Financial audits: friend or foe to your small business?
The word ‘audit’ may make you feel as if you want to crawl under your desk but hang on just for a second. Spoiler alert: There is more to them than you might think. Yes, this is not a joke: audits can really become your ‘best friends!’. It’s time to blast away the old fears, because these immersions into your financials could uncover hidden potentials, eliminate unnecessary workflows, and cut costs. If you have a financial watchdog, then he is not just there to eliminate the risks but to also highlight the better side that they can find ways for improvements. Are you interested? Well, let us lift the veil on how an audit can achieve the impossible feat of becoming your business drama’s unsung savior.
Understanding financial audits
Simply put, a financial audit is examining the financial records of the business and the various transactions conducted therein in detail. So, the focus turns towards the compiling, reviewing or appraising of those records. The main goal? To give an opinions on whether to all financial statements prepared in accordance with those accounts truly and correctly reflect the state of the affairs in the company.
Consider it as a check-up for the business's accounts. An independent auditor will go through books, records, income/expenditure statements, and internal control systems. They will also corroborate certain transactions in order to affirm the accuracy of the figures presented in financial statements. Such procedures are performed in accordance with the Generally Accepted Auditing Standards that state what ought to be done in an audit.
Types of financial audits
It is helpful to be familiar with three major types of financial audits:
Internal audits: these involve examining an organization’s internal processes for managing internal control, governance, risk management and finance. They help you ensure you're complying with laws and regulations and can uncover areas where you might be wasting resources.
External audits: these are likely to be performed if a third party intends to assess the credibility and accuracy of the financial documents. Though it is normally not required of a small-scale business, some entrepreneurs will opt to perform such audits on a voluntary basis to enhance public trust or in order to conform to stipulations for contracts or loans.
IRS audits: these types of audits determine if the organization’s accounts, books and records and other interests are accurately stated for tax purposes. Don’t worry if you have been cited. It does not mean that there is a problem.
Legal requirements
The necessity of legal audit due to financial reasons can rest upon various factors including, but not limited to, the nature of the business activities and the size of the company. For example, Companies having annual turnover below £10.2 million, less than 50 employees and assets less than £5.1 million usually have exemption from audit of financial statements. However, there are exceptions. An audit must be carried out if 10% of shareholders request so one month prior to the closure of the fiscal year being sought to be audited.
Is a financial audit right for you?
Wondering why you need a financial audit for your small business? Here’s how to decide: consider your business goals, your finances – how complicated they are, and the existence of some outside needs like loans, investor relations, etc. Still on the fence? Enty can guide you in taking help from a professional to make up your mind, by providing you with the pros and the cons of any option. Furthermore, Enty can make the very an audit more manageable, whether it is determining what information is required at first or synthesizing documentation into bite-sized bits of paper. Whether it’s your first audit or just your latest, Enty makes it easier and more efficient.
Preparing your small business for a financial audit
Ready to ace your financial audit? Let’s get to work putting your small business in order! First and foremost, there are your financial documents. It is not just stuffing the papers in a box to keep them in a convenient place – it is a well-structured plan that will arouse an auditor’s admiration.
Organizing financial records
Start by setting up a filing system that'd make Marie Kondo proud. First off, grab a home file organizer (or a set of some filing cabinets) and place them neatly. Scan all the receipts, invoices they used up, and other such documents with a special emphasis on their eyes. Just take our word for it. If you don’t do this, your future self will curse you for making her/him run around looking for that one most important document. And come on, why not use a recordkeeping provider? They will take your paperwork away and then you will have free space in the office for that ping pong table instead.
Implementing internal controls
Now, we can discuss internal controls. These are your financial superhero caps—they will assist you in the prevention of fraud, correct reporting, and generalize the operations of your business. Divide the work amongst your staff, spell policies, and use IT to standardize processes. Effectively, there are different tools that can be used in achieving this. At the end of the day, you shall be a good keeper of store documents and save time used in looking for them during audit time rather simply. Get intoxicated because, however stressed you may be with loads of transactions and documents, you are able to sort out what you need in no time.
