Business Audit: What Is it and What Are Its Benefits

Business Audit: What Is it and What Are Its Benefits

A business audit can be scary because it can uncover business secrets that you would rather keep private. This does not have to be so, because you can do periodic audits yourself so that when the taxman comes knocking, you have everything in order. Doing a business audit yourself has some potential benefits, and below we will look at what a business audit is and what the benefits are.

audits for business - Business Audit: What Is it and What Are Its Benefits

What Is a Business Audit?

A business audit is a detailed look at a business’s tax returns and accounting books. This is to ensure they are in order and that the business is complying with all local laws and regulations. All businesses should do an audit at least once a year. Businesses can choose to do an internal audit or have an external or IRS auditor look through their books.

An audit does not have to be done with the aim of filing the correct tax returns or finding if there are any accounting discrepancies in their books. An audit can also be done to earn business accreditations or to please investors and shareholders. Some of the audits done with the aim of getting these accreditations will require an external auditor so that your internal auditor does not do a job that favors the business.

The Benefits of a Business Audit

An audit can help your business in several ways:

  • Find productivity killers – Doing an audit can uncover a lot of ills at the business including theft, fraud or inefficiencies in your business processes and procedures. An audit can help improve profit margins by rooting out all these productivity killers
  • Get financial help – A detailed audit can help potential investors see the value of investing in your business. When the audit is done right, it will boost investor confidence and lenders are likely to lend to businesses that have their books in order.
  • Make it easier to file taxes – If your business does audits regularly, filing your taxes will be easier. A good audit can also make things easier for your accountant, thereby helping reduce the time and cost it takes to file business tax returns.
  • Certifications – Certifications such as the ISO 9001 certification require that your business is audited regularly. These certifications can help boost profits by increasing the amount of confidence different parties have in your business

How Does an Audit Work?

An audit should be thought of as a quality control measure in the business. It should be used to root out inefficiencies and improve your business’s practices and processes.

When doing an audit, the following steps are generally followed:

  • The financial books are organized in categories and by year
  • An internal auditor will gain access to your accounting books. 
  • This access can be in the form of physical books or a login into your financial system.
  • Once they have this access, the auditor will do a thorough examination of your financial statements and accounting books.
  • Once they are done, they will produce an audit report. This report will contain the auditor’s identity, the scope of the audit, and whether the financial records are correct or not.

Does Your Business Need Regular Audits?

There are some businesses that need regular audits while some do not. Companies that need to be audited regularly include:

  • Companies that are publicly traded 
  • Nonprofits
  • Companies that need business insurance. These companies need these audits to ensure the insurance covers everything and that they are paying the right amount of premiums.

Types of Business Audits

While many business owners are familiar with an IRS audit, there are other types of audits. 

External Audit

This audit is also known as an independent audit. These audits are conducted by a third party to ensure:

  • They have no responsibilities or loyalty to the business
  • No conflict of interest arises during the audit

Most of these external audits are done to comply with legal regulations. After the audit is done the audit will present an audit report with one of the following conclusions:

  • Clean opinion – Here, all financial records are proven to be accurate
  • Qualified opinion – Here the auditor is unable to say whether the records presented to them are accurate or not. They may disagree with some of the records presented to them but they may not have enough information to say whether this information was accurate or not. 
  • Adverse opinion – The auditor concludes that the financial records they have are not an accurate representation of the company’s financial records
  • Disclaimer of opinion – Here, the auditor does not provide an opinion on some financial records, for example, records from past years

IRS Audit

An IRS audit is triggered if there are issues with your tax returns. This audit usually focuses on the past three years but there are bigger problems; the IRS might ask for documentation from further back. Some other reasons for this audit include:

  • Claiming losses several years in a row
  • Taking lots of deductions
  • Higher than normal income levels

When this audit is being done, it often takes two forms:

  • A field audit where an IRS official comes to the business or your accountant’s office.
  • A correspondence audit where the IRS sends you a letter and you have to reply using documents that support the records you sent them.

Internal Audit

This is an audit carried out by a representative of the business. Many businesses do this audit once a year and because they do these audits for their own uses, the reports generated are not sent to third parties.

Larger businesses often have an audit department but small businesses have the option of having one or two people do the audit. These are usually highly skilled and experienced employees who have at least a master of accountancy degree. Internal audits are usually quite thorough as they also examine:

  • Procedures
  • Policies
  • Processes

They do this to ensure they are in compliance with a company’s guidelines and the law.

Publicly traded companies do these types of audits to let their shareholders and investors know how the business is doing.

Audits, especially external and IRS audits, can be scary for most businesses. That said, if you do these audits regularly, you are less likely to get in trouble with the IRS. Audits can also boost profits and help streamline business practices and procedures.

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