A lender or prospective capital partner asks for “audited financials.” Before your practice starts gathering documents, confirm exactly what that means. A financial statement audit, a review, a compilation and a financing diligence package are different engagements. Preparing for the wrong one can leave you with reports the counterparty will not accept.
For a staffed private medical practice, financing audit preparation means defining the reporting scope, supporting the balances in the books and assigning responsibility for unresolved issues. Payer receivables, provider payroll, equipment financing and transactions between related entities can all require attention before fieldwork begins.
Clean books support an audit; they do not provide audit assurance. Management remains responsible for the financial statements and underlying records, while the independent auditor determines the procedures and report appropriate to the engagement.
Confirm What the Financing Counterparty Actually Requires
Ask the lender or capital partner for its reporting requirement in writing. Then review it with the CPA who would perform the engagement and the accountant responsible for your books. Do not assume a tax return, internally prepared statement or accountant-prepared package satisfies an audit requirement.
| Requested service | What it generally provides | What to clarify before proceeding |
|---|---|---|
| Financial statement audit | Reasonable, not absolute, assurance and an auditor’s opinion on the financial statements | Reporting framework, entities, periods, required report and delivery deadline |
| Financial statement review | Limited assurance, primarily through inquiries and analytical procedures | Whether the counterparty accepts a review instead of an audit |
| Compilation | Presentation of financial information without assurance | Whether a compilation meets the financing requirement |
| Financing diligence package | Documents and analyses tailored to the counterparty’s questions; it does not itself provide audit assurance | Exact schedules, reconciliations and any separate accountant’s report required |
A counterparty may request a separate agreed-upon procedures engagement, which reports findings from specified procedures rather than an audit opinion. Have the CPA explain the proposed service and obtain the counterparty’s acceptance before committing to it.
Set the reporting boundaries
Resolve these questions before substantial preparation begins:
- Which entities are included? Identify the borrowing practice, any related management company and any property-owning entity relevant to the request.
- Which periods are required? Confirm whether comparative statements, opening balances or interim results are needed.
- Which accounting framework applies? Ask whether the counterparty requires U.S. GAAP or accepts another specified basis. Tax-basis or cash-basis books may need additional work.
- What reporting level is required? Separate entity statements, combined or consolidated statements, and location-level operating reports are not interchangeable.
- What is the actual deadline? Distinguish the desired financing date from the deadline for final statements and the accountant’s report.
A per-location P&L can help explain operations, but it does not replace the financial statements required for the borrowing entity. Likewise, shared ownership does not by itself determine how entities should be presented. Resolve that treatment with the CPA.
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Establish Management Responsibilities Before Fieldwork
Appoint one practice-side coordinator, usually the administrator, controller or finance lead. That person maintains the request tracker, routes questions and checks that submitted schedules match the books. The owner should remain available for financing decisions, ownership questions and significant accounting judgments.
Management is responsible for the financial statements, relevant internal controls, complete records and access to information needed for the engagement. An auditor may propose adjustments, but management must understand and accept responsibility for them. The auditor does not become the practice’s bookkeeper or approve transactions on management’s behalf.
If your current accounting firm will also perform assurance work, discuss independence and permitted assistance before cleanup starts. Do not assume the same team can perform every preparation and assurance task without restrictions.
Agree on a version-controlled trial balance and a process for recording later changes. Each proposed adjustment should show its explanation, supporting calculation, affected accounts and management approval.
Build a Medical Practice Audit-Readiness Checklist
Start with the balance sheet, then connect revenue and expenses to their supporting records. A folder of statements is not enough: each material balance needs an explanation and a reconciliation.
