The word "audit" tends to put a shake in any business owner's boots but it doesn't have to. An accounting audit is a helpful way to ensure your business financials are accurate and up to compliance with any accounting rules and applicable laws. Your accounting information is important if you want to grow your business and avoid punitive actions from regulatory agencies.
Accounting audits for your business are important to the financial health and success of your company.
Why Do Accounting Audits?
Accounting audits are valuable when your business is:
- seeking investments or venture capital
- losing profits or struggling with cash flow
- preparing for the loss of key employees
- noticing mistakes in your books
Your books are one of the most important resources in your business. Investors may ask for them on demand and expect to see accurate statements of accounts. If one of your key employees is leaving your company, especially if they worked in your accounting department, make sure everything is clean and organized before they go. Any mistakes in your books, even if it's just a math mistake, could add up to struggles with cash flow. An accounting audit is also a good practice at regular intervals to make sure your accounting records are up to par.
What Audits Reveal
Nobody knows your business like you do. Accounting audits are recurring touch points with the pulse of your company - your books. By regularly performing internal audits, you will have fair warning of potential crises and be able to avoid them. You'll also have clarity on your current financial situation, including accounts receivable or collections challenges, so that you'll know when it's time to invest or hire more staff.
External audits can also be revealing. An independent third party will have the experience of performing audits for other organizations and can identify improvements. Maybe there's a more efficient way of doing things, or best practices, that you're not aware of. An external audit can also add credibility to your financial statements, especially when presenting them to potential investors.
Problems with Independent Audits
A recent study from the International Forum of Independent Audit Regulators (IFIAR) found at least one problem in 40% of 918 worldwide company financial audits. The greatest number of problems were found in relation to accounting estimates and internal controls. Apparently the external auditors were not inspecting the financial statements being provided to them but instead took the financial statements at face value. The challenge with this scenario is that investors rely on auditors to independently scrutinize an organization's finances. If auditors aren't investigating the financial records of organizations, and then later that organization goes under, shareholders lose money and will be even more discerning about the businesses they consider for investments.
How to Prepare for an Audit
Preparing for an accounting audit may be the prompt you need to organize your small business accounting. Make sure your records, accounts payable, accounts receivable, budget, inventory, expenses and more, are reconciled. Contracts, leases, and other agreements may also be necessary during the audit. If you have any procedures and internal audits that you can present to an independent auditor or review internally, it will be helpful to identify challenges or opportunities to improve. Take the time to get ahead of an audit and it will be a much less stressful process. Investors are looking for good margins and cash flow. Are your financial statements ready?
