A Basic Guide To Business Audits

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. 

Internal Audit 

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. 

External Audit 

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. 

IRS 

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. 

Prevent fraud 

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.

Strengthen reputation 

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.

Tax returns 

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? 

Shoeboxed is a helpful tool to simplify your business audit works.

Digital receipts 

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. 

Expense tracking 

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.   

Audit-ready 

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!

Audit trails 

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!

Cryptocurrency Bookkeeping Must-know Best Practices

Cryptocurrencies have been around for some time. Bitcoin, Litecoin, Ethereum, and other digital currencies are now being used in many business transactions and are becoming an important financial instrument. The rising popularity of cryptocurrencies is drawing attention to the businesses that use them to transact, and especially how accounting for these digital currencies can be done properly.

This article provides essential information on cryptocurrency bookkeeping, and accounting best practices with tips to help simplify the process.

What is cryptocurrency bookkeeping?

Cryptocurrency in a nutshell

Cryptocurrency is a virtual or digital currency that is encrypted for security. By means of cryptocurrency, businesses can carry out their transactions peer-to-peer without centralized control or an intermediary such as a bank. According to Investopedia, the operation of most of the currencies is based on decentralized platforms with their blockchain technology, a distributed ledger enforced by a disparate network of computers, which we’ll be explaining in more detail in this article. 

It is noteworthy, though, that cryptocurrencies are, by definition, not currency. In Canada, they are viewed as a commodity and therefore treated as an investment. Therefore, accounting for cryptocurrencies is similar to other securities, such as stocks or bonds. However, in the US and some other countries, cryptocurrencies are considered property, which means that when you acquire any crypto, you need to record it at its market value, just like when you purchase a house or building for example. The same goes for when you sell or use cryptocurrency, you need to make sure to record its value correctly. A gain is made if the value when you sell or use crypto is higher than that when you obtain it, otherwise, you suffer a loss. Such gains or losses, which result from transacting or trading cryptocurrencies are taxable, so every transaction must be kept track of and accounted for in a compliant manner.

For a better understanding of cryptocurrencies and how it works for your business, check out our review article on Bitcoin and cryptocurrency for the e-commerce industry. But first, here are some essential crypto terms that you should be aware of when working with Bitcoin and the likes:

  • Blockchain is a form of distributed ledger technology (a database that is distributed to more than one computer or node) used to support Bitcoin and other cryptocurrencies, comprising pieces of digital information held together to record transactions. 
  • Tokens is a type of digital currency that represents its own asset or utility and relies on its blockchain. Tokens can be traded or transferred between users in the blockchain.
  • Wallet is a system that tracks the ownership of virtual currencies.
  • Mining: An act of earning cryptocurrency without having to put money down on it. Miners provide a service to the blockchain network using special software to solve math problems in return for the acquisition of more cryptocurrencies. Any cryptocurrency earned through this activity should be treated as income and reported accordingly. 

As online transactions are becoming a norm, the advantages of cryptocurrencies compared to traditional payment methods are easy to see. You can easily use an online wallet to send and receive cryptocurrencies with other people who have the same wallet. In this way, cryptocurrencies are not subject to currency conversion fees or exchange rates, which fluctuate and make international transactions cumbersome and costly. However, cryptocurrencies have also posed new challenges to how businesses should do bookkeeping and accounting.

Bookkeeping for cryptocurrency businesses

As a form of digital money that is unregulated by banks or government, cryptocurrency hasn’t been essentially accounted for by existing accounting standards, although most agree that it should be classified as an intangible asset, referring to standards such as International Accounting Standard (IAS) 38 and IAS 21. Due to its anonymous nature which can be exploited for illegal activities including money laundering and tax evasion, it is only a matter of time before the government takes measures to monitor the use of cryptocurrency in business transactions.

Of course, you don’t have to pay any specific income tax or Capital Gains Tax (CGT)  on purchasing goods or services. But as long as you use cryptocurrency for business investment or income generation, the actual tax accountancy surrounding Bitcoin and other digital money will inevitably be applied. To avoid potential troubles with tax and audits, bookkeepers and accountants should grasp some of the basics of crypto accounting as follows:

  • Calculate capital gains and losses based on the adjusted cost base

The adjusted cost base is the average cost for all cryptocurrencies you have obtained, from past to present, and it must be calculated separately for each type of coin you own, in case there are several of them.

