A business audit—be it internal, external, or from the IRS—can be a stressful experience for unprepared business owners. However, audits are excellent tools for an organization to both provide necessary information to external stakeholders as well as to gain further insight into internal financial reporting and operational processes. Ultimately, an audit, whether required by an external regulatory body or done internally as good practice, can be seen as investment into the overall health and security of your business.
Preparation for the audit is key. Since audits can be timely and expensive, especially in the face of complications, we recommend avoiding these five common mistakes that can hinder your business audit.
1. Lack of Accounting Process Documentation
The accounting processes you follow provide significant control over your business’ financial reporting. Additionally, documentation of those processes is necessary to ensure that all financial activity is accounted for according to GAAP principles.
When preparing to undergo an audit, it’s important to clearly document your company’s accounting processes so that an auditor can clearly understand them. This requires system descriptions that detail how accounting processes work, as well as any exceptions or workarounds. Without system descriptions, the auditor has to interview those in charge of your accounting processes, extending the time it takes to complete the audit.
2. Failure to Prepare for a Business Audit
Before an audit, it’s important to ensure that all basic financial statements and transaction documents are readily accessible. Similarly, prepare necessary legal documents and provide access to any relevant systems or applications, such as payroll, inventory, or assets. Excellent preparation and organization beforehand can help you maximize your time with the auditor, as well as save your business money.
Generally, an auditor will let you know beforehand the documents and statements they require, such as year-end reports, list of personnel, fiscal year budget, bank reconciliations, and more. However, the process of putting together all of the requested information can be timely and stressful. In these instances, contracting an outsourced accounting firm that focuses on audit preparation, such as NOW CFO, can be highly useful. According to the SEC, auditors cannot both provide non-audit services and audit the company. Otherwise, they would be auditing their own prep work. If your business has issues such as insufficient accounting records, ineffective internal controls, or a lack of GAAP procedures, the auditor is limited as to what they can help you with.
Not only can an outsourced accounting firm perform audit preparation, setting you up for a successful audit, but a fractional consultant can also work with you on a part-time basis throughout the year to maintain accurate, timely financials. This saves tremendous amounts of time before an audit is required.
3. General Neglect or Carelessness
Many issues uncovered in an audit are caused by simple neglect or carelessness. Neglect implies that management has failed to uphold general responsibilities, such as implementing reviews and safeguards, which leads to issues that could have been prevented. Carelessness similarly implies that there was no oversight or due diligence, which can be harmful for your organization year-round—not only when being audited.
Be prudent about your business processes. Ensure that there is a strong separation of responsibilities, especially surrounding your finances. Be sure that your employees have secure data practices, and know how to look for signs of fraud. Consider the worst possible outcome for an audit, and be proactive about implementing measures to avoid that outcome throughout the year.
4. Lack of Internal Controls
Internal controls are the procedures, policies, and rules that a company puts in place to ensure their financial integrity and accounting accuracy. Internal controls are crucial to the success of any business, as they help prevent fraud, support compliance with laws and regulations, and enhance the accuracy and timeliness of a company’s financial reports. And, of course, internal controls help to facilitate both internal and external audits.
When your business has a robust, consistent internal control system, you benefit from increased operational efficiency. Internal controls allow you to monitor your company’s performance in a systematic way and confirm that goals and objectives are being met. With an early warning system in place, you can rectify any small problems before they snowball into big issues—which could complicate your audit.
5. Failure to Keep Up with Accounting Standards
Accounting standards, as well as legal and regulatory requirements, are updated every year. Failure to stay on top of these standards can spell big trouble before an audit. Throughout the year, investing time to ensure your accounting team is following procedures according to GAAP will pay off in the face of an audit. You can start small by subscribing to AICPA, or contract a fractional accountant to keep you up-to-date before the need for an audit arises.
