Eight Tips for New Real Estate Fund Managers for Preparing an Efficient Audit

For real estate fund managers undergoing their first financial statement audits, the process can seem intimidating. By understanding the key processes and implementing strategic planning, you can significantly streamline your audit, saving time and resources.

Below are eight best practices to make the audit process more efficient.

Schedule Quarterly Business Update Calls

Schedule quarterly business update calls with the audit team (typically the audit team should reach out to schedule these) to discuss updates to the fund that have occurred during the year.

This includes any new investments or subsequent closings. These calls enable the audit team to stay current on all transactions and activities, allowing them to better plan for the audit.

Hold a Planning Meeting

Hold a planning meeting with the audit team and any other relevant third parties (e.g., administrators, property accounting, outsourced accounting) during the third quarter. This will enable all parties to be aligned in terms of expectations, deliverables, and timelines for both the interim and year-end periods.

Discuss Significant Transactions Early

If a significant or an unusual transaction occurred during the year, don’t wait for fieldwork to discuss it with your auditor. It’s better to discuss it right away so that you can gather sufficient audit evidence to support the transaction.

For instance, fund managers who previously operated on a deal-by-deal basis but have now been organized into a fund structure may obtain permission to transfer their interest in some of those joint venture investments to the fund. In this case, fair value would need to be determined not only at year-end but also at the date of the transfer.

By discussing this upfront with the auditor, expectations can be better understood, and the fund manager can determine fair value either by obtaining an appraisal or other valuation techniques to be used as audit evidence at the date of the transfer—and they won’t be scrambling to put something together months after the fact.

Establish and Communicate Expectations

Establish and communicate expectations to all parties involved. Typically, the audit team prepares an audit timeline that outlines all deliverables, both to and from the auditor and client, and reviews the timeline to ensure it is realistic and meets the targeted issuance date. Revisit the audit timeline during the audit to measure progress.

Schedule Weekly Call During Fieldwork

Schedule weekly calls with your auditor and administrator once fieldwork starts. This will allow the auditor to highlight the most significant open items and what needs to be provided to keep the audit moving forward.

Review the Auditor’s Request List

The auditor will prepare a request list, which will then be updated with any additional requests or open items as needed. Before spending time preparing support, if you’re unsure about an item, review it with the auditor.

Discuss Valuation Policies and Techniques

Discuss your overall valuation policy and each investment valuation approach and technique, including those that have changed from the prior year, with the auditors in advance. Understand what auditors will expect as part of the year-end valuation package.

This may include a write-up on the investment as well as any valuation models used. The auditors will also expect the information used to support the inputs to these models, such as appraisals, management budgets, discount rates, and risk factors, and/or a list of comparable properties used as part of the analysis.

Manage Confirmation Procedures

One of the procedures typically performed during an audit is sending confirmations to third parties. This process involves the auditor requesting and obtaining direct communications from third parties to verify the information you provided during the audit.

For instance, in a real estate debt fund, confirmations will be sent to counterparties, requesting that they confirm key terms of loans, including principal balance, interest rates, interest paid, and any other fees (e.g., origination fees, maturity dates). The auditor will provide the templates and a list of confirmations that need to be prepared and will also mail them. However, you will be asked to follow up on any unreturned confirmations in a timely manner.

Once the audit begins, request that the audit team send you weekly updates on open confirmations so you can follow up on them and avoid waiting until just before your expected report date. The earlier the confirmations are received, the better, so that any discrepancies can be identified and resolved without delaying the audit completion. When a confirmation response is not received, the auditor will have to perform alternative procedures, which may result in additional requests from the auditor.

Simplify Your Audit Process

Preparing for an audit can feel overwhelming for new real estate fund managers, but by following these eight best practices, you can streamline the process. Effective communication, early planning, and proactive management of audit requirements are key to success.

Connect with our team to learn more about how we can assist you in preparing for financial statement audits.