INSIGHT

Audit-ready: A technical accounting preparation guide  

Will Tanem • July 17, 2025

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One of the first signs that a startup is reaching a new level of maturity is the need for a financial statement audit. Whether prompted by investor requirements, capital-raising goals, or the company’s evolving strategy, this milestone marks a pivotal transition as the business steps into a new stage of growth and opportunity. Audits can feel stressful, particularly if you haven’t navigated one before. However, there are steps you can take to ensure a smooth audit process. 

When a company undergoes an audit, external auditors will scrutinize a company’s financial statements to ensure compliance with accounting standards, such as US Generally Accepted Accounting Principles (GAAP).  While various month and year-end close accounting tasks can help prepare a company for some of the more standard audit sections and procedures, an often-overlooked gap exists in areas of Technical Accounting.  

What is technical accounting? 

Technical Accounting is a specialized field within accounting that focuses on complex accounting transactions and compliance with accounting standards. It involves applying advanced accounting knowledge and research to analyze guidance and apply it to specific facts and circumstances present in unique transactions. The work product is often in the form of draft memorandums and calculation workbooks to support conclusions for auditors, regulators such as the SEC and internal stakeholders.  

Technical accountants often deal with areas of the financial statements such as: 

• Revenue recognition 
• Stock-based compensation
• Leases 
• Business combinations 
• Financial instruments.   

They play a crucial role in preparing companies for audits, advising stakeholders during the process, implementing new accounting standards, and providing advice on accounting policies and procedures. Proactive companies will often want to understand the accounting impact of transactions prior to their execution, technical accountants will often provide strategic consulting in this regard by helping clients achieve their desired accounting outcome. 

This roadmap will guide companies through the audit preparation process from the perspective of a technical accountant, focusing on the key technical accounting steps to take, along with common challenges and solutions to ensure a successful audit. 

Understand the audit process and Its challenges 

Before diving into technical accounting details, it’s important to understand how an external audit typically unfolds. External auditors evaluate whether your financial statements comply with the relevant accounting standards, ensuring that stakeholders such as investors and regulators can rely on your financial reporting. The audit process begins with planning, during which auditors gain an understanding of your company’s business and identify major audit areas based on risk and materiality.  

Following this, auditors perform substantive and analytical procedures to detect any errors or misstatements in the financial statements. If significant or complex issues are identified during testing that were not initially scoped in planning—such as large errors or intricate accounting matters—the audit approach and materiality thresholds may be revisited. This often results in additional procedures, which can extend the audit timeline and increase audit fees. 

It’s important to note that, due to independence requirements, auditors cannot resolve accounting issues on behalf of the company. For companies lacking strong technical accounting resources, this can lead to:  

• Substantial back-and-forth communication 
• Strained resources 
• Delayed resolution of audit findings 

As a result, the audit may be significantly delayed, audit fees may increase, or the process may even be put on hold until the company addresses the identified accounting issues. 

These challenges highlight the importance of being fully prepared for the audit process. Conducting a thorough GAAP assessment before your audit begins is a critical step to identify and address potential technical accounting issues in advance, reducing the risk of delays and unexpected costs. 

GAAP assessment and technical accounting implementation 

A GAAP assessment helps identify gaps and areas needing attention before the audit begins. For a first-time audit, we recommend performing this assessment at least 6 months before your target audit start date to allow sufficient time to address any gaps identified. For recurring audits, ideally transactions are identified and assessed prior to or as they occur. 

Below are key areas where companies often encounter technical accounting issues that need to be addressed to become compliant with GAAP during a typical first audit. It’s important to note that different industries face unique challenges in this process. 

Revenue recognition  

Revenue recognition is a critical aspect of financial reporting. The Accounting Standards Codification (ASC) – Topic 606 – Revenue Recognition (“ASC 606”) provides a comprehensive framework for recognizing revenue from contracts with customers. The framework is designed to be industry agnostic as it creates one standard that is applicable for all companies. Understanding, implementing and maintaining ASC 606 is crucial for companies to demonstrate comparability with peers and reliability in financial statements. 

A company’s revenue generating activities should be assessed under the five-step model as outlined under Accounting Standards Codification (“ASC” or “Codification”) – Topic 606 – Revenue Recognition (“ASC 606”). Companies often assume their revenue recognition is straight forward without understanding the complexities of its contracts and the revenue standard. During a GAAP assessment, technical accountants are likely to find that a company has not documented its policy for revenue recognition or if documented falls short of what would be required for a policy that would withstand an audit.  

