The word audit can send a business owner into a nervous panic. But an audit isn’t always a serious issue, especially when conducted internally. Yes, there are audits performed by the IRS if there is reason to believe that taxes have not been paid accurately. However, small business owners often don’t realize that they should be conducting internal audits. A small business internal audit (sometimes simply referred to as a review) can help to ensure your books are where they should be, and also surface areas of concern before they become major issues that could have a costly impact on your business. Below we cover small business internal audit basics, as well as when you should conduct an internal audit.
What is a small business internal audit?
A small business internal audit involves reviewing a business’s internal controls, governance, processes, and procedures, as well as ensuring compliance with laws and regulations. Internal audits are key to discovering areas of opportunity, and in some cases can also uncover internal theft and risk of losses.
Internal audits can provide business owners and managers with information needed to enhance procedures to increase efficiency. Regular internal audits should be part of your risk management strategy to protect against fraud, waste, internal theft, and abuse.
Why does my small business need an internal audit?
Do you think your business is too small, that your employees would never steal, or that your books are in order because you do them yourself? While we would all love to live in a world free of theft, human error, or other internal issues, unfortunate things do happen. Sadly, some of the worst cases that come across our desk involve owners who never imagined their businesses were at risk in any way.
Small businesses should conduct internal audits for a variety of reasons:
- Improve processes
- Identify areas of opportunity
- Discover the cause of a financial discrepancy
- Ensure specific areas of the business are operating effectively
- Create solutions to problems the business is facing
- Complete an annual financial review
When should I conduct an internal audit?
The decision of when to conduct your small business internal audit may be based on seasonal patterns in your industry, but we recommend completing one at least once each year. You may choose to tie it to an event, product launch, tax deadline, or other business priority. Some businesses will conduct a quarterly audit as part of their financial procedures. Below are four common times your business may need an internal audit.
1. Before you seek investment or apply for funding
Ready to expand your business? Sometimes, in order to expand your business, you will need to raise capital, perhaps through investors or bank loans. Aside from having the necessary documents to show profitability, we recommend conducting an internal audit to ensure your books are without error, allowing your reports to show a clear, accurate picture of your financial health. The last thing you want to do is to represent your business inaccurately to a potential investor, only to later be accused of misrepresenting the numbers.
2. When you spot errors in your books
If something looks off, or out of place, it’s likely a sign that it’s time to conduct an internal audit. A small business internal audit will double-check entries, ensuring there are no errors, and that all transactions have indeed been reported. Keep in mind that numbers don’t lie. If your accounts aren’t balanced, the process of finding the discrepancies will be much simpler when done sooner rather than later. Conducting an internal audit can save your business time and money down the road.
3. When profits and cash flow are declining
Profits and cash flow can have their highs and lows depending on the nature of your business, especially for seasonal businesses. If you find your business that typically has stable, or steadily increasing, profits and the cash flow suddenly dips, an internal audit may help to uncover what’s behind the issue.
While decreases can be a result of the market, there may be internal factors that you can influence. Conducting a small business internal audit can help you discover possible issues, and solutions, whether it be cutting costs, or improving processes through tools such as cloud accounting apps.
4. Before and after a period of growth
Conducting small business internal audits surrounding periods of growth is essential for improving processes and preparing for the next steps in order to be capable of sustainable growth. Internal audits can be supportive when you’re developing and reviewing business budgets with growth in mind.
Conducting an internal audit can sound intimidating, especially when your back office resides in various places. Our clients find that conducting internal audits becomes a much simpler process when their finances reside on the cloud. Utilizing cloud-based accounting tools can help you to have a back office that is organized in one place, and all information needed to conduct an audit can be found with the click of a button. Oftentimes, clients choose to adopt cloud-based accounting tools when their internal audit identifies areas of opportunity, such as automating processes in order to reduce human error.
If you’re not sure where to start, send us a message. Our experienced team of business CPAs and outsourced CFOs can help you in the process of conducting internal audits, interpreting results, and implementing solutions.