Business owners are constantly juggling numerous issues from marketing, product cost, product mark-up, promotions, human resources, customer service, and so much more. On top of that, business owners must also be cognizant of certain tax laws and regulations that pertain to their work and organization.
Occasionally, a small business may be audited. That’s where the business’s financial records (and sometimes policies and procedures) are reviewed to ensure that the business is in compliance with pertinent laws and regulations. This audit may be done internally by the business owner to better their business voluntarily. Alternatively, an external auditor or an IRS agent may audit the business.
There are many ways in which auditing your business might be beneficial. First, auditing your financial affairs not only helps you, the business owner, have more confidence that your finances are in order, but it also gives any investors you have (or hope to have) that same level of confidence. Those investors will be glad the records are in order but also that you took the initiative to make sure that’s the case.
In some instances, not only will investors require an audit, but some lenders will, too. Essentially, entities or individuals who may infuse money into your business, may demand to see that your business’s financial records are in order.
Second, conducting an internal audit may help flush out any significant problems. Too often, business owners don’t know the true cost of doing business.
For example, a restaurant owner may need to know the cost of materials (the food) that is used in making dishes for diners. And, a retail shop owner needs to know the cost of acquiring a customer. If the cost of running an ad on social media is more than the revenue that the customer brings to the business, then the cost of running that ad is not worth the price.
Internal audits can help pinpoint these problems and others like embezzlement, fraud, and other sordid issues that may not be so obvious until you’re able to see the detailed figures. Or, an internal audit may simply find accounting errors, which if not caught early and often may lead to much larger problems later on.
Internal audits are those that (as previously mentioned) are fulfilled by a representative of your company, somebody that works regularly for your company. Importantly, these audits may not solely focus on reviewing financial documents but may also oversee internal policies and procedures.
Often a business may be lacking a written policy on an issue that arises during the year. At the time of an internal audit is the perfect time to revisit that issue and ensure that there is a written policy in place to prevent future problems.
One of the advantages of having an internal auditor is that they are someone who already is familiar with the business. But, a potential disadvantage is they may have some bias that prevents them from seeing the numbers and records for what they truly are.
Also, many small businesses may not have the resources to conduct an internal audit. Such audits take time away from other tasks the auditor might need to do more. While large companies typically have audit departments, a small business does not usually have that luxury.
An external audit is the exact same process, but the auditor is not someone employed by the business. There are some benefits to hiring an outside auditor. This prevents the bias issue described above. And, it also alleviates the burden of one of your employees being responsible for the audit. Additionally, if an organization like the federal government requires your business or organization to undergo an audit, then that audit generally must be conducted by an external auditor.
However, paying for an outside audit may cost more money, which may be a disadvantage for a small business.
Lastly, an IRS audit is an audit required and/or conducted by the IRS. These audits are usually triggered by an inconsistent tax return. There are other factors that may increase your odds of being audited by the IRS. These include reporting high income levels, claiming losses for several years in a row, or taking numerous deductions. If you have any of these factors it doesn’t mean you’ll automatically be audited, just that it’s a likely possibility.
Depending on the circumstances and why you are going through an audit, it may help to have the advice and guidance of an experienced tax attorney. They can walk you through the process and protect your interests along the way. They can also represent you in a court of law if any legal disputes should arise.