Remember, a culture of compliance isn't just for the big guys — it's your secret weapon for success.
Working with auditors
While working with the auditors, envisage and treat it like a dance. You start with organization, they come up with queries. You have to be ready to present all necessary documents and work with their questions immediately. Also, do not overlook the ‘post-audit’ meeting; this is where you find out how well things went and what you need to work on. Instead, think of it as an opportunity to learn and validate all the good things you’ve accomplished. Following these few preparations, you’re likely to undergo the financial audit with composure and maybe with a little bit of swagger.
Benefits of financial audits for small businesses
There’s no denying that regular financial audits can prove to be a major turning point for your small business. They are not just about number crunching; they are more about strengthening your business position in the market. Let’s get ready to embrace the financial audits, as the benefits will be in plenty.
Improved financial accuracy
You know that feeling when you find a $20 bill in a hardly used pair of jeans? That’s how it feels but this time, you’re talking about your business finances. Routine reviews of these reports help to ascertain the accuracy of the financial statements. Which means you will have the company’s financial status with no vague areas. No more hoping and crossing your fingers before putting a foot forward on making any decision. Precise figures are at hand, and therefore in the management of the business, hasty decisions, which may have been expensive, are avoided.
Better decision making
Have you ever tried to walk through a maze while blindfolded? This is exactly how a business is run without the benefit of regular financial audits. These audits furnish you with information concerning the financial status of your business thus identifying the weaknesses and the strengths that need improvement. You will be able to identify the weaknesses of the operations and cut the waste that’s not being utilized, taking productive steps for business growth. That’s like having a supportive GPS on your head to help you win. If you thought you were going to be making moves with that level of discernment and still be beholden to your competitors, think again.
Enhanced credibility
Do you wish to command the respect of those in business? That’s easy, just ensure that regular financial audits are done. They indicate that one is in the intent and proper employment of honesty. This is not simply trying to make your mother proud; this is winning over your business partners, investors and credit lending firms. Impeccable audit reports can help garner better financing and attractive creditor terms. There is no IT support in Business; it is rather a very nice courtesy of doing business.
Potential drawbacks of financial audits
While financial audits can be incredibly beneficial, they're not without their challenges. Let's take a closer look at some potential drawbacks you might face when conducting a financial audit for your small business.
Time and resource commitment
One of the key challenges is that financial audits can be quite a time-eater. You'll need to dedicate a significant chunk of your schedule to this process, which can take anywhere from two to four weeks to complete. It's not just about handing over some documents and calling it a day. Your key personnel, from the CFO to the sales team, will need to be available to chat with the auditors. This means less time for their regular duties, which could slow down your day-to-day operations.
Costs involved
Let's talk money. Financial audits aren't cheap, especially for small to medium-sized enterprises. You're looking at a price tag ranging from $5,000 to $75,000, depending on your company's size and complexity. That's a hefty sum that could potentially be invested elsewhere in your business. Plus, it's not just about the auditor's fees. You'll also need to factor in the internal costs of preparing for the audit, like staff time and resources.
Potential for uncovering issues
Here's where things can get a bit dicey. Audits can uncover accounting issues you might not have been aware of. While this can be beneficial in the long run, it might lead to some uncomfortable conversations or even regulatory consequences. It's worth noting that audits aren't foolproof. They provide reasonable assurance, not absolute certainty, about the accuracy of your financial statements. So, while they can detect irregularities, they're not primarily designed to uncover fraud.
Final thoughts
Financial audits play a crucial role in the health and success of small businesses. They have a significant impact on financial accuracy, credibility, and decision-making processes. While these audits can be time-consuming and costly, their benefits often outweigh the drawbacks, providing valuable insights to improve operations and build trust with stakeholders. To make the most of a financial audit, you should focus on getting financial records in order, implementing strong internal controls and tools like Enty. Turn financial audits from a daunting task into a powerful tool to boost business success!
