Conducting a financial audit of your business is essential. The audit helps you compare your company’s processes and practices to ISO standards. The report also helps you confirm that your organization’s Quality Management System is effective.
So how do you prepare a business audit checklist? While this can sound like a daunting task, the checklist will make your work easier. Below are tips to help you design a checklist for a business financial audit:
Through our https://www.thepaystubs.com/ calculator, you will be able to efficiently keep track of your finances, secure bank loans, obtain credit cards and use the stub as proof of income and a strong work reference.
Document All Financial Transactions
Preparing your business for an upcoming audit can be a stressful experience. But, if you have all the necessary tools in place, the process might go off without a hitch. The first item on this checklist is transaction documentation.
Hence, you should record and document all financial transactions in your business. Record these transactions in your company’s general ledger.
Whether you use manual or electronic accounting methods to document your transactions, providing enough information about each particular transaction you record is essential.
Every recorded transaction should have enough data on the person who recorded it. It should also have correct revenue entries and an accurate time of recording.
Financial Statements and Budgets
Any reputable business will have a set of financial statements and budgets. These budgets are essential for measuring and monitoring the company’s financial health. In most cases, companies check their financial health throughout the financial year.
When preparing your business for an audit, ensure that you set a budget at the beginning of every year. In the budget, record your expected income and possible expenses. Then, track these figures at the end of every month.
Additionally, you should also have up-to-date primary financial statements. These include owners’ equity, income statements, statements of cash flow, and the balance sheet.
You should always review these four primary financial statements for completeness and accuracy. Confirm that the financial statements are compliant with Generally Accepted Accounting Principles (GAAP).
Sale Costs and Revenue
The auditors will conduct tests of your general ledger’s cost-of-sales and revenue entries during an audit. They will also check all financial statements to confirm that the entries are correct.
When you record any sales in the ledger, remember to keep proof of shipping. Also, keep a record percentage of completion and delivery of services accounting completions. These records allow your business to document periodic revenue on long-term contracts.
You should confirm that the cost-of-sales entries on the ledger are properly timed. You should also check that their associated revenue entries are accurate.
Accrual Accounts
Accruals are essential for any business. That’s because they establish balance-sheet reserves for any pending payments. These pending payments include items such as:
- Duties due for earned workers’ wages that are waiting for payroll processing
- Sick day earnings
- Paid vacation days
- Employee commission and bonus agreements
Ensure that your accrual includes all the above items. Based on the law, they should also be funded for state, federal, and local taxes due for sales, income, or property.
Expenses Approvals
Every business should have protocols for approving any payments for goods or services. Whether you’re paying for the services via check or in cash, the process should be governed by well-written procedures. Your company should also have appropriate approval levels before the money leaves the company’s accounts.
Your accountant should always keep petty cash funds and checks under lock and key. Other employees should also have minimum access to these funds.
All companies should include double signatures to verify any cash released or signed checks for any expenses. This rule should also apply to all payroll expenses.
Meeting Minutes and Bylaw Rules
All businesses should have a well-written set of bylaws for stakeholders to follow. Your company’s board of directors will create bylaws for the benefit of stakeholders, the business, and customers. If so, ensure that the approved bylaws are well documented.
You should also review, verify, and check the bylaws for compliance issues. Then ensure that you always keep an organized record of corporate meetings minutes. These minutes can come in handy in the future.
Also, make sure that the minutes are also reviewed regularly. This ensures that your business has addressed the issues discussed in the meetings.
Big Contracts
Most times, companies have major contracts with customers or suppliers. These contracts can greatly impact a business’s financial situation.
Hence, all major contracts and agreements with third parties should be reviewed and checked. These reviews confirm that each party is meeting its contractual agreements. This includes reviewing major sales agreements, long-term leases, and insurance policies.
You should also review all other agreements and documents with written business obligations. Confirm that your company is also working within the agreed terms on the agreements.
Confirm Your Company’s Regulatory Compliance
Auditors’ job is to ensure that a business operates within the compliant standards. They check whether your company is compliant with regulatory agencies within your industry. This is why their job also includes checking whether you filed your taxes correctly.
The audit also includes checking your business’s compliance with other local agencies that govern your industry. The auditor ensures that you share the required periodic statistics or reporting with these agencies.
The auditor will also check whether your company is financially sound. They also check that you maintain a physically safe environment for all stakeholders.
Separation of Duties
It’s key to verify the separation of duties of every financial transaction in your business. This provides internal control that will help protect your business from fraudulent activities. It also helps you prevent costly mistakes.
For instance, the employee responsible for writing a purchase order (PO) shouldn’t have permission to write a check to pay the suppliers. Such a rule protects your company from fraudulent activities. In this example, the staff that writes POs might collaborate with the supplier to defraud your business by writing a larger check.
