How to Conduct a Financial Audit? Step-By-Step Guide
Are you feeling the financial audit blues? The tedious task of combing through paperwork and numbers can be overwhelming, but it doesn’t have to be a pain point. Think of it as a necessary check-up for your business’s financial health.
It’s an opportunity to uncover any blind spots, ensure compliance with regulations and maintain transparency in financial reporting. It doesn’t stop there. Regular audits can also help you pinpoint areas of excessive spending and optimize resources for long-term cost efficiency.
There are specific steps that need to occur throughout the process to perform a successful financial audit.
That’s where this guide comes in.
We’ll walk you through the practical approach to helping business owners handle their finances, identify ways to optimize cost savings, and efficiently prepare for internal audits. This guide can also be beneficial for organizations undergoing other types of audits.
So without any further ado, let’s dive right in!
What Is a Financial Audit?
A financial audit is a process that looks at a company’s financial information to make sure it follows laws and standards. The goal is to check the company’s financial health, improve operations, and prevent fraud.
In general, there are three main types of financial audits.
- Internal audits: The audits that businesses realize internally to manage their annual expenses.
- External audits: The audits performed by independent third-party auditors to show financial accuracy and reliability for stakeholders and potential investors.
- IRS audits The audits conducted regularly by the IRS — or any other tax organization that handles tax laws in your region — to track tax reporting and spot potential mistakes or inconsistencies.
Financial audits need to be impartial and unbiased. The audit organization should not have any economic ties to the company being audited. Any auditor with a direct financial relationship with the company cannot be involved in the audit process.
How Can a Financial Audit Benefit Your Business?
It’s known that performing financial audits entails many advantages for your business’s economic well-being and ensures that companies are held responsible and law-abiding. Some of the benefits include:
- Serving as a guide to enhance your business procedures.
- Detecting and preventing fraudulent activities from taking place.
- Identifying any discrepancies and ensuring the delivery of accurate and transparent records.
- Strengthening the reliability and trustworthiness of your brand.
- Helping clarify your financial situation and securing adherence to law standards.
- Enhancing the ability to diagnose and address technical problems.
- Allowing your business to forecast and better address potential economic instability.
- Providing you with the necessary data to make strategic business decisions.
- Eliminating the need for excessive resources by replacing outdated expense reporting methods.
10 Proven Steps to Conduct a Successful Financial Audit
- Set up an audit plan:
Establishing a plan before embarking on the audit can help alleviate a lot of hiccups that can come along the way. Inevitable mistakes in planning can lead you to redo the entire audit and lose a lot of time, money, and effort.
Keeping the schedule updated for the entire year and clearly outlining all guidelines for the audit process should be the cornerstone of your audit.
All the areas being audited, how often the audit will take place, and the timeframe for each audit. You can also establish a timetable that outlines all the steps and use it to track your activities, so everything is noticed during the process.
- Explore ways to cut expenses
Not only do audits help businesses monitor their spending, but they also allow them to reduce expenses and increase revenue to their bottom line. That’s why it is a great idea to examine where and how it’s possible to cut down costs when preparing for an audit.
Here comes the role of expense management software, which will significantly help with handling your finances and finding opportunities for savings. Many options on the market can fit every type of business. We use Wave, but other options include Freshbooks, Quickbooks, Xero, and plenty more.
- Stay up-to-date with the latest accounting regulations.
Staying up-to-date with the latest tax filing laws and accounting procedures is critical for preventing outdated audits that you spend time and effort completing. Keep tabs on any new updates that might occur, and assign following this new regulation to some members of your accounting team.
Check out the IRS website for more information on the latest updates related to this year’s audit.
- Organize and evaluate data storage procedures
Data storing, categorization, and filing can decrease lost documents’ headaches and avoid the time dump of reorganizing things when tax prep time comes around.
Digitizing your documents makes categorizing and grouping financial data easy to compare, making spotting financial pitfalls and discrepancies much more feasible.
- Inspect the enterprise’s tax records
Inspection of a company’s tax records can be a daunting task. It’s well-known that the least retention period for tax records is seven years. That’s why it’s vital to consult the IRS to obtain your tax receipts and resolve any differences in your tax records. Make sure also to double-check all your recent tax credits and appropriately fine-tune the financial statements.
- Evaluate internal reporting systems
To perform a successful audit, accuracy in the financial details of your business should be optimal. You must fix any discrepancies on the spot. Providing all the valuable pieces of data, such as receipts and invoices, will help facilitate the reporting cycle. Remember once again to double-check your financial statement!
- Measure the potential financial risks and frauds
Have you thought about the internal measures you should put in place right now to avoid financial risks?
Determine who within your organization has access to financial documents and sensitive information and what protocols and procedures should be established to mitigate fraud and potential risks.
Always keep your client’s privacy in mind by implementing strict data protection policies and updating these guidelines to stay current with the latest threats and risks.
- Assign responsibilities and set completion deadlines for employees
As previously indicated, proper planning is key for a successful audit. Make sure to gather all necessary documents and assign roles to each employee involved. Set clear and realistic due dates for completing tasks and prioritize reviewing potential errors, mainly focusing on the most time-consuming data. To meet the deadline, prepare all necessary work papers, schedules, and financial details in advance.
- Be present during the audit process
The auditors request all the financial records in advance. That being said, you might be asked to bring more supporting documents related to the financial statement. Ensure key financial and accounting team players are available during the audit to provide any necessary information or records that the auditors may request. Another critical point is to take part in a meeting with the auditors to monitor the progress of the audit operation.
- Examine the results and make the necessary adjustments
Stay in contact with the auditors during the fieldwork process until the audit is complete. The auditors may require additional information and can schedule a meeting with the board of directors to ensure accurate details are provided.
Holding a post-audit meeting with all the relevant parties to analyze and review the results will offer meaningful insights for future audits.
Once your team analyzes the results, it’s crucial to take action and specify what modifications you can apply to enhance the findings, and this may include:
- Providing further training to the workforce
- Revising financial records and statements
- Making slight modifications to company policies and guidelines.
Last but not least, if the financial audit uncovers inaccuracies in the financial statement, Consider opting for accounting software to manage your records better.
The Bottom Line
Financial health is a top priority for business owners. Financial audits will play a significant role in re-establishing their financial balance. Now that we have covered the fundamental steps to conduct financial audits and how they can impact your business. It’s all up to you to start dedicating more time to getting ready for the next annual audit. Remember to keep up with accounting updates by consulting professional auditors and getting involved in the audit process. The ball is in your court now!
Alladdine Djaidani is an internet marketer and founder of Hustler Ethos. He likes to help companies rank on google and drive growth without breaking the bank.