Did you know it is a five-letter word that causes fear? You probably consider an audit as the last thing your business needs but they aren’t all that bad. Another possibility is a monthly or quarterly audit is closer to an exam than it is to penalties from the IRS.
Learn what audit is, what kind of audits exist, how they may help your business, and much more information.
What is a Business Audit?
An audit of a business is a written report that highlights whether or not the financial statements of the business are free from a material misstatement the work done and the assumptions made while preparing the report.
It is a written document called an audit opinion where the language of the opinion defines an audit. An auditor reports on several topics:
Financial statements: An auditor expresses an opinion on whether or not the financial statements are accurate or contain any material misstatement. In this regard, the word “material” refers to an omission or mistake in a report that is preferably significant in a way that it influences the reader’s perception of the financial statements. The audit is expected to provide detection of financial statement errors.
Regulatory requirements: The analysis of the financial statements is done following certain accounting rules with which in this case have to be complied. Previously, Australia employed the usage of Australian GAAP, but starting in 2005 migrated towards a new standard to align with International Financial.
Reporting Standards (IFRS): The audit opinion is that the financial statements were prepared in accordance with a particular set of rules.
Internal controls: Lastly, most audits require an auditor to assess the effectiveness of internal controls. The controls are put in place so that the business can produce accurate financial statements and prevent assets from being theft. When there are weaknesses in any of the internal controls, the auditor is required to disclose the weaknesses.
Importance of auditing
Auditing affirms that the accounts being used in your organization are correct and compiled in accordance with GAAP. This plays a role in maintaining the internal and external checks and balances of your finances in order to restore credibility. Unfortunately, unlike other smaller businesses, many business owners only appreciate auditing when they have been forced and made to pay the price for inaccurate data. An auditor is supposed to check that all the bookkeeping activities are appropriate and if your balance sheets and income statements are reflective of the true standing of the company. A well-audited, up-to-date business gets a space in the hearts of the shareholders, who would like to involve their capital in your business. However, if an auditor discovers that the financials have been manipulated, your business will have legal consequences. Similarly, in the current situations the business may fold up due to the damage of reputation as it is viewed by the customers and the stakeholders. To prevent this, you need to schedule internal audits periodically so that accountants or auditors notice that there are fraudulent activities or hindrances to compliance before these factors harm the business image.
Types of audits
There are three categories of audits: internal, external, and government audits.
Internal audits
Internal audit is particularly beneficial when it comes to the assessment of the accounting procedures of your business. It helps you to follow all the required laws and codes at your business and helps you to prepare reports of your financials on time. An internal audit mostly involves an accountant or an auditor from within your business doing the auditing.
Overall, the primary reason for this specific audit is to examine your company’s effectiveness in managing its financial aspects, identify potential risks, and suggest reasonable recommendations to avoid them.
You get internal audits done on a weekly, monthly, or annual basis. Overall, internal auditing on a regular basis helps you realize how bad your organizational structure and operations are, prevent probable fraudsters, and address mistakes that would not be apparent in external auditing later.
Internal audit process
1. Before you even contemplate seeking to undertake an internal audit, your management must formulate an internal audit plan together with the auditor. You are going to have to set a time within which the audit can be completed and agree more on what actions and measures shall be taken. It is also good practice to ensure that your employees are aware of the audit. They should prepare the necessary documents even before the auditors arrive.
2. When conducting an internal audit, the designated auditor will browse through the various financial records, make notes, and have discussions with several staff members in an attempt to assess the level of understanding of the objectives of the business, safety policies, and legal requirements of the business.
3. There are also times that upon completion of the investigation, the auditor will relay the proceedings to the management. The auditor will explain what your processes do well and what is wrong with them and advise your team on how to correct it.
4. After the discussion with the management is over, the auditor will draft the auditor’s report; this report is an outline of the investigation process and has the list of expectations to be changed/revised by the management. When all of the changes are made to the documents that require this, the audit is considered to be completed.
External audits
The main use of an external audit mainly focuses on ascertaining the financial statements of your business. The benefit of the external audit is a confirmation to the other parties that your financial assets are safe and your books are clean. Finally, businesses must consider it worthwhile to conduct an external audit since the auditor’s report in this case will be an asset for that Business. Comparatively, external audits are deemed much more accurate than internal audits. First, since the external audits are conducted by independent third-party accountants or accounting firms the review process and the reports presented to the relevant parties are not tainted. Flaws that are discovered in the finances to rectify do not impact work relations.
In this way, all the participants engaged in the business can make decisions based on the audited documents. External audits are conducted only one time within each fiscal year.
External audit process
1. It is recommended that prior to the external audit exercise, your staff should be well trained so that they are well equipped in case of such a situation. Normally, every department would be expected to be reporting to an audit manager, and the manager would be interacting with the auditor or with the personalities from the auditing firm respectively. Each time there are questions or questions the auditor should understand who to ask. The audit manager should ensure that all the necessary documents are well prepared to ease the task of the auditor as will be seen below.
