There’s nothing that can strike fear into the heart of a small business owner quite like one single word. That word is audit.
This time comes around at the end of every financial quarter. Depending on how you handle your money throughout the year, it doesn’t have to be as much of a nightmare as you may think.
We can help you get audit ready no matter if this is your first time at the rodeo or you’ve been audited before. Check out this guide to learn how to get all your documentation in order and not make any business-ending mistakes.
What Is an Audit?
If this is your first year as a business owner, you might not be familiar with what an audit is. Essentially, it’s an evaluation of your financial statements. The question is, why is this so important?
For one, you’ll be able to see where you’re making huge financial mistakes. You can use this knowledge to refine your financial procedures and turn your business around.
We will warn you that the first time you through the process will be a little rough. As the years go by and you gain more experience with audits, they will get easier and go by a lot faster.
Different Types of Audits
Some companies have specific audits that they have to perform. For the most part, though, there are only a few types that you need to familiarize yourself with.
The first type of audit is performed internally by your staff. Doing one will help you evaluate your internal controls and accounting process.
You and your board of directors can spot problems in your finances, so you may make financial improvements and get ready for an external audit.
An internal audit will give you a basic overview of your finances. You love your company, so you might make small mistakes due to your biases.
If you want a more detailed report, you’ll have to have a third-party company carry one out. You can trust the professionals won’t skip over a single thing.
If you make a mistake on your taxes, you might get a letter from the IRS telling you that you’ve been audited. Getting this letter is enough to send anyone into a panic, but it isn’t too bad.
As long as you keep all your financial documents throughout the year, you should be able to get through the audit process pretty smoothly. There are two branches of government audits that you should familiarize yourself with.
The first and most common type of government audits is corresponding ones. They’re the easiest to deal with.
The IRS will send you a letter highlighting every possible error that you may have made. If you have documentation available to debunk the errors, send them in. As long as your information is legit, there will be no further questions.
These are a little harder to deal with than corresponding audits because an auditor from the IRS will actually show up to your business.
Once they enter your building, they’ll pull up your financial records and compare them to what you put down on your tax returns. As long as things add up, you shouldn’t get hit with any penalties.
Your First Year Audit
Even if you have people on your staff who are familiar with accounting, getting ready for your first-year audit will be stressful. Most audits only take a few weeks, but your first one will go on a lot longer than that.
The auditors will take some time to get used to how you run your company. They’re going to need a lot of documents from you including receipts, bills, spreadsheets, and bank account information.
Since this is your first audit, you may have to present some additional documents. If this is the case, the auditor will give you plenty of time to get the proper paperwork together.
Non-profit audits work a little differently than traditional small business ones in that you’re not always required to do an independent one. It all depends on where you get your funding. You’ll need to do your research to find out where your non-profit stands.
You’ll have to get a lot of the same documents ready that you would if you were doing a regular audit. Make sure you have your bank statements, grant rewards, payroll tax reports, fixed assets, and your general ledger ready to go.
Preparing for Your Audits
With all the information that we’ve thrown your way so far, we understand how you might be a little overwhelmed. Here’s a quick walkthrough of the process.
Read Your Letter in Full
Again if you get hit with a government audit, you’ll receive a letter in the mail. Make sure that you read the information in full. If you’re having some trouble understanding it, hire an accountant.
They’ll sit down with you and go over all the errors in great detail.
Another piece of advice we have for you in this regard is to jump on the letter right away. It won’t disappear because you put things off. The sooner you address the errors, the sooner you can get the auditing process out of the way.
The key to financial improvement and audit readiness is to plan ahead. This means keeping up with your records throughout the year. There’s nothing worse than trying to play catchup right before the auditing process begins.
Keeping up with your records is only one part of planning. You should designate someone on your staff to stay in contact with auditors.
How long the entire planning process will take depends on how complex your business is. You should plan to spend at least a few weeks on it.
Familiarize Yourself With Accounting Standards
Every year, accounting standards are updated. You must stay in the know. If you don’t, you may find yourself scrambling to edit your statements at the last minute.
