THEACCASIST

PRIVATE EQUITY AUDIT GUIDE

Preface

The landscape of Private Equity (PE) is expanding rapidly in India and globally, bringing with it a unique set of
financial, regulatory, and assurance challenges. Audi ng PE funds is no longer reserved for large global firms or
specialists; it is becoming part of mainstream audit assignments, especially as Indian AIFs grow in scale and
complexity. This guide was created to bridge a growing gap between textbook audit understanding and the
dynamic, high-risk environment of PE fund assurance.

The Private Equity Audit Guide is designed for both current ACCA students (par cularly those comple ng their
PER), and for early-career professionals and firms engaging in fund audits or venture capital-related assurance
work. It provides deep insights into how audits are planned, scoped, and executed in the context of private
equity including the tes ng of valua ons, carried interest, exit event treatment, and regulatory compliance
under SEBI and interna onal frameworks. The focus is not only on compliance, but on cri cal thinking,
judgment, and scep cism the hallmarks of a quality audit.

Unlike tradi onal resources, this guide integrates Indian regula ons (SEBI AIF norms) with interna onal
audi ng standards (ISA), financial repor ng frameworks (IFRS/Ind AS), and the prac cal reali es faced by
auditors. Whether you’re naviga ng ISA 540’s requirements for Level 3 valua ons or dealing with going
concern risks in pre-IPO startups, this guide provides structured procedures, examples, and documenta on
templates to support you. Each sec on connects back to core ACCA papers AA, AAA, SBR, FM and shows how
to evidence your experience in PER logs.

What makes this guide unique is its prac oner-driven voice. Wri en by someone who is ac vely engaged in
fund audits Ajay Sharma it reflects not just theory but on-ground audit execu on. Realis c Indian case
examples are included to help students understand how carried interest is recalculated, how audit reports are
modified under ISA 705, or how KAMs are framed for unobservable inputs. For educators, mentors, and firms,
this guide also serves as a training base or internal reference point.

At THEACCASIST, our mission has always been to simplify audit complexity and empower ACCA students
through prac cal content. We hope this guide enables you not just to pass exams, but to think like an auditor.
Let it support your professional growth whether you're reviewing DCF models, preparing a SEBI compliance
report, or documen ng scep cism in your PER objec ve. Let this guide be your companion in becoming the
audit professional today’s financial world demands.

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PRIVATE EQUITY AUDIT GUIDE
Chapter 1: Introduc on: What Is Private Equity (PE)

Private Equity involves investments in unlisted companies or takeovers of public firms primarily aimed at
delivering higher returns.

PE Fund Lifecycle & Structure

A Private Equity fund operates through care stages from Fundraising, where GPs collect capital commitments
from LPs, to Investments into startups or buyouts, Value crea on, and finally Exit mechanisms (e.g., IPOs,
strategic sales).

En ty Mapping

 GP: responsible for investment decisions

 LP: provides capital, receives returns

 Fund Vehicle: usually an LLP or trust

 Por olio Companies: investee en es where capital is deployed

In ally Auditors should create a mapping worksheet of each en ty and the legal agreements that define fund
governance and economics.

Private Equity (PE) funds are vehicles created by General Partners (GPs) to raise capital from Limited Partners
(LPs), typically high-net-worth individuals, ins tu ons, or pension funds, for the purpose of inves ng in unlisted
(private) companies or the buyouts of listed companies with an aim to delist and drive value enhancements.
The audit journey begins with understanding the private placement memorandum (PPM), limited partnership
agreement (LPA), subscrip on documents, and fund structure, which define the legal and economic framework
governing management fees, carry alloca on, valua on methodology, and distribu on waterfalls.

In India, PE funds are o en structured as Alterna ve Investment Funds (AIFs) under SEBI regula ons, typically in
the form of Limited Liability Partnerships (LLPs) or trusts. GPs manage the investments, LPs contribute capital
but have limited liability, and por olio companies deploy the capital to drive opera onal improvements and
eventual exit value.

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Chapter 2. Regulatory and Repor ng Framework in India and Globally

In India, PE funds are governed by the SEBI (AIF) Regula ons, 2012, which mandate AIFs to register with SEBI,
follow specific investment guidelines, disclose fortnightly NAV, and undergo annual audits. Regulators require
PPMs to disclose disciplinary history, fund structure, control limits, fee tables, and distribu on waterfalls. AIFs
must also report por olio-level financial informa on and adhere to overseas investment caps (25% of
investable funds) and filing schedules. Category I and II AIFs must prepare annual audited financial statements
within 180 days of year-end, while Category III AIFs must also file quarterly reports and ensure biannual fair
value measurement. Por olio companies must prepare their own financial statements under Ind AS/IGAAP and
get them audited accordingly

Globally, PE fund structures o en include UK or US partnerships, Cayman trusts, or LLPs. Such vehicles must
follow IFRS or US GAAP, with consolida on or equity accoun ng obliga ons depending on control assessments
under IFRS 10, and fair value measurement under IFRS 13. The audit meline and requirements may also be set
by SEC or FCA regula ons, with periodic disclosures and regulatory filings.

United Kingdom:

UK-based PE vehicles, typically LLPs or UK AIFs, fall under the jurisdic on of the Financial Conduct Authority
(FCA) or, in some cases, the Pruden al Regula on Authority. Auditors must ensure compliance with FCA
disclosures regarding investor eligibility and risk repor ng. Financial statements are prepared under IFRS or UK
GAAP, with an annual audit required. There are stringent rules around use of capital, financial promo on, and
token investments. FCA requires annual audited reports within nine months of year-end and may demand
periodic regulatory returns.

United States:

PE en es in the US are generally structured as Delaware limited partnerships or GP-LP partnerships and
regulated by the SEC if assets exceed a threshold or if marke ng is involved. Although not always audited under
GAAP, many choose US GAAP or IFRS, audited under PCAOB standards or AICPA/US GAAS. SEC filings such as
Form ADV may apply, and there is heightened oversight of valua on processes, fee arrangements, and LP
disclosures. Audits o en include compliance a esta ons under the AICPA Standard on Service Organiza ons
(SSAE).

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Chapter 3: Defining the Audit Scope: Fund-Level, Por olio-Level, and Exit Procedures

The PE Audit, the scope encompasses the review of fund-level ac vi es such as NAV, investment valua on, fee
mechanics, capital drawdowns, and regulatory compliance as well as por olio company audits when
consolidated or material. Exit events, such as IPOs or strategic sales, require special a en on: auditors verify
that event documenta on, proceeds, and carried interest calcula ons match the LPA waterfall provisions

In India, fund-level audits also include compliance with overseas investment limits, trustee cer fica ons, PPM
consistency, and Adherence to SEBI valua on guidelines. For example, trustees must cer fy asset custody and
valua on transmission, SEBI requires overseas investment approvals within five days, and divestments must be
reported within three days, as per Master Circulars. Por olio-level audit scope may involve detailed tes ng of
revenue recogni on, leasing, going concern assessments, and related party transac ons, especially as Ind
AS/IFRS standards apply.

Overview

The scope of a private equity (PE) fund audit extends beyond standard financial statement assurance. Unlike a
conven onal corporate audit, PE audits require engagement teams to deeply understand fund structure,
regulatory compliance, valua on mechanics, fee calcula ons, and the complex economics of carried interest
and distribu on waterfalls. Moreover, audits may involve consolidated por olio companies or exits during the
year that require separate layers of verifica on. The audit scope, therefore, is threefold: Fund-Level, Por olio-
Level, and Exit-Event Related.

