Year-end close is made simpler when conducting a financial audit before the IRS does, but where you start?
Financial audits are conducted to ensure that businesses are paying taxes and wages properly. The IRS can conduct one at any moment, so it’s best to understand how to audit finances internally to avoid failing it. Managing finances for a small business can be fraught with challenges. Furthermore, tax filing for self-employed entrepreneurs is not the same as filing an individual tax return. Financial audits are conducted to ensure that businesses are paying taxes and wages properly. The IRS can conduct one at any moment, so it’s best to understand how to audit finances internally to avoid failing it.
Fortunately, learning how to audit your business finances doesn’t take long. All you must do is come up with a plan, so we’ll cover everything you need to know.
Read on to find out how to conduct a financial audit!
Create an Audit Plan
Before conducting a financial audit, one of the first things you must do is create a plan. Although financial audits don’t involve many steps, a plan can ensure that you’re prepared whenever the auditor asks for something.
With your audit plan, you should outline everything you’ll do throughout the process. Determine which documents you’ll request, who you’ll speak to, and how much time you’ll spend doing the audit. This will help you prepare everyone else for a real audit.
Spend a lot of time thinking about when you’ll conduct the audit. To prevent your business from having downtime, consider scheduling it outside of regular work hours. However, all employees should know what to do if an auditor conducts it during the day.
Reference Past Audits
Many business owners make a common mistake when conducting internal financial audits is not learning from past audits. However, this is the simplest way to figure out how to conduct a business audit because you can go through the same steps that another auditor has.
If you remember what the auditors have done in the past, make notes within your audit plan. You should also identify the things you’ve had problems with so that you can avoid them in future audits.
Ensure that you come up with strategies to address issues before you audit your finances. For example, if your company struggled to present the right info to an auditor, determine how you’ll store data to correct that.
Learn About the Accounting Standards
Understanding how to audit your business finances isn’t difficult, but many owners fail to follow the latest accounting standards. These standards can vary depending on where you’re located, but the main things you should think about are tax laws.
Whenever new tax laws are established, you may need to come up with different organizational strategies. Some changes may also require you to track different data forms or use software to meet the standards.
Inform Employees of the Audit
After thorough planning, the last thing you should do before you audit your finances is informing the audit employees. If you already know which date you’ll conduct the audit, it’s best to inform them as soon as possible.
The first audit or two shouldn’t happen without notifying them because they’ll be less likely to do things correctly. However, you can start conducting surprise audits later to ensure that everyone has a solid understanding of what they should do.
When informing them, let each member know what they’ll need to do during the audit. Some employees won’t need to do anything, but many of those that work in your finance department will. Assign roles to everyone and give them copies of your plan to simplify the process.
Analyze Tax Records
When an auditor is going over your business finances, they’ll look into its tax records. Because of this, you should analyze the tax records for your internal audit, so you know what they’ll be seeing. Providing that you have records from the past several years, you shouldn’t have issues explaining your transactions.
Things like tax credits, liabilities, and deductions should all be accounted for. Gather as many documents as you can from the IRS and adjust financial statements to reflect the records. If your tax-related info is correct, everything else will be much easier to document.
You can also invest in bookkeeping services to help you document things. When outsourcing this type of work, you won’t need to hire salaried employees to do everything, which will help you save money.
Start the Financial Audit and Measure Results
After going through all the other steps, the only thing left is to start the audit. On the date you planned, meet with the person you’ve assigned and request the necessary financial documents. Keep in mind that if you notice something isn’t right about your data, you can ask for supporting documents.
Your main goal should be to find out what would prevent your business from passing the audit. You’ll need everyone there, so postpone meetings, projects, and time off until after the audit. The only employees who don’t need to be those who won’t have any role in the audit.
When the audit is over, you’ll need to evaluate the results. Provide feedback to employees and develop a new strategy if the audit didn’t go as planned.
Now You Know How to Audit Your Business Finances
No matter what size your business is, you can expect to get a financial audit at some point to ensure that you’re handling everything correctly. After reading this article, you no longer need to ask yourself about how to audit your finances.
Knowing how to conduct an internal financial audit will ensure that your business is prepared for a real one. All you need to do is go through each of these steps to figure out which areas can be improved.
Check out our other articles to learn more about different business topics!
