15 Red Flags Auditors Look For (and How to Have the Answers Ready)
An audit letter is not an accusation, but it is a deadline. The examiner works from a short list of conditions that signal a trust account is out of control, and every one of them is visible in your own books before anyone else sees it. Here are fifteen of them, what each one signals to an auditor, and what to have ready when you are asked.
Trust Account Compliance Triggers
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.
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.
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.
Tenant & Owner Ledger Inconsistencies
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.
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.
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.
Reconciliation Red Flags
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.
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.
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.
Month-End Close Issues
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.
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.
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.
Internal Controls & Workflow Concerns
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.
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.
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.
Where to go from here
Most of these are findable in an afternoon if you know which reports to pull. If you would rather have someone go through your actual database and tell you what an examiner would find, we offer a free database review and put the findings in writing. The mechanics behind several of these checks are covered in our three-way reconciliation and trust compliance audit pages.