A. Fund-Level Audit Scope

This sec on of the audit focuses on the PE fund en ty itself — typically registered as an LLP or trust in India, or
as a limited partnership offshore. The fund’s financial statements include disclosures regarding investments at
fair value, cash flows, fee income and expenses, and the fund’s net asset value (NAV). The fund's accoun ng
policy o en follows IFRS 9 / 13 or Ind AS 109 / 113, and NAV is the key output used by LPs to monitor fund
performance.

Key Audit Areas at Fund-Level:

Area Description Audit Procedure Relevant Standard / Rule

NAV is the central metric Recalculate NAV based on fair value
NAV IFRS 13 / Ind AS 113; SEBI
used by investors to of investments and net liabilities;
Verification Circulars
assess fund performance. test allocation to LPs and GPs.
Valuation is often based Review valuation models, test DCF
Valuation of
on Level 3 unobservable inputs, perform sensitivity analysis, ISA 540 (Revised), IFRS 13
Investments
inputs. and engage expert if necessary.
Verify fee formulas against LPA;
Management Based on contractual recalculate fees and carried
Fees & Carried fund terms and interest; ensure accrual vs cash LPA; IFRS 15 / ISA 540
Interest performance thresholds. treatment aligns with accounting
standards.
Reconcile drawdown notices to
Drawdowns
PE funds call capital in bank statements; match investor
and Capital ISA 500
tranches. confirmations and verify timing/cut-
Calls
offs.
Verify SEBI registration, trustee
In India: SEBI’s AIF
Regulatory reporting, foreign investment limits, SEBI AIF Regulations; FCA
framework. In UK/US:
Compliance compliance certificates, and audit Handbook; SEC ADV
FCA/SEC guidelines.
timelines.
Review board minutes, investment
Related Party Between GP, LPs, and
committee approvals, and related ISA 550
Transactions portfolio companies.
party disclosures; verify
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PRIVATE EQUITY AUDIT GUIDE
completeness and arm’s-length
nature.

Evaluate design and

GPs must have systems
Risk implementation of internal
for valuation, investor
Management controls; test operating ISA 315/330
reporting, and
Controls effectiveness where material;
compliance.
communicate deficiencies.

B. Por olio-Level Audit Scope

Por olio companies are en es in which the PE fund has invested. These companies may or may not be
consolidated depending on control (per IFRS 10 / Ind AS 110). Even if not consolidated, significant influence (as
per IAS 28 / Ind AS 28) may require equity method accoun ng or enhanced disclosures.

The por olio company audit scope depends on:

 Whether the auditor is also the statutory auditor of the por olio company.

 Whether the por olio company’s financials are included in the fund’s consolidated financials or are
equity accounted.

 Whether there was a material event in the year (e.g. fundraising, IPO, strategic change)

Audit Involvement with Por olio Companies:

Area Description Audit Procedure Standards / Regulation

Revenue Recognition Significant for SaaS, EdTech, Perform cut-off testing; Ind AS 115 / IFRS 15; ISA 500
fintech, etc. Funds may review contracts under Ind
report performance metrics AS 115/IFRS 15; ensure
to LPs. alignment with board-
reported metrics.
Going Concern Startups often have limited Review cash flow ISA 570
Evaluation cash runway and rely on forecasts, loan covenants,
further funding. investor commitment
letters; check board
approval of business plans.
Lease and Liability Especially in real estate, Verify correct lease Ind AS 116 / IFRS 16
Recognition infra, retail, and logistics classification; test discount
sectors. rate assumptions;
reconcile with bank debt
ledgers.
Related Parties & Common where fund has Review shareholder ISA 550, IAS 24 ,Ind as 24
Transactions board rights or common agreements, board
shareholders across minutes, disclosures;
startups. confirm balances with
investee companies.
Aggressive testing on Bank
Statements, Evaluate
source of money for every
inter group transfer
Internal Controls & Varies depending on Assess segregation of ISA 265
Governance maturity and sector of duties, control over
portfolio company. revenue and payments;
report weaknesses to the
GP or fund board.
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Consolidation / Equity Required when control or Determine whether fund IFRS 10 / IAS 28 / Ind AS 110,
Method significant influence is controls or significantly 28
present. influences investee;
evaluate need for
consolidation or equity
accounting.
Example:
If a PE fund holds 40% of a startup and has board representa on, the fund auditor must assess whether
significant influence exists. If so, they may apply equity method (IAS 28), requiring review of the investee’s
profits/losses and impairments even if the investee is audited by another firm.

C. Exit-Related Audit Scope

Exit transac ons (e.g., IPOs, strategic sales, par al stake dilu on) are cri cal milestones in the fund’s lifecycle.
These events affect the NAV, carried interest calcula on, LP distribu on, and repor ng obliga ons. The audit
must verify transac on completeness, accurate recogni on, regulatory disclosures, and appropriate treatment
of performance-related fees.

Exit-Event Audit Areas:

Exit Area Key Risk / Issue Audit Procedure Reference

Recognition of Exit Timing and completeness Inspect Sale Purchase IFRS 15; Ind AS 115;
Gain of gain recognition; Agreement (SPA), IPO proceeds ISA 540
valuation risk. statements, escrow letters;
confirm exit date and
recognition logic.
Carried Interest Trigger Whether the exit met Recalculate IRR / preferred LPA; IFRS 15; ISA 540
performance hurdle; return metrics; verify hurdle
correct waterfall achievement; review carried
application. interest model for accuracy.
Proceeds and Accuracy of distribution to Test distribution ledger; ISA 500; SEBI
Distributions LPs and GPs; reconcile with bank records; Guidelines
misstatements in exit review any escrow or
proceeds. conditional payments.
Disclosure and KAMs Material exit may be a Key Identify exit-related judgments; ISA 701; ISA 705
Audit Matter. assess impact on NAV; consider
reporting in the audit report as
KAM.
Regulatory Approvals IPOs or cross-border exits Review IPO red herring SEBI ICDR, FEMA, AIF
may require SEBI, RBI, or prospectus, SEBI exit filings, RBI Regulations
FDI approvals. compliance; ensure disclosures
in AFS are complete.

The scope of a PE audit is wide-ranging and judgment-intensive. It spans investment valua ons, GP–LP
economics, SEBI/FCA/SEC compliance, and deep opera onal knowledge of por olio companies.

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PRIVATE EQUITY AUDIT GUIDE
Chapter 4 Planning Phase: Regulatory Readiness and Risk Mapping

The audit planning phase must begin by analyzing founda onal documents: PPM, LPA, AIF registra on
cer ficate, subscrip on no ces, and trustee agreements.

I. Founda onal Documents: The Star ng Point

A Private Equity (PE) audit’s planning phase begins not with trial balances, but with governing fund documents
that define the economic and legal structure of the fund. These documents include:

Document Purpose in Audit

Private Placement Memorandum Discloses fund’s investment strategy, fee structure, risks, and
(PPM) investor terms. Helps auditor understand expected fund behavior.
Limited Partnership Agreement (LPA) Legal contract between GP and LPs. Defines carried interest model,
hurdle rate, capital calls, distribution waterfall. Auditor uses this to
verify fee accruals and NAV allocations.
AIF Registration Certificate (India) Confirms SEBI registration. AIFs in India are governed by SEBI
(Alternative Investment Funds) Regulations, 2012. Auditors must
ensure continued compliance.
Subscription & Drawdown Notices Proof of investor commitment and capital received. Used to
reconcile drawdowns and verify cash inflows.
Trustee or Custodian Agreements Often required in India. Trustee certifies NAV and compliance.
Auditor must review trustee independence and certification
process.

