Do you know how your business is doing financially? Are you confident that your accounting records are accurate? If not, it may be time for an accounting audit. This tool can help you identify opportunities for improving your records management and ensure your business operates efficiently.
In this blog post, we will discuss the basics of conducting an accounting audit. We will also provide a checklist to help you get started!
An accounting audit, usually done by an external party, is an independent examination of the financial position of a business. This can be done irrespective of its size or legal status, whether driven by profit or not.
In the end, it involves checking to see if your company’s financial position complies with the necessary reporting standards. It also has to do with promoting policies and measures that ensure adequate handling of cash.
Small businesses typically aren’t expected to audit their financial records as frequently as large corporations. But it will go a long way if business owners can learn to perform a basic internal account audit. It will give an overview of the business’s financial strengths and weaknesses.
Follow these tips, and you will be well on your way to success!
In order to perform a basic accounting audit, you should:
- Prepare for the accounting audit
- Create an Accounting Trail
- Conduct an Internal Audit
1. Prepare to perform the accounting audit
Understand financial audits
A financial audit ensures that the financial information provided by a business is correct. It also helps the Inland Revenue Service to know that all expenses and revenues presented by a business are accurate. Ultimately, they are able to confirm the financial status of the business and that all deductions made are authentic.
For large corporations, a formal audit is usually carried out by a third party. For a small business, the IRS performs the audit. But it is important for a business owner to self-audit the business to ensure that the financials are accurate. This improves the business and also protects the business from IRS audits.
Learn the reasons for a financial audit
Auditing your business’s financials has its benefits. A business owner can regularly perform an audit by making sure that the information provided is accurate. Meanwhile, it is also important to have a professional look into the finances.
It helps ensure compliance with all legal and tax regulations. It gives the business owner insight into how the business is performing and how it can be improved. You can also ensure that the information is valid and in line with accounting standards.
Prevent your small business from triggering an IRS audit
You can prevent your business from receiving an audit from the IRS. Ensure your deductions are not excessive. Expenses for travel, business meals, and entertainment should be minimal.
Have a record and receipts for all deductions. And have proper documentation of any major disparity that you’ve experienced over the years.
2. Creating an Accounting Audit Trail
Determine whether your business has a sufficient accounting audit trail
An audit trail comprises paper and electronic sources that document the history of business transactions. Employ software and processes that can help you store and analyze data easily. Strengthen your accounting processes to create an adequate accounting trail.
Review your small business’s existing record-keeping policies
Have a policy that is reliable for securely storing financial information in an orderly way. Have relevant information stored until at least the end of an accounting period. All transactions should be documented with relevant explanations for the transactions.
Examine how financial documents are passed on to accounting personnel
All the financial documents gathered are handed over to the accounting department for processing. The documents include invoices, receipts, and bank statements. Make sure the handover process is quick and reliable so that the accounting records are accurate and up to date.
Create a system for monitoring your company’s internal controls
Set up internal control processes that will help protect against fraud, theft, and other internal accounting issues. Ensure safes are locked when not in use and possibly password protected.
Have cameras to monitor the process. Assign duties. You can have different people handle cash and bookkeeping. Carry out account settlements regularly to ensure the financials are valid.
Consider the accounting and tax laws your business must follow
Find out the laws that are relevant to you. For example, you are required by law to keep all accounting records for your business for at least six years. There are resources or websites to get such information from, or you can consult with your accountant on that.
3. Conducting an Internal Accounting Audit
Employ audit practices accepted by the industry
Ensure that your practices are accepted by the industry and in line with generally accepted accounting practices. The General Accepted Auditing Standards are the basic rules and standards that are used when doing an audit. They are typically used by professional auditors; you can consult these basic principles as a guideline for a personal audit.
Compare each part of your company’s accounting system
Compare all entries and make sure that all discrepancies are resolved quickly. Verify gross income, costs, and expenses by using accounting documentation. You can also use a sample to examine a large number of transactions.
Compare internal accounting records against external records
Comparing your accounting records against external records will help you determine how accurate your records are. Comparison can be between your purchase receipts and your purchase records.
If you have any errors, make the necessary correction and document such errors. This will help you understand how the error was made and to avoid such in the future. For stocks, you can compare physical stock against what you have on record.
Check internal tax records against your tax returns
Check your recent tax receipts and compare them against your internal records. The comparison should be between taxes paid and tax liabilities. And you should also keep your tax receipts for at least 7 years.
Create an audit report
Compile your findings into a concise audit report. The report should summarize the findings of your audit. It should state the problems, the improvements made, and what areas are working well. Make it as simple and clear as possible.
You need to consider hiring a professional to prepare if you find the auditing process too challenging for you.