For most small business owners, the thought of a financial audit is about as exciting as getting a root canal. But audits can reveal important information about the financial position and organization of a business, making them an invaluable tool.
1. Start with organization.
Whatever your long-term aspirations are as a business owner and company, communicate this plan with your accountant and push them to track finances accordingly.
2. Align accounting and reporting.
Your accrual accounting should be on the same timeline as your reporting. For example, if you report on your finances monthly, conduct your accrual accounting monthly. This will avoid endless hours spent on reversals/corrections later.
3. Fix your fixed assets.
Fixed asset tracking is difficult for many companies. Software Advice created an Excel spreadsheet that you can download here, to properly take into account for taxes and services that are a part of the purchase value of fixed assets.
4. Keep a digital record.
It’s worthwhile to keep a digital record of everything so when the time comes, you can refer to a document instantly. For example, be sure to digitally file bank statements because older statements can be unavailable online and copies may be difficult to obtain.
5. Employee PTO counts.
While paid time off is tracked from an hourly or daily value from a human resources standpoint, it has to be expressed on your balance sheet in terms of dollars. One idea is to connect every hour of paid time off an employee earned to their compensation each pay period.
6. Factor in deferred rent.
Proper Generally Accepted Accounting Principles (GAAP) accounting requires the value of a lease to be equally dispersed over a given period. So even if you get a few months of free rent, you need to recalculate for accounting purposes accordingly.
7. Correctly categorize expenses.
While audit financials may be rolled-up into broader categories (sales and marketing, research and development, general and administrative), granular tracking is common. But keep in mind which broader category each line item would fall under to avoid a difficult time allocating items later on.
8. Close your books each month.
Reconciling records each month ensures that expenses don’t fall through the cracks and makes it easier to catch any discrepancies.
9. Audit the team!
When interviewing potential auditors, ensure you’re communicating with the staff that will be helping you throughout the process. Knowing the team is a good fit from the start will help make the entire audit process go smoothly.
Financial audits are no small project, especially if you’re conducting one for the first time. Understanding how to conduct an audit now can make life easier for you in the long run.
