A small business frequently incurs expenses related to employee travel, meals, customer relations, and other necessary items. The Canada Revenue Agency (CRA) provides a long list of allowed business expenses. By law, you are required to save all your receipts, and you should also have a good internal audit process for evaluating the validity of those receipts. This process includes auditing data entries, especially manual entries, gathering actual receipts from employees, confirming the banking information of your employees, and only recording business-appropriate expenses.
Internal Expense Report Auditing
There are many different types of expenses you can deduct. Some of the more common expenses include advertising, business startup costs, insurance, office supplies, maintenance and repairs, office utility expenses, property taxes, rent, travel, and even prepaid expenses, such as insurance policies or contractor salaries.
Consider developing a periodic process for reviewing and internally auditing common expenses as a batch file. A benefit of reviewing expense reports in a batch is to avoid errors in data entry. It also makes the expense report internal auditing process more efficient, since you can easily sort each batch by batch number. Additionally, you can process all expenses at once using an accounting or expense tracking program.
Internal Audit Procedures
An internal audit brings a systematic approach to evaluating the processes and controls of your business. Thankfully, it’s not necessary for you 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 auditing process, which makes you the ideal person to develop them.
Internal audit procedures should be ongoing and seamless. A main focus of your auditing process should be the financial data you and your employees enter into your computer system. Tracking and verifying expense receipts and bank transfers is another important part of this process.
While audit procedures should be continuous, the internal auditing process shouldn’t always be the same. Periodically implementing a new audit plan may help you uncover issues with your business operations. It may take a while to develop multiple internal auditing procedures, but doing so is essential and can save you a great deal of time and hassle in the long run. Using various auditing procedures also increases your chances of tracking down and eliminating unnecessary business expenses, which helps to increase your bottom line.
Examples: Internal Audit Procedures for Expenses
Your process for auditing business expenses must include the examination of documentation confirming that you, your business partner, or an employee completed a specific process or transaction. It’s also important to gather specific information related to the transaction. For example, if you want to deduct the cost of an airline ticket, collect both the ticket and the boarding pass as verification. Someone at your firm might purchase a flight and then cancel the flight for a refund, so it’s important to verify both, since only the boarding pass confirms the flight was taken.
It’s also important to verify several receipts that came from the same store or business. 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 internal 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. Unfortunately, it’s not uncommon for employees or business partners to be dishonest, so reviewing everyone’s business expenses on a regular basis is necessary.
Internal auditing might seem tedious at times, but the process could ultimately save your company a great deal of money and keep the financial health of your company in good condition. 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.
CRA Business Audit Red Flags
The CRA conducts business audits on deductions to ensure ledgers, journals, invoices, bank statements, and receipts are well-documented. The CRA can even audit your personal and family records if they relate to your business. Large or unusual charges in deductions are red flags. Likewise, claiming large home office deductions or 100% of business use of a vehicle are other red flags. You want to develop internal simple internal audit procedures for your business to ensure red flags like these don’t occur. When in doubt, remember that the CRA really likes consistency.
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