Fund audits: Turning compliance into an operational advantage

Author:

The Carta Team

| Read time: 17 minutes
Published date: April 3, 2026

With the right support, private equity, private credit, and venture fund audits don’t have to be stressful or confusing. Learn about the annual fund audit process for private funds, including legal requirements and investor expectations.

What is a fund audit?

A fund audit is an independent examination of a fund's financial statements conducted by a third-party auditor for compliance with the applicable accounting framework (i.e., US GAAP or IFRS). The primary purpose of an audit is to verify that the fund’s general partners (GP) are operating in compliance with the rules established during fund formation in the limited partnership agreement (LPA). This agreement is the legal document that governs the relationship between the fund managers and the investors.

The audit also provides the fund’s investors, known as limited partners (LP), with an objective opinion on the material correctness of the fund’s financial statements and portfolio valuation. It serves as an important check to ensure that the financial information you provide to your investors is fair and accurate, fulfilling the auditor’s duty to protect investors through independent reports.

First-time audit checklist

Get ready for your first audit with confidence.

Venture capital fund audits

For a VC fund, investors might include friends and family, or more sophisticated investors (for example, pension funds, investment groups, trusts, government entities, or other external parties). Auditors perform audit procedures over the annual financial statements, which include the fund’s ownership and valuation of its portfolio companies (portco), net investment income, and allocations to investors.

Key audit procedures include:

• Verification of the existence and ownership of investments: Confirming that portcos are still active entities and determining the specific financial instruments (e.g., shares, convertible notes) held by the fund
• Evaluation of portco valuations: Assessing the fair value of the fund's investments in portcos
• Accuracy of management fees and carried interest calculations: Reviewing the calculations for management fees and carried interest attributed to the fund manager
• Allocation of profits and losses to investors: Checking the accuracy of allocations made to limited partners

The most challenging part of a VC fund audit is portco valuations. VC portcos are typically fast-growing, early-stage startups that may not yet be profitable or even generating revenue. Some GPs lack full information rights for their portcos (because it is private information to the company), which can be a challenge for the GP to determine the fair value of their investment. This, in turn, creates a challenge for auditors when assessing the reasonableness of the fund’s estimation of the fair value of its investment.

LPs evaluate fund managers on the strength of their returns—but VC funds don’t typically generate returns until one or more of their portcos is acquired or goes public. In the absence of such transactions, the VC fund instead reports the estimated value of their fund assets to the LPs. An audit assures your fund's investors that an independent, third-party accounting firm has conducted a financial statement audit in accordance with the fund's operating agreement and accounting framework.

Private equity fund audits

A PE fund audit covers all the same purposes as a VC fund audit does: It provides reasonable assurance to the investors on the financial information presented in the audited financial statements. Auditors apply the same procedures across PE and VC, allocating more time to each fund type's most complex areas (distributions for VC; debt/equity transactions for PE). A PE firm’s portcos are more likely to be closer to having established operations, cash flow, and revenue, so the audit will focus on more complex distribution waterfalls and models, in addition to the valuation of the portco.

When are audits necessary?

For most funds, an annual audit is not an optional exercise. Funds typically conduct audits either because it’s required by law or because at least one LP requires it as a condition of their investment, serving as a critical check on your fund's operations and financial health. Think of it as a yearly health checkup for your fund that provides assurance to everyone involved.

Audits required by law

The U.S. Securities and Exchange Commission (SEC) is a government agency that regulates the capital markets, including the private funds sector. U.S. securities law requires people or firms that manage money for other people to register as investment advisers. However, the SEC’s definition of VC funds exempts certain types of investment advisers (known as Exempt Reporting Advisers) from registering, although they still need to report certain information to the SEC on a regular basis. The available exemptions include the private fund adviser exemption (advising private funds only, up to $150 million AUM) and the venture capital fund adviser exemption (advising VC funds only, based on the SEC’s definition of VC funds, with no AUM limit). Versions of these SEC exemptions may also be available at the state regulator level. ERAs can skip some regulatory procedures required of registered investment advisers, including audits.

For firms not relying on an ERA exemption, RIAs typically register at the state level instead of with the SEC under $100 million in assets under management (AUM). Once an investment firm has between $100 million and $110 million in AUM it may elect to register with the SEC or the state regulator. Over $110 million, an RIA must register with the SEC, unless an exemption applies.

Once a firm must register as an investment adviser, it must begin conducting regular audits. The SEC also requires that any fund advised by a registered investment adviser (RIA) undergoes an annual audit. In states that have adopted the North American Security Administrators Association (NASAA) model rules for investment adviser regulation, private fund adviser ERAs are also required to conduct audits. This means an annual audit is actually required by law (as opposed to solely serving the investors).

