15 Red Flags Auditors Look For (and How to Have the Answers Ready)
A Property Manager’s Guide to Surviving Audits Without Panic
SECTION 1:
Trust Account Compliance Triggers
Warning Sign #1
Negative tenant or owner balances
Why it matters
Indicates possible commingling or use of funds that aren’t yours.
Be ready to answer
Provide transaction history and supporting ledger reports. Show how the issue was resolved.
Warning Sign #2
Missing interest allocation on trust accounts
Why it matters
In many states, interest on trust accounts must be tracked and allocated properly.
Be ready to answer
Show your process and any state-specific documentation.
Warning Sign #3
Discrepancy between bank balance and trust liability
Why it matters
This is one of the most common audit fails.
Be ready to answer
Show your three-way reconciliation and explain any timing differences.
SECTION 2:
Tenant & Owner Ledger Inconsistencies
Warning Sign #4
Tenant deposit not matching move-in date
Why it matters
Late or missing deposits suggest delayed trust accounting.
Be ready to answer
Provide the deposit ledger, lease start date, and move-in documentation.
Warning Sign #5
Unrefunded owner credits
Why it matters
Holding owner funds too long without distribution can raise flags.
Be ready to answer
Share your owner statements and your distribution policy.
Warning Sign #6
Adjustments made without notes or approvals
Why it matters
Auditors expect transparency behind all changes.
Be ready to answer
Use audit trails or internal approval forms to justify adjustments.
SECTION 3:
Reconciliation Red Flags
Warning Sign #7
Forced or manual adjustments to reconcile
Why it matters
Indicates books may be balanced artificially.
Be ready to answer
Provide detailed reconciliation reports and documentation of exceptions.
Warning Sign #8
Missing documentation for voided checks
Why it matters
Could signal hidden payments or mismanagement.
Be ready to answer
Keep all voided checks and explain why they were voided.
Warning Sign #9
Gaps in check number sequences
Why it matters
Might suggest deleted or untracked checks.
Be ready to answer
Keep a check register with explanations for any missing numbers.
SECTION 4:
Month-End Close Issues
Warning Sign #10
Incomplete or missing leases
Why it matters
Makes it hard to verify rent, deposits, and responsibilities.
Be ready to answer
Always keep signed lease agreements attached to tenant files.
Warning Sign #11
No W-9s or 1099 records for vendors
Why it matters
Indicates non-compliance with IRS requirements.
Be ready to answer
Maintain updated vendor files and ensure annual 1099s are issued.
Warning Sign #12
Owner agreements not on file
Why it matters
This is how you prove management authority.
Be ready to answer
Store signed property management agreements in your system and review annually.
SECTION 5:
Internal Controls & Workflow Concerns
Warning Sign #13
One person doing everything
Why it matters
Lack of separation of duties = high risk of fraud.
How to fix it
Outline your internal workflow or explain how duties are reviewed independently.
Warning Sign #14
No regular audits or oversight process
Why it matters
Auditors want to see proactive compliance.
How to fix it
Implement (and document!) internal monthly or quarterly audits.
Warning Sign #15
Payments to unfamiliar vendors
Why it matters
Suggests poor vendor vetting or potential internal fraud.
How to fix it
Provide vendor approval documentation and invoices.
Bonus
How to Strengthen Your Internal Controls
Still feel like your books are messy?
Here’s how to clean them up
Here’s how to clean them up
1.
Implement separation of dutiest
No one person should control all parts of the accounting process.
2.
Set up alerts in your bank and software
For large transactions, new vendors, or off-hours activity.
3.
Perform surprise audits
Rotate reviewers and occasionally audit trust activity without warning.
4.
Use dual approvals
Especially for wire transfers, refunds, or owner distributions.
5.
Invest in professional oversight
Outsourcing reconciliation or monthly closes provides a second line of defense.
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