Did you know that there are over 30 million small businesses in the United States? If you are a proud small business owner you know that keeping all of your records organized and accurate is very important. We have put together this guide to help you keep up with the different types of audits that you should know about to ensure that you are always prepared.
Keep reading to learn the ins and outs of audit types.
1. IRS Tax Audit
IRS tax audits are rarely ever fun but sometimes companies have to deal with this type of audit, therefore it is important to be prepared. These audits are to assess whether your company’s tax returns were accurate or not.
An auditor will look for any discrepancies to see if you either underpaid or overpaid the IRS. These audits are randomly done and can either happen in person or via mail.
The best way to prepare for an IRS audit is to have your files and records organized. If they notify you that you will have an in-person audit, collect and organize everything ahead of time to avoid scrambling for paperwork at the last minute.
You will have a much smoother experience with the IRS audit if you have your loan agreements, account statements, bills, loans, etc in place.
2. Internal Audit
An internal audit will happen within your own business. You as the owner initiate the audit while someone else inside your business conducts it. You can choose a specific department that you want to have audited and then the internal auditor will collect all of the data and report their findings once they are done.
These audits are a great way to check in on the financial goals of the business. If there are any shareholders or any board members, an internal audit is one way for everyone to stay updated on the business’s finances.
A few reasons that internal audits are done is to monitor effectiveness, examine operation processes, look at where improvements can be made, evaluate risk management procedures, etc.
Internal audits can happen daily, weekly, monthly, or yearly. This is completely up to you and how you decide to conduct the internal audits. You can either schedule them ahead of time to give departments time to prepare for them or you can opt for a surprise audit in case you suspect that there is any illegal or unethical activity going on.
3. Financial Audit
This is one of the most common types of audits done. An auditor analyzes the accuracy of the business’s financial statements externally. Financial auditing services will review the transactions, procedures, and balances within your business.
Once the audit is completed the company that does it, will usually release an audit opinion to any investors, creditors, and lenders in your business.
4. External Audit
External audits are conducted by a third party like an accountant or a tax agency. The auditor has zero connections to your business and has to follow GAAS (generally accepted auditing standards).
The main goal of performing an external audit is to check the accounting records to make sure they are completely accurate. If you have investors or lenders looking at your company, they will usually require an external audit to make sure that the business’s financial data and information are not only fair but also accurate.
The best way to prepare for an external audit is to prepare your team by designating an audit manager to act as the main contact for the auditor. If the auditor has any questions they can go to this assigned contact or audit liaison.
You also want to prepare by having all of your receipts in order to support any transactions they have in question. Make sure that you keep a detailed list of all records that you give the auditor during the process to have for your own records. If any documents are taken off the premises, make sure to keep track of these documents and make copies of everything in case anything is ever lost or questioned.
5. Compliance Audit
This type of audit will examine your policies and procedures currently in place. The goal is to make sure that they comply with both internal and external standards. You always want to make sure you are compliant with worker’s compensation laws, shareholders distributions, etc.
A compliance audit is conducted by someone externally that is not affiliated with the business in any way. This is to make sure that the audit is credible.
6. Payroll Audit
Every business with employees has a payroll to take care of to make sure everyone is paid for their work. A payroll audit is to ensure that your payroll processes are accurate and that no one has been either underpaid or overpaid. Different payroll factors are looked at such as pay rates, wages, tax withholdings, employee information, etc.
A payroll audit is usually done internally to check for any errors and to remain compliant at all times.
Now You Know the Most Common Types of Audits
As you can see there are quite a few different types of audits. The main goal is to stay organized in order to make it easier to perform these audits whether you do them internally or externally. Staying organized will also come in handy in case you have a surprise IRS audit.
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