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Preparation of financial statements for audit

Audit Preparation – While recently reviewing a fund administration fee quotation for a Cayman open-ended fund a new client asked why his fund needed Audit Preparation work and why didn’t the auditor cover the prep work in his fee?

I thought it was a good question and a reply worth sharing with others who may have the same thoughts.

Investment funds and their managers are increasingly under scrutiny by regulators which has resulted in audit firms no longer providing audit preparation services for funds they audit. The main two reasons are:
  • Independence – if an auditor prepares the financial statements of a fund they are about to audit their independence may be brought into question and also because they would
  • In effect be self-reviewing their own actual audit which might lead to being less rigorous than they otherwise might be.

Given the sensitivity surrounding proper financial reporting, who ever undertakes the audit preparation should have the required knowledge of financial reporting standards as well as the funds activities which makes a regulated administrator the most obvious party to undertake the role. Finally, what goes into ‘audit preparation?

  • Drafting Financial Statements
  • Coordinate with banks, brokers and legal firms for audit confirmation as required
  • Provide and update the auditors with the fund’s permanent file documents (corporate docs, resolutions, board minutes etc.)
  • Answer queries including detailed accounting questions
  • Preparation of the Fund Annual Return (FAR) for Cayman Islands Monetary Authority,
  • Complete post balance sheet questionnaire
  • Review and comment on final audited statements
  • Review and comment on management audit letter before Investment manager sign off

I hope the above gives some insight to the scope and scale of the audit preparation.