Set aside funding to send your accounting team to expos so they can stay up to date with all the latest audit regulations.
Look At Your Previous Audits and Account for Big Changes
If you’ve been in business for a while, there’s a good chance that you’ve been audited before. You should never throw them away once the financial year is over.
You can use them as a reference for your future audits. Familiarize yourself with your mistakes so you don’t make them again. If looking at your records has you a little confused, you should consider using the CPA services offered by Templeton & Company.
They can help you go over your previous audits and figure out how you can do better. Talking to them will be even more important if you’ve made a bunch of big changes throughout the year.
Audits get a little more complicated if you’ve expanded or received any financial support. Simply looking at your previous documents won’t be enough to help you figure out how to account for these changes.
Create an Audit Timeline
Most auditors want you to turn in your documentation within a certain timeframe. The best way to make your due dates is by creating a timeline that you can work with.
Make sure that you get your entire staff involved in this process. Everyone will have individual duties that they’ll need to perform for the audit to be successful. Hold meetings so people can ask questions and talk about where they are as far as their tasks go.
To make things go faster, you’ll want to tackle the big projects first. Once you get those out of the way, all the little parts of the auditing process won’t be as bad.
Get Your Documentation Together
Getting your documentation together is probably the most important part of the process. If you haven’t been keeping up with it, it will also be the longest part.
If you have no idea what you need, your auditor can give you a list. They may request some unique documents depending on what kind of business you run.
After your first year (and beyond), do yourself a favor and get yourself organized. Create folders and spreadsheets for everything. You’ll thank yourself later.
Ask the Auditor Questions
At this point, you’re closing out your auditing. If you’re going to ask any questions, now is the time to talk to your auditor to get a little clarification.
This is better than your audit coming back to you because you made a ton of errors.
Auditing is a crucial part of any business. You need to make sure that you’re available from start to finish. Even after you turn in your documents, the auditors will have questions throughout the entire process.
That means anyone crucial to the audit needs to be there. Make sure that they don’t schedule a vacation during this time and reschedule any meetings that might take attention away from the audit.
You’re at the end of the process, but you’re not out of the woods yet. It’s never too late for auditors to ask for documents. If they do, talk with them to come up with a time to turn the requested paperwork in.
After a few weeks, you’ll get the results of your audit back. Call a meeting to go over everything with your staff. Ask for ideas for how to improve based on what comes up.
Avoiding a Business Audit
You can avoid getting an audit notice from the IRS. As long as you’re careful on your taxes, keep up with your records, and submit accurate information, you won’t run into any problems.
Be Careful With Your Numbers
It’s easy to make errors when you’re filling out your business taxes. You did your math wrong, or when you’re putting in your financial information you left out a 0.
Either way, the IRS will send you a letter if the numbers you put in don’t match up with the numbers that they received from third parties.
Keep Up With Your Records
One of the main reasons why business owners mess up the numbers on their taxes is that they don’t hold on to their records. Having receipts and bill statements makes it much easier to fill things out.
If you are audited, you’ll need these documents so you can prove that you did your business tax return the right way.
Don’t Fall Into the Home Office Trap
When you’re filling out your business taxes, you’ll have the opportunity to write things off as a deduction. One of these categories is a home office.
You can’t work from your living room and call that your office. It has to be a room that you only use to conduct business. Many people fall into this trap and end up getting audited for it.
Pay Your Quarterly Payment
If you earn a certain amount of money as a small business owner, you’ll be expected to make quarterly payments to the IRS. If you don’t make the requested payments, you’ll face penalties when it comes time to do your taxes. It also looks fishy enough to warrant an audit.
Get Your Company Audit Ready
Hearing the word audit is something that causes any business owner to panic. It doesn’t have to be this way. As long as you keep up with your financial records, and work with the auditors, you shouldn’t run into any problems.
We hope that you’re able to use this guide to kick panic to the curb and get audit ready every single year. If you’re looking for more ways to stay on top of your business and finances, we’ve got you covered. Check out our blog daily for all the latest tips and tricks.