Example:
A fund has a 2% management fee and 20% carry post an 8% hurdle return as per the LPA. During audit
planning, this structure informs the auditor’s design of procedures for fee accrual tes ng, IRR calcula on
tes ng, and distribu on accuracy.

II. Key Audit Risk Areas in Planning

Once the documents are reviewed, the core audit risks emerge, requiring ISA 315 risk assessment procedures.
These risks are o en industry-specific, involving complex es mates and ethical boundaries.

Risk Area Planning Considerations

PE investments are usually unlisted. Auditors must assess whether
Valuation Methodologies valuation follows market-comparable, discounted cash flow (DCF),
or latest-round funding approach.
Especially for portfolio companies consolidated or equity
Revenue Recognition accounted. Auditors should ensure IFRS 15/Ind AS 115 is applied
correctly, including contract testing and cut-off.
GP and LP entities are often related. Portfolio companies may be
Related Party Transactions cross-invested. Auditor must trace circular investments, board
overlap, and hidden arrangements (ISA 550).
Start-ups often have a short cash runway. Planning must include
Going Concern (Start-ups) forecasts, debt covenants, investor bridge commitment letters, and
stress tests of business models (ISA 570).
Auditor may have performed advisory, valuation, or tax services.
Audit Independence This creates self-review or advocacy threats. Auditor must evaluate
ethical safeguards (IESBA Code, Sec 290).
Example:
A PE fund holds 60% of a logis cs tech start-up. The start-up received Series C funding last year. Auditor must

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validate whether the fair value at year-end reflects the Series C price, adjusted for performance or economic
changes — or if DCF is used, challenge revenue, cost, and WACC assump ons.

III. Materiality in PE Audits

Materiality is complex in PE audits, as the financial statements are heavily dependent on valua on, not
revenue or profits. It must reflect not only tradi onal quan ta ve thresholds but also investor sensi vi es.

Basis for Materiality Why It Matters

Net Asset Value (NAV) NAV is the primary metric reported to LPs; misstatements in NAV
can distort investor performance.
Committed Capital Materiality based on total committed capital may better reflect
economic materiality in a fund.
Investor Expectations (qualitative) Even small errors in carried interest or exit disclosures can cause
reputational or legal risk.
Global Materiality Thresholds For UK or US audits, materiality may follow PCAOB, ISAs or FRC
thresholds.
Example:
For an AIF with ₹1,000 Cr commi ed capital and ₹650 Cr deployed, NAV materiality may be set at 1-2% of NAV
(i.e., ₹6.5 Cr–₹13 Cr), while performance fees and exit gains may require a lower threshold due to their
investor sensi vity.

IV. Internal Control Evalua on in Planning

Private Equity funds o en have small internal teams, but s ll require strong control environments to handle
valua on processes, investor rela ons, and regulatory filings.

During audit planning, auditors must perform ISA 315 procedures to understand and document:

1. Valua on Controls – Are valua ons reviewed independently? Is there an internal valua on
commi ee?

2. Fee & Carry Calcula on Controls – Are IRR and hurdle models tested internally?

3. Investor Communica on Controls – Is investor NAV repor ng subject to review?

4. Regulatory Monitoring – Are SEBI/FCA/SEC filings reviewed by legal/compliance staff?

Example:
In India, many AIFs appoint Big 4s as third-party valua on agents. If the auditor uses this, they must evaluate
the expert per ISA 620, reviewing qualifica ons, assump ons, and methods used.

. Regulatory Compliance: Planning Impera ve

Auditors must incorporate country-specific regulatory compliance into planning. Below is a compara ve table
covering India, UK, and US PE regula ons affec ng audit planning.

Country-wise Regulatory Planning Table

Country Authority Audit-Related Documents Required at Planning Focus Areas

Requirements Planning
India SEBI – AIF Regulations Must file audited AIF registration certificate, Overseas investment
(2012) financials within 180 PPM, SEBI reporting limits, Category
days of year-end; formats, trustee I/II/III compliance,
quarterly reporting agreements fee disclosure, PPM
to SEBI; NAV adherence

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certification by
trustee

UK FCA – AIFMD Fund must appoint FCA authorization letter, LP eligibility, risk
depositary; audited LLP deed, NAV reports, disclosures, leverage
financials within 9 valuation memos, investor limits, fee
months; comply with KIDs transparency
AIF Rulebook
USA SEC – Investment Advisers Registered funds Form ADV Part I & II, LPA, SEC fee scrutiny,
Act / Form ADV must disclose fee investor notices, IRR and valuation policies,
structures, valuation NAV models GP-LP conflict
processes; audits disclosure, cyber &
follow US GAAP or AML compliance
IFRS

Audit Planning Is the Anchor of a Quality PE Audit

The planning phase of a PE audit is far more than procedural. It defines the risk map, the materiality
benchmark, and the regulatory lens through which the en re audit proceeds. The auditor, by thoroughly
examining the fund documents, fee and valua on mechanics, investor disclosures, and regulatory backdrop,
sets the tone for a focused, risk-sensi ve and ethical engagement.

For ACCA students and professionals:

 This phase aligns with PER Elements on risk assessment, planning, and ethics.

 It supports SBR and AAA competencies involving investor-focused repor ng, ethics, and ISA
applica on.

 A well-planned audit paper serves as documentary evidence for your PER log, especially when
dealing with ISA 315/330, 540, and 550 procedures.

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Chapter 5: Audit Procedures on various areas during PE Audit

Fieldwork: Audi ng Valua ons, Fees, Controls, and Exit Events

Audit Area Audit Objectives Key Audit Procedures Standards/Guidance

Valuation of Ensure fair value • Obtain DCF and comparable company models• IFRS 13, ISA 540
Investments estimates are free Re-perform valuations and test cash flows, (Revised), Ind AS 113
from bias, properly WACC, terminal value
classified, and reflect • Assess Level 3 inputs under IFRS/Ind AS 113
economic substance. • Benchmark against latest funding or industry
multiples
• Engage valuation experts where needed
• Sensitivity testing
• Review management override risk
NAV & Capital Confirm NAV per • Reconcile NAV reports with GL ISA 500, Fund GAAP
Reconciliations unit/share is correctly • Confirm capital contributions and drawdowns (IFRS or Ind AS)
derived from fund • Test investor capital statements• Agree
records and distributions to bank statements and trustee
reconciled with bank confirmations
balances, capital • Review treatment of expenses, redemptions
flows, and investor • Examine intra-period NAV adjustments
movements.
Carried Verify GP • Review LPA for carry structure, hurdle rates, ISA 540, LPA, SEBI AIF
Interest & entitlements are waterfall Circulars
Fees calculated in line with • Re-perform carry calculation
fund documents, IRR • Reconcile management fees with
logic, and catch-up committed/deployed capital
provisions. • Agree to income statements and cash trails
• Assess whether any clawback or unrealized
carry exists\
• Consider consistency across LPs
Related Party Identify conflicts of • Scrutinize minutes, registers, board disclosure ISA 550, Ind AS 24,
Transactions interest or bias due s• Send confirmations to LPs/portfolio IESBA Code
to relationships companies
between GP, LPs, • Evaluate completeness of management’s
portfolio companies, disclosure
or shared • Identify cross-holdings, inter-fund loans, GP
management. control of investees
• Evaluate nature and fairness of fees charged
between related entities
Regulatory Ensure fund • Review SEBI AIF filings and trustee SEBI AIF Regs, FCA
Compliance operations align with certifications Handbook, SEC Form
AIF guidelines, PPM • Test fund limits (e.g., max 25% sectoral cap) ADV
disclosures, and • Ensure expense allocation policies match PPM
local/global • Confirm overseas investment limits & category
regulations. status
• Match AIF type (I/II/III) with investment
behavior and ensure complicane with category
norms
• Validate disclosures required by SEBI, FCA, or
SEC

