What Are Business Audits? How Can You Prepare for Them?
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What Is a Small Business Audit?
How Small Business Audits Work
3 Types of Small Business Audits
Process of Internal Audits
How Often Should Internal Audits Take Place?
Why Are Internal Audits Performed?
Process of External Audits
How Often Should External Audits Take Place?
Why Are External Audits Performed?
IRS Correspondence Audits
IRS Field Audits
Internal vs External Audits: Similarities and Differences
How to Avoid Getting Audited: 7 Top Triggers
1. Having a Lot of Cash Transactions
2. Deducting Too Many Expenses
3. Excessive Claims of Business Use for a Vehicle
4. You’ve Misclassified a Contractor
5. Not Reporting All of Your Income
6. Reporting Round Numbers and Making Calculation Mistakes
7. Reporting a Negative Business Income in Multiple Years
8. Filing an Amended Return
9. Filing Manually
How Can a Business Audit Benefit Your Company?
It could make your business more attractive to investors or lenders. If you’re looking to bring on investors, get a small business loan, or sell your company, having an audit can give any potential investors, buyers, or lenders confidence that your company is fiscally responsible and, therefore, a good investment. It might shine a light on problems, as well as opportunities for growth. An audit can expose inefficiencies, fraud, or employee theft. It might also reveal that a particular product is selling well and prompt you to expand on that line. It can make it easier to file your business taxes. The process of auditing can force you to get all your numbers and financial statements in order, which can make filing your taxes at the end of the year significantly easier. If it makes the process faster for your account, that could also save you money. It can enable you to receive business certifications. Many business certifications (such as ISO 9001, an internationally recognized standard for quality control) require regular business audits.
Preparing for Audits
Bank statements, canceled checks, and receipts The auditor will likely want to see bank records from all of your accounts, both personal and business. Books and records Whether all you have is a checkbook and cash register tapes or you maintain balance sheets, ledgers, and journals, the auditor will likely want to see your business records. Appointment books, logs, and diaries An entry in a business diary can help justify an expense to an auditor if it appears to be reasonable. Records for certain equipment If you use certain equipment, like a cell phone or a car, for both business and personal use, you will likely need to show records of usage. Records for travel and business-related meals You may need to show written records of the specific business purpose of the travel and the costs you incurred, as well as receipts.
Finding the Right Auditor
Making Sense of an Auditor's Reports
Clean or Unqualified Report (no issues) Qualified Opinion (the company did not follow the proper accounting standards, but did not break any laws or compliance rules) Adverse Opinion (the company did not follow acceptable accounting practices and there were discrepancies in the company’s financials) Disclaimer of Opinion (the auditor could not complete the audit or has chosen not to provide their opinion due to lack of impartiality or adequate information)
Frequently Asked Questions
About the Author
Share this article: