying an external party once a year. It is about creating a predictable, reliable business that inspires confidence in every stakeholder, from your board to potential investors.
To benefit from this guide, your focus must shift from understanding to implementation. Here are the most critical actions to take now:
This checklist for auditors provides the "what," but the "how" requires dedicated resources and specialized knowledge. Implementing robust internal controls, mastering ASC 606 nuances, or managing complex intercompany reconciliations demands expertise that is often outside the bandwidth of a growing company's internal team. The opportunity cost of pulling your team away from growth-focused activities to prepare for an audit is substantial. This is where a strategic partner becomes your advantage.
This is not just about passing an audit. It is about building a scalable financial foundation that supports your company's ambition. When your financials are clean, reliable, and investor-grade, you unlock new opportunities for growth, from securing favorable debt financing to accelerating a fundraising round. The confidence that comes from knowing your numbers are unassailable is the ultimate competitive edge.
Ready to transform your audit from a liability into an asset? Jumpstart Partners provides SOC 2 Type II certified, audit-ready financial reporting, closing your books in just 5 days each month so you're always prepared. Schedule a consultation to see how our expert team can build the investor-grade financial infrastructure you need to scale with confidence.