The mere mention of the word “audit” is enough to cause some business owners to break into a cold sweat. They’ve either been through one before and it wasn’t a pleasant experience or they know that their records are in such a mess that they aren’t prepared for one.
In this post, we want to help you avoid that feeling. In this post, we’re here to recommend that you do a regular “business audit” on your own so that you have better information to help you take your company to new levels of success. (And if you get a call from the IRS, it doesn’t cause fear and trembling.) You deserve a business that brings you peace, so read on to learn more.
What Is A Business Audit?
An audit is simply a detailed examination of your company’s financial statements. The goal is to make sure that your books are current and free from errors that could cause accounting problems down the road or misrepresent the overall financial health of your business.
The mere mention of the word “audit” is enough to cause some business owners to break into a cold sweat.
What Are The Benefits of Audits?
There are several reasons why you should be doing regular business audits. The biggest is that most business owners want to maintain a reputation of integrity, and being able to demonstrate that your finances are in order and above board is a huge part of doing that. Whether it is your customers, future investors, the government, or financial institutions that you are seeking approval from for whatever reasons, having provably accurate books is essential.
Beyond establishing credibility, additional benefits of regular business audits include:
- Helping prevent fraud and employee theft
- Maintaining compliance with industry regulations
- Refining your budgeting process
- Improving overall efficiency
Types of Audits
The main types of audits we want to focus on are the 3 that are most common in the business world.
Internal Audit
This type of audit is done by an employee of the company usually at the request of the owners or leadership team. Its goal is to give stakeholders and decision-makers an accurate picture of the overall financial health of the business.
They will often look at current financial statements, check to make sure the company is abiding by all necessary policy and legal standards, evaluate the effectiveness of various procedures throughout the company, and report on any operational issues that need to be addressed.
Internal audits are usually performed on a regular schedule (weekly, monthly, quarterly, yearly, etc.), and doing so leads to significantly improved financial management…which in turn leads to a stronger overall business.
External Audit
Independent CPAs perform external audits at the request of the company. Their work often builds upon the results of internal audits but goes even deeper. The findings of an external audit carry much more weight than those of internal audits since the firm conducting them represents an unbiased and reliable authority to outside parties such as banks and investors. An external audit can also be very valuable to your internal accounting team since it will either double-check and affirm the work they are doing or catch mistakes before they become too costly.
During an external audit, a CPA will gather all available financial information about your company and conduct a thorough assessment. Afterward, they will deliver a detailed report and give you an opinion of their findings.
All publicly traded companies are required to publish annual financial statements and do external audits to ensure the accuracy of their reports. Larger nonprofit organizations must also conduct annual external audits to maintain their tax-exempt status. Privately owned companies, however, are not required to do them even though many still do to help maintain credibility with creditors, customers, and investors.
Governmental Audit
Audits done by the federal government (i.e. Internal Revenue Service) are the type that most commonly comes to mind. They are initiated by the IRS and are generally conducted randomly unless they have reason to suspect non-compliance or fraud.
The goal of governmental audits is to ensure that the amount of income being reported for tax purposes is accurate. During such an audit, agents will review a company’s financial documents and may request certain items for further verification such as receipts, agreements, bills, etc.
Additionally, you can conduct several other types of audits to better measure your business’s financial and operational health.
- Financial Audit – a brief review of financial statements to present a report to investors or other stakeholders
- Operational Audit – an evaluation of goals, policies, processes, and procedures to find areas where you can improve efficiency
- Compliance Audit – an assessment to ensure applicable federal, state, local, and company-wide policies are followed (safety protocols, quality control, etc.)
- Information System Audit – a review of your IT equipment and processes to make sure things are updated for maximum security and efficiency
- Payroll/Pay Audit – a report that verifies the accuracy of your employee tax withholdings, hours and wages, and employee information
- Forensic Audit – a highly detailed examination of your books related to a criminal or civil investigation that is often used to settle disputes among shareholders or serve as evidence in court proceedings
Should You Be Nervous About Getting Audited?
If you operate your business ethically and above board, you should never have to worry about the outcomes of an audit. They will simply confirm that you are a business owner of integrity or they will shine a light on areas where you can improve your business and increase productivity, profitability, or both.
However, we completely understand that the process of an audit is not pleasant. It can be an expensive and time-consuming disruption. You simply want to be able to get back to running your business as soon as possible, and going through an audit isn’t on your list of things you look forward to.
With that in mind, here are some steps you can take to prepare for an audit (of any kind) that will make the whole process much easier.
How to Prepare For a Business Audit
- Get Organized – If your office is a mess, it will be easy for your financial records to be disorganized as well. Take the time to set up a system for filing all of the important records that you need. (“Second pile of papers on the left” doesn’t count, by the way.)
Related posts: - Stay Current – The best filing system doesn’t do any good if you don’t use it regularly and keep it up-to-date. Schedule time each week/month/quarter to go through your paperwork and remove any unnecessary or outdated items.
- Keep Important Papers – As a rule, never discard things like receipts, bank statements, checks, checkbooks, register tapes, etc. While most auditors can use digital versions of bank statements and your accounting software to gather a lot of the information they need, having physical documentation available is very helpful. (Side note: keeping copies of old appointment calendars and business diaries can also help verify/justify expenses.)
- Protect Your Data – Not only should sensitive financial information always be locked with very limited access, but your digital data needs to be protected as well. It helps prevent thieves from stealing valuable information and provides you with a backup in case anything ever happens to the physical files in your office. (Take a look at a post we did a while back on “3 Best Ways to Protect Your Business Data”.)
- Make Life Easy For The Auditor – If you have done the first 3 steps above, then you are in a good position for this one. By presenting auditors with neat stacks of documentation (financial statements, receipts, etc.) you make their job easier, and they will often reward you with a much benefit of the doubt if they discover errors or inconsistencies. “Help them help you.”
Prep With The Pros
We’ve been in business ourselves for over 40 years now. In that time, we’ve helped countless small business owners through audits of all kinds. Our team of accounting pros can help you get ready for the next time you need to do a deep dive into your financials.
Take the stress out of your next business audit. Schedule a call with our team today.
PS – There’s a chance that you may not need to do a full audit in certain situations. Check out “How To Know When A Reviewed Financial Statement Is Better Than An Audit.”
