A small business frequently incurs expenses related to employee travel, meals, customer relations, and other necessary items. The Canada Revenue Agency provides a long list of allowed business expenses. By law, you are required to hold onto all your receipts and to have a good audit process for evaluating the validity of those receipts. This includes auditing data entries, especially manual entries; gathering actual receipts from employees; confirming banking information of your employee; and only recording business-appropriate expenses.
CRA Business Audit Red Flags
The CRA conducts business audits on deductions to ensure ledgers, journals, invoices, bank statements, and receipts are well-documented. It can even audit your personal and family records if they relate to your business. Large or unusual charges in deductions are a red flag. Likewise, claiming large home office deductions or 100% of business use of a vehicle is also a red flag. You want to develop internal simple audit procedures for your business to ensure red flags like these don’t happen. When in doubt, remember the CRA really likes consistency.
Common Business Expenses
There are many different types of expenses you can deduct. In general, you can deduct any reasonable business expense paid out to earn money. Some of the more common expenses include advertising, business startup costs, insurance, business-use-of-home expenses, maintenance and repairs, office expenses, property taxes, rent, travel, utilities, and even prepaid expenses. Consider developing a periodic process for reviewing and auditing expense reports as a batch file. A benefit of reviewing expense reports in a batch on a periodic basis is to avoid errors in data entry. It also makes the auditing process more efficient as each batch can then be sorted by batch number. Additionally, all expenses are processed during a single program run.
An internal audit brings a systematic approach to evaluating the processes and controls of your business. It may sound like a daunting task, but you don’t need to hire a consultant to conduct an audit of your business expenses. The best audit procedures are unobtrusive and virtually hidden from those engaged in the process, which makes you the ideal person to develop them. Audit procedures should be ongoing, seamless, and focused on auditing the data entered, verifying receipts, confirming bank account information, and excluding personal expenses. While audit procedures should be continuous, they shouldn’t always be the same. A new audit plan may even uncover issues in other areas. It may take longer to develop multiple procedures, but it may also save you a lot of money.
Examples: Internal Audit Procedures for Business Expenses
Substantive procedures for auditing business expenses includes the examination of documentation submitted confirming the process was completed. If you want to deduct the cost of an airline ticket, the ticket should include the boarding pass as verification. This is because someone can purchase a flight and then cancel the flight for a refund. Only the boarding pass confirms the flight was taken. Another example is to red flag several receipts from the same store. Similar dates and times stamped on the receipts could be a clue that something is amiss. It could mean someone collected receipts from other people leaving the store at the same time. Suppose a sales manager submits a receipt for a group dinner. Set up an audit to check the expense reports of the employees on the submitted receipt. If someone else also submitted a receipt for the same meal, it could be a sign of fraudulent activity. Auditing isn’t an exciting subject, but it could save a great deal of time and energy. Having a good internal audit process for tracking expense reports prevents fraudulent activities by employees and decreases the likelihood you’ll receive a negative business audit from the CRA.