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Portfolio Where fund controls • Apply cut-off procedures for revenue• Review Ind AS 115, 116, 110,
Company portfolio cos or lease capitalization under Ind AS 116 28; ISA 570
Testing equity accounts • Check going concern plans, cash burn and
them, ensure funding letters
revenue, leases, and • Test FX, consolidation entries, and related
solvency judgments party balances
are accurate. • If significant, perform full audit file review
(consolidation or equity method)
Exit Events Confirm that • Obtain sale agreements, IPO pricing ISA 701, 540; IFRS 15,
gain/loss on exit is documents Ind AS 115
accurate, legally • Trace consideration to fund’s bank accounts
supported, and • Re-perform gain calculations
compliant with fund • Match gain recognition with NAV adjustments
accounting policies. • Evaluate any contingent consideration
• Highlight in KAMs if significant impact on
investor returns
Audit Report & Finalize opinion Draft ISA 700-compliant report ISA 700, 705, 701;
Disclosures based on evidence Include KAMs for major exits, valuations, or SEBI/FCA/SEC rules
obtained; report uncertainty
findings transparently Modify opinion where necessary (ISA 705)
to regulators, • Submit compliance certificate (India) or fund
investors, and filings (UK/US)
governance teams. • Communicate with those charged with
governance under ISA 260
• Ensure full disclosure under Ind AS 107, 109 &
113

1. Valua on of Investments

In PE funds, most investments are in unquoted equity or conver ble instruments. These are Level 3 financial
instruments, where valua on depends en rely on management’s assump ons or external events (e.g., funding
rounds). According to ISA 540 (Revised), the auditor must rigorously challenge assump ons such as revenue
forecasts, terminal growth, EBITDA mul ples, and discount rates.

For example, if a startup is valued at ₹100 Cr based on a DCF model assuming 50% CAGR for 5 years and a 10%
WACC, the auditor must test the forecast against historical data, industry trends, and budget approvals. An
external valua on expert may be needed for biotech, fintech, or distressed assets, where internal models are
specula ve or overly aggressive.

Valua on files should be supported with:

 Board-approved forecasts

 Benchmark mul ples

 Sensi vity analyses

 Documenta on of all changes from prior year valua ons

 Reconcilia ons with audited financials of por olio companies

Auditor focus must include bias indicators, such as unreasonably op mis c projec ons just before carry
becomes payable.

2. NAV and Capital Reconcilia ons

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NAVs drive investor performance and repor ng. Errors in NAV affect IRR calcula ons, distribu ons, and fee
income. The auditor must reconcile NAV per unit/share with fund ledgers, bank statements, and trustee
confirma ons (especially in India, where trustees cer fy NAV).

This includes:

 Matching capital calls with bank credits

 Verifying LP capital accounts

 Tes ng that distribu ons are accounted on an accrual or cash basis as per policy

 Ensuring expenses, valua ons, and FX items are correctly treated

Example: If NAV jumped 20% in Q4 due to a por olio revalua on, the auditor must ensure this was approved,
documented, and communicated properly to LPs.

3. Carried Interest and Fee Tes ng

Auditors must examine the economic rights of GPs based on the LPA or trust deed, par cularly regarding:

 2% management fee on commi ed capital

 20% carry on profits exceeding an 8% IRR

 Catch-up mechanisms and hurdle logic

 Clawback clauses for overpaid carry

Each element must be traced from fund calcula ons to:

 Bank transfers

 Investor statements

 Fund's income statement

 Audit working papers with fee schedule models

Errors or omissions can cause LP disputes and regulatory scru ny. Documenta on should link LPA clauses
directly to journal entries and fee ledgers.

4. Related Par es and Conflict Tes ng

Given the GP o en sits on boards of por olio companies or manages mul ple funds, ISA 550 requires a
proac ve search for related par es. It is not enough to rely on management declara ons.

Procedures include:

 Reviewing board mee ng minutes

 Searching registers for common shareholders/directors

 Confirming transac ons with por olio companies and LPs

 Reviewing expense alloca ons between related funds

Example: A GP charges research costs to Fund I for a company later moved to Fund II. The auditor must assess
if this shi was legi mate, documented, and disclosed.

5. Regulatory Compliance

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Private equity funds are deeply regulated. In India, Category II AIFs must:

 File quarterly reports with SEBI

 Disclose fund expenses and overseas limits

 Follow sectoral caps and investor eligibility criteria

 Obtain trustee sign-off on NAVs and financials

Auditors must:

 Verify PPM adherence

 Inspect regulatory filings

 Check whether unauthorised structures (like side-pocke ng or leverage) exist

In UK and US, AIFMD (UK) and Form ADV (US) require:

 Periodic disclosures

 Depositary reports

 Detailed fee and performance breakdowns

Failure in regulatory compliance may lead to modified opinions or regulatory sanc ons.

6. Por olio-Level Audit Tes ng

For controlled or consolidated por olio companies, the auditor may need to:

 Perform full-scope audits or reviews

 Test IFRS 15/Ind AS 115 revenue recogni on

 Validate Ind AS 116 leases and ROU assets

 Review cash flows for going concern (ISA 570)

 Evaluate equity method entries under Ind AS 28

Example: An auditor finds that a por olio company recognizes annual subscrip ons upfront. This violates
revenue principles. The error must be corrected and NAV adjusted accordingly.

7. Exit Events and Gain Recogni on

Auditors must:

 Examine SPAs, public filings, and payment confirma ons

 Match sale proceeds with NAV revalua on

 Ensure proper ming (de-recogni on only when control passes)

 Disclose gains/losses and any carry arising

 Highlight exit risk as a Key Audit Ma er (ISA 701) if material

Example: A ₹300 Cr IPO occurs post-year-end but was priced before 31 Dec. If shares were s ll held on 31 Dec,
auditors must ensure IFRS 13 fair value incorporates exit price without premature gain booking.

Audit Repor ng
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Auditors must:

 Form an opinion based on sufficient and appropriate audit evidence

 Consider material misstatements or lack of evidence

 Include Key Audit Ma ers (KAMs) for significant judgment areas (e.g., valua on, exits)

 Clearly state the basis of opinion and management’s responsibility

 File any required reports with SEBI, FCA, or SEC, as applicable

When to Modify the Opinion

Qualified Opinion (Material but Not Pervasive Misstatements) Scenario:

In cases where a specific area of the financial statements contains a material misstatement, but this does not
affect the financial statements as a whole, a Qualified Opinion is appropriate under ISA 705 (Revised). A
common example in PE audits involves valua on disagreements.

Consider the case of a PE fund that has invested ₹100 crore in a health-tech startup named Greentech Pvt Ltd.
The fund’s management marks the fair value of this investment at ₹180 crore, claiming jus fica on based on a
recent non-binding term sheet from a poten al Series C investor. Upon detailed examina on, the auditor
iden fies that the term sheet lacks enforceability, is con ngent upon mul ple condi ons (including regulatory
approval and market milestones), and no independent valua on has been obtained to support this upli .
Further, the management’s DCF model assumes an unrealis c 60% CAGR for five years, with revenue doubling
year-on-year, unsupported by historical or industry data.

