Companies usually prepare a set of financial statements disclosing business activities and financial performance once a year. The statements are a crucial source of information for shareholders, investors, and stakeholders. But how can stakeholders trust these reports and the figures they provide?
That’s when an audit comes in. It assesses whether the financial statements are indeed above board and trustworthy.
This article will cover what a business audit is, why it’s important, and how businesses can simplify their audit process for expenses.
What is a business audit?
An audit examines relevant documents to determine whether the business provides accurate financial information and complies with accounting & legal standards. It goes through financial reports and accounting work in a systematic review process.
Many business owners may immediately relate the word ‘audit’ to the Internal Revenue Service (IRS) assessing their business’s accounting for tax penalties (which can happen). However, an audit more commonly refers to a financial inspection of a company’s financial statements and accounting books.
The purpose of an audit is to get an unbiased opinion about a business’s records and transactions. It helps the business pinpoint where inaccuracies and inefficiencies are in the system. As a result, the company can understand its operating performance thoroughly and make solutions to improve finances and management processes.
Different types of business audits
You, your employees, or a third party can perform audits depending on the purpose and the nature of your business. There are various types of audits. By knowing the differences between these types, you can choose the most suitable and beneficial audit plan for your company.
An internal audit is typically carried out within a company by its employees. This type of audit helps the business address its significant ongoing risks and weaknesses. It examines both finance and management aspects to make sure everything is functioning correctly.
When an internal audit team works independently, free of any outside influence, they will provide a deep insight into improving corporate governance and effectively managing risks.
Large companies usually have an internal audit committee to update business performance to shareholders or board members. It helps them become more aware of their financial status, hence developing better strategies. That’s why an internal audit is also an excellent tool for decision-making.
In contrast to an internal audit, an external audit is conducted by an outside source, like a government agency or a financial services company.
The purpose of this audit is more likely to focus on financial statements. The external auditor will issue an audit report following GAAS (Generally Accepted Accounting Standards). This report gives the auditor’s opinion on whether a company’s financial statements meet these standards and accurately represent its financial position.
Lenders or investors sometimes require a company to perform an external audit to prove the legitimacy and fairness in accounting records and financial reports.
An IRS tax audit takes place to check and verify the validity of a company’s tax returns.
If your tax return shows any discrepancies, the IRS might select you for a tax audit. Sometimes, unfortunately, it’s random. Yet, the chance of being audited by the IRS is extremely low with less than 0.5% of all businesses audited in 2020.
But you can never be too careful!
Stay alert of some common triggers that may catch the attention of the IRS such as math errors, unusual donation amounts, or claiming 100% business use of a vehicle. It’s best to avoid the triggers and file tax returns correctly by keeping a sound expense tracking system.
Why is a business audit important?
Business owners may be terrified of the word ‘audit’. As scary as it might sound, auditing can be a tremendous help for businesses. Think of an audit as a doctor checking your business’ health. It diagnoses problems and inefficiencies in your business and prescribes the remedy to get your company in good shape.
5 major benefits of a business audit
Ensure regulatory compliance
Sometimes, companies conduct an audit to see if they meet the regulatory standards in their industry. And if they don’t, an audit makes them aware of that.
Non-compliance can mean paying large penalties, loss of customers, and a damaged reputation. These can cause serious harm to the business’s survival. It’s more than worth the expense and any temporary annoyance caused by an audit.
Improve accounting system
An audit almost always starts with an accounting system. It goes through major financial transactions, bookkeeping records, receipts, etc. to check the accuracy and look for errors.
Auditing provides an overview of how the system works and a chance to implement better practices to improve the whole accounting process.
Sadly, fraud is not uncommon in business, especially when it comes to money. Workplace fraud may go undetected for years and companies could pay a hefty price for that: bankruptcy.
An audit is a great tool to detect fraud or pinpoint where fraudsters can take advantage of the system. By enhancing internal controls, businesses can prevent this from happening again.
Do you want to raise your company’s capital? Are investors and lenders reluctant to part with their cash?
An audit may solve that problem for you. It can offer an independent confirmation that your financial statements truthfully reflect the company’s status. It provides financial assurance that everything is as it appears. This can reinforce your image, and provide essential credibility and confidence to your clients, stakeholders, investors, or lenders.
