Surprise Audit Examinations

Assurance Dimensions

Surprise Audit Examinations

Assurance Dimensions performs the required annual surprise custody examinations for firms that meet the Rule 206(4)-2 (the “Custody Rule”) of the Investment Advisers Act of 1940 (“Advisers Act”). If you are a trustee registered investment advisor (”RIA”) for your client accounts, a general partner of an unaudited fund, have client log in credentials, or provide bill-pay services, our process is designed to make your annual custody examination as efficient and painless as possible.

A RIA is deemed to have custody for various reasons including if they directly or indirectly hold client funds or securities, or have the authority to obtain possession of them. Surprise examination requirements include, but not limited to, the examination of the books and records as they relate to the RIA’s custody as well as confirmation with the qualified custodians and their clients.

What sets Assurance Dimensions’ Surprise audit service apart from the rest?

  • Fixed fee pricing to give you assurance on the value you are receiving for our services
  • Efficient and effective audits completed by working directly with you and communicating timely
  • Utilizing only experience personnel to make the custody examination as smooth as possible

RIA Surprise Examination

Frequently Asked Questions

FAQ: Am I required to have a surprise examination?

Answer: The answer is rarely straightforward and should be discussed with your general counsel. The requirements of a RIA account are complex and each situation can vary. Rule 206(4)-2(a) Under the Investment Advisers Act of 1940 governs these custody rules. If you are a RIA, there are several instances that may subject you to the custody rules:

  • Are a trustee on client accounts,
  • Directly or indirectly hold client funds or securities,
  • Have authority to obtain possession of client funds or securities,
  • Any arrangement (including power of attorney) which the RIA is authorized or permitted to withdraw client funds or securities,
  • A general partner of an unaudited fund,
  • Can log-in to your client accounts,
  • Do bill-paying services for your clients,
  • Or have another qualifying event.

There are certain exemptions to this rule, which include:

  • An audit provision that allows for exclusion of the investors and assets managed in the pooled investment vehicle from a surprise examination if an audit of the financial statements has been completed and the audited financial statements have been distributed to investors within 120 days of the pooled investment vehicle’s fiscal year end (180 days for “fund of funds”).
  • RIA has custody of client assets only because of its ability to deduct advisory fees.
  • RIA has custody only because a related person holds or has the authority to possess a client’s assets and is operationally independent of the related person.

Furthermore, if the RIA client’s assets are not maintained by an independent custodian (i.e. a related party custodian), the adviser is required to obtain a report on the internal controls relating to the custody of those assets from a PCAOB-registered independent public accountant.

FAQ: What is the purpose of this examination (or sometimes called surprise audit)?

Answer: The objective of the accountant’s examination is to verify that the client’s funds and securities that a registered investment advisors (“RIA”) has custody of are held by a qualified custodian in a separate account for each client under that client’s name, or in accounts that contain only clients’ funds and securities, under the investment adviser’s name as agent or trustee for the clients.

FAQ: How often is this requirement needed?

Answer: Rule 206(4)-2(a) Under the Investment Advisers Act of 1940 generally requires that client funds and securities of which a RIA has custody under the rule be verified by actual examination at least once during each calendar year by a PCAOB registered independent public accountant, at a time that is chosen by the accountant and is at different times of the year.

FAQ: Will this surprise examination be like a financial statement audit?

Answer: Custody examinations are more limited in scope than audits since custody examinations focus on investment existence, but not the underlying values of the investments. An audit requires more planning and risk assessment as well as testing of the entirety of the fund’s financial statements, including valuation of investments. The financial statement audit also requires management to develop sufficient and appropriate procedures and controls over valuation and financial reporting to comply with U.S. GAAP.

FAQ: What are some good resource to read on the requirements involving RIA surprise examinations?

Answer: Here’s a few great recourses from the SEC and the AICPA:

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