Industries such as software and biotech frequently have complex contracts with multiple units of account known under the standard as performance obligations. These performance obligations once properly identified may require complex allocation models based on a company’s determination of its standalone selling prices which may require: 

• Extensive data collection 
• An analysis of historical sales data 
• Competitor analysis.  

Furthermore, a company has to determine whether it is appropriate to recognize each performance obligation at a point in time or over-time and if over-time an appropriate measure of progress for which to reflect the pattern of transfer. 

Often, companies that have never been audited and might be using a combination of tools and excel to gather data and track revenue. Often data sources such as salesforce are flawed due to inconsistent user data inputs which does not lend itself to quick remediation of accounting issues. Due to this and complexities with the standard, documenting and applying the five-step model to contracts in order to implement changes required in order to conform with GAAP may require significant time and revenue recognition expertise. 

While revenue recognition issues may be tackled for inception to date activity in preparation for a first-time audit, contractual terms evolve, unique arrangements are entered into and new products are offered, all of which make compliance with ASC 606 an ongoing exercise of importance.  

In maturing organizations, technical accountants are included in the decision-making process to ensure contractual terms drafted will meet desired outcomes and not overcomplicate revenue recognition or overburden the accounting function. Executives often think about top line revenue and product margins but forget to contemplate increased G&A costs related to accounting for its agreements. 

Equity-based compensation 

Equity-based compensation is a common tool for attracting and retaining talent in early-stage companies. However, accounting for these awards under ASC 718 – Compensation—Stock Compensation can be another technically demanding area of a first audit. The complexity arises from the volume of awards, the variety of terms, and the need for precise valuation and expense recognition.  

As technical accountants, often we find that companies that have never undergone an audit have not recorded anything for share-based compensation in their accounting records due to a knowledge gap and the complexities involved. Furthermore, a technical accountants review of a company’s board minutes for equity grants and award modifications against the capitalization table typically results in uncovering errors in an area where stakeholders emphasize importance of having accurate data to avoid legal disputes and tax issues that may arise if not resolved. 

A foundational concept in ASC 718 is the determination of the grant date, which anchors the fair value measurement of the award. For private companies, this typically requires a third-party 409A valuation to establish the fair value of common stock. Without a contemporaneous and supportable valuation on the date of grant, auditors may challenge the appropriateness of the expense recorded, potentially leading to understated expenses. 

Technical accountants play a critical role in evaluating whether grant date criteria are met, ensuring that award terms are clearly documented and that valuation inputs are reasonable and supportable including an appropriate method of interpolation of fair value in between grant dates. This includes assessing whether awards are equity or liability classified, which affects both measurement and presentation. 

When awards include performance or market conditions, the accounting becomes even more nuanced. Companies must estimate the probability of achieving performance milestones and adjust expense recognition accordingly. This requires a robust framework for tracking progress and reassessing assumptions as facts evolve. 

Modifications—such as repricings, accelerations, or post-termination exercise period extensions —introduce additional layers of complexity. Each change must be analyzed to determine whether it results in incremental fair value and how that value should be recognized over time. 

Given the intricacies of ASC 718, in addition to share-based compensation schedules, companies often benefit from: 

• Developing a policy that outlines key assumptions 
• Valuation methodologies 
• Accounting conclusions 

This documentation not only supports audit readiness but also helps internal stakeholders understand the financial impact of equity awards.  

Research and development and internally developed software 

Accounting for R&D and software development costs depends on the project’s purpose and stage. Under ASC 730 – Research and Development, most R&D costs—like salaries, materials, and even indirect costs such as depreciation and overhead—are expensed as incurred if they support R&D activities. 

For companies that develop software, different accounting guidance applies which is dependent on whether the software will be for internal use (such as a hosted Software-as-a-Service application) or if it will be licensed and sold. 

For internally developed software, ASC 350-40 – Internal-Use Software applies. Certain costs are capitalized during the software development process whereas planning and maintenance costs are expenses as incurred.  

If the software is intended for sale or licensing, ASC 985-20 – Costs of Software to Be Sold, Leased or Marketed governs. Here, capitalization begins only after technological feasibility is established—typically when a detailed design or working prototype is in place. 

Technical accountants help determine which standard applies, identify eligible costs, assist in obtaining relevant engineering data and document the process to ensure companies are audit-ready in this area. 