  • Check the fair market value on the day of the transaction

Because cryptocurrency can be subject to variations in value, the value of a transaction, be it a commodity trade or a payment, depends on the fair market value on the same day.

  • Make payments to vendors

Payments in cryptocurrencies with a fair market value of $600 and higher must be reported to the IRS, using form 1099-MISC.

  • Record mined cryptocurrencies

It is necessary to record the currency you mined in the income account and the costs incurred by the mining act as an expense in your books. Because, when you’re “mining” cryptocurrencies, you’re creating new value for that currency (the digital equivalent of printing money, without the inflation) and creating compensation for yourself. To record your income and expenses, use tax form Schedule C if you are not incorporated, or Form 1120 if you are incorporated. Schedule C is used when you pay self-employment taxes.

  • Trade cryptocurrencies

Cryptocurrencies are considered property as their holders can sell or transfer them separately. They do not give the holder a right to receive a fixed or determinable number of units of currency. As a result, trading cryptocurrencies is just like day trading. You need to record two things: first, the value of any currency on the day you acquire it, and second, its value on the day it is sold.

The difference in value recorded will reflect your gains or losses. When you do your tax return, record these gains and losses on the required form and categorize them as short or long-term gains or losses based on how long you have the currency.

  • Account for more than one cryptocurrency

Accounting for transactions with one type of digital money is difficult enough, but in many cases, you have to handle transactions between two or more cryptocurrencies. Everything comes into play all at once, and you need to calculate multiple cost bases, adjusted cost bases, fair market values, gains, and losses. It will definitely take a great deal of time and bookkeeping skills to ensure nothing is overlooked and to maintain accurate accounting. But if you keep track every step of the way, it is definitely manageable.

cryptocurrency bookkeeping
Cryptocurrency bookkeeping best practices

Why is cryptocurrency bookkeeping complicated?

Business transactions that deal with cryptocurrencies between blockchain businesses, brokers, or funds often entail using an array of wallets or trading accounts, each with different purposes to serve. Because of the different cryptocurrency systems and formats, to report a crypto transaction for tax purposes, businesses must collect related data from various exchanges and account for them accurately according to regulations. 

Since the value of a transaction is determined by the fair market value on the day it is conducted, the accounting tasks of obtaining, consolidating, organizing all data for various assets at different times and varying prices can be a hassle. Not every business has the willingness and ability to take up that challenge. 

The complexity of this process, therefore, may lead to the reluctance of cryptocurrency businesses to maintain daily bookkeeping tasks, only to find out later that the accumulated workload is getting overwhelming, putting extra strains on accounting efforts for which enterprises must bear the resulting costs.

In addition to the complex and high volume of crypto exchanges, accountants and bookkeepers in cryptocurrency businesses must also deal with the constantly changing regulation of digital assets. With most financial guidelines on reporting and accounting meant only for fiat currency-based businesses and with few assisting tools, managing and tracking different digital assets and meeting compliance requirements can cause major hurdles for any crypto business seeking tax-effective bookkeeping practices. 

Working with highly volatile investments such as cryptocurrencies means that financial professionals have to do their tasks with utmost care. It is part of their duties to fulfill the tax obligations, so the least desirable thing is to fall behind the regulatory updates and make accounting mistakes that harm their companies. 

Cryptocurrency bookkeeping best practices

1. Track all transactions

While accounting guidelines regarding cryptocurrencies remain unclear, crypto businesses can still benefit from executing proper bookkeeping. Keep all proofs of invoices and payments safe and organized to be ready for any tax event or to help your business with a better picture of its financial situation. Besides this, other information that you’d better keep close include the list of exchange accounts, addresses, wallets used for each transaction, and especially the records of cryptocurrency value at the time you obtain it and when you get rid of it.

The burden of keeping up with piling documents can be worrying, but there are bookkeeping-friendly tools to assist you in recording necessary receipts like Shoeboxed. No more missing receipts and messy folders, Shoeboxed digitizes your documents into verified images which you can get access to anytime and anywhere. With its customized reporting feature, Shoeboxed can also help you to categorize all crypto transactions into operational costs, expenses, revenue, or other relevant transaction types.