Unfortunately, such rules can be quite challenging if you work in a small company. But, you can ask the finance and accounting employees to request staff members from a different department to confirm the checks.
Trial Balance
Your business’s trial balance is the value of all your accounts as a snapshot in time. Any internal and external audit procedures should have a process to confirm the balances. But, the auditor should pay special attention to the balance reconciliations of major accounts.
Additionally, you should provide detailed aging reports to support and prove that you have the correct balances in your accounts payable and receivables. Fixed assets and inventory should also be confirmed by value, item, and quantity with periodic cycle verification counts to ensure the numbers are accurate throughout the year. You should also confirm cash balances through invoice and bank statement reconciliation.
Loan Statements
Almost all publicly-traded businesses have some kind of debt. Auditors need to confirm all the company’s debts with the respective lenders. Hence, keeping an updated loan statement is key to making work easier for auditors.
Ensure the current loan statement has an updated record of the following:
- Old and current payments
- Delayed payments
- Percentage interest rates
- The creditor’s current mailing addresses
- Contact information
Remember to include all this information in your loan statement. That’s because it makes it easier for the auditor to contact the creditor and confirm that everything on the statement is correct.
Types of Audits
Almost every business receives an annual financial statement audit. These statements include cash flow statements, balance sheets, and income statements. There are different types of audits which include:
Internal Audits
An internal audit is conducted by auditors employed by the same organization receiving the audit. The resulting audit report from an internal audit is shared directly with the board of directors and managers of the same business.
Consultant auditors often use the auditing standards set by the company they’re auditing instead of a separate set of criteria like in other types of audits. Internal audits are quite common for companies without the in-house resources to audit different aspects of their businesses.
Internal audit reports are often used to make informed decisions about the business. This includes managerial changes, departmental improvements, and changes in internal controls. The primary aim of an internal audit is to ensure the company is compliant with laws and regulations governing the business.
The audit also ensures that the business maintains timely and accurate financial reporting as well as data recording and collection. It’s also beneficial to the company’s management as it helps them identify any flaws in their financial reporting or internal control before an external audit.
External Audit
An external audit is performed by an outside party. These audits are very helpful in getting rid of any bias when reviewing a company’s financial state. External financial audits are conducted to identify any material misstatements and mistakes in a company’s financial statements.
An auditor’s opinion gives the users of the company’s financial statements the confidence and assurance that all the financials are complete and accurate. Hence, external audits are great for your company’s stakeholders. The report from this audit allows them to make informed decisions about your company.
External auditors don’t follow your company’s set of standards. They follow different standards than the ones your internal auditors would follow. An external auditor is independent, which is the main difference between them and internal auditors.
When a third party conducts a business’s audits, the resulting opinions expressed on the reports of the audited items such as the company’s systems, internal controls, and financial statements can be considered candid. Additionally, the external audit will not affect the current employee relationships as they don’t work with your organization.
Internal Revenue Authority Audits
The IRS regularly conducts audits on different companies to verify if they accurately reported their income and paid the right tax amount. The IRS auditors also check specific transactions in the company for any irregularities. Unfortunately, when the IRS shows up at your door to audit your personal or business finances, most people take this as a negative sign that you have done something wrong.
But, this isn’t the case, and the IRS can select anyone or any organization for an audit. This isn’t a sign of any wrongdoing.
The IRS selects companies and people for auditing based on a random statistical formula. The formula analyses all taxpayers’ returns and compares them to past or similar tax returns. You could be selected for an IRS audit if your company had any past dealings with a business with tax errors in their audit.
Before the IRS comes knocking at your door for an audit, ensure that your business is ready. This means ensuring all steps in the above checklist are in order. There are often three outcomes at the end of the audit:
- No changes to the company’s tax return
- A change that the taxpayer accepts
- A change that the taxpayer doesn’t accept
If you accept the changes made by the IRS auditors, you may owe extra taxes and \or a penalty. But if you disagree with the changes recommended by the audit report, you could ask for an appeal. You can also hire an attorney to assist you with mediation to try and resolve the issue.
If you have a payment issue with the IRS, whether it’s late payments or an inability to make payments on time, it’s best to get some professional help. Check out this company https://silvertaxgroup.com/irs-fresh-start-program/, and they will help you with your IRS troubles.
Supplier Audits
A supplier audit is often focused on third-party companies and suppliers. This audit makes sure that the external providers meet the required standards.
These audits are performed more frequently than the other three types of audits. That’s partly because internal audit processes are a major part of becoming ISO Certified.
Are You Ready for a Business Audit?
Facing internal, external, and IRS auditors is inevitable for anyone running a business. This means you always have to be ready for a business audit. The best way to get your business ready is to ensure that your financial statements are in order.
Follow the above guide for a comprehensive checklist of everything you need for an accounting audit.
Did you enjoy this article? Check out other posts on our site for more informative tips.
