Mistakes Every Company Makes During an Audit
By Amie Jatana
Wells Group New York
Most of our team has been on both sides of the audit table. We’ve prepared and defended accounting schedules. What we’ve learned is that most companies don’t fail an audit because they don’t care about accuracy. They fail because they underestimate how much detail is necessary to back up the numbers.
Founders prioritize growth while operators focus on keeping things moving. Often lean teams skip documentation and reconciliations to keep the momentum day to day. However, when it’s audit season lack of documentation, reconciliations and supporting workpapers will slow you down.
Below are the mistakes we see again and again, and the consequences of waiting until audit season to catch them.
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1. Not Verifying Balances Against External Support
Your balance sheet isn’t evidence, it’s a summary. Every number needs to be traced back to something that exists outside your system: a bank statement, supplier confirmation, clearing report, or customer invoice.
I can’t count the number of times we’ve seen payment processor clearing account balances that don’t tie to Stripe, Shopify, or PayPal settlements. Same with Prepaid Inventory balances that are carried forward without checking against vendor records. We’ve seen numerous “Inventory in Transit” accounts still showing value for goods that landed months ago or used as a “catch all” when things don’t tie out.
If your numbers don’t tie to reality, auditors will find out quickly. Even worse, cash flow planning becomes a mess.
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2. Ignoring Slow-Moving or Obsolete Inventory
This one hurts. We’ve seen clients carry seven figures in dead stock because “it might sell someday.” Auditors don’t buy that argument and then your profit and loss statement takes a hit due to audit adjustments.
Your reserve policy should be current, documented, and applied consistently. That means reviewing aging reports, identifying unsellable SKUs, and supporting every assumption with data.
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3. Overlooking Cost vs. Reported Value Discrepancies
Price testing sounds tedious, but it’s where product margin accuracy is put to the test.
Auditors will test your recorded costs against supplier invoices, landed costs, and FX rates. If your pricing support is outdated or incomplete, you’ll spend audit season recreating your own P&L from scratch.
We’ve seen teams lose months of time chasing old invoices due to lack of tracking purchase orders, payments, and associated product value. A quick monthly reconciliation of purchase costs would have saved them countless headaches.
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4. Not Keeping Clean Workpapers for Adjustments and Entries
This one’s universal; adjustments without context create mayhem. Every journal entry needs to have clean backup; outside of email threads, outside of a spiel. Instead, a document that speaks for itself.
We’ve had to rebuild prepaid and accrued expense schedules because prior adjustments were never logged properly. Intercompany eliminations lead to the same story. No audit trail, just last year’s closing entry and a memory.
Thorough workpapers don’t only make auditors happy. They protect your credibility when investors start asking hard questions and relieve pressure when recalling prior adjustments.
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5. Mismanaging Stock-Based Compensation (SBC)
SBC is one of the most common and misunderstood audit areas, especially for startups and growth-stage companies looking to give early stage employees upside.
We often see grants approved and expensed inconsistently, vesting schedules misaligned with HR data, or option valuations that haven’t been updated since the last funding round. In some cases, finance teams rely on prior auditors’ memos without reviewing them against new grants or modifications.
That leads to understatements in expense and late surprises during audit season.
Every new grant, modification, or forfeiture should be documented, modeled, and approved in real time. SBC isn’t just an accounting line; it’s a signal of discipline to investors.
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5. Not Reconciling Deferred Revenue
We’ve seen deferred revenue balances remaining from prior-year orders that had already shipped, overstating liabilities by hundreds of thousands.
Monthly reconciliations to shipment data or tracking numbers fix this before it becomes an audit issue. It’s simple, but most teams never do it until they’re forced.
Revenue is one of the most scrutinized categories. When it’s incorrect, the validity of all reported numbers becomes questionable.
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The Bottom Line
An audit isn’t about passing. It’s about creating an accounting function that generates credible numbers so that when your audit comes around, you can prove your numbers tell the same story your investors already believe.
Clean numbers build a credible narrative, and that credibility is ultimately what fuels smarter decisions and stronger investor alignment.