Most entrepreneurs will certainly not have a smile on their face when the term ‘audit’ comes up in a conversation. As much as they love their business and are interested in how it is currently functioning, the only part they would like to stay away from is the audit.
Better understanding and knowledge about the process will help most entrepreneurs relate to its benefits much more comfortably. So, here’s how an audit helps your business become more efficient.
What is an Audit?
Let’s start with the basics.
In the simplest form, audit is termed as an independent assessment/inspection of your business accounts. You may need some accounting systems, documents and invoices in order to carry out an audit. The entire audit process helps you to determine whether the financial statements are depicting the actual picture of your company.
An auditor who does not belong to the company completes this process as it assures that the entire process is carried out impartially with maximum transparency. There are two types of audits –internal and external.
o Internal Audit
An internal audit can be carried out by an accounting professional or qualified internal auditor. But, if you own a small business you may not need a separate staff to carry out this task. There are some self –assessment tools to guide you with the process and its policies.
You can set a specific routine for one of your employees to make journal and ledger entries and verify all the figures. This way, you can manage an internal audit without having to outsource it.
o External Audit
An external Audit is performed by a Chartered Accountant or CPA firm (based on the country you are in). While issuing their final opinion, these auditors follow all the rules and regulations set by the government. This means there is no scope of manipulating any figures or any other discrepancies.
Small business owners can hire an external auditor to examine the accuracy of their financial statement. These auditors pick material amounts in the financial statement and cross-examine them keeping in mind the accounting norms. They usually pick amounts which appear to be above basic percentage of the company’s assets.
For instance, if your cash balance is very high as compared to figures stated in your entries then they would examine all your ledger entries to check the cash flow. Expense invoices and other statements can also be reviewed to confirm the figures.
Often, businesses experience cash crunch and/or imbalance but entrepreneurs can avoid such issues by learning more about how does cash flow finance work and its importance for your firm.
Apart from cash flow, your business expenses, debts, assets, liabilities, etc. are other aspects which need to be carefully examined during the entire audit process.
So far you might have developed an idea about the audit process but you are still clueless about the benefits that your organisation could gain through this process.
Discussed below are some advantages of performing an audit of your organisation-
Provides a Reality Check:
The most basic advantage any firm acquires through an audit is that it reveals specific truths about your financial activities which you might have not noticed. At times, entrepreneurs are surprised to see the conclusions of an audit.
Business owners realise the fact that they have ignored certain financial activities which has landed them into problematic situations. Since the owner of an enterprise is usually busy with numerous responsibilities, such situations are bound to occur.
For example, employees or management personnel stealing money from your firm. With the help of an audit report, you can trace back such activities. In fact, the auditor can help you in this process so that you can get rid of the problem – and the culprit as well.
Improves Tax Planning:
Audits give you accurate figures of your purchase, sale, assets and liabilities. These digits prepare you for taxation and provide you with valuable insight on how much to write-off, profit/loss you have incurred.
If you perform audits on time you can pay your taxes on time minus the stress involved in the process.
Inspect your accounting system:
Sometimes, there could be flaws in your accounting system which is restricting your business’s growth. It could be as simple as the system not recording transactions accurately or there could be mistakes made in payment transactions or some figures are wrongly recorded.
Employee productivity can also be determined through this process. If your employees are entering incorrect figures in documents or largely missing deadlines, their lethargic attitude or any errors in your accounting process will be laid bare through an audit.