Running a successful business requires more than just sound strategies and effective management. It demands a comprehensive understanding of your financial health, compliance with regulations, and adherence to industry standards. This is where business audits come into play.
Let’s explore what they are and when it makes sense for your business to get one.
“Audit,” derived from the Latin word “audire,” is an official inspection and appraisal of your company’s financial records. The purpose of business audits is to ensure that the company’s financial statements are accurate and up-to-date. If your financial transactions are accurate and your records are spotless, that’s a strong sign your business is thriving.
An audit verifies that your financial records are accurate and comply with Generally Accepted Accounting Principles (GAAP). Maintaining financial credibility requires routine internal and external business audits.
An auditor’s responsibility is to verify the accuracy of your financial records and to check if your financial statements reflect your company’s true financial standing. Investors will feel more comfortable with your firm if it has been subjected to a recent audit and given a clean bill of health. But if an auditor discovers fraudulent activity in your company’s books, you could be in serious legal trouble.
An external audit is an inspection of a company’s operations by an impartial third party. This audit, also known as an “independent audit”, ensures the auditor has no vested interest in the company’s success. Thus, the auditor will not have any financial stake in the company, preventing a potential conflict of interest.
A company’s representative, typically an accountant or auditor, typically organizes and carries out an internal audit, also called a self-audit. Among the many things an auditor can check during an internal audit include the company’s finances, rules, procedures, processes, legal standing, etc. Audits like this should be done at least once a year to ensure the books and taxes are in order. The results of an internal audit are not shared with any outside parties and are kept strictly confidential.
The Internal Revenue Service conducts an audit of a company when it suspects tax returns include irregularities. The IRS usually arranges audits of tax returns submitted during the previous three years. They may investigate even further back in time if there is reason to suspect fraud or if they find significant inaccuracies.
Too many deductions, claiming losses for consecutive years, reporting high income, etc., are just a few of the many things that could lead to an IRS audit.
Business audits allow you to have an impartial third party (often a Certified Public Accountant) review your company’s financial records. Investors and lenders in your company may insist on an annual audit to fund the company.
Certified public accountants (CPAs) can help your company in a few different ways:
Checking up: An audit is like a health exam for your company. Knowing that auditors will be coming in once a year to take a detailed look at things will keep your company on its toes and alert to any issues that they may uncover during the audit inspection.
Reporting: Following an audit, a certified public accountant (CPA) will write a concise report detailing whether or not the company’s financial statements have been prepared per applicable U.S. or international accounting and reporting standards.
Audit requirements are different for public and private companies:
Public companies: Publicly traded companies in the United States must have their books audited by an independent certified public accounting firm once a year. (The Securities Act of 1933 and the Securities Exchange Act of 1934 under federal law mandate these audits.)
Private companies: Although federal law does not mandate audits for private enterprises, financial institutions may request them to extend credit.
The results of business audits are extremely important to your company. An audit could be a huge benefit or burden, depending on how transparent your financial records are. However, it is important to go through this process to assure your stakeholders that your company is honest and trustworthy.
Contact Foster Financial CPA today for expert accounting services and take your company’s financial health to the next level. Let us help you navigate the complexities and strengthen your foundation for success.
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