Audit Readiness Before a Fundraise or SME IPO
Audit readiness for a fundraise or SME IPO: restated financials, a peer-reviewed auditor, Ind AS vs Indian GAAP, internal controls and related-party cleanup.
An outside investor or an SME IPO merchant banker reads a company's financial statements far more closely than a routine annual audit does, and over a longer window. Restated financials, the auditor's own standing, the accounting framework used and the state of related-party records all come under direct question in a way they rarely do in a normal filing year.
This guide sets out the five areas that most often decide whether an audit file is actually ready for a fundraise or an SME IPO: restated financial statements, the peer-review status of the auditor who will sign the offer document, the Ind AS versus Indian GAAP question, internal financial controls, and related-party and old compliance cleanup.
Restated financial statements
An offer document or an investor data room typically asks for restated financial statements covering the last three financial years, and sometimes a stub period closer to the transaction date. Restating means more than relabelling old accounts: every year in the set is adjusted to one consistent set of accounting policies, so a change in revenue recognition or depreciation policy part-way through the period does not leave the three years looking inconsistent.
The auditor who signs the restated financials - usually the company's own statutory auditor, examining the full period - needs to have been engaged on terms that make this possible well before the transaction timeline gets tight. Leaving restatement to the last few weeks before a DRHP filing is one of the most common causes of delay.
The auditor needs a valid peer review certificate
SEBI's SME IPO framework requires the auditor who signs the restated financial statements in the offer document to hold a valid peer review certificate issued under the ICAI's Peer Review framework. Not every practising chartered accountant holds one, since peer review is itself a separate process of being examined by another qualified reviewer.
If the company's existing auditor is not peer-reviewed, the time to find that out is well before the IPO process begins, not when the merchant banker asks for the certificate. Changing a statutory auditor follows the normal Companies Act process - a board and, where required, a special resolution - so it needs lead time of its own.
Ind AS or Indian GAAP
Whether a company must apply Indian Accounting Standards (Ind AS) rather than the older Indian GAAP (Accounting Standards under the Companies (Accounting Standards) Rules) is decided by the mandatory-applicability thresholds in the Companies (Indian Accounting Standards) Rules, 2015, broadly tied to net worth - for an unlisted company, a net worth of Rs 250 crore or more brings mandatory Ind AS applicability. This is a company-law question independent of any IPO, and it does not change just because a fundraise is being planned.
A company already below the Ind AS threshold can still choose to adopt it voluntarily, which some do ahead of a listing to avoid a conversion exercise later. The decision is worth making deliberately and early, since switching frameworks partway through a restatement period adds real work.
Internal financial controls
Section 143(3)(i) of the Companies Act requires the statutory auditor to report on the adequacy of the company's internal financial controls over financial reporting. Certain smaller private companies are exempted from this specific reporting requirement below prescribed turnover and borrowing levels set out in the exemption notification, but a company growing toward a fundraise or a listing typically outgrows that exemption well before the transaction itself.
Where the exemption no longer applies, the company needs documented controls - approval matrices, reconciliation procedures, access controls over accounting systems - and not just controls that work in practice but controls that are written down and tested, since the auditor reports specifically on the documented and tested framework.
Related-party transactions and old gaps
Related-party transactions draw particular attention in any due diligence, because they are where a reviewer looks for value leaking out of the company before new investors come in. Every related-party transaction across the restated period needs the board or shareholder approval the Companies Act required at the time, pricing evidence showing the terms were on an arm's length basis, and consistent disclosure across all the years being restated.
Alongside that, it is worth building a simple register of every ROC filing and tax position still open or under question - a form filed late in an earlier year, a notice replied to but not formally closed, a capital history that does not fully reconcile to the current MGT-7 register of members. None of these necessarily stop a transaction, but an open item found by the company first is a very different conversation from the same item found by a merchant banker or an investor's counsel.
Frequently asked questions
How many years of restated financials does an SME IPO usually need?
The restated set typically covers the last three completed financial years, sometimes with a more recent stub period depending on how far the transaction date sits from the last year end. The merchant banker confirms the exact period for a specific filing.
Does a company need Ind AS just because it is doing an SME IPO?
Not automatically. Ind AS applicability is decided by the Companies (Indian Accounting Standards) Rules, 2015 thresholds, mainly net worth, independent of any IPO. A company below the threshold can stay on Indian GAAP for the IPO unless it chooses to adopt Ind AS voluntarily.
What if our current auditor is not peer-reviewed?
Raise it early. Either the existing auditor completes the ICAI peer review process in time, or the company appoints a peer-reviewed auditor through the normal Companies Act appointment process, with enough lead time before the restated financials need to be signed.
How far back do related-party transactions get checked?
Generally across the whole restated period under review, not just the most recent year, since the restated financials present all those years together in the offer document.
Related guides
- Virtual CFO support for SME IPO readiness
- SME IPO: the complete guide
- Statutory audit of a private limited company
- Audit and assurance services
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Chartered Accountant and Managing Partner at DRSPV & Associates (est. 2023), an ICAI-registered firm that has advised 500+ businesses across India, UAE, the US and UK. IBBI Registered Valuer and DISA (ICAI) certified. Writes on SME & mainboard IPO, fundraising and cross-border structuring.