Debt and equity financing 

Entities are financed through combinations of equity, debt and other instruments that have both debt and equity-like characteristics. The accounting for all of this inception to date activity can be quite complex and impact the current year’s opening balance sheet subject to audit even if instruments were converted and settled historically. 

The key complexities involved include determining proper classification of instruments as debt or equity, analyzing whether instruments contain features that require separate accounting as derivatives, resolving accounting allocations when multiple instruments are issued in conjunction with one another. Furthermore, convertible debt instruments which are commonly used as bridge financing in between funding rounds pose unique fair value and ultimate conversion method challenges. 

As technical accountants, no instrument is alike requiring an in-depth understanding of various sections of the Codification including ASC 470 – Debt, ASC 480 – Distinguishing Liabilities from Equity and ASC 815 – Derivatives and Hedging and how the guidance applies to the various nuances of the legal agreements. 

Consolidation 

For companies with multiple legal entities, consolidation introduces significant reporting complexities. One key challenge is identifying variable interest entities (VIEs)—which may not be obvious from a legal entity organization chart. Unlike traditional subsidiaries, VIEs may require consolidation even without majority equity ownership, based on control through contractual or economic interests. In contrast, entities governed by the voting interest model are typically more straightforward to assess. Consolidation assessments require detailed evaluations of voting rights, exposure to financial returns, and decision-making authority to determine whether an entity should be consolidated under either model. 

When operations span multiple countries, determining the functional currency of each subsidiary becomes critical. This decision—often involving significant judgment—affects how foreign exchange gains and losses are reported. Notably, the functional currency may differ from the local currency where the entity operates. 

As technical accountants, we guide companies through the intricacies of ASC 810 – Consolidation and ASC 830 – Foreign Currency Matters. Early involvement is essential—especially during entity formation—as an incorrect functional currency determination can be costly and difficult to correct within an ERP system. 

Leases 

ASC 842 – Leases, in effect for years, still presents accounting challenges for companies that have never been audited and implemented the standard and for companies under ASC 842 that encounter new unique lease transactions such as sub-leases or significant lease build-outs. ASC 842 defines leases as any contract that grants control over identified assets for a period in exchange for payment.  

One common areas for first year audit findings are what are referred to as embedded leases, or a contract that meets the GAAP definition of a lease but might be structured as a service contract or a component within a larger contract such as outsourced contract manufacturing with dedicated machinery.   

Entities also need to evaluate and conclude on complex lease terms for each reporting period such as: 

• Assessing classification as operating or finance 
• Estimating a discount rate 
• Determining the lease term, including non-cancellable periods, renewal options, and their likelihood.  

Subsequent contract amendments that change the term, payment structure or assets under lease can result in modification accounting for leases under 842.  

These areas of judgement can have major implications for companies, leading to large potential financial reporting misstatements if improperly evaluated.  

Business Combinations 

When a company completes a merger or acquisition, it triggers a range of complex accounting requirements under ASC 805 – Business Combinations. One of the first steps is determining whether the transaction qualifies as a business combination or an asset acquisition, as this distinction drives the accounting treatment. 

Key considerations include identifying the acquirer and acquiree, and accurately measuring GAAP purchase consideration, including any contingent payments. It’s also critical to distinguish between acquisition consideration and other concurrent arrangements—such as equity awards or compensation agreements—to avoid overstating goodwill or understating expenses. 

A central focus of purchase accounting is the identification and valuation of acquired intangible assets, such as customer relationships, developed technology, and trademarks. These assets must be separately recognized from goodwill and require supportable valuation methodologies. 

Another common challenge is ensuring the accuracy and completeness of the acquired company’s opening balance sheet. This includes validating the recognition of all assets and liabilities—such as contingent liabilities (e.g., unresolved legal claims)—and addressing cutoff issues that may affect the timing of recognition. 

Successful execution of purchase accounting requires close coordination across finance, valuation, and systems teams. Early involvement of technical accountants helps ensure that due diligence findings are properly reflected in the accounting and that key judgments are well-documented. 

The path forward with BPM 

An audit represents more than just a compliance exercise — it’s an opportunity to strengthen your financial reporting foundation and position your organization for future growth. By partnering with BPM’s technical accounting professionals, you gain access to proven methodologies and practical guidance that help ensure audit success. 

To learn how we can help guide your organization through the audit readiness process and establish lasting financial reporting excellence, contact us today.