How to Best Prepare for a Smooth Audit in Your Business

How to Best Prepare for a Smooth Audit in Your Business

Congrats! You finally took that huge leap of faith and launched your full-time business. Your clients can’t stop raving about the amazing services you offer and you can’t get enough of the money cha-chinging into your pocket.

You even learned how to do your own books (yup, taking the Master Your Finances course really paid off!) and now you feel like the world’s top entrepreneur!   

Until you hear the dreaded word “AUDIT” and it stops you dead in your tracks.

But is your business being audited something that should make you shake in your boots?

My good friend and business/financial controller, Andria Norval, says, “definitely NOT!”

I sat down with her and she explained what an audit is and what every small business owner should do to best prepare for the process and make it as smooth as possible.

WHAT’S AN AUDIT?

First, let’s wrap our heads around what an audit is.

It’s basically a process through which a specific authority takes a deeper look at some figures you presented to them to gain more insight into your business’s financials. Is what you reported aaaactually accurate…

TAX AUDIT vs. FINANCIAL AUDIT

There are two types of audit, a tax audit and a financial audit.

A tax audit is always initiated by a tax authority after selecting a business either based on risk (companies with really high turnovers or complex business models) or randomly. 

The purpose of a tax audit is to verify the taxable income the business owner has presented to the tax authority and to ensure that the appropriate amount of tax has been paid by the business owner.

A financial audit, on the other hand, is always initiated by the business itself when it requests funding from entities such as banks, venture capitalists or equity firms. In that case, the potential lenders always need to check the applying business’s audited financial statements and that’s where an auditor steps in to perform the necessary audit.  

A financial audit is more complex than the tax one, since the auditor must verify every line item in the business’s financial statements.

Remember, you will never be randomly selected for a financial audit as a business owner.  

What both types of audit have in common, though, is the level of materiality, aka a numerical threshold above which auditors are interested in investigating a business’s financials. Anything below that simply isn’t worth looking into by the auditor. 

PICKED FOR AN AUDIT? HERE’S WHAT YOU SHOULD DO

To be as well prepared for an audit as possible, Andria advises small business owners to do some housekeeping beforehand to make sure their books are in order.

Here are some things you should keep in mind:

  • Always keep a detailed breakdown for your recorded batch transactions above your materiality threshold as the auditor will probably want to check them further. A lack of clarity will prevent the auditor from expressing an opinion on those amounts.  
  • Since an auditor will most probably try to identify your business’s taxable income, i.e. your revenue and any expenses you’ve deducted from it, start with your profit and loss statement and focus on the line items it contains.
  • The auditor will want to understand what underlies the information you’ve given them. For example, if you’ve had a number of revenue invoices during the year, they can be identified in your bank account and bank statement. That list of invoices (aka a specification) will be used by the auditor as the basis to select the items they’ll want to dive deeper in.
  • Don’t forget to provide your bank statements to prove to the auditor that the invoices are real and you didn’t create them yourself. So, having those invoices and bank statements handy will help both you and the auditor tremendously as it’ll save you precious time. Always keep your paper trail!   
  • Do the same for expenses and assets you’ve deducted for tax purposes and make sure you record all the write-offs to show to the auditor.
  • Don’t assume that the auditor knows everything. YOU know your business better than anyone else, so help the auditor understand it, too!
  • Stay calm and be kind. Never become defensive. Even if the auditor identifies an issue in your financials, they’re here to help you fix it. Unless your intention all along has been to commit fraud, you WON’T end up in jail. 

So to sum it all up, an audit is not the end of the world

If you’re willing to cooperate with the auditor and provide all the documentation they ask you to, the audit process will be really smooth and quick.  

Want more tips like these on how to master the financial aspect of your business and free your mind?

My course Master Your Finances will teach you everything you need to know to get a firm grasp of bookkeeping and accounting in no time!

Plus, you’ll be part of an amazing Facebook community group to get all the support you need and answer any questions you may have!

Don’t wait any longer! Enroll NOW!

Share:

Share on facebook
Share on twitter
Share on pinterest
Share on linkedin

More Posts

Get your Free Accounting Checklist!

Enter your email below to download your free accounting checklist!

Take the MYF Quiz!

Are you LOSING SLEEP wondering if you’re doing everything right? Take the quiz and know where to start!