Performing a business audit is something that many business owners put off amongst many other tasks on their to-do list. We get it, running a business can get pretty chaotic, but did you know that it may be a legal requirement for you? According to the Corporations Act 2001, audits are generally conducted for businesses that:
- Make an annual turnover of $2.5+ million
- Have total assets worth $12.5+ million
- Or employ over 50+ employees
Even if your business doesn’t fall into one of these categories, there are numerous advantages to conducting an audit. Firstly, let’s look at what an audit involves.
What Does an Audit Entail?
A business audit is a thorough examination of a business’ financial records to verify they are accurate. This involves looking through financial statements and ledgers to make sure that all the figures add up. An audit helps businesses find any errors or discrepancies in their accounting which can lead to problems in your financial reporting (and more problems down and effort fixing errors down the track). It also helps businesses keep track of their bottom line, helping them set goals for the future. There are two types of audits that you can conduct as a business:
Internal vs External Audit
An internal audit is initiated by the businesses itself and is conducted by an employee within the business. These are often initiated as a preventative measure, to check for any mistakes that may arise in the financial reporting. These aren’t as formal of a process, however, they are valuable in checking on a business’ progress towards its goals and objectives.
By contrast, external audits are required to be undertaken by registered company auditors that are independent of the business under audit. The auditor reviews the business’ financial records to produce a conclusion based on their accuracy and organisation. The Corporations Act 2001 requires that businesses are audited in accordance with the Australian Auditing Standards which outlines a transparency report should be produced to display the findings of the review to businesses.
Performing a business audit is something that many business owners put off amongst many other tasks on their to-do list. We get it, running a business can get pretty chaotic, but did you know that it may be a legal requirement for you?
There are many benefits to conducting both internal and external audits, some of which include the following:
The Benefits of an Audit
- Helps business owners understand their financial operations
- Helps with money management by determining big-ticket expenses
- Helps evaluate financial risks as a business grows and plans for larger goals
- Helps protect a business against fraudulent activity
- Helps to ensure all reporting is accurate and follows professional standards in accounting
Why Your Small Business Should Conduct an Audit
Auditing promotes consistency and precision in financial reporting and helps you be sure that the financial statements you are submitting to the ATO are true and fair, so you avoid any penalties. If you don’t conduct regular audits, you may find that your record-keeping could get sloppy or disorganised, leaving a bigger mess to clean up down the track, especially if you’re not using a professional bookkeeper.
Also, if you have a particular timeline you’re working towards in regards to upscaling your business, then it’s important to have an overview of your business’ finances. An audit can provide you with invaluable information about your business (and where you can save money through cost-cutting measures and deductions). Overall, if you’re looking to improve the efficiency of your business and internal controls, an audit is a great place to start. An external audit, in particular, is a great way to have your operation evaluated, as professional accountants and tax agents understand a business’ finances to a higher degree and can alert you to any issues or where your practices aren’t up to standard.
How Often Should Your Business be Audited?
While there is no strict protocol for small businesses, for larger companies, the general rule is that an external audit must be conducted annually. Of course, conducting smaller internal audits every three to six months is a great way to stay on track with your reporting requirements as a smaller business.
Getting Audited by The ATO
If the ATO discovers any indication of fraud or anomalies in your reporting, they may conduct their own audit to look at your finances more in-depth. They often verify your records through complex data matching software, so if this spots any issues or discrepancies, they are flagged. This software has the ability to match data reported on your tax return against information supplied from government agencies, banks and trade suppliers, hence why verifying all of your data via an audit is super important. At times, some tips may have been provided by community members to alert the ATO – these may also warrant an audit. Ultimately, the best way to get your business cleared is by being completely transparent with the ATO and demonstrating you are on top of your finances by providing all of your documentation – if you use a reliable bookkeeper, then this process is much easier.
How to Decide if Your Small Business Needs Auditing
You should consider auditing in your small business if…
- You’re trying to obtain a grant: If your business is seeking a government grant then an audit may be required to gather proof that the figures in their financial statement are true. Seeking an investment instead? Then an external audit may also help build your credibility in your proposal.
- You’re trying to obtain a grant: If your business is seeking a government grant then an audit may be required to gather proof that the figures in their financial statement are true. Seeking an investment instead? Then an external audit may also help build your credibility in your proposal.You’re trying to qualify for a loan: If you’re seeking a loan, lenders require an audit of your financial statements to protect themselves and verify your figures are accurate.
- If you plan to sell your business: Potential buyers of your business will want to be able to rely on your financial data, so having your statements audited will increase sales values to your business.
- If you want to become a partnership or LLC: Regular financial audits are required as part of a business’s Partnership or LLC agreement to provide investors and stakeholders with accurate information and transparency.
- If you’re wanting to maintain good business practises: Through regularly conducting financial audits, your business can build financial confidence amongst investors and customers.
Why Else Might an Audit be Beneficial For Your Business?
Conducting audits can reveal practises in your businesses you may have been overlooking, such as…
- Weaknesses and opportunities. For example, you might discover that your system isn’t tracking certain transactions correctly. Or maybe you will find errors in payments that need to be corrected or possible deductions.
- Uncovering fraud. Audits can help report and deter fraudulent business practises that may go unnoticed without a keen eye from a professional. There are many types of business fraud and audits can safeguard your business from many of them.
- Pinpointing poor accounting practices. With the help of audits, your company can determine incorrect financial tracking and adjust their practice to learn and improve.
- Efficient tax planning. Audits can make tax time less stressful, as correct auditing practices make completing tax returns more streamline.
How to Prepare for a Business Audit
To conduct a business audit, it’s important to have all of your financial records completed up to date – so that includes your ledgers and transaction records. You may use accounting software that does this automatically, which will save you a lot of time and effort. The next step involves sifting through these records to double-check that all of the figures add up and correlate to bank and account transactions. If you’re strapped for time (or just really feel overwhelmed by the whole process, understandably), outsource a bookkeeper, accountant, or tax agent to audit your business. To help you get started, Shoebox Books can help you find your nearest bookkeeper who can come out to you to help with your finances.
The Bottom Line…
Ultimately, a business audit helps business owners understand how their business runs, how it uses money and also assumes risks. Understanding these processes is crucial to the success of any business, regardless of its size – it’s never a waste of money, time, or energy conducting an audit and it should be a part of every business’ regular operation.
Shoebox Books is a team of highly qualified and knowledgeable bookkeepers, accountants, and tax professionals across Australia. Get in touch with us today to learn more about our services and how we can support your business