How To Audit Small Business
Auditing is a process of examining the different area of your business’s suspects. That gives you knowledge about the errors done by your staff and you. Another fact regarding auditing is, if your audit report is fair and accurate then it will be easy to pay the right taxes. Here right tax means are you not overpaying tax or underpaying tax. Auditing is necessary for every type of business. The large business owner knows how to do that. But some small business owners don’t know how to audit small businesses. Hence they spend lots of time to audit it. That’s why we are here to reduce your problem of small business audits. Let’s see below
But before preceding toward small business auditing lets overview of auditing
What is Auditing
Auditing in accounting is a process of recheck your business account. So that you can come to know where your money goes. there are mainly two ways to conduct auditing in small businesses. First, internal auditing and second external auditing. internal auditing can be done by the business staff and owner itself.
While an external audit can be done by the account professional like Chartered Accountant(CA). the person who did an audit of your business is called an auditor. when the auditor finished the auditing process, then he provides you audit report that includes all the errors regarding your business. this report tells you, where & what mistakes you have done in accounting that you got losses.
This report also tells you about your business rules are a match with the IRS rule or not. Every business should be done his small business audit once in a year or quarterly. so that business owners can improve their motive to get growth in their business. So let us see how to audit small businesses.
How To Audit Small Business
Every business needs to purchase goods and services. After purchasing they have to keep stock of each item in the godown. Then they start to sell goods or services. These all three stages we have to maintain separate accounting. Because if any mistake occurs then it will be easy to find mistakes. So we found that we have 3 stages in our business Purchasing Process, Stocking of goods process and then sell.
So we audit in all three stages first we should start the purchase accounts, that what item and in how much quantity has been purchased. And then we can see their voucher and supporting vouchers for reference. These steps help you to identify the quantity, price, and cost of goods. If you find any error then you should write in a separate paper. Similarly, you have to check the rest of the two stages and write down on paper if any mistake found. This process is called an internal audit of small businesses. that should be based on GAAS(General Accepted Auditing Standards). So you have seen how to audit small businesses. Now let’s discuss it briefly.
Steps To Audit your small business
We have given some basic steps to audit your small business accounting. So follow these steps to get better results.
Cross-check of each account of small business
Cross-check of each accounting should be done on a regular basis. Check your journal entries and vouchers, individual account balances. And account balance should be check regularly just before preparing the trial balance at the end of the accounting period. If you find and wrong entry during examining then immediately correct it. Like you have purchased a laptop that is $2000 but you have journal entry $200 then correct it immediately.
Second, crosscheck your purchase order receipt with the supplier receipt. If you see any mistake in your purchase order then correct it. And if you find any error from the supplier side then contact them and correct it.
Check Physically(How Much Stock Available)
Now you have to cross-check your stock accounting and actual product Qty in Godown. Suppose in your stock entry there are 500 laptops are available right now. But when you examine physically you have found 498 laptops. This process will help you to aware of any mistakes. So if you do not do auditing then what happens, there was a possibility of taking orders from any customer for 500 laptops. But actually you have 498, then the customer will not satisfy with your business and next time it is possible that he will purchase from any other store.
Check your sells department
Similar to the purchase books, you have to cross-check your sales entry from the godown stock and purchase order. If you find the selling amount of a laptop on accounting is $2500, but seles receipt has $2589, then you can correct it. So automatically auditing will help you to identify where and how you have done any mistakes.
Check Tax Record against your Tax Return
If you have paid tax to the government then cross-check it with the internal tax paid and tax liabilities account. It’s advised you to keep the tax receipt at least for 7 years.
Generate Audit Report
After deeply examining your small business accounting. You have to make an audit report, that includes all the mistakes you have made. These mistakes should be categorized according to business areas. And what improvement you can do in a specific area. That will bring good revenue to the business. And give this report to a professional document so that you can show it to the IRS.
Besides the internal audit report, you have to prepare additional documents. Which is required to ask by the IRS
Necessary Document That can Be asked By The IRS
Bank Statement & Receipt: you will be required to present your bank statement and canceled check from the internal accountant.
Journal Entries and Ledger: there is now law to tell us to keep formal books. But it will help you to better understand your business expenses. And this can be asked by the IRS.
Digital Transaction Record: if you have done any business expense and received a digital receipt. Then it is also accepted by the IRS. But the receipt must include the name of the payee and address.
Equipment Record: you should have an appropriate document for your assets. All assets whether it’s used for personal or official, you should maintain well. So that when the IRS asks for it then you can easily show them.
Vehicle Record: The vehicle that is used for the business purpose and personal use also mentioned in your accounting. It can be asked by the IRS
Travel & Entertainment Record: if you have travel for the business purpose. And did some expenses, then you have to keep a record of each expense together with a good explanation note.
Before going to acquire an external auditor. It’s better to do internal auditing for your small business. Internal audit helps you to understand where you have made mistakes. Or how much your employees are loyal to you. We have provided every detail on how to audit small businesses. Follow all the instructions, this will really be helpful for you.