You never know when an audit of your business’s financials may occur. Therefore, companies should always be prepared for a potential audit of their business financials. Having your business financials audited can be stressful, particularly if you are not prepared for an audit. Making sure you are prepared for an audit will ensure the process goes as smoothly as possible.
Types of Audits
Audits are a process where a company’s business financials are examined to verify they are accurate and are a fair representation. There are three types of audits:
- External audits are performed by a third party. External audits have the added benefit of being unbiased because the people conducting the audit have no ties or connection to the business.
- Internal audits are conducted by employees of the company. Internal audits are generally reserved exclusively for internal use.
- Government audits are performed by government entities, such as the Internal Revenue Service (IRS). Government audits are conducted to ensure that the prepared financial records do not misrepresent taxable income.
Audits are important to keep companies honest and maintain trust and efficiency within financial markets. Without auditing, a company could misrepresent their business financials to make it seem as if the company is more profitable than they actually are.
Audits also help ensure that financial statements, which provide information for and are utilized by people such as investors, creditors, and other stakeholders, are accurate. If the information in the financial statements cannot be trusted, it will have an impact on this important decision-maker’s willingness to work with a company.
Preparing for an Audit
It is important to keep up with your business financials at all times so that when an audit occurs you will not need to do too much additional work to prepare for the audit. However, when an audit is upcoming there are some steps, you can take to ensure the audit is successful and goes smoothly.
First, it is critical that your business plan for an audit and take the additional time necessary to properly prepare when an audit is upcoming. The process of planning for an audit could take a few days or extend several months, depending on the size of your business and the complexity of business financials. However, it is important you invest as much time as necessary.
Planning for a financial audit will involve tasks such as gathering and organizing the necessary records and financial information. Taking steps such as diligent record-keeping throughout the year will make the preparation process for an audit run more smoothly when the time comes. Pre-audit planning should also include keeping up with general bookkeeping tasks, such as reviewing and approving transactions before they are processed, reconciling accounts, timely document preparation, and proper organization and storage of financial documents.
It is also important to keep up with relevant accounting standards. Accounting standards and relevant legal and regulatory standards are ever-evolving, even changing from year to year at times. It is essential your business stays up to date on these standards as they change, and your financial team is aware of any changes and adjusts their practices to reflect any changed requirements.
It is also important to keep in mind any changes your business has experienced since your last audit. Small changes are not likely to have an impact on the auditing process. However, larger changes, such as an organizational restructuring or an investment in a new project or an expansion are likely to have significant impacts on your business’s financials.
If you have undergone an audit in the past, you should also consider that previous experience when preparing for your next audit. By considering what went well during that previous audit, and what did not, you can then adjust your preparation for an upcoming audit and ensure you have as good an audit experience as possible.
Any good audit preparation will also include an assignment of deadlines and responsibilities. It is important to establish from the beginning exact times or dates important tasks in the audit preparation process will be done by. You should also establish who is responsible for ensuring each task gets done. This way you can ensure you stay up to date with the audit preparation process and are not waiting until the last minute to complete the necessary preparations.
The tasks that should be scheduled and delegated will include both internal processes needed to get ready, in addition to any tasks the auditors may require are completed before they can begin the audit process.
Finally, you will want to organize and gather all relevant data to be submitted to the auditors. This information will likely include general ledgers, fiscal year budgets, invoices and bills, transaction records, and financial statements.
The audit process will likely involve some sort of entrance meeting with your auditor. During this meeting, you should ask any necessary questions to ensure you understand the audit process, the scope of the audit, the timing of the audit, and any other requirements. Following this meeting, you should have a better understanding of the audit process and you will be able to make any necessary adjustments to your preparation to ensure you are ready for the requirements of the audit.
As you can see audit preparation is significantly easier when your business financials are up to date. The better your routine bookkeeping and tax preparation processes are easier the audit preparation process will be.
Remote Quality Bookkeeping offers a variety of accounting and bookkeeping services that can help your business be well prepared for its next audit, even before you know the audit is coming.