QuickBooks Cleanup Before the Audit: What to Fix First and a Client Readiness List

Delays in a small-company audit often start in the client's books. The trial balance does not tie to the bank, the aging reports do not agree to the ledger, a clearing account holds six figures, or prior-year entries have been edited. Each of these costs fieldwork time that the firm either absorbs or bills.

A cleanup before fieldwork, done by the client or a bookkeeper, costs less than the same fixes made during fieldwork. This guide sets out what to fix, in what order, and what the audit firm can and cannot do itself. It pairs with auditing a client on QuickBooks Online, which covers the audit side.

First, a note on independence

Before offering to fix a client's books, decide whether the firm may. Bookkeeping and cleanup are nonattest services under the AICPA Code of Professional Conduct, and they are permitted for attest clients only when the general requirements and safeguards in the nonattest services interpretation are met. The main ones are that management takes responsibility for the records and the financial statements, designates a person with suitable skill, knowledge and experience to oversee the service, and makes the decisions. The firm must not perform management functions.

Where an audit is performed under Government Auditing Standards, the requirements on nonaudit services are stricter and can rule the work out. See Yellow Book (GAGAS).

A practical approach is for the firm to give the client a list of what to fix and let the client or its bookkeeper do the work. If the firm does help, document the safeguards and who made each decision. Some firms separate the cleanup from the audit by using a different team or a separate engagement, and some decline the cleanup where the audit risk is high. Whichever route is chosen, record it in the acceptance and independence file.

What to fix first

Work in this order, because earlier items affect later ones.

1. Reconcile every bank and credit card account through year-end

Every cash, savings, credit card, merchant and loan account should be reconciled to the statement balance at year-end, and preferably each month. Old unreconciled differences, uncleared items from prior years and reconciliations that were undone and redone are the first things an auditor looks at. A reconciliation done on the audit date for the year-end is acceptable, but it needs to be done before fieldwork. See the bank reconciliation guide and template.

2. Clear the catch-all accounts

Four accounts are the usual suspects, and each should be zero or explainable at year-end:

• Opening Balance Equity. It should be zero. Balances here usually come from opening entries made when the file was set up. Move them to the right equity accounts and agree them to the prior audited or filed balances.
• Undeposited Funds. It holds payments received but not yet deposited. A balance that is older than a few days at year-end means payments were not matched to deposits. Match them or correct them.
• Uncategorized Income, Uncategorized Expense and Uncategorized Asset. Review each item and reclassify.
• Ask My Accountant or similar suspense accounts, which should be cleared with the client's support.

3. Tie the subledgers to the general ledger

The A/R aging as of year-end should equal the A/R control account. The A/P aging should equal the A/P control account. If they differ, look for journal entries posted directly to the control accounts, unapplied payments and credits, and transactions with the wrong date.

Then clean the aging:

• apply old unapplied customer payments and credit memos
• write off or reserve balances the client knows are uncollectible, with approval
• remove duplicates and fix customers listed under the wrong name
• confirm that bills not yet received but known are recorded, or listed for the auditor

4. Check that the books are on the stated basis

If the client reports on the accrual basis, confirm that revenue and expenses are recorded when earned and incurred, and that prepaid expenses, accrued liabilities and deferred revenue are recorded. Some QBO files are cash-basis books converted to accrual by journal entries at year-end. Ask what the conversion process is and keep the support.

5. Fixed assets

List the fixed assets, with cost, date placed in service, useful life, method and accumulated depreciation, and tie it to the general ledger. Capital items expensed during the year should be identified. See the fixed asset rollforward template and calculator.

6. Debt, leases and equity

• Agree each loan balance to the lender's year-end statement, and split principal and interest. Prepare an amortization schedule if one does not exist. The loan amortization schedule calculator can help.
• List leases and have the contracts available for review. See ASC 842 lease accounting.
• Reconcile equity: contributions, distributions, owner draws and retained earnings to the prior year, and confirm that retained earnings has not been adjusted by hand.

7. Payroll and taxes

Payroll liabilities should agree to the filed quarterly returns and to deposits. Compare payroll expense in the ledger to the payroll reports, and confirm that owner payroll is classified consistently. For sales tax, the liability account should agree to the returns filed and amounts paid. Resolve old balances.

8. Inventory, if there is any

The inventory balance should agree to a physical count or a perpetual record. Correct negative quantities, and be prepared with count sheets or the count plan for observation. See inventory observation procedures.

9. Housekeeping

• Merge duplicate customers and vendors, collect W-9s and complete 1099 data.
• Mark inactive accounts and clean the chart of accounts without deleting accounts with history.
• Remove personal expenses of owners from business expense accounts or record them as distributions or loans, consistently.
• Identify related parties and related-party transactions. See related party transactions.
• Set the closing date after the cleanup, with the password held by management, and tell the audit team how adjustments will be handled.

Client readiness list

The year-end close checklist and the trial balance template cover much of the same ground.

Send this list at least a few weeks before fieldwork, and ask the client to confirm each item with a date.

Pair it with the PBC list and the audit readiness checklist for clients.

What to do when the client will not clean up

Some clients cannot or will not. The options are to quote for the additional time with a clear explanation, to delay fieldwork until the items are done, or to reconsider the engagement. Ask what the books say about the control environment and the risk of fraud, since a client whose books cannot be reconciled raises questions about management's ability to prepare financial statements. See AU-C 210 and the engagement letter.

Frequently asked questions

What should be cleaned up in QuickBooks before an audit?

Bank and card reconciliations, clearing accounts such as Opening Balance Equity and Undeposited Funds, tie-outs of A/R and A/P agings to the ledger, payroll and sales tax liabilities, loans, fixed assets and prior-year balances.

Should Opening Balance Equity be zero?

Yes, at the audit date. A balance usually means opening entries were never allocated to the proper accounts. Move them to the correct accounts and agree them to the prior-year statements.

Can the audit firm do the cleanup?

Only if independence is not impaired. The firm must meet the AICPA Code's nonattest services safeguards, and under Government Auditing Standards the rules are stricter. A safer path is to give the client a list and have the client or its bookkeeper do the work.

When should the client close the books for the year?

After the cleanup and before fieldwork, with a closing date set in QuickBooks and the password held by management. Plan how audit adjustments will be recorded.

How early should we send a readiness list?

A few weeks before fieldwork starts, with a date for each item. The longer the cleanup, the earlier the request needs to go out.

Sources

• AICPA Code of Professional Conduct, ET 1.295.010 to 1.295.040 (Nonattest Services, general requirements) and ET 1.295.120 (Bookkeeping)
• GAO, Government Auditing Standards: 2024 Revision (GAO-24-106786), Chapter 3, Independence (nonaudit services)
• AICPA, AU-C Section 210, Terms of Engagement
• AICPA, AU-C Section 315, Understanding the Entity and Its Environment (risk of material misstatement)

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error