What comes to your mind when you hear the word audit? The first thing most business owners think of is the Internal Revenue Service.
While IRS audit is the most common type of audit, you should be prepared for more.
Established businesses, to be precise, conduct self-audit to establish if their accounts are on the right track and ensure accuracy. You may also require external business audits when applying for a particular program or certification.
In some cases, IRS could select you for a tax audit, especially when you made mistakes in your returns.
This is just an overview of what to expect in business audits. It is crucial to be prepared for anything by understanding the different types of business audits and what to expect. Read on for a comprehensive guide on the same.
What Is Business Audit?
Auditing is the process of examining your business’s financial records to determine or verify that they are accurate.
The activity is carried out via a systematic review of your business transactions. It focuses on your accounting books and financial statements to check for a balance.
Most businesses conduct a business audit once every year as this helps maintain a clear accounting record that indicates your income and expenses.
The main upside of regular auditing is that it helps you spot issues in your business early. Finding errors early enough enables you to make sound decisions and saves you from costly mistakes. In the long run, business audits will keep your company on track and boost its success.
Types of Business Audits
Here are the common types of Audits and what to expect from each.
As the name suggests, internal audits are carried out within your organization. It is your responsibility as the business owner to initiate the process and delegate it to an expert.
Internal audits are helpful to businesses with board members and shareholders. It is the best way to keep them up-to-date on the finances to assure them that you are on the right path towards meeting your financial goals.
You may conduct an internal audit to monitor the effectiveness of your current strategy. If you realize that expenses are higher than income, it is an indicator that you made the wrong choices.
Internal audits also come in handy when proposing improvements and want to prove the point behind your paranoia. Moreover, the idea allows you to ensure that you are compliant with laws and regulations, not to forget that it helps evaluate risk management procedures.
Unlike internal audits, external audits are carried out by a third party outside the organization. The third-party could be IRS, an expert accountant, or a tax agent.
External auditors are not connected to your business in any way. Their goal is to ensure that you comply with all tax and accounting laws and regulations, and they must follow the generally accepted auditing standards.
In some cases, the auditors will want to look at your financial records from an in-depth level. In others, they will only be interested in specific areas of your company’s operations.
Upon auditing your business, the auditors will give you a detailed report on their findings. The reports will indicate whether your financial records had any missing or inaccurate information.
This is among the most common external audits. Ideally, the auditor will analyze your organization’s financial statements’ accuracy and establish if they are fair.
They do so by reviewing transactions, balances, and procedures. Thereafter, the third-party auditor provides a detailed report on their findings and even gives an opinion about your financial position to lenders and investors.
The IRS carries out business tax audits. The goal is to assess your filed returns to determine if they are accurate. There are instances where business owners emit some income when filing returns. They also tend to exaggerate the expenses and incurred losses to evade taxes.
IRS may select your business for a tax audit to ensure that your company did not underpay taxes. They review any possible errors before giving a report via email or in person. Check out this resource for more information on tax errors and audits.
Compliance Business Audits
Regardless of your sector, there are set rules and regulations that every business should meet.
A compliance audit evaluates your business to determine if its policies and procedures are compliant with external and internal standards.
These audits can help establish if you are compliant with workers’ compensation payments and meet the shareholder distribution requirements. Moreover, the audits will determine if you meet the IRS standards and regulations.
A compliance audit is crucial as it saves you from getting on the wrong side of the law. Failure to meet compliance standards could result in expensive and irreversible losses. Nonetheless, conducting a compliance audit regularly will help you realize and rectify your mistakes sooner.
Your workers are a huge part of your business and you should treat them like so. The last thing you want is to deal with endless complaints from employees who feel underpaid due to payroll errors.
You can avoid such by carrying out regular payroll audits to ensure payroll processes’ accuracy before salaries are processed.
When carrying out payroll audits, you should consider wages, pay rates, and tax withholdings, to mention a few factors.
Operational audits are more like internal audits. They aim to analyze your business operations goals and operation results.
The audits are done internally, but in some cases, they can be external. The goal is to evaluate your business and establish effective ways to improve them.
The process checks and verifies that all your business performance procedures are compliant with the set limits and conditions.
The operational audit entails a system audit, which evaluates various management systems to ensure that they meet all the development and documentation standards.
The other element of an operational audit is production evaluation.
It focuses on your business’ final products to ensure that you only offer consumers the best quality services that are in line with the described specifications and physical performances. The products must also meet customer needs and comply with legal and regulatory standards.
Preparing for a Business Audit
Auditing is a big deal for any company. You cannot just wake up and decide that you will carry out an audit on that specific day.
It takes time and planning to prepare for an audit. For starters, you must get your financial records in order.
What’s more? Ensure you have an audit trail to showcase that the numbers are accurate, giving the auditors an easy time tracking your transactions.
When planning for an audit, spare some time to organize your financial documents. This way, you will be giving the auditors easy access to the records so they won’t feel like you are hiding anything.
Some of the critical financial records to bring along include; invoices, bank statements, journal entries, and receipts.
The purpose of these reports is to test the accuracy of your transactions and discover any errors.
It is, therefore, best to provide as much information as possible for a fast audit process.
What Happens When a Business Is Audited?
The primary purpose of business auditing is to discover finance and accounting errors and ensure that your company complies with the law.
An auditor has the skills and resources to spot even the most minor mistakes before they grow and get out of hand. Also, non-tax audits will help you spot mistakes before filing returns, thus saving you from fines.
Audits will push you to go for the new accounting process that you have always wanted. If the current one does not give you a clear view of your records, you will have no choice but to try a new one. Changes and improvements are the keys to any successful business.
With a reliable auditor, you can count on the given reports to help you make sound decisions for your business.
Many are cases where business owners depend on financial statements to determine if they are on the right path or they need to make adjustments.
However, if the statements are incorrect, you are bound to make misinformed decisions. But by letting an expert verify your accounting records’ accuracy and rectifying errors, you will be better positioned to make wise decisions for your company.
Even better, audits will give you peace of mind, knowing that you are not breaking any law and that you are not up for unexpected financial blows.
Embrace Business Audits and Start Your Journey to Financial Freedom
It is high time individuals embraced business audits to keep their financial records organized.
Most business owners feel like the process is a waste of time and money, but now that you understand the benefits and what happens during a business audit, you have no excuse for missing out.
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