Make better choices
An audit includes an in-depth analysis of a company’s income, expenditure and management skills. Auditors also make recommendations for businesses on how to improve their performance. Both give business owners a deep foundation to make decisions for future strategies and planning.
Overall, a business audit may cost a lot to carry out and create inconveniences. But gaining a deep insight into your company is invaluable and can lay the foundation for future growth.
What is a business expenses audit?
Audit of business expenses is a crucial part of a financial audit. Throughout this process, auditors gather evidence from accounting entries, receipts, and relevant documentation to check their validity. Then they will evaluate if the expenses were necessary and aligned with internal policies. Any non-business costs claimed as business expenses will be flagged and require further investigation.
Whether conducted internally or outsourced to a third party, the goal of a business expenditure audit is to double-check the accuracy of expense records, identify any out-of-the-ordinary expenses and eliminate expenses fraud.
Why should businesses audit their expenses?
Expenses are a high-risk area for every company. Any incomplete or false records in expenses can lead to severe consequences. For example, an understatement of expenses will result in the overstatement of profit which means you will pay more tax than necessary. That’s only one of many reasons why businesses should conduct audits for business expenses. There are three more important reasons for auditing your business expenses.
Avoid false claims
This fraud is typical in expense reports. When employees spend their money on business-related items, they will submit expense reports to get reimbursement. While many employees are honest and claim the actual spendings, some seize the opportunity to use it for their ends.
Fraudulent expense reports damage a business’ budget and profit and increase the risks of IRS penalties. Auditing expenses help the company examine the documents and related receipts claimed by employees to ensure everything is under control.
Expenses are closely associated with your tax return. Since forever, businesses always have learned ways to minimize their taxable amounts. Many business expenses are deductible that can be subtracted from a company’s income before it is subject to taxation.
To know which expenses are deductible and which are not, you need to keep detailed records of spendings and categorize them according to the IRS. However, when dealing with hundreds of transactions per day, it’s easy to make mistakes. An audit of expenses will check through all the data and show you where to adjust or provide assurance that your accountants have done a good job. Consequently, you won’t have to overpay for your income tax.
Prepare for income statement
An income statement is a financial statement including the company’s revenues and expenditure. That’s why having accurate numbers on expenses will save hassle later when preparing an income statement. Yet, how do you make sure that your expenses are recorded and calculated properly? Do an expense audit!
As beneficial as an expense audit is, there can be challenges that make it counterproductive. One of them is the manual receipt process. When businesses still apply manual expenses management practices, auditors will need to review paper receipts one by one to ensure the numbers match the report which is time-consuming
Luckily, Shoeboxed can help you with that and more!
How can Shoeboxed help your business audit?
In the section above, we’ve mentioned the paper receipts challenge. A simple solution for that is to let Shoeboxed digitize all of your receipts. After scanning, Shoeboxed creates a digital version of your paper receipts. Our software extracts and human-verifies data then store them in a secure location. Quickly, piles of your paper receipts transform into fully categorized, organized, and searchable data that is available anytime and anywhere. The system is time-saving and efficient for auditors.
The whole purpose of an expenses audit is to verify and reinforce the accuracy of expense records. If the company has an efficient process to stay on top of the expenses, the workload for auditing will be reduced and simplified.
Shoeboxed helps you organize all receipts and other audit-related documents into a well-categorized and searchable digital database. By doing so, you can always easily trace back any expense for further use.
In the case of an external audit or a tax audit, both the Internal Revenue Service and the Canada Revenue Agency accept digital images of your receipts. Shoeboxed guarantees to have every receipt legibly scanned, clearly categorized, and always ready for audits!
An audit trail is a set of documents validating your business transactions. It includes details like the transaction date, type, category, value, and vendor. Audit trails can be simple or complex, depending on the nature of the business transaction. For example, the audit trail of buying a notebook is the receipt, while that of a photocopy machine consists of a few more documents such as the purchase order.
Shoeboxed creates the easiest system to organize your audit trails with extracting, data-verifying, and searchable functions. Our software helps not only during audit time but also during daily management.
It’s no fun with a business audit. But there’s nothing to worry about. Any kind of audit can be extremely useful and beneficial for financial planning and the future growth of your business.
Besides, Shoeboxed is here to take away all the headaches!
Try Shoeboxed free for 1 month!