Many business owners have their own sets of fears regarding their business. Some fear that a storm might wipe away everything they’ve made, while others might worry that a supplier might scam them with the supplies they are selling. However, there is one fear that all business owners have in common: audits.
An audit can be a frightening process for any business owner, but you can be prepared for anything with the correct information. This article will discuss everything you need to know about business audits, from what they are to how to prepare for them. We will also discuss common fears and misconceptions about audits so that you can be better informed and prepared if your business is ever audited.
What is an audit?
An audit is an official examination of a company’s financial statements and records. The purpose of an audit is to ensure that the financial statements are accurate and compliant with applicable laws and regulations. Audits can be conducted by government agencies, independent auditors, or both.
There are three main types of audits: internal, external, and IRS audits.
Internal Audit
An internal audit is an audit conducted by a company’s employees. This type of audit is used to review and monitor the company’s financial statements operations regarding the company’s rules and regulations. This is primarily to assess the company’s performance or see something wrong with the business’ balance and checks.
External Audit
An external audit is an audit conducted by an independent third party. This type of audit is used to review and assess the company’s financial statement following generally approved practices. Essentially, it’s utilized to remove any form of bias that an internal audit might have.
Multiple inspections might occur in your company, depending on the kind of external audit you get. Therefore, it’s good to hire collateral inspection services for your external audit, especially if you have loans. This is because the results of your external audit will affect not just your company but also, possibly, the lending institutions you’ve borrowed money from.
IRS Audit
Lastly, we have the IRS audit. Among all the audits mentioned above, this is the most feared. An IRS audit is conducted by the Internal Revenue Service (IRS). This type of audit is used to review and assess a company’s compliance with tax laws and regulations. Why is it so scary? Well, an IRS audit only happens when they have a justifiable reason for it.
What are the stages of an audit?
There are multiple stages of an audit. However, the most fundamental stages of an audit are planning, fieldwork, reporting, and closure.
Planning
The planning stage is where the auditor and the auditee (the company being audited) agree on the scope of the audit and the timetable for completing it. The auditor will also gather preliminary information during this stage to assess the risks of the audit.
Fieldwork
The fieldwork stage is when the auditor conducts the audit. This usually involves reviewing documents, interviewing employees, and observing processes. The auditor will also test the controls to ensure that they are effective.
Reporting
After the fieldwork is completed, the auditor will prepare a report detailing their findings. This report will be shared with the auditee and contain recommendations for improvement, if necessary.
Closure
After the report is issued, the auditor and auditee will discuss the findings. If there are no significant issues, the audit will be closed at this point. However, if there are significant findings, further action may be required.
How can you prepare for an audit?
There are a few things you can do to prepare for an audit. First, you should make sure that your financial records are up to date and accurate. You should also have a good understanding of your company’s financial statements and tax returns. Additionally, it is important to have policies and procedures in place to ensure compliance with applicable laws and regulations. You should also have a good relationship with your auditor so that there is open communication between the two parties.
You should avoid making math errors or hiding any financial gains from your auditor. This will only make the audit process more difficult and could lead to penalties. In a worst-case scenario, the IRS might visit your business to do an audit themselves. You want to do everything you can to avoid this.
An audit can seem like a very daunting process, but with the right information, you can be prepared for anything. By understanding the different types of audits, the stages of an audit, and how to prepare for an audit, you can rest assured that your business is ready for anything.