The auditor applies ISA 540 (Revised) and challenges the valua on methodology, forecast assump ons, and
absence of third-party benchmarking. Despite these findings, the fund’s management refuses to revise the NAV
or adjust the valua on input. Since the valua on of this single investment materially impacts NAV, especially in
a concentrated por olio, but does not distort the en re fund’s financial statements, the misstatement is
deemed material but not pervasive.

As a result, the auditor issues a Qualified Opinion, sta ng in the Basis for Qualified Opinion paragraph:
"Except for the valua on of unlisted equity in Greentech Pvt Ltd, which we believe is overstated due to
unsupported assump ons and absence of reliable external evidence, the financial statements present a true
and fair view."

In compliance with ISA 701, a Key Audit Ma er (KAM) is also disclosed, tled "Valua on of Level 3 Investments
in Greentech Pvt Ltd", describing the high degree of judgment, reliance on internal models, and the audit
procedures undertaken.

B. Adverse Opinion (Material and Pervasive Misstatements)

Adverse Opinion (Material and Pervasive Misstatements)

An Adverse Opinion is issued when the auditor iden fies material misstatements that are so pervasive that
the financial statements as a whole are misleading or unreliable. This o en arises in PE audits when there is a
systemic failure of governance, undisclosed conflicts of interest, or accoun ng treatment viola ons affec ng
mul ple components of the financials.

For instance, imagine a fund managed by a GP who holds significant influence across mul ple investee
companies. The GP engages in numerous related-party transac ons that remain undisclosed in the financial
statements, in direct viola on of Ind AS 24 and ISA/SA 550. The auditor also discovers that the fund has
improperly allocated expenses such as due diligence costs and legal fees between different funds managed by
the same GP, in a way that inflates the performance of one fund (the one being audited). Moreover, the NAV

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has been significantly overstated, triggered by premature revenue recogni on from unrealised exits, designed
to create the appearance of mee ng hurdle rates for carried interest.

These misstatements are both material and pervasive, affec ng not only the accuracy of the NAV, but also
management fees, investor repor ng, and fund-level disclosures. The auditor's repeated communica on with
management and governance bodies under ISA/SA 260 results in no correc ve ac on or disclosure. The audit
team concludes that the financial statements as a whole do not represent a true and fair view of the fund’s
financial posi on and performance.

Accordingly, the auditor issues an Adverse Opinion, sta ng in the Basis for Adverse Opinion paragraph:
"The financial statements do not present a true and fair view due to pervasive misstatements in related party
disclosures, improper alloca on of expenses, and inaccurate valua on of por olio investments."

Addi onally, a Key Audit Ma er is disclosed under ISA/SA 701, tled "Conflicts of Interest and Related Party
Omissions", and the ma er is escalated to SEBI (in India) due to viola ons of the AIF Regula ons, which
require accurate disclosure of por olio composi on, NAV methodology, and conflict mi ga on prac ces. This
could lead to regulatory inquiry or suspension of the fund’s future capital raise.

C. Disclaimer of Opinion (Material and Pervasive Limita on on Scope)

A Disclaimer of Opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence and
concludes that the possible effects of undetected misstatements could be both material and pervasive. This
typically arises in cross-border AIFs or trust structures involving SPVs, where audit access is restricted, or
confiden ality clauses prevent informa on sharing.

Imagine a situa on where a foreign PE fund registered in Mauri us, inves ng into Indian start-ups through
layered SPVs, denies the auditor access to:

 The financials of underlying por olio companies

 Trustee confirma ons on NAV approvals

 Valua on models and fair value workings, ci ng confiden ality obliga ons and internal policy
restric ons

Despite mul ple requests and wri en queries under ISA 500, the fund manager fails to provide access or
sa sfactory alterna ve procedures. The auditor cannot validate investment valua ons, capital movements, or
even basic cash reconcilia ons. This cons tutes a limita on on the scope of the audit, which is so severe and
pervasive that the auditor is unable to form an opinion at all.

In this case, the auditor issues a Disclaimer of Opinion, with the Basis for Disclaimer sta ng:
"We do not express an opinion on the accompanying financial statements because we were unable to obtain
sufficient appropriate audit evidence about the valua on of investments, fund-level NAV reconcilia ons, and
trustee confirma ons. Consequently, we could not determine whether any adjustments might have been
necessary."

In such a case, ISA/SA 705requires the auditor to clearly explain the limita on. Addi onally, under Indian
regulatory requirements, SEBI and the fund’s trustees must be informed immediately, and LPs must receive
transparent communica on. In interna onal jurisdic ons like the UK or US, this situa on may warrant a Form
ADV disclosure (SEC) or an FCA supervisory report, depending on whether the fund is registered as an AIFM.

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Chapter 6: An cipa ng Challenges and Applying Professional Skep cism in PE Audits

Private equity audits are uniquely challenging due to the non-standardised nature of fund structures, complex
valua on methodologies, significant es ma on uncertainty, and the inherent risk of conflicts of interest
between fund managers (GPs), investors (LPs), and por olio companies. As a result, the exercise of
professional skep cism is not merely recommended—it is essen al. Auditors must maintain an inquisi ve
mindset, ques on management asser ons, and verify assump ons with third-party data where possible.

Understanding Professional Skep cism in PE Context

Professional skep cism, as defined in ISA/SA 200, is an a tude that includes a ques oning mind, being alert
to condi ons which may indicate possible misstatement, and a cri cal assessment of audit evidence. In PE
audits, this mindset is par cularly important when dealing with Level 3 fair value measurements, related party
transac ons, and highly con ngent exit events (such as IPOs or trade sales).

Common PE-Specific Challenges and the Scep cal Auditor’s Response

Challenge Procedure
Optimistic valuation assumptions (e.g., 60% Compare assumptions with prior forecasts, industry averages,
CAGR, low discount rate) or analyst benchmarks; engage external valuation expert

GP fees and carried interest triggered near Trace timing of valuations and exits; verify if performance
year-end hurdles truly met or manipulated
Circular related party structures Extract complete ownership charts, minutes, and confirm
entities with common control; demand independent
confirmations
Restricted access to investee financials or Escalate via ISA 260 to governance; perform alternative
trust confirmations procedures; consider scope limitation under ISA 705
Exit proceeds recognised before lock-in ends Examine SPAs for lock-in clauses; check post-year-end events
and compare NAV impacts
Significant year-on-year valuation swings Validate by checking funding rounds, external valuations,
sensitivity testing, and recalculation of terminal multiples

Scenario: Discount Rate Bias

Example:
A PE fund holds a 30% stake in a fintech startup. In the prior year, the investment was valued at ₹100 Cr using a
DCF model with a discount rate of 17%. In the current year, despite worsening macroeconomic condi ons and
lower revenue visibility, management uses a discount rate of 11%, resul ng in a valua on increase to ₹145 Cr.

Auditor Ac on:
A scep cal auditor applies ISA 540 (Revised) and inves gates the basis of change. Upon review:

 No updated external market data supports this reduc on in discount rate

 Risk-free rates and sector-specific beta have remained the same or increased

 No significant de-risking of the startup’s opera ons is evident

The auditor challenges the assump on, documents inconsistencies, and escalates concerns under ISA/SA 260
to the fund’s audit commi ee. The change is flagged as a significant risk of material misstatement. If
management refuses to adjust, this may become the basis for a qualified opinion (ISA/SA 705) and a Key Audit
Ma er (ISA 701).

