Surprise Audit Checklist: What You Need to Know

Audits are a common occurrence in the financial advisory space. However, if you’re new to the industry, don’t let the SEC custody rule audit, commonly called a “surprise audit,” requirement take you by surprise. To help you prepare for it, we’ve outlined a surprise audit checklist.

Registered Investment Advisors (RIAs) are responsible for appropriately handling their clients’ funds and assets. To ensure RIAs adhere to their fiduciary responsibilities, they must undergo an audit as the SEC Custody Rule outlines as applicable.

Although this audit is commonly called a “surprise audit,” it doesn’t have to be. RIAs can prepare for it ahead of time using a surprise audit checklist.

Here’s what RIA should know about surprise audits.

Understanding the SEC Custody Rule

The Investment Advisors Act of 1940 outlines Rule 206(4)-2, the Custody Rule. This Rule protects advisor clients from potential mismanagement or misappropriation of their assets by RIAs. To ensure RIAs handle their clients’ funds and securities correctly, the Rule requires RIAs to undergo a surprise examination or an audit.

According to the Custody Rule, a third-party auditing professional must complete these audits annually on a surprise basis. Generally speaking, most RIAs are subject to a surprise audit if they have log-in access to client funds and securities or have the authority to make disbursements from client accounts.

Surprise Audit Checklist: What to Know

Thankfully, it’s not difficult to stay prepared for a surprise audit. However, having a surprise audit checklist readily available can help guide your audit preparations. While organizing your records for your audit team, keep these suggestions in mind.

1. Organize and Maintain Proper Documentation

One of the best ways to prepare for a surprise audit is to organize and maintain proper documentation of your records meticulously. A third-party auditing professional will need to see copies of your records, including:

Client statements
Reconciliations
Custody agreements

Organizing and centralizing these documents will prevent you from scrambling to find your materials when your surprise audit begins.

2. Identify Common Compliance Gaps

While perfect audits do occur, some RIAs will encounter pitfalls. For example, it’s common for an RIA to have the following:

Incomplete listing of accounts that meet custody.
Failed to complete reporting on time.
Inappropriate internal controls are in place.
No representative of their custodian to get prompt replies.
Not responding in a timely manner to auditors.

To ensure smooth surprise audits, take some time to review common surprise audit pitfalls. You can avoid potentially costly SEC violations by reviewing the most common deficiencies and implementing solutions to circumvent them.

3. Work with an Experienced Audit Firm

The final item on the surprise audit checklist is to ensure that you work with a seasoned audit firm. Partnering with a team that has handled hundreds of surprise audits will give you peace of mind and expertise for your audit.

Experienced firms understand the need for efficiency and accuracy. They’re also committed to maintaining the appropriate certifications and requirements to ensure they do their job correctly, ultimately resulting in your compliance with the SEC Custody Rule.

Why Choose Assurance Dimensions?

As Batul Abdulali, ACA, Principal at Assurance Dimensions, puts it, preparing for a surprise audit does not have to be stressful. According to Abdulali, “The key is maintaining organized records and understanding compliance requirements before the audit happens.” That’s why following a surprise audit checklist and asking clarifying questions when hiring an auditing firm is helpful.

If you’re ready to talk with an experienced auditing team about your surprise audit, contact us today. At Assurance Dimensions, we work closely with investment advisers to streamline the process, identify issues in advance, and ensure SEC compliance with minimal disruptions to your operations.