Due to the necessity of financial audits, year-end reporting can be quite challenging. However, these audits are extremely important in building your company's reputation with external stakeholders like banks, regulators, and shareholders. Listed firms must go through this rigorous process as well because it is a legal requirement, therefore there is no way around it!

Aside from publicly traded enterprises, even small, privately held businesses may be subjected to extensive audits by independent firms. As a result, it is critical to take the necessary precautions before, during, and after the audit to ensure a smooth process.

Before we get to the steps involved in an audit, it's important to understand what an audit is.

What is auditing?

An audit is a detailed study of your company's financial records to ensure their accuracy. This procedure entails a rigorous analysis of your operations, including a thorough examination of financial statements and accounting records designed specifically for small businesses.

An auditor reviews or inspects various books of accounts, followed by a physical inventory check, to make certain that all departments use a standardized way of recording transactions. It is done to ensure that the organization's financial accounts are correct.

As the owner of a small business, you are responsible for keeping accurate accounting records that demonstrate your company's income and expenses. Audits will be more time-consuming and difficult if your records are unorganized or missing.

Audits can assist you in identifying issues in the business you run. They can detect flaws in data and assist you in making decisions. In the long run, a corporate audit can help you get your small business back on track and enhance your bottom line.

After completing the audit, the auditors will provide you with a detailed report that includes findings on the accuracy, completeness, and potential inaccuracies within the records.

Types of audits

Common types of small business audits are:

Internal Audit

An internal audit is a self-audit that is scheduled and carried out by a company representative. Many organizations conduct an internal audit once a year to guarantee that their books and financial statements are accurate. An internal audit is conducted for your benefit; the results are not shared with a third party.

These can often be used as a preventive strategy to detect any discrepancies in financial reporting. Compliance audits, internal financial audits, Operational audits, IT audits and performance audits are a few types of internal audits conducted by small businesses. These aren't as formal processes, but they're useful for assessing a company's progress toward its goals and objectives.

A smaller company might only hire one or two employees to do audits, as opposed to larger corporations, which typically have audit departments. Internal auditors provide more than simply financial audits of companies. In order to ensure compliance with corporate guidelines and local, state, and federal regulations, they also examine firm’s internal controls, policies, procedures, and processes.

Internal audits are typically carried out by publicly traded corporations to inform shareholders and investors about how the business is doing. Internal audits can be a valuable tool for identifying operational problems even if your business is not publicly traded.

External Audit

An external audit, also known as an independent audit, is an audit conducted by a person or entity outside of the company. External audits can be performed by the IRS, insurance company, or a local tax agency. It is called 'independent' because the auditor has no commitment or obligations to the company, hence eliminating potential conflicts of interest.

In order to meet a certain type of regulatory requirement, firms typically perform independent external audits. While some external auditors may wish to review all of your company's financial records, others may only focus on a few key areas of operations. A report on the audit prepared by the external auditor will adhere to (GAAP) Generally Accepted Accounting Principles. In their report, they must state if your organization passed the audit. If a corporation doesn't get a "clean opinion," they might have to fix accounting inaccuracies and redo the audit.

IRS Audit

When the IRS notices any problems on your tax return, an IRS audit takes place. The IRS typically plans audits for tax returns submitted during the last three years. The IRS may dig deeper if there are significant errors.

You will first get a notice in the mail if you are the subject of an IRS audit. In-person interviews or mail-based audits are both used by the IRS. If the IRS finds that you are liable for any tax fines and penalties, it will let you know. The IRS will notify you if there are any tax penalties and interest due. Flaws and discrepancies in your income declaration or claiming business-specific deductions can ensure that the IRS investigates your tax filings more closely. 

You should act quickly and seek the advice of a tax expert if the IRS audits your account. 

Auditing For Small Businesses: Step-By-Step Guide

While running a small business requires balancing a number of responsibilities, the auditing process is one that shouldn't be overlooked. Especially now that managers are legally accountable for the veracity of their company's financial statements under the Sarbanes-Oxley Act of 2002. Furthermore, SOX required organizations to document and assess their internal controls as an integral component of their external audit. Through internal auditing, small business owners can assess their financial records and unbiasedly identify areas for growth. Through routine audits, small business owners can gain a complete understanding of their finances and ensure regulatory compliance. By assisting in the identification and avoidance of fraud, can reduce the risk of financial losses for small businesses.

Small business owners must therefore pay special attention to their internal auditing process because it could be the key to unlocking the full potential of their company.

Below are the steps involved in conducting internal audits.

Step 1: Planning the Audit

Effective audits require planning, making it the first step in conducting internal audits. Audit planning establishes the criteria for audit including its goals, timeframe, schedule and the roles assigned to each team member. Audits may also review previous audit reports to learn more about the management's preferences for information gathering and presentation.

The audit plan includes a checklist to make sure that each team member understands the overall goals and expectations. In addition, the internal audit team may proactively schedule meetings with management to update them on the audit's status and discuss any potential difficulties.