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Complex Related Party Networks

In PE structures, par cularly in India where GP families o en manage mul ple AIFs, iden fying related par es
can be difficult. An auditor may uncover that:

 Por olio company directors are related to the GP’s managing partners

 Inter-fund loans are used to inflate NAV or temporarily bridge cash shor alls

 Fund expense alloca ons between sister funds are undocumented or biased

Professional skep cism requires the to dig beyond basic disclosures, review board minutes, inspect
shareholder registers, and even consult ROC filings to understand linkages. Under ISA/SA 550, these must be
disclosed accurately and may require modified opinions if material and undisclosed.

Exit Manipula ons and Carried Interest Triggers

Another recurring issue in PE audits involves exit events being med or misrepresented to trigger carried
interest. For example, a par al sale of a por olio company to a related party may be used to create a no onal
gain and recognize carry, even though the transac on is unrealised or reversed post-year-end.

Audit procedures

Review SPAs, shareholder agreements, and distribu on models

 Assess whether exit proceeds were actually received (bank statements, SWIFT confirma ons)

 Check that waterfall logic aligns with the LPA and that fees were not over-recognised

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Chapter 7. Documenta on and Repor ng: The Trail to Assurance

Effec ve audit documenta on is the backbone of audit quality and defensibility, especially in private equity
(PE) audits where judgments, assump ons, and regulatory obliga ons intersect. As per ISA/SA 230, all audit
procedures, evidence gathered, decisions taken, and conclusions formed must be recorded in a manner that
allows for another experienced auditor to understand the basis for the audit opinion.

Given the valua on-heavy, regulatory-sensi ve, and high-risk nature of PE audits, documenta on must go
beyond standard checklists. It must demonstrate how risks were assessed (ISA/SA 315), how audit procedures
were designed and performed (ISA/SA 330), how es mates were evaluated (ISA/SA 540), and how the final
repor ng decision was jus fied (ISA/SA 700/701/705).

Example: Documenta on Trail for a Valua on-Based KAM

A PE fund records a ₹150 Cr fair value for a SaaS startup. The auditor, skep cal of management’s internal DCF,
involves an external valua on expert. The documenta on includes:

 Original DCF with assump ons (11% discount rate, ₹80 Cr terminal value)

 External expert’s independent model showing ₹110 Cr valua on

 Emails with management discussing forecast realism

 ISA 540 checklist showing comparison of prior period es mates

 Working paper linking this to a KAM disclosure under ISA 701

 Final audit report with Qualified Opinion, referencing the unsupported upli

Key Audit Documenta on Components

Audit Area Documentation Requirements

Valuation Workpapers DCF/market multiple models, sensitivity analysis, source data
validation, management assumptions vs. benchmarks
Fund Flow and Capital Recons Reconciliation of committed capital, NAV per share, capital
calls, distributions, fee calculations
Related Party Confirmations Ownership structures, board minutes, GP-LP connections,
independent confirmations
Exit Documentation Sale deeds, SPAs, board approval, exit waterfall workings, IPO
confirmation, regulatory disclosures
External Expert Reports Expert qualifications, scope, findings, auditor’s assessment of
competence, integration with audit evidence
KAM Determination Memos Judgment logs, risk scoring, partner-level signoffs, rationale for
inclusion or exclusion of Key Audit Matters
India-Specific Regulatory Repor ng

Under SEBI’s AIF Regula ons, a er PE Audit, firm must:

 Submit an Annual Compliance Cer ficate to SEBI and Trustees within 180 days of year-end

 Cer fy compliance with:

 Private Placement Memorandum (PPM) terms

 Investment concentra on norms

 Valua on guidelines and fee disclosures

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 Transparency in investee financials

Failure to file this cer ficate or disclose material non-compliance can trigger SEBI inves ga ons and impact the
fund’s ability to raise further capital.

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Chapter 8: Alignment with ACCA Exams & PER Private Equity Audits in ACCA Journey

Audit & Assurance (AA and AAA

PE audit work directly brings to life the standards and concepts taught in AA and especially in AAA (Advanced
Audit & Assurance). In these papers, you deal with:

Topic in Exam How PE Audit Applies Practically Standard(s) Involved

Audit risk identification Evaluating risks in valuation, related party ISA 315, 330
transactions, fee allocation, and regulatory non-
compliance
Accounting estimates Testing Level 3 inputs in DCF models, challenge of ISA 540 (Revised)
management bias
Use of experts Engaging valuation professionals; assessing their ISA 620
competence and objectivity
Group audits / complex Consolidation of portfolio entities or special purpose ISA 600; IFRS 10
structures vehicles (SPVs)
Key Audit Matters (KAMs) Determining whether valuation or IPO exit timing ISA 701
qualifies as a KAM
Audit opinions (modified) Drafting qualified, adverse or disclaimer opinions for ISA 700–705
PE misstatements or scope limitations
Ethical threats in advisory Dealing with self-interest and familiarity threat when IESBA Code (Part 4A –
roles the firm advises the same fund it audits Sec 290, 600)
Reporting to governance Communicating concerns to trustees and fund ISA 260
controllers

Strategic Business Repor ng (SBR)

PE audits involve complex financial repor ng judgments and applica on of mul ple global standards, relevant
to the SBR exam, including:

IFRS / Ind AS Standard How It’s used in PE Audit

IFRS 13 / Ind AS 113 Determining fair value of unlisted investments, use of market
inputs, and disclosure of valuation hierarchy
IFRS 10 / Ind AS 110 Evaluating control over portfolio companies – whether the PE
fund consolidates or equity accounts its investments
IFRS 9 / Ind AS 109 Classifying and measuring financial instruments, recognition of
impairments
IFRS 15 / Ind AS 115 Reviewing revenue recognition in portfolio companies (e.g., SaaS
or subscription-based start-ups)
IFRS 7 / Ind AS 107 Disclosing financial risks, fair value techniques, and sensitivity
analyses in the fund’s financial statements
IAS 24 / Ind AS 24 Disclosures of related party dealings, GP-LP arrangements, and
conflicts of interest

Financial Management (FM) & Advanced Financial Management (AFM)

Understanding valua on models, IRR, exit events, and capital structuring in PE is a cri cal crossover with
FM/AFM:

Exam Topic How It Links to PE Audit

Net Present
PE valuations often use discounted cash flows (DCF) to estimate fair value
Value (NPV)
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Internal Rate
Assessing investor returns from exits; validating hurdle rates or carried interest triggers
of Return (IRR)

Financing
Use of preference shares, convertible debt, and equity-like instruments in deal structures
instruments
Valuation
Comparable company analysis (multiples), precedent transactions, market-based inputs
methods
Corporate
Exit events (IPOs, buyouts, secondaries), spin-offs, and recapitalization
restructuring

