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Is Your Business Ready for an Audit? Here’s What You Need to Know

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Is Your Business Ready for an Audit? Here's What You Need to Know

As a business owner, you constantly seek ways to boost your profits. But have you ever thought about auditing? It might not seem thrilling, but it’s super important for your company’s success. In this blog post, we’ll discuss why it’s vital for every business, big or small, in any industry and give you the best tips to be ready for auditing.

Auditing for business growth

Auditing is essential for any business. It’s like checking everything to ensure it’s all good. You’ve got financial stuff, operations, and systems. Different types of audits look at various things: money, how things work, and whether everyone’s following the rules.

  • Auditing helps us find where we can save money or do things better. When we audit, we spot problems in our money handling and fix them to make our work smoother.
  • It’s like having someone check your homework to ensure it’s right. An auditor checks whether the boss’s words are accurate, ensuring everyone knows what’s happening.

How can your business be ready for an audit?

Discover these ten steps to ensure your business is ready for an audit:

1. Month-end close

Ensure that your books are closed regularly. This usually isn’t a problem for big companies, but smaller companies sometimes overlook it. Setting up a regular closing and reporting schedule is a smart move. It follows best practices and helps you spot any issues early on.

2. Closing checklist

Having a closing checklist that you use all year round is essential. This checklist helps ensure you complete all the tasks at the end of each month and post all the journal entries. Without a checklist, you might forget to make some critical entries, especially the ones needed every quarter or year. So, having a checklist is helpful.

3. Documentation

Documenting, filing, and organizing might sound boring. However, these tasks are vital to having an easy audit. You don’t want to scramble to find paperwork for the auditors later. Keep records of debt agreements, leases, legal cases, complex deals, technological changes, and contracts with essential customers and vendors.

4- Internal controls

Ensure that robust internal controls are in place, functioning properly, and effective. Remember to include Information Technology General Controls (ITGC) that manage who can access and alter the systems holding your financial data. Having a skilled consultant perform a control assessment is a smart move to ensure your controls meet the required standards.

5. New accounting rules

Keep an eye on the latest changes in accounting rules and updates to the existing ones, which happen often. For instance, significant changes have recently been made to how revenue recognition, lease accounting, and non-profit accounting are handled. 

Ensure you know when these new rules start to apply. Since adapting to these changes can take longer than you might think, it’s wise to get started early.

Is Your Business Ready for an Audit?

6. Non-recurring transactions

If you’re unsure how to record a one-time or unusual transaction this year, talk to the auditors soon. These could include selling property, buying another company, extending lease agreements, starting a new bonus plan for managers, launching a different product or service, or changing your loans.

7. Balance sheet reconciliations

Clean and check your balance sheet every month. An up-to-date balance sheet shows that your finances are in good shape. A straightforward way to catch mistakes or problems in your accounts is to do bank reconciliations regularly. Smaller businesses can only check other accounts, like fixed assets, prepaid expenses, accounts receivable, and accounts payable, every three months.

But don’t just stop at doing these checks. Use these moments to look for and fix any differences or mistakes. This helps keep your financial processes smooth all year long. For instance:

  • If you see old checks that haven’t been cashed when doing your bank reconciliations, it might mean they are lost or were issued twice. 
  • If negative numbers are found in an asset account, something might be wrong with how transactions are recorded.

Find and solve these problems quickly. If you wait until the end of the year, you might run out of time to fix them.

8. Customer and vendor ageing review

Every month, look at the ageing of accounts receivable (A/R) and accounts payable (A/P). Check for any old or overdue items. It’s essential to stay on top of these. Set up a process for collecting payments from customers. Ensure that you follow through with this regularly. Also, go over old balances with vendors. If necessary, make changes to them during the year. This helps keep everything in order.

9. Expenses

At the end of the year, ensure that all expenses are recorded correctly. Then, check later payments to catch anything that might have slipped through the cracks. 

Reviewing expenses from year to year and comparing them to the budget can help spot mistakes and extra expenses that need to be included in the year-end records. 

Remember to account for wages paid after the year ends, bonuses, and earned vacation time. Finally, the repair and maintenance expenses should be reviewed to see if any should have been recorded as fixed assets.

10. Physical Inventory

Companies preparing for a year-end physical inventory must plan carefully and educate their count teams. It’s essential to consider counting before the year-end and doing a roll-forward but ensure that you get approval from your auditor first. 

Just like with your year-end sales cut-off, having a solid process for proper cut-off of shipping and receiving is essential. Auditors pay close attention to these two items, so everything must be in order.

Final thoughts

Auditing is essential for businesses. It gives valuable insights into growth and following rules. By auditing, businesses find areas to improve and lower risks. To be ready for an audit, companies must do some things beforehand to ensure everything is in order during the audit.

FAQs

What are the different types of audits?

There are various kinds of audits: financial audits, internal audits, external audits, tax audits, and operational audits. Each type has a specific job, like checking financial accuracy or ensuring a company follows tax rules.

Who usually does audits for businesses?

Internal company auditors or external auditors can conduct audits. 

What steps does the audit process involve?

The audit process involves several steps: planning, gathering evidence, checking controls and procedures, writing down findings, sharing results, and suggesting improvement.

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