Auditing is a kind of quality control. Business owners perform audits of their financial statements or have these audits performed for them to make sure they're documenting their finances and reporting their income accurately. As a business owner, financial audits are a good time to make sure your accounting standards are being followed and are as effective as you can make them.
Skynova's business accounting software helps you keep that paperwork in order and easy to access so conducting audits is a simplified process no matter what kind of business you have. Let's take a look at what financial auditing is, why it's an important part of your business accounting, and how to perform a financial audit of your own.
What Are 3 Types of Audits?
There are three primary ways an audit of your business's financial statements can be performed: internally, externally, or by a government agency, such as the Internal Revenue Service (IRS). Although the idea of combing through your finances may sound stressful, each type of audit serves its own purpose and can be beneficial to the health of your small business.
Internal audits are conducted by your business for your own purpose. These are done by you, an employee, or a group of employees. Internal audits assess a business from a number of angles, including risk assessment.
In the business world, risk is defined as anything that threatens a company's ability to make a profit. Risk management is a key part of making sure your business is successful in the long term, and performing regular internal audits to strengthen and secure the financial side of your business is a risk management must.
Larger companies may even employ in-house or internal auditors to complete regular examinations not only of financial procedures and reporting but also other operating aspects of the business. Internal auditors make sure a business is following its systems and procedures and regularly evaluate those systems for overall effectiveness.
External audits are conducted by independent auditors, most often certified public accountants (CPAs) who may or may not work for a larger accounting firm and are not directly employed by the business being audited.
They collect audit evidence (e.g., all of your company's financial statements from a given period) and look for inaccurate reporting or material misstatements. Finding material misstatements can mean something was incorrectly reported or not reported at all, such as receipts for business purchases not being noted under your expenses.
While internal auditors are more intimately familiar with the inner workings of your business, external auditors operate outside of a business's systems and can deliver an audit report based on unbiased opinions. CPAs must also adhere to generally accepted auditing standards (GAAS) while performing audits and generally accepted accounting principles (GAAP) while preparing any of your financial documents.
As a small business owner, performing regular audits can help you keep a finger on the pulse of your company's financial situation and system of reporting. However, engaging the services of an external auditor will give you an outsider's perspective on just how well your business is operating. These external auditors can bring attention to items of concern you may otherwise have missed.
Government audits are performed by government agencies or groups to make sure a business is following all legal requirements when it comes to reporting its taxable income. The IRS conducts audits verifying reported tax return information for your business, which includes profits, losses, and payments made to employees.
Publicly traded companies can also face audits from the Public Company Accounting Oversight Board (PCAOB). This is a nonprofit organization founded alongside the Sarbanes-Oxley Act, which holds larger corporations accountable for accurate reporting of their financial statements. The United States Securities and Exchange Commission (SEC) is another government agency concerned with protecting stakeholders' and investors' rights through accurate reporting.
What Is the Purpose of Auditing?
While the IRS looks at your tax information, performing your own financial statement audit gives you a clearer picture of the overall financial health of your business. Conducting regular financial audits means you can look at every part of your finances to see what money is coming and going and how accurately and consistently each transaction is being documented.
An audit report, which is what you'll generate during the actual audit, is a way to monitor how well you keep track of your money. The IRS, PCAOB, and other organizations use financial audits to make sure your business is operating above board and following all legal financial reporting requirements.
How Is Auditing Done?
Auditing is an important part of business accounting. Understanding the audit process will make you more comfortable performing a financial audit of your own and preparing for an external audit. Regular audits help you keep your accounting records in order and are an excellent way to keep an eye out for internal theft or fraud.
Collect All of Your Financial Records
Every financial audit begins with gathering all of your business's financial statements and other documents, also known as audit evidence. Financial records include client invoices and bank statements to account for money coming in and bills, receipts, and employee payment documentation to account for money going out.
Keeping all of this information tidy and easy to find can be a challenge when running your own business. Using Skynova's accounting software means having all the forms you need stored in one place (you can even do it from your phone). With streamlined record-keeping, performing regular financial audits becomes simpler.
Be Sure Everything Is Recorded
Accurate and timely record-keeping is a must for every small business owner. Performing an audit is a great way to see just how well you're handling your financial reporting. If it's a struggle to find your most recent banking statement or remember where you put all of your receipts, it's time to reevaluate your record-keeping practices.
Review Your Accounting Procedures
Along with your record-keeping, performing an audit means taking the time to evaluate your accounting procedures. Are you filing your invoices, receipts, and other paperwork consistently? Is the system you're using to keep track of your money as effective and efficient as it could be? If your accountancy or bookkeeping isn't where it should be, Skynova's software can help you get more organized.
Audits can turn up material misstatements, such as unpaid invoices, incorrectly reported financial data, or inaccurate employee income reporting. In short, you can see where, if anywhere, you're dropping the ball. If you have employees handling any of the above, such as invoicing or paying bills, an internal audit informs you as to where someone may not be doing their job as well as they should. Audits find weak spots. Many business owners schedule regular internal audits for this reason.
Evaluate Internal Controls and Policies
Internal controls and policies are additional safety measures you can add to your accounting system to make sure your business's financial information and money is as safe as possible. These can include a separation of duties that your employees may perform so that no one person has access to too much of your most sensitive information. They can also be physical controls, such as placing important information in a secured location, like a safe, and making sure only a limited number of people can open it.
Internal controls and policies also include protecting your password-encrypted information. You can do this by limiting access others have to it. However, even if you're the sole employee of your small business, you should take precautions by regularly changing your passwords. Between those security measures and performing regular internal audits, you'll be able to ensure that your business's financial information is as safe as you can make it.
Compare Internal Records to External Records
Comparing internal and external records of financial information and transactions is another way to make sure the systems you're using are accurate and safe. You want to make sure the money you have recorded as coming in for a given period is what's reported on your bank statement. To do this, look at your records (e.g., purchase receipts or cash register closeout reports) and compare these to external records, like a supplier's invoices or bills and your banking statements.
You can select a random period to examine rather than your entire business year or quarter. For example, comparing the internal and external records for May can give you a fairly clear picture of the rest of the year. If you turn up any questionable information or discrepancies, you can widen the scope and look at April, May, and June.
If necessary, continue to do this until you can pinpoint the source of the error(s) in your internal and external records. This is very similar to creating a balance sheet, which is a way to take a quick peek at a business's overall financial situation.
Analyze Your Tax Records
Analyzing your tax records is important not only for internal reporting accuracy but also to make sure you're reporting the correct information to the IRS when you file taxes. Being accused of tax fraud is something no small business owner ever wants to deal with. To make sure you're complying with all reporting requirements, comb through your recent tax information and compare it to your internal records.
Tax records should be kept for a number of years in case you're audited by the IRS and need to show supporting documentation. Many business owners keep records for at least seven years, if not longer.
Maintaining records is also a way for you to examine the efficacy of your business's accounting practices. Compare your tax returns against your own records to compare taxes paid, credit or deductions claimed, expenses reported, and any other details noted about your finances. Discrepancies in reporting between your records and your returns can uncover further weak spots that you need to address.
How Often Should You Perform an Audit?
Regularly checking in with the financial health of your small business and its accounting procedures is a good habit. Larger companies may choose or even be required to perform monthly audits, often under an audit committee made up of members on its board of directors. For smaller businesses, annually or semiannually should suffice. If your business goes through any major changes, such as scaling up operations or restructuring a department, consider performing an audit after that, as well.
Thinking of audits not as a hassle or something to be dreaded makes them easier to perform. Even if you're an audit committee of one, you can still put best practices into place when it comes to the safety and security of your business's finances.
Let Skynova Help You Manage Your Small Business Accounting
Audits are useful tools, but getting into the habit of preparing for and conducting audits for your small business can be stressful. Let Skynova's accounting software help you feel more confident. With features like invoicing, tracking expenses, storing receipts, a general ledger, and double-entry accounting, our software lets you store your business's information all in one place.
Staying organized is the key to success when it comes to performing an internal audit, preparing for an external audit, and running your day-to-day business. Skynova keeps your finances neat, secure, and easy to access. You'll never worry about where you left a receipt or if you recorded a business expense again. From audits to invoices, Skynova's software products have you covered.