Audit. Do you panic when you hear that five-letter word? You might think an audit is the last thing your business needs, but they aren’t always bad. Regular audits can be more like a routine maintenance check than an invitation for IRS penalties.
Learn what an audit is, what types of audits there are, how they can benefit your business, and more.
What is auditing?
An audit examines your business’s financial records to verify they are accurate. This is done through a systematic review of your transactions. Audits look at things like your financial statements and accounting books for small business. Many businesses have routine audits once per year.
As a small business owner, you are responsible for maintaining clear accounting books that show your business’s income and expenses. If your records are disorganized or missing, audits will be especially drawn out and difficult.
Audits can help you spot problems within your business. They can find errors in your numbers, which can help you with decision making. In the long term, a company audit can help you get your small business on track and boost your business bottom line.
When your small business is audited, you will generally receive an audit report. Auditors write audit reports to detail what they found during the process. The report states whether your records are accurate, missing, or inaccurate.
Types of audits
IRS audits might be what comes to your mind, but they aren’t the only type of small business audit. You can have internal or external audits at your business.
What is internal audit?
An internal audit is initiated by you and conducted by someone within your business. You might have someone conduct an internal audit to prevent financial mistakes and check in on company goals.
Internal audits don’t just look at your business’s finances. They can examine business operations and management to make sure everything is functioning efficiently.
If you have board members or shareholders, you might conduct an internal audit to update them on your finances.
What is external audit?
An external audit is performed by a third party, like an insurance company, local tax agency, or the IRS. External auditors must follow auditing standards known as generally accepted auditing standards (GAAS).
Some external auditors might want to look at the complete picture of your business’s financial records while others may examine specific aspects of business operations.
Audit reports prepared by external auditors are written using generally accepted auditing standards.
An IRS audit might take place due to a discrepancy on your small business tax return. Or, your business might randomly be selected for an audit.
If you are being audited by the IRS, you will first receive a notice in the mail. IRS audits are conducted either by mail or through in-person interviews. In the event of an IRS audit, you should respond promptly and seek the guidance of a tax professional.
Audit procedures: Preparing for an audit
So, what happens if you get audited? Before an audit, you need to get your financial records in order. Theoretically, you should always be prepared for an audit. You should have an audit trail so you can prove where your numbers come from and auditors can easily trace your transactions.
Organize your financial documents so the auditors can easily access records and get a clear view of your business. Organize records chronologically.
Bring financial records like bank statements, credit card statements, receipts, invoices, and journal entries. Your auditor will use the records to test for accuracy and discover errors. The more information you provide and the more organized you are, the faster the audit process.
Benefits of a business audit
There are many advantages of having an external or internal company audit.
The main function of an audit is to check for accuracy. As a result, an audit can help you find errors in your accounting books or processes. An audit might be able to spot a small mistake before it grows into a big one. And, non-IRS audits can catch errors before you file your business tax return, helping prevent IRS audits.
Audits can also motivate you to implement new accounting processes. If your auditor isn’t able to get a clear view of your records, they can help you improve records for the next audit. You can learn how to use accounting software to prevent disorganized and incomplete records.
Many business owners rely on financial statements to guide their business decisions. But, what if the number used to create the reports are incorrect? By verifying the accuracy of your financial records and finding errors, an audit can help straighten out your finances so you can make wise business decisions.
Embracing audits and recognizing their role in your business’s success might help prevent your heart from skipping a beat the next time one comes up.
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This article has been updated from its original publication date of October 12, 2012.This is not intended as legal advice; for more information, please click here.