Do you panic when you hear that five-letter word? You might think an audit is the last thing your business needs, but they aren’t always bad. Regular audits can be more like a routine maintenance check than an invitation for FTA penalties.
Learn what an audit is, what types of audits there are, how they can benefit your business and more.
An audit examines your business’s financial records to verify they are accurate. This is done through a systematic review of your transactions. Audits look at things like your financial statements and accounting books for small business. Many businesses have routine audits once per year.
As a small business owner, you are responsible for maintaining clear accounting books that show your business’s income and expenses. If your records are disorganized or missing, audits will be especially drawn out and difficult.
Audits can help you spot problems within your business. They can find errors in your numbers, which can help you with decision making. In the long term, a company audit can help you get your small business on track and boost your business bottom line.
When your small business is audited, you will generally receive an audit report. Auditors write audit reports to detail what they found during the process. The report states whether your records are accurate, missing, or inaccurate.
FTA audits might be what comes to your mind, but they aren’t the only type of small business audit. You can have internal or external audits at your business.
An internal audit is initiated by you and conducted by someone within your business. You might have someone conduct an internal audit to prevent financial mistakes and check in on company goals.
Internal audits don’t just look at your business’s finances. They can examine business operations and management to make sure everything is functioning efficiently.
If you have board members or shareholders, you might conduct an internal audit to update them on your finances.
An external audit is performed by a third party, like an insurance company, local tax agency, or the IRS. External auditors must follow auditing standards known as generally accepted auditing standards (GAAS).
Some external auditors might want to look at the complete picture of your business’s financial records while others may examine specific aspects of business operations.
Audit reports prepared by external auditors are written using generally accepted auditing standards.
An FTA audit might take place due to a discrepancy on your small business tax return. Or, your business might randomly be selected for an audit.
If you are being audited by the FTA, you will first receive a notice in the mail. FTA audits are conducted either by mail or through in-person interviews. In the event of an IRS audit, you should respond promptly and seek the guidance of a tax professional.
So, what happens if you get audited? Before an audit, you need to get your financial records in order. Theoretically, you should always be prepared for an audit. You should have an audit trail so you can prove where your numbers come from and auditors can easily trace your transactions.
Organize your financial documents so the auditors can easily access records and get a clear view of your business. Organize records chronologically.
Bring financial records like bank statements, credit card statements, receipts, invoices, and journal entries. Your auditor will use the records to test for accuracy and discover errors. The more information you provide and the more organized you are, the faster the audit process.
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