How to Document Financial Controls for Your First Audit: A Practical, Good Enough Guide

Foundational Understanding: The 'Good Enough' Approach for Your First Audit

Facing your first financial audit can feel like preparing for an exam you never studied for. The requests for “control documentation” seem disconnected from the day-to-day reality of running a startup, where processes are often informal and managed in Slack, spreadsheets, and email. This uncertainty creates friction, leading to worries about what auditors will accept, how to translate workflows into a formal document, and the risk of delays that can erode investor confidence.

The goal isn't to build a burdensome corporate compliance machine. It’s to tell a clear, credible story about how your company handles its money. Preparing financial controls for an audit is about documenting the sensible steps you already take to protect company assets and ensuring you can prove it when asked. This guide provides a practical path to get it done efficiently.

For an early-stage company, the primary goal is not perfection but demonstrating sufficient control. What is the absolute minimum you need to do to pass your first audit without drama? The answer lies in the “good enough” approach. This principle focuses on documenting core, high-risk processes rather than every single financial activity. Auditors, whether applying US GAAP for American companies or FRS 102 in the UK, understand that a five-person biotech startup will not have the same internal controls checklist as a public company.

Your objective is to prove that your financial statements are materially correct and that you have reasonable, repeatable systems in place. The reality for most Series A startups is more pragmatic: auditors are looking for evidence of thoughtful process, not a flawless, automated system. They need to see that key transactions are reviewed, access to systems like QuickBooks or Xero is managed, and that there is a clear trail from a transaction to its source. Official standards on audit evidence explain the required documentation. If you follow US GAAP, see our CPA-ready guide.

How to Prepare Financial Controls for the Three Core Processes

With limited time, you must focus your documentation efforts. Auditors overwhelmingly concentrate on three fundamental narratives that explain your business's financial health. These are how you spend money, how you make money, and how you verify the numbers. Everything else is secondary for a first audit.

How You Spend Money (The “Procure-to-Pay” or P2P Process)

The Procure-to-Pay, or P2P, process covers the entire lifecycle of an expense, from identifying a need to the final payment. It is the story of how money leaves your company. For a startup, this might look less like a formal procurement department and more like a series of emails and Slack messages. That’s perfectly acceptable, as long as you can document the key steps.

A typical P2P process includes purchasing, receiving an invoice, getting approval, and making the payment. For a US-based deeptech company using QuickBooks and Bill.com, a control might be that all invoices over $2,000 require email approval from the CEO before being scheduled for payment. The evidence is simply the approval email and the payment record from Bill.com. The key is distinguishing the control activity (the approval) from its evidence (the digital proof).

What founders find actually works is mapping this out simply. Who can request a purchase? Who must approve it, and at what dollar threshold? How are invoices entered into the accounting system? Who has the authority to release payments? Documenting these steps provides auditors with assurance that your spending is authorized. See our guide to audit-ready expense reports for examples of approval workflows.

How You Make Money (The “Order-to-Cash” or O2C Process)

The Order-to-Cash, or O2C, process documents your revenue stream from the moment a customer agrees to buy something to when their cash is in your bank. This is one of the most scrutinized areas during an audit, as it directly impacts your valuation. The auditor needs to verify that the revenue you’ve recognized is real, earned, and accurately recorded.

For example, consider a US-based SaaS company. A customer subscribes to a plan online, and payment is processed via Stripe. The O2C controls would involve verifying that the Stripe transaction data matches the customer subscription tier, that cash received in the bank reconciles to Stripe payouts, and that revenue is recognized monthly over the subscription term in QuickBooks, not all at once. The evidence chain is the Stripe subscription record, the bank deposit, and the revenue recognition journal entry.

For a UK-based B2B SaaS startup using Xero and Stripe, the O2C process often starts with a signed customer contract. If you are in the UK, see our statutory audit checklist. Key controls include verifying contract terms, generating an accurate invoice, processing payment, and correctly recognizing revenue. The critical evidence includes the signed contract, the invoice, and the corresponding bank or Stripe deposit. The link between these items must be clear. A common mistake is poor record-keeping for non-standard deals, so documenting these is essential.

How You Close the Books (The “Record-to-Report” or R2R Process)

The Record-to-Report, or R2R, process is the engine room of your finance function. It’s the set of recurring activities you perform, typically monthly, to close the books and generate financial statements. This is how you prove that the numbers presented to investors are accurate and complete. For a founder without a finance team, the R2R process is often a month-end checklist in a spreadsheet.