2. Once he or she has been appointed to carry out the audit, that person or the full accounting firm gets personal to your records be it accounting and financial to have an understanding of your business operations. Among others, they will be interested in proper strategic and tactical development and management of the audit trail process, scrutinizing of the finances, and investigating any business risks if they exist.
3. The auditor may even recreate your financial statements in a bid to determine if basic accounting standards were used when developing them. They may also decide to look at the other competitors in the field to assess whether or not your progress is warranting or try to find something suspect with your report.
4. Once it is over they should give you a report and tell you their honest opinion on your business. This effectiveness in grading a company’s performance is important in the view of the business owners; customers’ opinions and contributions thus play a significant role in this grading process.
Government audits
Tax audits are conducted by government organizations to ensure that all the financial records submitted by a business for returns are tax-compliant. There is no specific time or date on which it is conducted. It is mostly conducted randomly or called for in situations of non-compliance or fraud.
Government audit process
1. Regrettably, the crucial work here is to ensure that the documents are made orderly, at all possible, because no one can know beforehand for which transaction he is going to be required. Therefore, do not allow your bills, receipts, agreement documents, and many others to be coordinated month by month, and year by year. Using this will enable you to answer all questions a government agent may ask.
2. During the audit process there will be discussions between the agent and the taxpayer in which the taxpayer will be expected to answer the agent’s question with documentation support. Once the examination is over, there are only three outcomes in your result.
- The taxpayer will ASSUME to accept the alteration suggested by the IRS agent in question.
- Depending on the nature of changes as deprecated in the section above, the taxpayer will NOT AGREE to make the changes and will seek a court appeal.
- The two parties, as usual, reach a consensus on a big idea, that is, that they have looked at everything, and there is no need for any alteration.
What should you do to be audit-ready?
The more prepared you are for an audit, the more quickly and smoothly it can be completed. In fact, preparation begins way in advance of the actual audit and has a lot to do with the way your business handles its financials in the first place.
To ensure your business is audit-ready, follow these essential steps:
It may be recommended to introduce a powerful close process at least once a month. This will help to standardize all the general activities of the organization especially the recording of transactions, journal entries, and the resultant financial statements.
This means you need to have a professional financial worker to help in the orchestration of business strategies. The most logical way to approach financial management and budgeting is to locate an appropriate financial advisor.
Look for someone who has gone through the experience of getting audited. More frequently it will be the company’s CFO. As the CFO, it will be your responsibility to rely on him/her to liaise with the audit team and supply any information they may require as well as address challenges that may characterize the process.
Integrate all information, documents, and data that might in any way be connected to the implementation of the presented proposal.
What papers should be presented to begin an Audit?
A typical audit will involve access to the following:
- Major Transactions
- Verification of the authenticity of other large ledger balances (i.e. cash and accounts receivables etc.)
- Equity documents
- Company documents
- Material contracts
- System internal controls checklist
- Expense grouping in the Profit and Loss account
How complex do you want your serving to be?
Auditing firms usually provide services at different levels of operation depending on the kind of business that a client has. It is necessary to distinguish how valuable and how invasive each level is to understand which variant is optimal in a given situation.
The Association of International Certified Professional Accountants makes the distinction as follows:
Audit
It has been developed to provide creditors, investors, and other outside parties with the maximum possible confidence in the financial statement.
From this background, based on your company’s internal control, fraud risk, and audit evidence through CPA observation, inquiry, physical examination, third-party confirmation, examination, analytical procedures, and other procedures, CPA needs to confirm the amounts and disclosures in the financial statements.
The management’s report provides an opinion on whether the financial statements have been prepared and are free from material misstatements in accordance with the in the applicable financial reporting standards.
Review
Originally designed to give lenders and other outside users a reasonable level of confidence regarding the actual figures published.
By conducting analytical procedures, inquiries, and other tests, CPA possesses only the ‘Limited Assurance’ over the financial statements and offers a certain level of assurance to a user about the reliability of the same.
The formal report includes a conclusion as to whether, based on the review, the CPA is aware of any such material changes that need to be made to the financial reports so that it complies with the requirements of the specific financial reporting standard.
In general, as a business grows it requires larger and complex forms of financing and credit.
Compilation
Intended for the type of user who could find value in having access to a CPA-affiliated business without necessarily expecting that the franchise financial statements are free of material misstatements
CPA is required to read the financial statements in consideration of the financial reporting frame of reference, to decide whether or not the financial statements contain in a mannerly way.
This was made known in the compilation report that CPA did not audit or review the financial statements for expressing an opinion, conclusion, assurance, or extension.Finally, your company finances need constant care, and you need some professional help no matter how big or small your business is. If you are unable to execute these functions effectively, you should consult a financial consultant to give you advice and oversee them.