The IRS guide to business recordkeeping supports maintaining complete business records, keeping business accounts separate and reconciling bank records. Those habits provide a foundation, although they do not by themselves satisfy an audit’s evidence requirements.
| Area | Evidence to prepare | Readiness check |
|---|---|---|
| Cash and payment clearing | Bank statements, reconciliations, deposit detail and merchant settlement reports | Ledger balances reconcile; outstanding items and deposits in transit are explained |
| Payer and patient receivables | Dated aging reports, billing-system-to-ledger reconciliation, adjustment reports and subsequent collections support | Receivables and revenue are supported; valuation assumptions are documented |
| Payables and accrued expenses | Vendor aging, invoices, statements and payments after period-end | Unpaid obligations and period-end expense timing have been reviewed |
| Provider and administrative payroll | Payroll registers, compensation agreements, benefit records, filings and payment support | Payroll expense, liabilities and cash payments reconcile; unpaid compensation is evaluated |
| Debt | Executed agreements, lender statements, repayment schedules and covenant calculations | Principal, interest, classifications and reporting obligations are supported |
| Leases and equipment | Signed leases, amendments, equipment invoices and fixed-asset schedules | Complete agreement list is available for the CPA’s accounting assessment |
| Ownership and equity | Formation documents, ownership ledger, governing agreements and contribution/distribution records | Ownership activity agrees with accounting records and signed documents |
| Related-party balances | Intercompany schedules, owner advances, agreements and settlement history | Both sides agree; differences, terms and proposed treatment are documented |
| Shared costs | Allocation policy, source invoices, payroll allocation support and entity/location schedules | Allocations use a documented basis and reconcile to total recorded costs |
Give receivables more attention than a bank reconciliation
For a practice reporting receivables, bank deposits alone do not establish revenue or the amount collectible at period-end. Prepare a bridge between the billing system and general ledger that explains charges, contractual adjustments, collections, refunds, write-offs and other reconciling items as applicable.
Discuss contractual adjustments, collection estimates and revenue timing with the CPA under the selected reporting framework. Document the basis for estimates rather than using an unexplained percentage to make the ledger match an aging report.
Keep the period-end aging export. A current report may not recreate what was outstanding on the financial statement date. Subsequent collections can help support evaluation of that balance, but they must be linked to the relevant period-end receivables.
Reconcile payroll without overlooking compensation obligations
Tie provider and administrative payroll to the ledger, payroll liabilities, filings and payments. Review bonuses, earned compensation and benefits that may require period-end accounting under the selected framework.
Keep source records under an appropriate retention policy. IRS employment-tax recordkeeping guidance identifies relevant supporting records, but the practice should confirm applicable retention requirements with its advisers rather than treating completion of the audit as permission to discard them.
Resolve an Unsupported Opening Balance Before Fieldwork
An unexplained opening balance can affect more than the beginning balance sheet. It may change current-year expenses, equity, cash flows or related-party disclosures. Moving the difference into a miscellaneous account does not establish what happened.
Illustrative example: an unexplained owner payable
A practice’s opening trial balance contains a $48,000 payable to an owner, but no supporting schedule. This is an illustrative example, not a case study. The owner remembers paying practice expenses personally but cannot confirm the recorded amount.
Use this sequence before fieldwork:
- Preserve the starting records. Save the opening trial balance, prior-period ledger and original entry details. Identify whether the balance came from a conversion, prior accountant or manual adjustment.
- Trace the balance backward. Obtain available prior financial statements, closing entries, owner-account schedules and relevant bank records. A prior statement can help trace the balance, but may not fully support its nature or classification.
- Reconstruct the activity. List the claimed advances, expenses and repayments. Match them to invoices, payment evidence and the entity that received the benefit. Check for duplicate expenses or amounts belonging to another entity.
- Separate supported and unresolved amounts. Suppose the records substantiate $35,000 and leave $13,000 unexplained. These figures are illustrative. Do not treat the unexplained portion as valid merely because it was carried forward.
- Determine the accounting response. Ask the accounting adviser to assess whether supported activity represents debt, an owner contribution, reimbursement or another category. Discuss any prior-period correction and disclosure implications, then communicate the issue to the auditor.
- Approve and document the resolution. Management reviews the evidence and any proposed entry. Retain the original balance, reconstruction, conclusion and revised reconciliation.
If adequate evidence remains unavailable, tell the auditor promptly. The auditor must assess the implications for the engagement and report. Neither writing off the balance nor providing a management explanation automatically resolves an evidence limitation.
