Financial Audits for Small Business: Who Needs Them and Why
Audits provide valuable information about a business. When done thoroughly, they can help identify issues affecting operational efficiency and internal controls and also identify errors in the records and books.
Audits involve a thorough examination of a company’s financial statements and can be used to help companies obtain a small business loan. Knowing how to perform a financial audit on your own books can help you to prepare for a possible external audit, keep your accounting system in order and discourage internal fraud and theft.
The Benefits Of A Financial Audit
Financial audits are useful because:
- They give your financial statements enhanced quality and value.
- With them, 3rd parties – banks, investors, private equity groups, insurance companies- look at your company as more professional and prepared
- From a valuation perspective, you have added value to your company because you have prepared financial statements
- The audit will look at internal controls and the auditor should provide suggestions on how to improve them
6 steps to conduct a Financial Audit
Begin by gathering financial documentation like sales receipts, invoices and bank statements, and don’t forget to have accounting process them completely.
- Analyze Record-Keeping
Are all records stored digitally and backed up? You should keep at least an electronic photocopy of cash register tapes, cancelled checks, and invoices until the end of the current accounting period. Make sure you also have archived records that can be easily accessed.
- Look at Accounting
Review each element of your firm’s accounting system including individual T-accounts (debits and credits), journal entries, the general ledger and current financial statements. Systematically work through the accounting system to ensure that all necessary accounts are present and that the system has the ability to correct errors.
- Understand Internal Control Policies
Investigate your business’s internal controls policies to understand the level of protection from theft and fraud. These include things like separation of accounting duties between different employees, locked safes for holding pending bank deposits and password-protected accounting software that tracks exactly who does what and when.
- Compare Internal and External Records
Compare internal records of cash holdings, income and expenses against external records. Check the company’s stored external records and compare selected transactions against internal records.
- Look at Tax Records
Analyze the company’s internal tax records and official tax returns.