Step 2: Auditing

Similar methods are frequently used in internal and external audits. Periodic audits may be carried out by some businesses for continual oversight. Internal auditors use assessment techniques to get a full understanding of internal control policies and if staff are adhering to them.

Initially, auditors use indirect assessment techniques during the internal auditing process. They may review flowcharts, manuals, and departmental control policies as part of the auditing process. Activities including transaction matching, audit trail calculations, counting physical inventory, and mandated account reconciliation are all included in the auditing fieldwork procedures. Auditors may use analytical methods, such as examining random or specific data, to enhance internal control processes.

Although the internal audit may have begun with a clear scope, as the team obtains and evaluates data, it may be important to reevaluate the objective and scope of the audit. This includes reassessing the initial schedule or budget set aside for the audit.

Step 3: Reporting

An interim memo can be included in internal audit reports to bring attention to urgent findings for the board of directors. Sometimes, before finalizing an audit report, a meeting is held between the internal auditors and management. At this meeting, management can provide feedback, add information that may change the conclusions of the audit, or share their thoughts on the findings.

The report concludes by presenting a summary of the findings, explaining the methods and procedures used during the audit, and providing suggestions to enhance internal controls and procedures. Additionally, it may outline future steps, including any necessary modifications, ongoing monitoring, and upcoming review timelines.

Step 4: Monitoring

Once a certain amount of time has passed, it is possible that an internal audit will need to be followed up on to ensure that any suggested changes have been implemented. The details and procedures for this monitoring and review process are typically established once the final audit report has been issued.

Monitoring is a crucial step in the internal audit process as it helps organizations ensure that their internal controls are working effectively and efficiently. Internal auditors can identify control recommendations to improve the efficiency and effectiveness of the organization's processes by continuously monitoring and reviewing them. This phase of the audit involves evaluating internal controls and compliance, testing transactions, records, and resources, and conducting necessary procedures to achieve audit objectives.

Beginner's guide to auditing for small businesses

Internal Auditor Skills

The skills of an internal auditor are qualities that they develop through training and experience to effectively fulfill their responsibilities and collaborate with their colleagues. Technical aptitudes allow them to focus on their financial, auditing, and accounting duties, while also possessing knowledge in areas such as risk management, project management, and regulatory compliance.

While not immediately related to their core responsibilities, soft skills are critical for internal auditors to effectively engage with colleagues, clients, and supervisors. These include organizational, communication, time management, problem-solving, and analytical ability.

Small Business Auditing Basics

Small business owners need to have a good grasp of the basics of auditing. It involves a structured evaluation of financial records and activities to ensure accuracy, compliance, and operational efficiency. This process instills confidence in stakeholders and maintains the integrity of finances.

Here are five ways to gain expertise in auditing for small businesses:

1. Formal Education and Courses

Enrolling in auditing courses or pursuing a degree in accounting or finance from reputable institutions provides a structured and comprehensive foundation in auditing principles. These programs cover topics like risk assessment, evidence gathering, and financial statement analysis.

2. Professional Certifications

Certifications such as Certified Internal Auditor (CIA) and Certified Public Accountant (CPA) provide relevant auditing training. These credentials are widely recognized and give in-depth knowledge as well as practical auditing skills.

3. Online Learning Platforms and Resources

Using online platforms such as Coursera, Udemy, and LinkedIn learning allows you greater flexibility in studying auditing concepts. These platforms include a variety of courses, webinars, and tutorials offered by industry experts, making them accessible to anyone with varying timelines.

4. Joining Professional Organizations and Networking

Joining auditing or accounting professional groups gives you access to resources, opportunities for networking, and auditing-related educational activities. Interacting with experienced auditors and mentors in these networks provides useful insights and help.

5. Staying Informed on Industry Regulations

Staying current on accounting standards, rules, and regulations is crucial for effective auditing. This includes understanding how changes in compliance standards, reporting criteria, and industry-specific legislation may affect auditing procedures.

DIY Auditing for Small Businesses

As a small business owner, it is essential to perform regular internal audits to ensure the accuracy of your financial records. This process involves reviewing all financial transactions, reconciling accounts, and identifying any discrepancies. However, for more complex audits, seeking the expertise of a professional is highly recommended. A professional auditor can provide valuable insights and ensure that your financial statements are accurate and compliant with relevant laws and regulations. By conducting thorough internal audits and seeking professional help when necessary, you can ensure the financial health and sustainability of your business.

Conclusion

While a small business audit may not be enjoyable, there is no reason to fear it. Indeed, an internal audit can be a good opportunity to find inefficiencies and build better future strategies. External audits can also help keep stakeholders, investors, and lenders satisfied. Accuracy in reporting income and deductions is crucial for IRS audits, but they are not intimidating.

As a small business owner, it's important to have a good understanding of auditing. This will enable you to ensure financial accuracy, compliance, and operational efficiency. It also helps you make informed decisions, build trust with stakeholders, and ultimately contribute to the long-term success of your business.