Audit-ready books before your Series A: what due diligence checks

01What a diligence team asks for#

The request list varies, but the core is consistent:

• Monthly income statements and balance sheets for the last 12–24 months, on an accrual basis.
• Bank and credit card reconciliations for each month.
• Revenue detail that ties to your billing system, and an ARR or MRR figure that ties to recognized revenue.
• Schedules behind every balance-sheet account: prepaids, fixed assets, accruals, deferred revenue, debt, SAFEs and convertible notes.
• A cap table that agrees with the equity on the balance sheet.

02Where early-stage books usually fail#

Annual software contracts expensed in the month they were paid, so one month looks terrible and eleven look great. SAFEs recorded as revenue or left off the balance sheet. Customer prepayments booked straight to revenue instead of deferred revenue. Founder expenses mixed into the company account. Stripe deposits recorded net of fees, so revenue and fees are both wrong. None of these are hard to fix in the month they happen; all of them are painful to unwind across two years.

The common thread is cutoff: an expense, a sale or a refund landing in the wrong month. A diligence team tests it by picking transactions either side of a month end and checking which month they belong to. One booked in the month cash moved, rather than the month it was earned or incurred, is enough to make them test everything.

03What a reconciled balance sheet looks like#

Every line on the balance sheet should have a file behind it whose total equals the line, as of the same date. That file is what a reviewer asks for, and building it in the month is minutes; building it two years later is archaeology.

• Cash and cards: the statement balance, the book balance, and the items in transit between them, each dated.
• Accounts receivable: an aging by customer that totals to the ledger.
• Prepaids and accruals: a schedule per item, with the contract or invoice behind it.
• Deferred revenue: a schedule by contract that ties to the billing system.
• Fixed assets: a register with cost, accumulated depreciation and the policy used.
• Debt, SAFEs and notes: the signed documents, and a schedule of principal, interest and conversion terms.
• Equity: common, preferred and paid-in capital that agree with the cap table.

04Do you need an audit?#

There are three levels of CPA involvement, in rising order of assurance and cost. A compilation presents your numbers in statement form with no assurance. A review adds analytical procedures and inquiry, and gives limited assurance. An audit tests balances against outside evidence and ends in an opinion.

Usually not at seed. Audits tend to arrive with a later round, a lender covenant, a large customer’s procurement process or an acquisition. But an audit of a year you didn’t close properly starts with someone rebuilding it, at audit rates. Books that are closed monthly, on US GAAP, with a schedule behind every balance, turn a first audit from a project into a request list.