Audits required by investors

The most common reason for a fund audit is the investors themselves. Many LPs—institutional investors that manage money on behalf of organizations and groups like foundations, public pensions, and health care systems—often require an annual audit as a condition of their investment for two reasons:

1. Risk assessment and mitigation: Institutional investors are typically pretty conservative. Audits can bring greater transparency when investing in riskier asset classes.
2. Reputation preservation: Institutional LPs answer to their own boards and management committees and need to monitor how GPs are executing on the investment strategy that the LPs signed up for when they invested. Regular, required audits are a way for LPs to take a step toward satisfying their fiduciary responsibility to the groups whose money they manage.

Audits required by lenders

Some banking institutions providing credit facilities to funds require an annual audit as a loan condition (this is more common for PE than it is for VC).

Do you need an audit?

Private funds can be subject to annual audit requirements, which could be imposed due to regulatory requirements or fund governance agreements. Your own audit needs will ultimately depend on investor preference and regulatory requirements.

Can VC funds skip audits?

First-time VC fund managers may decide to forgo the expense of an audit for their fund when they aren’t required by law or an institutional LP to conduct one. Funds in their earliest stages, such as those in their first or second year of investment, that do not have a regulatory audit requirement may also skip the process, so long as none of their LPs have required one. However, annual audits are increasingly common across the VC ecosystem. Even when they’re not required to have an audit, fund managers often conduct one anyway—especially if their firm is looking to raise a new fund.

Private fund audit process

The audit is best understood not as a single event, but as a year-long cycle that requires continuous preparation and communication. For a fund with a December 31 year-end, the timeline is typically broken down into the following phases, each with its own set of tasks and priorities. The following is an ideal audit timeline for private funds, but of course it’s not always possible to stick to in practice.

July/August: Finding an auditor

For funds whose fiscal year ends on December 31, audits generally begin in January and occur on an annual cycle. As a fund manager, you’ll need to start evaluating prospective auditing firms in July or August if you want to have your fund audited in January, and the audit completed by the relevant deadline.

Start of Q3: Contract a firm and begin interim testing

Ideally, you’ll engage an auditing firm by the start of Q3. Your auditor’s interim testing will typically begin in the third quarter. This is a preparatory phase of the audit cycle, when auditors begin reviewing your fund’s cash-related events—things like capital calls, distributions, investment purchases, and sales. Interim testing gives your auditor a head start on making sure your financial reports can be issued on time.

During Q3: Prepare documentation

During Q3, your auditors will also send a “provided by client” (PBC) information request list, which itemizes the documentation you’ll need to send them. As the GP of the fund, it’s your job to assemble and prepare these documents for your auditor’s inspection. This might sound simple, but it can become a serious burden for fund managers who lack the support of a fund administrator.

Q1: Valuation testing and auditing begins

Audits also usually begin in January. Following this ideal timeline means your audit firm has already finished initial audit scoping and performed testing over transactions that have occurred for the first through third quarters. By January, they can focus on procedures they need to perform to review Q4 transactions and valuation of portcos.

End of March/Early April: Complete audits

The SEC’s deadline to complete audits for funds where the investment adviser is an RIA is 120 days after the fiscal year end (that is, end of April). Even if the investment adviser is not an RIA, an on-time audit must be returned in accordance with a fund’s LPA or operating agreement (usually within 90 or 120 days from the end of the previous fiscal year).

What happens if you don't plan ahead?

If you wait to engage an audit firm until January, it’s unlikely you’ll receive a timely audit in accordance with SEC regulations or within your LPA’s specified deadline. Missing deadlines is more common with first-time emerging managers who are less familiar with the audit processes.

What do auditors look for?

To evaluate your fund’s compliance with its LPA or SEC requirements, auditors will examine financial documentation and records. They’ll look at some of the following information:

• Invoices(to confirm you’re only charging LPs for permitted expenses)
• Bank statements
• Investment transactions, including executed agreements (purchases, sales)
• Valuation support focusing on the GP's assessment (e.g., valuation model, which may be from a third party or in-house, post-money valuations, etc.)
• Management fees
• Capital calls
• Distributions

Frequently asked questions about fund audits

How much does a fund audit cost?

Audit fees depend on your fund's size and complexity. Inefficient processes and poor documentation are significant drivers of higher costs.

How does an audit for an SPV differ from a full fund audit?

An audit for a special purpose vehicle (SPV) is typically much simpler and less expensive than a fund audit, largely because SPVs are commonly structured to invest in a single asset rather than managing a large, multi-company portfolio with more complex valuation and reporting requirements.