Businesses go through both internal and external audits. As a small business owner, it’s important to know the purpose of an internal audit as well as what to expect during an internal audit procedure. First, what is an internal audit?
Audit defined
You might associate audits with the IRS and think about the process negatively. But, an audit is not only performed by the IRS.
Audits can be conducted by someone at your business or an outside company like a tax agency. And, audits can benefit your business by verifying that your records are accurate. It can make sure your business is on the right track to achieving its goals.
An audit is a process where an auditor examines a business’s accounts and records. The auditor looks to make sure the business’s financial statements are accurate. In the long run, this can help your organization identify and avoid potential IRS audit triggers.
External audits
There are two main auditing categories: internal and external audits. You must understand the difference because your business could experience both.
An external audit is performed by an outside firm. The external auditor does not work for the business they are auditing. External auditors look at a business’s records and operations.
What is an internal audit?
An internal audit is where a business is examined by someone working within the company. Your business does not need to have its own auditor. If you do not have someone at your business to do the audit, you can assume the role of internal auditor. Or, you can hire an outside firm to regularly conduct internal audits for your business.
The purpose of an internal audit is to assess how the company is performing in relation to its company goals. The internal auditor examines how the company is running from the inside out. The auditor also measures the business’s operations, like employee performance and information systems. And, the auditor makes sure the business complies with the Internal Revenue Service (IRS).
Think of an internal audit as a check-up to make sure your business is performing at the best of its abilities.
Types of internal audits
Internal audits don’t just look at your business’s accounting books. There are several types of audits that check different parts of your business: finances, management, and operations.
Here are the three main types of internal audits that you should regularly conduct at your small business:
Financial audit
A financial audit is what most people think of when they think of an audit. When an internal auditor conducts a financial audit, they want to get the scoop on a business’s finances.
In a financial audit, the auditor looks at information in the business’s accounting records. They want to verify that the income, expenses, and liabilities recorded in your books are accurate. The auditor compares your records with your transactions to make sure they line up. Types of transaction records include invoices, bank statements, receipts, credit card statements, and tax records.
One of the most important internal audit objectives is to make sure your business operates legally. An internal auditor makes sure that you have all the licenses you need to run your business. And, they check to make sure you filed your taxes accurately and legally. Lastly, a financial audit makes sure you pay your employees the correct amounts.
Management audit
A management audit does not focus on the financial records of your business. Instead, it looks at your roles and the roles of your employees and compares them to your business goals. If your business is not set up to match its goals, you might need to make some changes.
An auditor looks at the top of the business in a management audit. They also look at how the employees’ goals are met and how they relate to the business’s goals. That way, each part of the business is examined to make sure that the business goals can be reached.
Operational audit
The final main audit type looks at a business’s operations. Business operations are the day-to-day activities that keep a business running.
Some aspects of business operations include the business’s relationships with customers and vendors. And, operations look at the performance of the business and how much income they bring in from sales.
An internal auditor looks at how the business is performing in regard to day-to-day activities, like its sales and expenses. If the operations audit shows that the business is not functioning as well as it could be, changes must be made to improve the business operations.
Tips for an easier internal audit
If you want the audit process to go over smoothly, you need to keep every financial record. Make sure you always organize and store records. Using online accounting for small business alleviates the hassle of dealing with paper records.
It might be beneficial to have frequent audits. That way, you can catch errors or improve productivity faster. You can do an audit monthly or semi-annually.
Know what areas of your business need to be audited more than others. For example, you might conduct more internal audits for departments that handle cash than customer service departments.
Internal audit procedure
If you decide to conduct the internal audit yourself, or if you don’t know what to expect from an internal auditor, here is a three-step internal audit checklist to help simplify procedure:
1. Set up the audit
Before anything, the internal auditor needs to know when and what they are auditing. Make sure you know what area needs auditing as well as how many times per year you need to have internal audits.
Much of the auditing process is making sure a business is complying with legal regulations. Make sure you understand the laws you will be checking. And, understand the duties of the department you will be auditing.
2. Conduct the audit
The main part of the internal audit procedure is actually conducting the audit. Gather all your accounting records and supporting documents so that you can compare the information. It may help to have an accounting checklist to walk you through the financials.
You then must figure out if the business follows internal policies and state and federal laws. Talk to employees about business procedures to see if the work they perform matches policy.
3. Create a formal audit report
During the audit, take accurate notes so you know where the business’s inaccuracies lie as well as what areas it performs well in. After the audit process, create reports to keep in your records.
If you, the business owner, conduct the audits, you can use them to figure out ways to improve your business. If someone else conducts the audit, they will give you an audit report for you to look over with suggestions for improvement.
Want to make audit processes easier? Patriot’s online accounting software keeps track of your expenses and income to help you organize records. That way, you don’t need to scramble before an audit. And, we offer free, U.S.-based support. Get your free trial today!