The Complete Guide to Audits for SMBs
For any business, audits are important in maintaining transparency, trust and accountability in financial reporting. If you’re running a small or mid-size business (SMB), you may be caught up in daily business operations and put auditing to the side.
However, an audit is an essential process for your company, and prioritizing auditing can lead to numerous benefits. This guide to business audits will help you understand the auditing process and how to prepare for internal and external audits.
What Is an Audit?
An audit is an extensive review of a company’s transactions, financial records and processes, helping to determine their accuracy and compliance with regulations and laws. There are two main types of audits:
- Internal audits: Audits conducted by employees within the business.
- External audits: Audits conducted by independent auditors.
An external audit is generally more detailed than an internal audit and contains one of the following judgments:
- Qualified opinion: A qualified opinion is given when the auditor doesn’t reach a definite conclusion and doesn’t have full access to accounting records.
- Clean opinion: This opinion is given when a company has accurate financial statements and records.
- Negative opinion: This opinion is given when the financial records of a company contain a misrepresentation.
The audit verifies whether the financial statements accurately represent the business’s performance, financial position and cash flows.
What Is the Audit Process for a Small Business?
There are three main steps involved in auditing a business:
1. Collecting Accounting Records
The auditor starts by gathering accounting information, which is available in records such as invoices, bank reconciliation statements, receipts and financial statements. The auditor will ask you or your team to present the past two to three years of accounting data. Auditing can’t be done without a proper record of this accounting-related information.
2. Inspecting the Information
The auditor will review the accounting information to ensure no errors are present. Some key accounting records reviewed in this second stage include financial reports, vendor receipts, sales invoices, meeting minutes, electronic records, internal policies, taxation documents, trial balances, and transaction-related documents.
3. Comparing the Records
The auditors compare the company’s records with the information it has submitted to other companies, government entities and other third parties. The auditor will:
- Flag any wrong entries.
- Highlight math errors that result in inflated figures.
- Compare the salvage value of assets with the gain or loss from an asset’s sale.
- Inspect and compare losses or gains from previous years.
- Flag inflated expenses or fewer sales on Form 1099.
- Use accounting formulas to identify errors.
How to Prepare for an Audit
Be sure to organize your financial records and documentation in preparation for audits. In addition, you should understand the auditing process and what to expect. Understanding the process helps you prepare well for the audit and allows you to select competent certified public accountants or auditors to perform the audit.
Take the following measures to prepare for an audit:
- Understand the purpose: Understand why the audit is being conducted. While audits are important for keeping your business’s books in order, they also help with satisfying stakeholders’ expectations and building trust.
- Maintain accurate records: Ensure you maintain accurate financial records and supporting documentation. Supporting documents include receipts, bank statements and invoices. Financial records you should maintain include expenses, income, assets and liabilities. Use accounting software or engage a qualified bookkeeper for easy record-keeping. Ensure you separate your personal finances from your business finances.
- Review internal controls: Review the policies and internal procedures designed to safeguard your business assets. Address any weaknesses discovered during the review.
- Understand tax regulations and auditing standards: Understand the tax regulations that apply to your business and industry. Ensure you comply with local, state and federal tax laws. You should also familiarize yourself with auditing standards to understand the requirements and expectations.
- Perform a self-audit: You can prepare for the official audit by conducting a self-audit to identify and address issues. Perform reconciliations, review your financial statements and verify the accuracy of your financial records.
- Prepare for the auditor’s questions: Expect your auditor to ask questions during the auditing process. These questions will generally cover internal controls, transactions and financial statements. Prepare for these questions by having a thorough understanding of your financial records and business operations.
- Engage professionals: Engage certified public accountants or auditors who are experienced in auditing SMBs. A professional and experienced auditing firm will help you navigate the complexities of the audit process and stay compliant with relevant regulations.
What Are the Benefits of an SMB Audit?
For many business owners, auditing seems like an overly complicated process that should be avoided if possible. However, auditing is essential for your company’s financial success. Here are some of the key reasons why companies need to pursue auditing:
Identify Fraud
An audit can help you identify internal fraud or learn about potential theft of business assets. It can also identify discrepancies in recording accounting information. Regular audits can deter employees from engaging in fraudulent activities and prevent misappropriation and waste of business resources.
Compliance With Tax Submission Rules
The Internal Revenue Service (IRS) can potentially impose fines and audits for businesses that submit false accounting and tax data. The SMB auditing process helps you collect all documents required to file tax returns correctly and make sure your financial reporting information is accurate.
Gain Investor and Lender Confidence
Before investing in any business, investors want to understand its finances. If someone is interested in investing in your company, they will likely ask for bookkeeping and accounting records. Having your accounts audited by an independent auditing firm can help you gain the confidence of these investors. Financial institutions like banks and credit unions can also consider this information when deciding to lend to your business.
Get Certifications
Some certification bodies require companies to audit their operations before they are certified. Certifications can help your business build trust with customers, lenders, vendors and investors.
Contact Marshall Jones for a Comprehensive SMB Business Audit
A business audit can help your business detect fraud and implement measures to prevent future incidents. In addition, having accurate audits can make all the difference when looking for new investors, helping your company grow and succeed.
At Marshall Jones, our experienced team has been assisting businesses in the Atlanta area for more than three decades. We offer an array of accounting services, including professional audit and assurance services that can give you an in-depth overview of your company.
We’re here to support your organization with customized accounting solutions that can help you save time and lower costs. Contact one of our specialists today to learn more and get started.