Because all crypto-related costs, expenses, and transactions need to be converted into fiat currency at the end of the day, it is best practice for crypto businesses to track fiat and cryptocurrency transactions, and then create consolidated reports for both. Accurate data collection surely takes time, but it is the key point of this process that any crypto business must find a way to handle, whether by manual entry or by utilizing supporting software.

2. Integrate automation tools to reduce time and errors

The main problem with using standard accounting programs for cryptocurrencies is that they are only compatible with fiat currency. With the help of specialized software to export the crypto transactions to standard accounting software, though, the booking procedure for cryptocurrencies is becoming easier. There are now increasingly more such tools, so you have the options to take advantage of those with convenient functions such as the ability to integrate with cloud-based accounting systems. Reducing the time-consuming manual input and user errors, it is undoubtedly worth your investment to automate the crypto accounting processes.

3. Comply with rules and regulations

Understanding and adhering to the regulatory treatment of cryptocurrencies is crucial to the success of any business that transacts in crypto. However, defining exactly how to execute a crypto bookkeeping strategy is complicated because cryptocurrency is still a volatile financial instrument, the regulatory practices of which vary widely across different countries. In any scenario, it is wise for bookkeepers and accountants to get accustomed to these distinctions in order to guarantee regulatory compliance, especially if cryptocurrency is being used for international transactions.

Since crypto bookkeeping has not been standardized without an existing bookkeeping framework, crypto businesses have mostly carried out their bookkeeping on a case-by-case basis. Confusions regarding implementing such practices are inevitable, but above all, cryptocurrency is generally classified as a property with applicable property tax principles. Given that fact, it is sensible to prepare all the documents to justify transaction activities for tax purposes, ranging from invoices, proof of ownership of the addresses, to wallet balance.

To look on the bright side, many believe in the potential of the technology under crypto assets to disrupt the current bookkeeping system. Small improvements have been steadily introduced and it may pave the way for a new accounting model to emerge. With changes brought by blockchain technology being underway, accountants and bookkeepers should be aware of the possible opportunities and challenges these changes offer and keep themselves updated with cutting-edge knowledge and technology to stay competitive in the field. our staff from Shoeboxed would be glad if our product could accompany those who need help with storing and organizing receipts, so let us hear your voices on the crypto industry as well as the bookkeeping services you may wish you had.

Share with us your thoughts on bookkeeping for cryptocurrency in the comment section below!

A 5-Step Guide to Manageable Tax Prep for Entrepreneurs

Not only are taxes time consuming, confusing, and a nuisance, but they can also be a drain on your wallet if you don’t prepare well. This is especially true for entrepreneurs who, aside from having to deal with the complicated tax filing process of running a business, also have to actually run the business.

If there’s one thing all entrepreneurs can agree on, it’s that they dread tax season.

In fact, a recent survey by the National Association of Small Business (NSBA) reveals that 38 percent of small businesses reported they spent more than 80 hours a year dealing with federal taxes. That’s two whole workweeks! That same survey found that almost 50% of small businesses spend $5,000 or more annually on the accounting process alone—before paying their taxes!

Not only are taxes time consuming, confusing, and a nuisance, but they can also be a drain on your wallet if you don’t prepare well. This is especially true for entrepreneurs who, aside from having to deal with the complicated tax filing process of running a business, also have to actually run the business.
Whether you choose to do taxes on your own or hire an accountant this year, here’s a quick guide on how to knock tax season out of the park:

1. Familiarize Yourself With the Lingo

One thing we shouldn’t complain to the IRS about is the amount of tax breaks they offer. Tax breaks give small business owners and freelancers a great opportunity to win back some of that money they’ve been spending on their business, and it’s a unique way to encourage entrepreneurship.

However, there is a small caveat to this: it’s hard to keep track of what’s what. There are important differences between deductibles, refundable credits, and non-refundable credits. Each can help you in distinctive ways, so it’s useful to know which expenses qualify for which tax break as you track your finances throughout the year. Investopedia and the IRS website are helpful tools that can break down tax vocabulary into simple terms.
 