Turn the Request List Into a Working Tracker
The auditor’s provided-by-client list, often called a PBC list, should become an active work plan. Assign one preparer and one reviewer to each request, with an agreed due date and a clear definition of completion.
The following is an illustrative tracker structure; replace the sample statuses with your practice’s actual progress.
| Request | Responsible person | Required output | Status and next action |
|---|---|---|---|
| Period-end cash reconciliations | Bookkeeper | Statements, reconciliation reports and outstanding-item support | Under review: explain older outstanding payments |
| Receivables support | Billing manager and accountant | Dated aging, ledger bridge and collections support | Preparing: resolve clearing-account difference |
| Payroll reconciliation | Payroll administrator | Registers-to-ledger reconciliation and liability support | Ready for internal review |
| Debt and leases | Practice administrator | Complete agreement list, statements and schedules | Awaiting equipment lease amendment |
| Opening owner payable | Owner and accounting adviser | Reconstruction and documented accounting conclusion | Blocked: obtain prior-period payment records |
| Related-party balances | Entity accounting lead | Matching schedules and allocation support | Awaiting related entity’s confirmation of difference |
Add columns for the actual due date, file link, reporting period, entity and auditor follow-up. Use statuses such as Preparing, Under review, Submitted and Follow-up required. Uploading a file does not mean the auditor has accepted it as sufficient evidence.
Before submission, check that every schedule identifies its period and entity, ties to the agreed trial balance and explains differences. Keep superseded versions separate from current submissions.
Protect Patient Information While Providing Financial Evidence
Start with aggregate reports and financial identifiers where they can answer the request. Do not place patient-identifiable information in ordinary Slack messages or general-purpose AI tools.
When detailed patient information is genuinely needed, coordinate the purpose, access and transfer method with the CPA and the practice’s privacy lead. HHS explains that accounting services can involve business-associate responsibilities when protected health information is involved. Its minimum necessary guidance also informs how practices limit applicable disclosures, subject to exceptions.
Do not assume that a familiar file-sharing service is appropriate merely because it is convenient.
Hold a Readiness Meeting Before Fieldwork
Meet with the auditor after the core reconciliations and supporting schedules have been reviewed internally. Discuss unresolved balances, accounting-framework changes, related entities, receivables estimates and missing documents. Ask whether the proposed schedule remains realistic and what outstanding evidence could affect it.
Keep financing analysis separate from audited results. Forecasts, proposed owner-compensation adjustments and lender-specific calculations should be clearly labeled and reconciled where relevant; they should not silently alter historical financial statements.
Lucid Financials provides CPA-led bookkeeping, tax and CFO services for U.S. private medical practices with staff. Its AI-assisted financial work and human finance team can support clean books, catch-up bookkeeping and location/entity financial visibility, with coordination through Slack. Audit scope, independence and any assurance report require a separate discussion with the CPA performing that engagement.
The immediate goal is a supported, management-reviewed reporting package that matches the financing request—not a promised audit opinion or financing approval.
FAQs
Does every medical practice seeking financing need audited statements?
No. Requirements depend on the counterparty and financing arrangement. Obtain the requirement in writing and confirm whether an audit, review, compilation or specified diligence package is acceptable before engaging a CPA.
Can cash-basis books be used for the audit?
The answer depends on the required reporting framework and engagement. If the counterparty requires U.S. GAAP statements, cash-basis books will generally need additional accounting work. Confirm the basis with the counterparty and CPA rather than assuming tax-return records are sufficient.
What if the practice cannot support a beginning balance?
Investigate its origin, reconstruct available evidence and document the accounting conclusion with your adviser. Notify the auditor while the issue is being evaluated. An unsupported adjustment does not cure missing evidence, and an unresolved limitation may affect the auditor’s report.
Does an audit verify every transaction or guarantee financing?
No. A financial statement audit provides reasonable rather than absolute assurance and does not examine every transaction. It does not guarantee financing approval. The lender or capital partner makes its own decision using its requirements and other information.