Conducting an audit of your business accounts is extremely beneficial, despite any initial fears of what skeletons might be lurking in the closet. Auditing reveals risks and opportunities that any small business can avoid or capitalise on and helps achieve its maximum performance potential. However, the burning questions remain: when and how should you conduct an audit?
The Benefits of an Audit
As a small business owner with an intimate knowledge of the company’s processes, you’re in the best position to perform the audit, which will help you better understand how activities and processes operate. This knowledge will assist when creating action plans to improve those processes. Further, an audit sharpens your financial reporting and serves as an early-warning system in case there are any problems that could affect the company if a much more serious audit were handed down from the ATO.
Another benefit of the audit is it clarifies the company’s financial position and how much cash is in reserve for business activity. This is extremely useful if you’re looking to expand the business or try something new. It’s important to know exactly how much room you have to manoeuvre when taking on any new project.
Internal Versus External Audit
Owners can audit accounts in one of two ways: either internally or by recruiting a third party to handle proceedings. Handling the audit with your team is much more cost-effective, however you lose a level of objectivity a third party would bring to the proceedings.
External audits can catch anything you might have missed, as well as help reduce waste and promote better efficiency. At the same time, a trusted third party working with your business adds credibility and accuracy to the auditing processes. Further, the external team can double-check the integrity of your internal audit process, making sure it’s quality work.
However, cost is a consideration and it isn’t always necessary to have a third party handle the audit for you. Plus, you won’t get the intimate, up-close learning of your business. It’s a trade-off between value and objectivity.
What Needs Recording
According to the Corporations Act 2001 s286(1), companies must keep written financial records that a) correctly record and explain its transactions and financial position and performance, and b) would enable true and fair financial statements to be prepared and audited.
ASIC defines financial records as: “invoices, receipt orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers, documents of prime entry, and working papers and other documents needed to explain the methods of which financial statements are made up, and adjustments to be made in preparing financial statements.”
Financial records can be kept electronically with software such as QuickBooks Online.
How to Start an Audit
Before you start, be sure to organise the audit. It will save time, improve efficiency and produce more consistent, quality results. Remember, there are five key drivers of audit quality, including the culture, the skills and personal qualities of those involved, process effectiveness, uncontrollable outside factors and the reliability of the reporting. With that in mind, you can follow these six steps to get your audit underway.
- Set goals: Ask what you’re trying to achieve through the audit and what you expect to achieve. See it before you do it
- Identify risks: If the business is already facing problems, make sure to focus on those but also attempt to discover any other problems. You’ll want to tackle the major problems or threats to your business during the audit
- Plan activity: Decide how long and how many of you are going to work on the audit, and decide what information you’ll need to complete your goals
- Just do it: Work on the audit and complete it
- Create a report: Develop records of your work as you go and make action plans for problems as they arise so that you drive real change through the business
- Follow up: Check in on your action plans and ensure their recommendations are being carried out
- Learn and refine: As with all business activity, learn from the experience and refine the audit process so it’s more effective next time
Auditing your business accounts can have massive benefits for your company, so don’t be afraid to start today.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.