PER Objec ve-Wise Mapping Table: Private Equity Audit

PER Objective How PE Audit Work Examples of Work How to Document in

Meets the Objective Performed MyExperience (ACCA Portal)
1. Demonstrate the PE audits involve - Identified self-interest “I assessed threats to audit
application of independence threats due and familiarity threat in independence due to overlapping
professional ethics, to GP relationships, recurring valuation advisory roles. I applied the IESBA
values and judgment related party circularity, engagement- Applied Code to identify familiarity risk and
fee dependency, and firm rotation for senior recommended rotation of the
valuation bias. You must staff- Refused advisory engagement partner. I documented
apply ethical reasoning role on valuation model ethical safeguards and
under the IESBA Code (Sec for audit client communicated the same to
290, 600) to assess governance.”
safeguards.
2. Stakeholder PE audit requires active - Conducted valuation “I managed stakeholder
relationship engagement with fund discussions with CFO and communication with GPs and the
management controllers, GPs, valuation GP- Coordinated trustee board. I explained audit
experts, and trustees. information gathering findings related to overstatement of
Strong communication is from portfolio company NAV and supported my conclusion
critical to address audit auditors- Presented using ISA 260 guidance.”
issues (e.g., valuation findings to audit
disagreements or committee under ISA 260
incomplete disclosures).
3. Strategy and Understanding how PE - Reviewed “I evaluated how the exit strategy
innovation funds create value management’s IPO exit (via IPO) impacted the valuation
through exits, plan for one startup- assumptions in a DCF. I considered
restructuring, and Evaluated reasonableness whether the claimed CAGR and
performance fees helps of strategy-based discount rates were aligned with
you align audit procedures revenue growth in DCF- actual strategy execution.”
with business risk. You Analysed PE performance
gain exposure to deal hurdles and fee design
strategies, exit pipelines,
and value-creation
assumptions.
6. Record and analyse Fund capital calls, - Verified fund cash “I recorded and analysed
transactions management fees, carried inflows and capital call transactions related to capital
interest, and distributions notices- Reconciled commitments, cash calls, and fee
need detailed audit carried interest against allocations. I ensured that carried
testing and reconciliation. waterfall logic in LPA- interest calculations complied with
You test journal entries, Tested management fee the distribution waterfall defined in
ledger integrity, and allocation across LPs the LPA.”
contractual consistency
(LPA terms).

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8. Evaluate financial You assess how portfolio - Analysed EBITDA “I evaluated financial performance
performance performance affects NAV, multiples used for of portfolio companies to test
fair value gains, and comparable valuation- reasonableness of forecast inputs in
carried interest Evaluated SaaS KPI trends the DCF valuation model. I used
recognition. You examine to challenge revenue external market data and prior
forecasts, KPIs, and assumptions- period comparisons to challenge
compare them to past Benchmarked forecasted revenue assumptions.”
results and benchmarks. margins against sector
reports
10. Audit and Core experience: risk - Designed audit program I performed PE fund audits involving
assurance identification, substantive for valuation and fee ISA 540 valuation testing, ISA 550
procedures, estimate testing- Assessed related party disclosures, and ISA
testing, ISA application, materiality using NAV and 701 KAM identification. I also
and audit reporting. You investor thresholds- applied ISA 705 in drafting a
gain strong exposure to Drafted modified opinion qualified opinion due to valuation
ISA 315, 540, 550, 701, and KAM due to overstatement.
and 705. unsupported valuation
11. Governance, risk You evaluate fund-level - Tested control over NAV “I evaluated governance and
and internal control controls over valuation, preparation and review- control mechanisms for valuation
NAV calculations, and Identified gaps in related oversight and compliance
compliance tracking. You party transaction logs- monitoring in a PE fund. I identified
also assess portfolio-level Reviewed SEBI control deficiencies in related party
controls such as revenue compliance monitoring tracking and documented it for
and cost recognition. system of AIF management letter.”

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Chapter 9: Case Study

Sona Capital LLP is a Category II Alterna ve Investment Fund (AIF) registered with SEBI. It manages ₹200 crore
raised from ins tu onal and high-net-worth investors. The fund holds minority and significant stakes in high-
growth Indian start-ups including TechNext Pvt Ltd (a health-tech AI firm) and FastWheel Pvt Ltd (an electric
vehicle start-up preparing for global expansion).

The audit covered both fund-level and por olio-level financials for the year ended 31 March 2025, focusing on
valua on risk, carried interest accuracy, related party transparency, and regulatory compliance.

Step 1 here would be as auditors we should obtain Understanding Fund Structure & Agreements

As earlier understood, possible documents to be reviewed Private Placement Memorandum (PPM), Limited
Partnership Agreement (LPA), Subscrip on agreements and SEBI AIF Registra on Cer ficate. This will help us to
understand the Fund category, applicable laws and condi ons and we need to confirm fee and carry
arrangements: 2% annual management fee on commi ed capital 20% carried interest post a 10% hurdle rate.
Review fund strategy to confirm compliance with investment restric ons (e.g., no leverage, no exposure over
25% in a single investee)

Step 2 is Valua on Tes ng of TechNext Pvt Ltd

Sona held a ₹40 crore stake in TechNext, marked at ₹68 crore as of year-end. The fund jus fied this using a
Discounted Cash Flow (DCF) model, projec ng significant growth due to expected regulatory tailwinds in AI-
based health diagnos cs.

Step Audit Action

Forecast Testing Verify assumptions: ₹20 Cr revenue in FY26, 55% gross margin, 40% CAGR—tested
against industry trends and board-approved budgets.

Discount Rate Audited 11.5% WACC used benchmarked against sector risk premiums and cost of
capital models.
Sensitivity Analysis Run scenarios adjusting revenue growth down by 10%, showing NAV would drop
₹8–10 Cr.
Funding Round Comparison Compare current valuation to last equity round (₹60 Cr valuation) raised 7 months
ago.
Expert Input Involve external valuation specialist to independently test assumptions and cross-
check model logic.

Fair value deemed acceptable under Ind AS 113 (Level 3 hierarchy), but flagged as Key Audit Ma er due to
es ma on uncertainty and market vola lity in the AI sector.

Step 3: Carried Interest and Distribu on Tes ng – Fast Wheel IPO

FastWheel Pvt Ltd underwent a par al exit through IPO, where the fund realized ₹30 crore in cash proceeds.
The audit team had to validate if carried interest and distribu ons were accurately calculated and fairly
disclosed.

Check Point Audit Steps

IPO Exit Proceeds Verify ₹30 Cr receipt through bank statements and demat
statements.
Carry Trigger Assessment Review if post-hurdle gains justified carry: Total NAV appreciation
exceeded hurdle by ₹6.5 Cr.
Carry Calculation Recalculate 20% carry = ₹1.3 Cr; matched with income statement
and cash movement.

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Waterfall Distribution Test Trace distribution waterfall per LPA: preferred return → catch-up →
GP carry.
KAM Disclosure Note IPO pricing volatility , exit gain recorded under fair value
estimate, flagged under ISA 701.

Emphasis-of-ma er paragraph included: highlighted that fair value was based on provisional IPO price band
subject to lock-in.

Step 4: Compliance Review – SEBI & Cross-Border Exposure in Fund

The fund had made minor investments (approx. ₹6 crore) in a Singapore-based ed-tech company through SPV.

Confirm that fund had board approval and disclosures under SEBI Circulars on overseas investment. Review
AIF's quarterly report filings submi ed to SEB. Verify PPM clauses allowing foreign exposure under prescribed
limits (not exceeding 25% of corpus)

Step 5 Check Related Party aspects and Governance Evalua on

Given the GP (General Partner) also managed two other AIFs, there was poten al for related-party conflict

In this case, we will ini ally verify the any monetary transfers between the group. Examined board minutes,
shareholding registers, and management representa ons to understand that any transfers made was approved
also Cross-check that Fast Wheel was not held by mul ple funds or used for performance arbitrage. Also
Reviewed disclosures under Ind AS 24/IAS 24 for related party transparency

Step 6: Final Opinion and Repor ng

Area Conclusion
Opinion Type Unmodified

1. Valuation of TechNext (DCF estimates and sensitivity) 2. IPO exit of

Key Audit Matters (KAMs)
FastWheel (pricing uncertainty)

Caution around market-based valuation of FastWheel (lock-in not

Emphasis of Matter
expired at balance sheet date)
Advised improving investor communication trail for fee allocation
Internal Control Comments
disclosures

Issued compliance certification confirming adherence to AIF norms,

SEBI Compliance Certificate
investment restrictions, and disclosure policies

Once substan ve tes ng was complete and significant risks are addressed, the final phase involves forming the
audit opinion and compiling the required disclosures under applicable audit and regulatory frameworks. This
phase demands a high degree of professional judgment, technical ar cula on, and transparency with
stakeholders, par cularly because the fund dealt with Level 3 investments and complex exit events.

