- An important factor of owning a business is auditing.
- Which type of audit is best for your company's needs?
- With guidance, you can complete a DIY audit.
As a small business owner, you have many responsibilities to juggle. It can be tempting to remove yourself from your business's finances just to take something off your plate – especially if bookkeeping and accounting aren't your strong suits. However, you should stay involved in your business's finances.
If you do hire someone to help with finances, should you audit your bookkeeper? The short answer is yes. Theoretically, if you keep yourself involved in your bookkeeper's processes, you should be fully aware of the state of your finances; but it's always a good idea to conduct random audits to ensure all of your books are balanced and your bookkeeper is following proper protocol.
What is the audit process?
For most people, simply hearing the word "audit" causes stress. It isn't easy to open your doors – and your financial records – to an outside party for scrutiny. As a busy small business owner, you may feel like you don't have sufficient time to undergo an audit, or you may feel self-conscious about your record-keeping or your processes. However, there are benefits for small business owners in conducting an audit.
Auditing employs various methods that an independent party (either a person or organization) uses to inspect the accounts (or the documentation and quality control processes) of an organization and ascertain that the company is following generally accepted practices. It is also an opportunity to find potential opportunities for improvement inside the organization. An audit focuses on finding solutions for vulnerabilities and risks in your business.
Are there different types of audits?
There are three types of audits: operational, financial and compliance.
Operational audits, also known as an internal audit, are a voluntary action taken by an organization to determine the effectiveness of risk management, internal controls and to facilitate achievements of the organization's objectives. This type of audit is done by employees of the organization who will report their findings to the board of directors.
Financial audits are necessary for all companies and they are usually done externally. This type of audit is also known as an accounting audit and is used to examine and analyze the statements of accounts to determine if the organization is compliant with regulations.
- Compliance audits focus on the policies and procedures of an organization to ascertain if the company is complying with internal or regulatory standards.
Outsourcing an audit
You may want to consider hiring another person to double-check the books, also known as a controller. A good choice for a controller, if you're able to afford it, is to hire a CPA. Not only will they check your bookkeeper's work, but a CPA is a tax expert, which your bookkeeper most likely isn't. A CPA can thoroughly review your financial records to ensure everything matches up with your tax returns and find deductions you may have overlooked.
To ensure your bookkeeper and CPA collaborate smoothly, GrowthForce – a bookkeeper, accounting, and controller service provider – recommends you create internal controls to establish clear expectations and maintain transparency between your bookkeeper, CPA and yourself. For example, develop a procedure manual and service level agreements that outline the procedures your bookkeeper and CPA should follow when they produce and share financial statements. Your procedures should specify timelines, formats and methods for all deliverables.
Be sure to include processes for closing the books every month, too. AccountingDepartment.com recommends meeting with your bookkeeper at the end of the month to review the general ledger, match all transactions against credit card statements, bank statements, and bank and other receipts to ensure everything is accounted for and the books balance. Once they've been balanced, "close" the books so no additional changes can be made. [Find out the difference between an accountant and a bookkeeper.]
If your bookkeeper works remotely, AccountingDepartment.com suggests that you include proper security protocols in the procedure manual. Making sure the passwords used are difficult to hack, locking their computer when they step away from their desk, and having your bookkeeper work on a secure server that doesn't allow files to be printed or downloaded are all security procedures you should invoke.
5 tips to help you prepare for an audit
Follow these tips from NOLO to help you prepare for a smooth audit.
Plan ahead. Clear expectations and proper planning are necessary for reducing your frustration and anxiety before and during the audit. Have an open line of communication with all department heads, including ensuring they are prepared to submit all information they need in a timely manner.
Organize the data. Create subfolders for the primary categories of the audit, such as expenses and payables, receivables and revenue, investments, debt, and fixed assets.
Ask for clarification. If you come across anything that is unclear, ask for clarification as early as possible. Obtain all necessary information and have alternative suggestions prepared in case specific information isn't available.
Assess changes. Be aware of any changes in the company. For instance, did the company start new programs? Were any programs discontinued or have there been changes in reporting requirements? There are many types of changes that can have an effect on the accounting records, so the sooner you are aware of changes, the less risk there is of an interference with the audit.
- Develop a timeline. Make sure you allow adequate time for reviewing, the actual audit and corrections if necessary. Make sure you have work papers, financial statements and other items necessary for the audit gathered and sorted before the day of the audit. Work your way through the process by starting with the most complex and time-consuming areas of the audit first.
Even if you bring on a bookkeeper and a CPA, remain involved in their processes; and if you have questions, don't hesitate to ask. Whether you opt for scheduled or random audits, or the audit is internal or external, it's still your business, and you need to know how it's performing at all times.
In addition to conducting random audits, some good rules to implement include reviewing copies of invoices before signing checks to ensure everything is legitimate and making random requests to see petty cash receipts or review bank reconciliations. Another good rule of thumb is to distribute financial duties and responsibilities so it's not one person handling all financial tasks. For example, you could require counter signatures on all checks. [Looking for the best accounting software for your small business? Check out our best picks.]