Preparing For a Business Audit

Audits are conducted for several reasons, one of them being to ensure that reports and financial statements conform to requirements. Audits also provide information on the business’s accounting and whether or not it is in order. Investors and other shareholders utilize audit information to understand the financial health of the business.

Furthermore, the IRS may conduct an audit through a statistical formula or through a process called a random selection and screening, or by what is known as a related screening where if a business partner or investor is being audited, their associates will be screened as well.

Be Prepared

The important thing for a business is to be prepared for the audit and provide the auditor with the information requested. It is common that critical information may not be easily accessible for the business and may need to be searched for. For example, the IRS may ask for receipts and records of financial transactions that have been used to claim exemptions.

One of the key requirements in preparing for an audit is ensuring records are in place. Auditors are first and foremost accountants themselves and appreciate well-categorized entries.

• Locate Records
  Ensure all transaction records are found and categorized in a manner where they will be easy to locate on short notice if required. Often, individuals will dump a box-full of paper receipts and records at the last minute to be used during tax filing and then forget all about it. Audit preparation should include locating these records in case they are needed.
• Keep Records Used During Tax Filing
  The IRS can demand to see documents that were used for the preparation of tax returns. As part of preparation for a business audit, it helps to ensure these records are at hand.  Bank statements, canceled checks, cash receipts or records in a petty cash book, all count as proof of payment. It is important to note that both personal and business-related proof of payments may be required.
• Business and Personal-Use Equipment
  A startup will often use equipment that is the founder’s own personal property. In the event of an audit, records of business usage must be produced for such equipment. This can include laptops, cellphones, cars, etc. used for both, personal and business use. Ensure business usage is recorded for mixed-use equipment. Assets that are used only for the purpose of the business, for example a machine that manufactures products sold by the business, could be exempt from scrutiny.
• Expenses Incurred for Business
  Keep copies of rental agreements, in the case of real estate rented out. In a case where cars are used or flight bookings completed for long distance travel, it is best to keep fuel receipts, tickets and other proof of expenses incurred for business purposes. This could also include entertaining for the purpose of business development and taking clients out for lunch or dinner.  Typically, these are categorized as travel and entertainment records.

Why Businesses Should Take Audit Preparation Seriously

Audit preparation can help a business organize their accounting and bookkeeping. However, the motto ‘begin at the very beginning’ can prove to be most helpful. Audits are about scrutinizing records and receipts. Solutions, such as automation, can help maintain records and track expenses, as well as locate receipts on demand. But software needs expertise to operate and thus could prove to be financially challenging for a startup or a small business.

At Analytix, we have been helping businesses address this challenge by providing scalable, outsourced accounting and bookkeeping solutions, including reliable record-keeping. We provide extensive and comprehensive business advisory services to companies poised for growth, including guiding them through financial operations. For more information on how we can assist you, call us at 781-503-9002 or email us at sales@analytix.com.

Written by

Analytix Editorial Team