Is Your Financial System Audit-Ready? A Quick Checklist

Is Your Financial System Audit-Ready? A Quick Checklist

By a Cannabis CPA Who Knows What Regulators Look For

In the cannabis industry, being audit-ready isn't optional—it's essential. Whether you're applying for a license, preparing for a state inspection, or trying to attract investors, your financial system must stand up to scrutiny.

And let’s be honest: with constant changes in regulations, strict state compliance requirements, and the ever-looming IRS (hello, 280E!), cannabis businesses are under a bigger microscope than most industries.

So how do you know if your financial house is in order?

Here’s a quick audit-readiness checklist to help you evaluate your current systems—before an auditor, regulator, or potential investor does it for you.

✅ 1. Are You Using Cannabis-Compliant Accounting Software?

Why It Matters:
Generic accounting platforms (like basic QuickBooks setups) often fail to support cannabis-specific needs like seed-to-sale reconciliation, proper cost accounting under 280E, or inventory tracking required by state regulators.

What to Look For:

• Integrations with METRC, Biotrack, or other seed-to-sale software
• Audit trails and user access logs
• Support for class/department tracking by license type (cultivation, manufacturing, retail)

Pro Tip:
If you’re running multiple license types, your software should support segment reporting—not just a single P&L.

✅ 2. Do You Have Clean, Segregated Chart of Accounts?

Why It Matters:
A messy chart of accounts can bury critical tax data, make compliance harder, and increase your audit risk. Worse, it may lead to incorrect 280E calculations.

What to Look For:

• Separate cost centers for each license/entity
• Dedicated accounts for 280E vs. deductible expenses (e.g., COGS vs. SG&A)
• Consistent naming conventions across all books

Pro Tip:
If you’ve acquired another business or merged operations, make sure the chart of accounts was updated to reflect your current structure.

✅ 3. Are You Performing Monthly Reconciliations?

Why It Matters:
Cash is king—but only if you know where it’s going. Regulators expect timely and accurate reconciliations of bank accounts, inventory, payroll, loans, and taxes.

What to Look For:

• Bank reconciliations completed within 10 days of month-end
• Inventory reconciliations tied to POS and seed-to-sale data
• Supporting documentation stored in a secure, accessible format

Pro Tip:
If you’re operating in cash, keep a detailed cash log that reconciles to deposits, POS reports, and expenses—this is often a missing piece in cannabis audits.

✅ 4. Do You Have Documented Internal Controls?

Why It Matters:
Internal controls aren’t just for public companies. Cannabis regulators and auditors expect you to demonstrate oversight, segregation of duties, and review processes, especially if you handle large amounts of cash or inventory.

What to Look For:

• A written accounting manual or SOPs for key processes (sales, purchasing, payroll, inventory, etc.)
• Approval workflows for payments and journal entries
• Segregation of duties between recording and authorization functions

Pro Tip:
Even if you’re a lean team, you can use software controls and regular independent reviews to meet this standard.

✅ 5. Are You Audit-Defensible Under 280E?

Why It Matters:
The IRS is actively auditing cannabis businesses. You’ll need solid documentation to support cost of goods sold allocations and justify tax positions taken under 280E.

What to Look For:

• Time tracking for employees allocated between deductible and non-deductible functions
• Invoices and contracts that align with expense classifications
• Clear methodology for allocating overhead to COGS (if applicable)

Pro Tip:
Don’t wait until tax time to get this right. Your allocations should be documented and defensible throughout the year.

Final Thoughts

If your cannabis business isn’t audit-ready, you're not alone—but now’s the time to fix it. The good news? With the right systems, workflows, and accounting support, audit readiness becomes part of your everyday operations—not a fire drill.

At Living Green CFO, we help cannabis operators put systems in place that are not only compliant, but investor- and auditor-friendly.

✅ Need an audit-readiness checkup?
✅ Want help implementing SOPs or selecting software?

Let’s talk. Schedule your free discovery call today.

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