Based on the audit case the engagement partner concluded that the financial statements of Sona Capital LLP
presented a true and fair view in accordance with Ind AS/IAS. No material misstatements or pervasive issues
were iden fied that warranted a modified opinion. Hence, an Unmodified (Clean) Audit Opinion is issued
under ISA 700.

However, because of the valua on uncertainty around TechNext Pvt Ltd and the exit pricing sensi vity around
FastWheel’s IPO, the audit report included a Key Audit Ma ers (KAMs)

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Two areas were determined to be of most significance in the audit and were communicated to those charged
with governance (i.e., the board of trustees):

1. Valua on of Unlisted Investment in TechNext Pvt Ltd

 The DCF valua on involved assump ons around 40%+ CAGR and EBITDA margins that were
yet to be historically achieved.

 Sensi vity analysis showed a ₹10 Cr swing in NAV for slight changes in growth rates.

 Due to the high judgment involved, this was reported as a KAM.

 The auditor described how valua on experts were used, how assump ons were challenged,
and what procedures were performed.

2. Recogni on of Gains on FastWheel Exit

 While the exit proceeds were received, the pricing was s ll under lock-in and based on an
IPO that closed just before year-end.

 The gain was material and triggered carried interest distribu ons.

 This was reported as a KAM because of the complexity in recognizing exit ming and its
impact on NAV and fees.

Emphasis of Ma er would be also included sta ng that No misstatement existed, but a en on to the fact
that:"The valua on of FastWheel Pvt Ltd is based on IPO pricing that remains subject to regulatory lock-in and
vola lity in secondary trading post year-end." EOMP was included

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Chapter 10: Final Thoughts

Audi ng Private Equity (PE) is unlike tradi onal corporate audits. It stretches an our skillset beyond cking
checklists and reviewing ledgers it requires ac ve engagement with complex valua on models, mul -layered
fund structures, and unregulated or loosely regulated en es. In PE, assets are not marked to invoices but to
judgment-heavy es mates, projec ons, and management asser ons. The auditor’s role evolves from verifier to
challenger ques oning fair value assump ons, carry logic, and governance prac ces with precision and
scep cism. Whether audi ng a DCF based on high CAGR claims or tes ng a carried interest calcula on linked to
opaque waterfalls, each audit test becomes a judgment call anchored in ISA 540 and IFRS 13.

From a learning perspec ve, PE audits give an excep onally rich exposure to real-world financial structuring.
You gain hands-on understanding of how NAV is built, how investor returns are modelled, and how fund
economics influence repor ng. This offers direct applicability to ACCA papers like Audit & Assurance (AA/AAA),
where es ma on, ethics, and KAMs come alive through live tes ng of assump ons; and to Strategic Business
Repor ng (SBR), where fair value measurement, financial instrument disclosures, and consolida on. Even FM
and AFM become prac cally relevant when evalua ng IRRs, hurdle rates, or exit gains. Working on a PE audit
sharpens both technical and commercial awareness, two traits cri cal in advanced ACCA roles.

The professional value of PE audit experience is also immense. Having exposure to AIFs, GP-LP models, and
fund flows sends a strong signal to future employers that you’ve operated in high-judgment, high-risk
environments. It demonstrates your ability to work around incomplete data, deal with powerful stakeholders
(like fund managers and trustees), and issue opinions that may materially affect investor confidence or
regulatory filings. It shows you’ve dealt with ISA 260 governance communica on, understood IESBA ethical
safeguards, and held your ground when professional independence was tested all of which highlight maturity
and accountability beyond your year

In career terms, private equity audit opens doors to roles in transac on advisory, due diligence, fund
accoun ng, M&A assurance, valua on services, and even por olio CFO tracks. It builds credibility in fast-
growing areas like venture capital audit, ESG fund assurance, and cross-border SPV audi ng. For ACCA
students, ar cula ng this experience in PER linking it to ethics, audit risk, valua on methodology, and
governance controls can be a game-changer. It reflects not only technical capability but also readiness to work
in financial environments that shape investment decisions. In short, private equity audit is not just a niche it’s
a proving ground for tomorrow’s trusted financial professionals.

Keep leading, keep building

Team THEACCASIST, always forward.
 THEACCASIST
PRIVATE EQUITY AUDIT GUIDE
Conclusion

Private Equity Audit is more than a specialist branch of assurance it is a fron er where valua on complexity,
regulatory sensi vity, and professional judgment converge. Unlike conven onal audits that focus on historical
cost and recurring transac ons, PE audits demand an understanding of unobservable inputs, strategic exit
structures, and fund governance ecosystems. Whether you're audi ng a startup valued on future projec ons or
naviga ng inter-fund related party webs, your role as an auditor becomes deeply analy cal, risk-driven, and
ethically rooted.

This guide was created not just to provide a technical walkthrough, but to help ACCA students and
professionals see the real-world depth of what private equity audi ng involves. From applying ISA 540 to
engaging with SEBI AIF compliance, from recalcula ng carried interest waterfalls to challenging valua on
op mism, the work involved in a PE audit mirrors the complexi es of high-stakes financial decision-making. It
equips auditors with tools that go beyond checklists fostering the kind of sharpness needed for advisory,
repor ng leadership, and investor-facing roles.

For ACCA candidates, Private Equity audits offer a unique pla orm to apply syllabus content in a meaningful,
integrated way. Topics from AA, SBR, FM, and even Ethics and Professional Skills come alive in prac cal
scenarios involving fair value, revenue, independence, and es ma on uncertainty. Logging such experiences in
your PER helps build a record of competence that reflects depth, commercial awareness, and credibility with
global employers.

Ul mately, audi ng PE funds prepares you not just for exams or qualifica ons, but for thinking like a
professional who audits judgment not just numbers. If you approach it with scep cism, technical rigour, and
clear documenta on, PE audit becomes not just a challenge, but a career accelerator. We hope this guide offers
the structure, examples, and clarity to navigate your journey into one of the most intellectually demanding and
rewarding areas of audit prac ce.

Reviews & Reader Reflec ons:

If you’ve found value in this guide whether you’re a student preparing for AA, an ACCA member gaining
experience, or a firm exploring audit best prac ces we’d love to hear from you.

Your feedback helps us grow this movement of experience-based ACCA learning.

If something in this guide helped clarify your concepts, deepen your professional thinking, or inspired new
ques ons reach out, and let’s talk.

Confident in Your Audit Ability? Join Us.

Whether you're just star ng your PER journey or already managing audits across sectors, THEACCASIST is
building a network of professionals who believe in integrity, clarity, and real audit excellence.

Are you an ACCA student looking for structured mentorship?

Do you want to publish with us, co-author guides, or contribute prac cal cases?
Are you confident in your understanding of Audit & Assurance, SBR, or FM/AFM?

With purpose and precision,

Ajay Sharma & Sandarabh
Founders, THEACCASIST

Connect with THEACCASIST

Email: [email protected]
Instagram: @theaccasist
Keep leading, keep building
Team THEACCASIST, always forward.