The term “tax audit” usually refers to a government examination of specific items, divisions, or years when errors or fraud are suspected. On the other hand, a business audit involves an unbiased assessment by a third-party auditor of an organization’s financial statements and internal controls. This type of audit thoroughly examines overall operations, internal controls, bookkeeping systems, and compliance with accounting standards.

Business audit preparation can seem daunting, but audit readiness can make your financial recordkeeping easier year-round and increase internal control quality. Here’s how…

What Do Auditors Look For?

A third party, like a bank or investor, may request audited financial statements to make a decision on whether they should work with your organization. Subsequently, the auditor’s job is to ensure that your financial statements are accurate and without major (material) misstatements.

The most important areas of examination are the effectiveness of your internal controls and whether your financial statements are compliant with GAAP or IFRS. Auditors also assess the strength of your recordkeeping systems, the accuracy and validity of the financial records within them, and whether the integrity of your recordkeeping systems, among other factors, puts the organization at risk of errors, fraud, or noncompliance.

How to Ensure Audit Readiness Year-Round

Auditors examine your transaction volume and the nature of these transactions. After all, a construction firm will have drastically different audit procedures than a restaurant. They also determine who has access to information and how often and frequently your financial records are updated to ensure that your statements are accurately and fairly presented.

While forming year-end business audit preparation procedures is helpful, audit readiness needs to be performed year-round to fix potential issues before they become major problems. This financial audit checklist isn’t just for end-of-year but for keeping your organization on track year-round:

1. Level Up Recordkeeping Systems

Recordkeeping systems evolve alongside your organization. You may need something more robust after growth or taking on more complex engagements and revenue streams. No matter what types of revenue your organization generates, all records should be easily retrievable at any time.

Invoices, contracts, orders, payroll documents, bills, tax statements, and other business and financial documents should have a recordkeeping system that makes them easy to track down without compromising security. Being unable to find records will not only have an adverse audit outcome, but also cause inefficiencies year-round.

2. Maintain Accounting Records Regularly

Accounting schedules should be clearly communicated and easy to follow whether you have an in-house accounting department or use an outside accountant. Schedules should outline how often records are updated. Note if AI and other automation are used to create or update journal entries and other transactions. Show that you can maintain this accounting schedule, what types of human and machine assistance are used, and how often.

3. Clear and Meticulous Accounting Policies

Accounting policies should be clearly outlined and consistent, such as the persons responsible for bank and credit card reconciliation, setting up and maintaining the chart of accounts, and labeling journal entries.

4. Review and Adjust Policies As Needed

Accounting policies aren’t set in stone. They will need to change when regulations do, along with industry shifts and changes at the organizational level. They must stay clear and consistent, but reviewing policies at year-end and after major changes is prudent.

5. Identify and Retrieve Supporting Documents

A solid recordkeeping system is the foundation for year-round audit readiness and smooth operations. Supporting documents should always be easily identifiable and available for retrieval at a moment’s notice. Labels, dates, systems, and other means of organizing records should be known to all who have access to them. If you have a chart or blueprint that explains how you identify and retrieve supporting documents, share them with the auditor when the time comes.

Every line on your balance sheet should be tied to these supporting documents that are easily referenced.

6. Ask for Help

Drafts of financial statements should be shared with other decision-makers internally, including executives and employees on the accounting team. Ask them for input on how reasonable they think these statements are and key areas to address.

Learning From Your Audit Postmortem

Even the most compliant organizations with advanced accounting systems and robust cybersecurity measures can have vulnerabilities; auditors are likely to identify areas for improvement. Maintain vigilance with best practices in accounting and recordkeeping throughout the year to minimize the risk of material misstatements in your audit.

Nonetheless, expect the auditor’s findings to reveal areas needing attention. Review what aspects of your operations went smoothly and which did not. For elements that are challenging to quantify, like the equity and valuation of intellectual property, work on developing more precise quantification methods. No organization has unlimited resources, yet insights from audit findings are pivotal for prioritizing crucial improvements in internal controls, security measures, and fraud detection.

Be Audit-Ready with Accounting Freedom

Partnering with Accounting Freedom ensures your business is always audit-ready. Our expert guidance will help you organize and maintain your financial records, giving you a significant advantage when it’s time for a business audit. With us, your business information will be meticulously prepared and ready to present, making the audit process smoother and more efficient. Contact us today to secure your financial integrity and streamline your audit preparation.