Key controls within R2R include bank reconciliations in QuickBooks or Xero, recording accrual journal entries for expenses incurred but not yet paid, and a final review of the financial statements. A scenario we repeatedly see is a founder performing the bank reconciliation themselves. The control is not just doing the reconciliation; it is the documented review of it. A simple control activity could be the founder saving a PDF of the completed reconciliation report to a shared drive each month. This action creates evidence that the review took place, a core part of audit documentation requirements.

Building Your Control Matrix Without the Headache

How do you translate these day-to-day tasks into a formal document? The answer is a Control Matrix, a simple table that organizes your financial processes for an auditor. It is the central document for preparing for your financial audit. Don’t let the name intimidate you; it can start as a basic spreadsheet.

Your matrix should have four core columns:

1. Control Objective: The goal you are trying to achieve. State it plainly, like “Only valid company expenses are paid.”
2. Risk: The specific thing that could go wrong without the control. For example, “Risk of paying fraudulent or duplicate invoices.”
3. Control Activity: The specific action you take to mitigate the risk. This is what you actually *do*. For example, “The CEO reviews and approves all vendor invoices over $1,000 via email before they are paid.”
4. Evidence: The proof that the control activity happened. This could be a screenshot, a system log, or a saved email. Following the example, the evidence would be the “Approval email from the CEO.”

Example Control Matrix Entry: Invoice Approval
Objective: Ensure all vendor payments are for legitimate, authorized business expenses.
Risk: Unauthorized or fraudulent payments could be made from the company bank account.
Control Activity: All invoices over $2,000 must be approved by the department head via email before being entered into Bill.com by the finance manager.
Evidence: The saved approval email from the department head, attached to the transaction record in Bill.com.

Building your control matrix is an exercise in documenting your current reality. If your approval process happens in a specific Slack channel, that is your control activity. The screenshot of that approval is your evidence. The goal is to be honest and accurate, not to invent a process that looks good on paper but does not reflect your actual startup audit process.

Avoiding Common Gaps That Cause Audit Delays

What simple mistakes cost startups time and money during an audit? The most common issue for small teams is a lack of Segregation of Duties (SoD). In many startups, one person may be able to create a vendor, approve an invoice, and make the payment. From an auditor's perspective, this concentration of power is a significant risk.

Addressing Segregation of Duties and Other Audit Readiness Steps

Auditors know that hiring three people to manage payments is not feasible for a startup. The solution is not ideal SoD but a practical and auditable compensating control. The most common and effective compensating control is a documented review by a second person.

Example of a Compensating Control for Payments
If your bookkeeper can both enter and pay bills in QuickBooks, the CEO can perform a weekly review of all payments made. The CEO runs a payment summary report, verifies each payment is legitimate, and then sends an email to the bookkeeper stating, “I have reviewed the payments for the week of X and approve.” This email serves as the evidence that a secondary review mitigated the SoD risk.

This review proves a second set of eyes verified the transactions. Another common gap is undocumented manual processes, especially complex revenue or commission spreadsheets. The fix is not to replace the spreadsheet, but to add a tab that explains the methodology, formulas, and sources of data used in the calculation.

Practical Takeaways: Your Action Plan

Preparing your financial controls for an audit does not need to be an all-consuming project. By focusing on what truly matters, you can meet auditor expectations efficiently and build a stronger financial foundation for your company.

Your immediate action plan should be straightforward. First, embrace the “good enough” mindset and prioritize the three core processes: how you spend money (P2P), how you make money (O2C), and how you close the books (R2R). Second, begin documenting these processes as they exist today in a simple control matrix. Third, use the digital artifacts you already create, like emails and system reports from Stripe or Bill.com, as your evidence. Keep these as organized working papers. Finally, for any clear Segregation of Duties gaps, implement and document a simple review control. This pragmatic approach will satisfy auditors and instill confidence in your financial governance. See the audit preparation hub for more guidance.

Frequently Asked Questions

Q: What is the difference between a process and a control?

A: A process is the sequence of steps to get something done, like paying a bill (the Procure-to-Pay process). A control is a specific action within that process designed to prevent errors or fraud, such as requiring a manager's approval before the payment is released from your bank account.

Q: How much time should my startup budget for preparing audit documentation?

A: For a first audit, a well-organized startup should plan for 20 to 40 hours of dedicated time to document controls and gather evidence. This can vary based on your business complexity and the state of your existing records. Starting several weeks before the audit fieldwork begins is highly recommended.

Q: Do we need formal financial controls if we are pre-revenue?

A: Yes. Even if you have no revenue, you still spend money (Procure-to-Pay) and manage your finances (Record-to-Report). Auditors will need to see documented controls over your spending, cash management, and financial closing process to verify your balance sheet and statement of operations accurately.