Fund audits: Turning compliance into an operational advantage

Author: The Carta Team
Read time: 17 minutes
Published date: 3 April 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.

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, which can make it challenging for the GP to determine the fair value of their investment.

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 the fund's operations and financial health.

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 others to register as investment advisors. However, certain types of investment advisers, known as Exempt Reporting Advisers (ERAs), are exempt from registering but still need to report certain information to the SEC.

Audits required by investors

Many LPs—institutional investors that manage money on behalf of organizations—often require an annual audit as a condition of their investment for risk assessment and mitigation, as well as reputation preservation. A consistent history of clean, timely audits is essential for building trust with LPs.

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.

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:

• July/August: Finding an auditor.
• Start of Q3: Contract a firm and begin interim testing.
• During Q3: Prepare documentation.
• Q1: Valuation testing and auditing begins.
• End of March/Early April: Complete audits.

What do auditors look for?

To evaluate your fund’s compliance with its LPA or SEC requirements, auditors will examine financial documentation and records such as invoices, bank statements, investment transactions, valuation support, management fees, capital calls, and distributions.

How to prepare for your annual audit

Being organized is the foundation of a smooth audit. Your auditors will request a core set of documents regarding the fund itself and the companies your fund has invested in.

Fund-level documents

• Fund formation documents
• The fund’s governing documents
• Partner agreements
• Statement of assets, liabilities, and partners’ capital
• Statement of changes to partners’ capital
• Bank account and brokerage account statements
• Schedule of portfolio investments
• Service agreements with third parties
• Expense invoices
• Statement of cash flows

Portfolio company documents

• A spreadsheet of contacts for each portco
• Updated portco cap tables
• Most recent financial statements for each portco
• Financing documents related to the most recent round of financing for each portco
• Valuation model and support used in determining the fair value of the investment

Challenges in fund audits

The annual audit can become a stressful fire drill, driven by the significant time and resources required for compliance. Common challenges include:

• Chasing down documents.
• Valuing illiquid assets.
• Reconciling disconnected data.

How to select an audit partner

Choose an audit firm that has deep experience in your specific asset class. Matching your auditor's scale to your fund's scale means you're not overpaying for overhead you don't need and not underserved by a firm stretched beyond its capacity.

What to do after the audit

The end of the audit should be viewed as a starting point for improvement. The audit report and any accompanying management letter comments offer a professional, third-party assessment to strengthen your internal controls and improve your financial reporting processes.

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.

What happens if auditors find an error? An error is a specific misstatement in your financial records. If auditors identify one, it should be treated as an opportunity to improve.

What if auditors identify a material weakness? A material weakness refers to a deficiency in your internal controls that creates a reasonable possibility of a material misstatement. Your fund will need to develop a remediation plan to address this before the next audit cycle.

Can I change auditors if I'm not satisfied? Yes, you can change audit firms if you're not satisfied with their service.