Deductibles

Benefits: Lowers taxable income and total tax liability. Can help with items that represent reductions in ability to pay tax (i.e. casualty losses).
What Does That Mean: Because deductions cannot reduce taxable income below zero, their value is limited to the filer’s tax liability before applying the deduction. Value depends on the taxpayer’s marginal tax rate, which rises with income.
Examples: Health care expenses, mortgages, car loans, investment-related expenses
 

Refundable Credits

Benefits: Decreases a person’s tax liability. Same value for all taxpayers with tax liability at least equal to the credit.
What Does That Mean: Treated as payments of tax you made during the tax year. When total of credits is great than total tax owed, you get a refund for the difference. Credits are more appropriate for subsidies provided through the tax system.
Example: Earned Income Credit, Additional Child credit, Small Business Health care credit.
 

Non-Refundable Credits

Benefit: Lower tax limit as low as it can go. Represents the majority of credits.
What Does That Mean: Credit cannot be used to increase tax refund or to create a tax refund when you wouldn’t already have one. Savings cannot exceed amount of tax you owe.Example: If you only owe $200 in taxes, and the only credit you’re eligible is for $500, the $300 difference is non-refundable.
Example: Child and Dependent Care Expenses credit, Saver’s tax credit, Adoption tax credit, Foreign tax credit.
 

2. Don’t procrastinate

Unless you want to have a very stressful week, don’t wait until right before April 18 (note – usually tax day is April 15) to prep and file your taxes! Last year, the IRS reported that 28% of Americans waited until the last few weeks before tax day to file their return. Sure, you can file for an extension if you can’t make it before the IRS deadline, but there are drawbacks to this, like late fees. And, just because you file late doesn’t mean you get extra time to pay taxes if you owe the government money.

Plus, when you take your time to carefully approach a tax filing, it won’t seem as stressful or time consuming. You’re more likely to make an error or miss out on a deduction if you rush the process.
 

3. Stay organized

By far, the easiest way to minimize the hassle of tax season is by staying organized and keeping updated records of receipts, payments, and expenses. The IRS demands documented proof for claims, so having everything stored and accessible can reduce a substantial amount of time and pressure.

Organization also helps maximize deductions and reimbursements without the hassle of scrambling to find misplaced financial records. It also makes it possible to file taxes at the earliest possible time because paperwork is readily available at your fingertips.

Shoeboxed’s mission is to streamline this process so that you can focus on more important things during tax season, like running your business or taking care of your family. We process and organize your receipts so that vendor, total amount, date and payment type are extracted and available in a searchable online account—without you ever having to lift a finger. You can also tag receipts as reimbursable or deductible so when you file taxes, your documents are already catalogued appropriately.
 

4. Stay informed

There’s a lot to swallow these days when it comes to tax codes, especially since the IRS makes changes on a yearly (and sometimes, even seasonal) basis. It doesn’t hurt to take some time researching professional blogs and news sites that can keep you informed on the latest tax changes. The extra initiative will take a few hours of time on your end, yes, but not nearly as much time it would take to prep taxes with little to no knowledge on how to maximize returns. This is especially helpful for entrepreneurs who do not have their own accountant.

Without a guiding hand, it’s easy to make misinformed decisions with tricky nuances (like filing status, for example). Some helpful sites that give excellent pro advice are Don’t Mess With Taxes, TaxGirl and AICPA.
 

5. When in doubt, ask a pro 

With an endless supply of information, the Internet of things can answer any question you may have related to taxes. Sometimes though, having 10+ pages pulled up with an overwhelming amount of information can make material difficult to digest. If your questions are very intricate and situational, it may be best to approach a tax expert or CPA. Examples of these questions may include:

  • Do I have a limit for my charitable contributions?
  • Should I itemize deductions? How in-depth?
  • When should I contribute to an IRA?
  • Should I file jointly, as single, or as head of household?
  • I have all these miscellaneous business expenses and reports, but which ones should I keep for reimbursements and deductions?

Sometimes it’s easy to do a quick Google search for these common tax questions. Other times, the answer depends on your business situation, among other variables.

If you have an accountant, keep in touch with them throughout the year. There’s no reason you should wait until tax season every year to speak to them. CPA’s are experts in their field and they’re a great resource that can put you up to date with all the latest changes in tax policy. Stay organized, plan ahead, and you can get the most out of your tax season.