Financial Audit Preparation Checklist

Lock the prior period in the practice management or accounting system (Clio, CosmoLex, QuickBooks + LeanLaw, Tabs3) so no further entries hit the audit period without an explicit reopen. A common gotchas: a partner books a December reimbursement in January after the close — the reopen audit trail is what auditors check first.

Generate the three core statements at fiscal year-end with comparative prior-year columns. Confirm the cash flow ties to the change in cash on the balance sheet — a common reconciliation break is partner draws posted to equity but not flowed through financing activities.

Print the post-closing trial balance and confirm debits equal credits across both the operating and trust ledgers. Flag any account with an unusual sign — a debit balance in unearned revenue or a credit balance in advanced client costs almost always indicates a misposted entry.

Reconcile bank balance, book balance, and the sum of individual client ledgers for every IOLTA account. All three numbers must match to the penny. Auditors and state bar examiners both lead with this — a Rule 1.15 violation surfaces here first.

A negative per-client trust balance — even by a dollar — is commingling. In most states the bank reports IOLTA overdrafts directly to disciplinary counsel, so the audit trail must show how each negative was identified and cured.

Export each active matter's trust ledger showing deposits, disbursements, and ending balance. Auditors will sample-test deposits against retainer agreements and disbursements against settlement statements or invoices.

Trust reconciliation under Rule 1.15 is a partner-level responsibility. Capture a wet or e-signature on the reconciliation summary — staff-only sign-off is the most common deficiency cited in bar audits.

For any three-way mismatch, document the cause (uncashed disbursement, missed bank fee posted to IOLTA, transposed deposit), the corrective entry, and whether bar disclosure is required under your state's IOLTA overdraft rule. Attach the corrected reconciliation.

Collect twelve months of statements plus canceled check images for both operating and IOLTA accounts. Auditors will also request the December bank statement plus cutoff statement (typically the first two weeks of January) to test cutoff.

Pull invoices and receipts for the year, sorted by vendor. Flag advanced client costs (filing fees, expert fees, court reporters, transcripts) separately — these are tested against matter ledgers, not as firm expense.

Provide the asset register with acquisition date, cost, useful life, accumulated depreciation, and net book value. Include disposal documentation for any furniture, equipment, or library disposed of during the year.

Assemble the line-of-credit agreement, any term loans, and the partner capital account roll-forward (beginning balance, contributions, distributions, allocated income, ending balance) for each partner.

Narrate the workflow from mail-open through deposit (operating vs. trust routing), and from check request through disbursement. Auditors look specifically for who endorses incoming checks, who deposits, and whether the same person can do both.

Sample 25 trust transactions and confirm a different person initiated, approved, and reconciled each one. In small firms this is the hardest control to satisfy — document the compensating control (typically partner review of the monthly reconciliation) when full SoD isn't possible.

Pull the bank's signature card and confirm authorized signers match firm policy. Confirm the dual-signature threshold (typically $5,000 or $10,000) was respected — pulling a sample of large disbursements to verify.

Categorize each finding as a deficiency, significant deficiency, or material weakness. Self-reporting before fieldwork starts almost always results in a milder management letter than letting the auditor surface the issue independently.

For each material weakness, draft the firm's planned remediation, owner, and target date. The management response is included in the auditor's communication to those charged with governance — sloppy responses become the next year's audit issue.

Tie the income-tax payable and prepaid tax accounts to the prior-year return, the year's estimated payments, and the current-year provision. Most partnerships and PCs run this through partner K-1s rather than firm-level tax — confirm which structure applies before reconciling.

Pull the 1099-NEC list for contract attorneys, expert witnesses, court reporters, and other unincorporated vendors paid more than $600. Confirm W-9s on file for each and that the January 31 filing was timely. Missing 1099s are an IRS penalty, not an audit finding, but auditors flag them.

Reconcile quarterly Form 941 totals to the general ledger payroll tax expense and confirm all deposits were made on schedule (semi-weekly or monthly per IRS classification). Late payroll deposits trigger automatic penalties and are a common finding at firms that do payroll in-house.

Tie the AR aging from the practice management system to the GL control account, and reconcile WIP (unbilled time × billing rate, less expected write-downs) to the same. Differences usually trace to bills issued but not posted to the GL, or to write-offs entered in one system but not the other.

Review balances aged 90+ days with the responsible attorney. Reserve specifically for collection-risk matters (closed files, bankrupt clients, fee disputes) rather than applying a percentage across the board — auditors will ask the attorney directly about anything material.

Reconcile the advanced costs balance sheet account to the sum of unreimbursed costs by matter. Costs older than the responsible attorney can defend collecting are reserve candidates; in contingency practices these can run into six figures per matter.

Pull every manual journal entry posted during the period with date, source, description, accounts, and amounts. Attach supporting documentation (accrual workpaper, depreciation calc, reclassification memo) to each — auditors test a sample and will ask for the workpaper on the spot.

Build a lead schedule for each material balance sheet and P&L account: prior-year balance, current-year activity, current-year balance, variance explanation. Auditors use these to scope substantive testing — well-prepared lead schedules typically reduce fieldwork by 20-40%.

Compile the prepared-by-client (PBC) binder organized by audit area, with an index, and send to the engagement team a day before fieldwork. Capture firm administrator and managing partner sign-off on the binder contents.