What Is an Audit?
An audit is the review or investigation of a business, agency, nonprofit or government organization with the purpose of gathering information on a specific aspect of that business, such as business practices, income, or regulatory compliance. The audit is completed when the audit criteria are fulfilled.
Tax audits differ from audits on businesses. Business audits are done to ensure compliance with accounting regulations and to review internal procedures. Tax audits are done to review financial information.
What Happens During a Business Audit?
When a business, government bureau, or an accountant sees the need for an audit, a plan or strategy is outlined with the company being audited. Internal audits have to follow guidance from the Institute of Internal Auditors, and external auditors have to comply with standards set out by the Auditing Standards Board, the American Institute of Certified Public Accountants, and sometimes, from the Public Company Accounting Oversight Board.
The plan must describe the intent of the audit and its scope. External audits also must outline the procedures that will be used, their timing, and the extent of the investigation.
An audit’s findings are reported to the company that was reviewed. Internal auditors give their results to the board of directors while an external auditor may provide a report for public review. Depending on who conducted the audit and its purpose, an audit statement may be issued, federal tax returns may be corrected, or internal action within a company may be taken.
Types of Audits
An internal audit is performed by a business in association with the company or organization it's examining. An audit performed by a CPA in the company's employ, for example, is an internal audit.
A compliance audit studies the actions of a company, business, or specific department to see if its regulations and procedures are in compliance with the company's personal standards. Some compliance audits also determine if a company is in harmony with external standards, such as federal regulations in its field.
Information Systems Audit
An information systems audit looks into the IT system of a business, including its security, operations, software, and data. The goal is to eliminate potential problems that could hinder the systems from performing their duties and to avoid gaps in the security of the system.
An external audit is performed by a third party independent of the company being investigated. Sometimes, businesses will perform an external audit to be made aware of potential problems in an unbiased manner. Some external audits are conducted by an independent source without the approval of the business, like a tax audit.
A tax audit is perhaps the most common type of audit and is usually undertaken by the IRS if it sees suspicious activity on your tax returns. There are many reasons why the IRS may perform a tax audit, but they usually all boil down to low or invalid payments to the government.
A financial audit is another very common type of audit that is conducted by an independent party. Publicly traded companies are subjected to regular audits to ensure the financial statements of the company are legitimate and fair. This type of audit gives investors reassurance that the company is being honest in reporting their financial statements. An independent accounting firm will typically perform this audit.
Investigative audits often involve internal and external auditors working together to investigate fraudulent activity, missing money, or negligence in a company. Sometimes, an internal auditor will uncover a problem such as fraud and pass the investigation on to an unbiased source. Besides remedying problems, information on possible fraud within the company is collected by the auditor in case legal action is taken.
Benefits of Business Audits
Government agencies, nonprofits and businesses can all be subject to an audit. While many business owners may view an audit as a negative occurrence, it can actually be beneficial in some cases. An audit can be thought of as a quality control measure to ensure accuracy of financial records and help your business in the long run. Some of the things an audit can do for your company include:
- Provide a positive signal to investors and lenders: If you’re looking to grow your small business and raise capital, having audited financial records can boost the confidence of investors and lenders, making them more likely to approve you for a loan or invest in your company.
- Highlight internal problems: Things such as employee theft, fraud and operating inefficiencies can potentially be spotted sooner.
- Make tax processes easier: Filing small business taxes each April can be easier if your company has already self-audited its financial statements. It can also make things easier on your company accountant.
- Let you qualify for business certifications: Some particular business certifications, such as ISO 9001, require regular business audits to qualify. Some of these certifications can help your business become more profitable and potentially decrease operating costs.