If you manage properties in California, chances are you will face a DRE audit at some point. The Department of Real Estate (DRE) conducts audits to ensure that property managers are handling trust funds properly and complying with legal and financial reporting standards. The best way to approach a DRE audit is to stay audit-ready at all times. That means having processes in place, clean records, and full compliance with GAAP and DRE requirements.

This guide walks through the steps property managers can take to prepare for a DRE audit, avoid common mistakes, and pass with confidence.

What Is a DRE Audit?

A DRE audit is a formal review of a property management company’s trust accounting records, operational procedures, and compliance with California real estate law. Audits may be scheduled or triggered by a complaint or licensing issue.

Auditors will review items such as: – Trust bank account balances and reconciliations – Lease agreements and rent rolls – Income and expense records – Owner statements and disbursements – Security deposit tracking – Internal controls and SOPs

Failure to meet requirements may result in fines, citations, or license suspension. Staying organized and audit-ready protects your license and your reputation.

Step-by-Step DRE Audit Checklist for Property Managers

1. Trust Accounts: Reconcile and Segregate

• Ensure all client funds are held in properly labeled trust accounts
• Confirm that no operating funds are ever held in trust
• Reconcile all trust accounts monthly
• Match trust account balances to property-level ledgers

With Yardi Breeze, each property’s funds are tracked separately and assigned to the correct bank account, which helps prevent co-mingling and reduces reconciliation errors.

2. Bank Reconciliation: Tie Out Every Account

• Reconcile each bank account against your general ledger
• Review for discrepancies between deposits, withdrawals, and statement balances
• Address any unreconciled items immediately

Yardi Breeze makes this easier with built-in reconciliation tools and audit trails.

3. Review Financial Statements

• Confirm balance sheet, income statement, and cash flow reports are current
• Ensure accounts are coded consistently and accurately
• Make sure owner contributions and disbursements are documented

4. Verify Revenue and Expenses

• Check that all rental income is recorded in the correct period
• Match expense payments to invoices and lease obligations
• Review for duplicate or missing charges

5. Lease Agreements and Contracts

• Ensure tenant lease agreements are signed, current, and stored properly
• Verify rent amounts, terms, and deposits match what is shown in your accounting system
• Review vendor contracts for scope, payment terms, and expiration dates

6. Security Deposit Records

• Reconcile tenant deposit liabilities to your balance sheet
• Ensure each security deposit is held in trust and assigned to the correct unit
• Maintain documentation of any deductions, refunds, or transfers

7. Aged Payables and Receivables

• Review AP reports for any past-due vendor bills
• Confirm expenses are approved, matched to work orders, and paid on time
• Check AR for delinquent rent or charges and note collection efforts

8. Bank Activity and Fund Flow

• Track every deposit and disbursement
• Ensure all activity is supported by documentation and linked to the correct property
• Maintain clear logs of manual adjustments or voids

9. Evaluate Internal Controls

• Review staff access to financial systems
• Separate duties between those who approve, pay, and reconcile
• Identify gaps in oversight or missing approval chains

10. Verify Compliance

• Ensure all accounting processes align with GAAP principles
• Check that you are following DRE trust accounting guidelines
• Use software reports to support compliance

With Yardi Breeze, you can generate audit-ready reports with just a few clicks. The platform helps property managers stay in compliance by enforcing clean data entry and built-in accounting workflows.

11. Insurance and Risk Management

• Verify that all properties have current insurance policies
• Track expiration dates and coverage levels
• Document risk assessments or incidents

12. Maintenance and Health Code Compliance

• Maintain logs of inspections, repairs, and service requests
• Verify compliance with safety and habitability regulations
• Include photos or documentation where possible

13. Owner Reporting

• Send monthly owner statements that clearly show income, expenses, and distributions
• Maintain a record of every statement sent
• Provide backup documentation for any owner inquiries

14. Follow-Up and Monitoring

• Create a log of any previous audit findings and how they were resolved
• Monitor for internal issues such as recurring errors, late reconciliations, or tenant complaints
• Establish a regular cadence for internal reviews

15. Prepare a Summary Report

• Compile a one-page summary of current trust balances, insurance status, reconciliation schedules, and outstanding risks
• Keep this ready in the event of an unannounced audit

Tips for Staying Audit-Ready All Year

• Schedule monthly reconciliation and review tasks in your calendar
• Use property management software that enforces best practices
• Train your team on trust accounting rules and SOPs
• Document every transaction, no matter how small

Final Thoughts

DRE audits are not optional, and they should never be a surprise. By treating audit preparation as an ongoing process, not a one-time scramble, property managers can protect their business and avoid penalties.

With tools like Yardi Breeze, most of these processes can be automated or simplified. Segregated ledgers, automated reconciliations, and built-in reports make it easier to meet DRE requirements without manual effort.

For expert support with trust accounting setup, reconciliation, or audit preparation, contact the team at Balanced Asset Solutions.