Did you know that only 1 in 100 businesses is audited each year?
When was the last time your business did a business audit? For many businesses, it’s been far too long. The result is that they’re flying blind when it comes to their business.
If your company has fallen into such bad habits, then you need an intervention. The perfect way to help your company is to do a business audit.
Not sure how to get started? Keep reading for everything you should know about business audits!
The Different Types of Business Audits
There are many different types of audits for a big and small business owner, and each has its own purpose. Here is a brief overview of the most common types of audits:
Financial Audit
Financial audits are the most common type of business audit. They involve a review of the financial statements of a company to ensure that they are accurate and follow generally accepted accounting principles (GAAP).
Operational Audits
Operational audits involve a review of a company’s internal processes and procedures. The goal of an operational audit is to identify potential areas of improvement and make recommendations for how to optimize operations.
Compliance Audits
Compliance audits are always conducted to ensure that a company is complying with applicable laws and regulations. These audits are processed by government agencies or by third-party organizations.
Information Technology Audits
Information technology audits assess the adequacy of a company’s IT infrastructure and security procedures. The goal of an IT audit is to ensure that information assets are adequately protected from potential threats.
Environmental Audits
Environmental audits are always conducted to assess a company’s compliance with environmental regulations. These audits are by government agencies or by third-party organizations.
Quality Audits
Quality audits are to assess whether a company’s products or services meet specified quality standards. These audits are often processed by third-party organizations.
Social Audits
Social audits assess a company’s compliance with social responsibility standards. These audits are often done by third-party organizations.
Why do You Need to Complete a Business Audit?
As a business owner, you are likely already aware of the many benefits of completing a business audit. However, you may not be aware of some of the situations in which a business audit can be incredibly helpful.
Here are situations in which you might need to complete a business audit:
When You’re Considering Accepting Investment
If you’re in the process of seeking investment from venture capitalists or other investors, they will likely require that you complete a business audit.
They want to see that your business is in good financial shape and that you have adequate systems and controls in place. Completing a business audit will give you the chance to show them that you’re a responsible and professional business owner.
-
When You’re Applying for a Loan
When you apply for a loan, the lender will want to see that your business is in good financial health. A business audit will give them the peace of mind they need to feel confident in lending you money.
-
When You’re Having Financial Difficulties
If your business is experiencing financial difficulties, a business audit can help you identify the root of the problem. Once you know the cause of the financial difficulties, you can put a plan in place to resolve the issue.
-
When You’re Making Major Changes to Your Business
If you’re making major changes to your business, such as expanding your product line or opening new locations, a business audit can help you ensure that you have the finances in place to support the changes.
It can also help you identify any areas of your business that need improvement.
Preparing for Your Business Audit
When most people think of business audits, they picture an IRS agent going through their records with a fine-toothed comb.
So, audits are always processed by different types of organizations for different reasons. Even if you’re to be audited by a government agency or a private company, it’s important to always prepare.
Here are a few tips to help you get ready for your business audit:
Know Why You’re Being Audited
The first step in preparing for an audit is to find out why it’s being targeted for audit.
Is it a routine audit or are there specific concerns that have been raised? If there are specific concerns, make sure you understand what they are so you can address them head-on.
Gather Your Records
No matter the reason for the audit, you’ll need to have your records in order. This includes financial statements, receipts, invoices, contracts, and any other documentation that relates to your business.
If you’re organized throughout the year, this shouldn’t be a problem. But if you tend to let things pile up, start going through your records now so you’re not scrambling at the last minute.
Choose Your Audit Team
If you have a team of accountants or other professionals who help you with your finances, you’ll need to decide who will be working on the audit. You may also need to hire outside help, depending on the scope of the audit.
Choose a team that you’re confident in and that you feel comfortable working with. An Office 365 consultant will help with smart management.
Cooperate With the Auditor
The auditor is doing their job, so there’s no need to be adversarial. Cooperate with the auditor and answer any questions honestly. This will help the process go more smoothly and will likely result in a better outcome.
Review the Results
Once the audit is complete, review the results carefully. If you don’t agree with the findings, you have the right to appeal. But if everything looks good, you can breathe a sigh of relief and move on.
What to Expect During a Business Audit
Gather all of the relevant financial documents, including your tax returns, bank statements, and invoices. The auditor will likely request additional information as well, so it’s important to be responsive.
The audit process can be lengthy, so it’s important to be patient and cooperative. The auditor will likely ask questions about your business operations and finances. It’s important, to be honest, and upfront in your responses.
After the audit is complete, the auditor will provide a report with their findings. If there are any areas of concern, you’ll have the opportunity to address them.
How to Reduce the Likelihood of a Business Audit
There are a number of reasons your business could be selected for an audit. The IRS could compare your tax return to others in your industry, or to similar businesses in your area.
Your return could be selected randomly. Or, the IRS might question some items on your return, which could trigger a closer look.
The best way to avoid an audit is to take care when preparing your tax return. Be sure to include all required information and documents. If you have questions, ask your tax advisor.
Here are some additional tips to help you reduce the likelihood of a business audit:
Keep Good Records
The IRS can audit your business for any tax year. That’s why it’s important to keep good records for at least three years. Store your records in a safe place, such as a fireproof box or off-site storage.
Use Accounting Software
If you haven’t already, sign up for accounting software. This will help you keep track of your income and expenses. Be sure to reconcile your bank and credit card statements each month.
File Electronically
If you file your taxes electronically, the IRS is less likely to make mistakes. That’s because the IRS’s computer can catch errors that you might miss. The IRS also has a record of your return, so you can’t claim you never received it if you’re selected for an audit.
Don’t Forget To File
If you forget to file your taxes, the IRS can penalize you. The failure-to-file penalty is 5% of the unpaid tax for each month, up to 25%. So, it’s important to file on time, even if you can’t pay the full amount owed.
Pay Your Taxes on Time
If you don’t pay your taxes on time, you’ll be charged interest and penalties. The interest rate is currently 5% per year. The late-payment penalty is 0.5% of the unpaid tax for each month, up to 25%.
E-File Your Payroll Tax Returns
The IRS offers a free online service for businesses to file their payroll tax returns. This service is called e-file for Businesses. You can use it to file Form 941, Employer’s Quarterly Federal Tax Return.
Deposit Taxes When Due
You’re required to withhold federal income tax, Social Security tax, and Medicare tax from their paychecks. You then need to deposit these taxes with the IRS.
If you don’t deposit the taxes when due, you’ll be charged interest and penalties. The interest rate is currently 5% per year. The late-payment penalty is 2% of the unpaid tax for each month, up to 25%.
File Quarterly Tax Returns
If you’re self-employed, you’re required to file quarterly tax returns. This helps you spread out your tax liability over the year. It also helps you avoid a large tax bill—and potential penalties—at the end of the year.
Ready For A Business Audit?
Now that you know the ins and outs of completing a business audit, put your new skills to the test. Use this guide to streamline your next audit and make the process simpler than ever.
Find this post helpful? Check out the rest of our blog for more topics.
