Are you ready for an audit? A 5-point checklist
Why audits happen
The papers and electronic records you keep in order to validate your firm’s accounting records are known in the finance world as the audit trail. While the word ‘audit’ is most commonly associated with a harrowing process that companies or individuals are put through by the Internal Revenue Service, companies may also undergo internal audits to make sure everything is in order should the IRS come knocking.
In fact, putting your company through an internal audit every year, even without probable cause, might make your life a whole lot easier if the IRS decides to review your company’s audit trail. Outsourced bookkeeping or an accounting consultant keeps the audit processed fair and balanced. You can even outsource a Chief Financial Officer (CFO)!
What you can do
Whether the audit is an internal audit performed by a business accounting consultant, or an external audit performed by representatives of the US Federal Government, here are a few things you can do that will make your life easier:
1. Minimize your risk.
In the business world, three aspects make up what is known as the Fraud Triangle, and when the triangle is complete, fraud may occur. The aspects of the Fraud Triangle are: Motivation, Opportunity, and Rationalization (or Perceived Pressure). A classic example is a sales manager reporting their own numbers (opportunity), whose bonus is based on his or her annual sales (motivation) and who may need the extra money to fix his or her car (rationalization). For this example, by putting someone else in charge of reporting the sales figures, and/or basing the annual bonus on other merit besides the amount of sales, you are minimizing the risk of fraud, which will be of great help to you should your firm be audited. Outsourcing bookkeeping responsibilities using a business consultant is a great way to prevent fraud.
2. Create an accounting policies and procedures manual.
Non-standard accounting procedures or those that vary from year to year are more likely to raise flags at the IRS. The manual can be used as a training guide for a new employee, and can be created by employees in different departments by simply having them write a report to the finance manager about how they perform their jobs. In some cases, the finance manager, vice president, or chief financial officer (CFO) may need to make a policy decision for accounting procedures within the company. Your business management consultant will be of great help putting these together.
3. Keep impeccable primary and secondary records.
This means not only keeping a receipt for every incoming and outgoing financial transaction, but keeping the receipts in chronological order, as well. Scanning receipts and keeping a digital file of these secondary records in two separate locations, also in chronological order, is a good idea, too.
4. Write notes about bookkeeping decisions.
Accountants are allowed to write notes about why certain bookkeeping actions were taken, and you should definitely have your firm take advantage of this even if you don’t have an accounting consultant, especially when taking action not covered by the procedures manual. Take the time to write detailed notes about decisions such as where you reported individual expense accounts or which inventory method you are using so that auditors can quickly see the logic behind your decisions.
5. Get professional help.
An enrolled agent, business accounting consultant, certified public accountant (CPA), or tax attorney will help you make sense out of the US tax code, which can be confusing at best. An outsourced CFO or business consultant will also help you set up your systems such as Quickbooks, make sense out of your records, check what others are doing, provide oversight, and guide you through the process of audit preparedness before the audit occurs.
–by Cate Patricolo, Fisher Business Management staff
About the Author Barb Fisher
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).