If you own a business, the idea of your first audit might fill you with dread. But it doesn’t have to be a stressful experience and, if everything is done correctly, it can actually have various benefits. A business audit goes over your company’s financial records with a fine-toothed comb to make sure your year-end finance reports are accurate. The objective is to establish exactly how profitable your business is and where those profits are coming from.
It also lets HMRC know that everything you are doing is above board. Businesses in the UK are required to have their annual accounts audited by a third-party firm, but they can be done voluntarily as well. Some choose to do this as a way of understanding their finances better.
What happens during an audit?
This depends on the type of audit, but it generally consists of the following:
- Using established procedures to gather financial evidence regarding your business. All documents handed to them must be accurate.
- Verification that financial statements have been prepared in accordance with rules from Companies House and HMRC.
An auditor’s findings are reported to your business. The different types of audits include:
- Financial Audits
- Compliance Audits
- Tax Audits
- Construction Audits
Companies can also appoint internal auditors to carry out audits with the goal of making sure there are no problems. This can be a good idea to do before having an external audit carried out. Using appropriate accounting software like Sage 200 or NetSuite can improve the accuracy of your records and all your compliance procedures – if you want to simplify everything and put robust processes in place to ensure your business audits go smoothly, ERP software can be a huge help.
Tips to Prepare For an Audit
As previously stated, audits don’t have to be your worst nightmare. With ongoing work to prepare for them, aided by software with built-in features for accurate record-keeping and compliance, you can feel supremely confident when the auditors knock at the door. Here are some tips to be ready when an audit happens:
1. Do a Regular Month-end Close
If you close your books on a regular basis with a routine ‘hard’ close, you will identify any problems very quickly so you can nip them in the bud. Most larger companies will do this as standard but some smaller companies don’t keep it up. Again, ERP software can make this really easy to do.
2. Follow a Closing Checklist
You should have an established closing checklist that you follow during month-end throughout the year. This will ensure that nothing is missed and all journal entries are posted. If you don’t provide yourself with a checklist, entries can be forgotten. Your ERP would have a standard set of processes for you to follow.
3. Establish Internal Controls
You should have a robust set of internal controls in place that are highly effective. There are things like the IT General Controls (ITGC) to govern access and changes to your systems where financial information is stored. An assessment of controls if carried out by an experienced consultant in an efficient way to ensure all existing controls are up to standard.
4. Keep Records and Build Documentation
It may seem like a mundane task, but comprehensive records are key to a smooth audit. It’s never good to be scrambling at the last minute to find the right documentation for an audit. Track your leasing arrangements, debt agreements, complex transactions, lawsuits, contracts with major customers and technology modifications.
5. Be Clear on Non-recurring Transactions
If you are uncertain about the recording of non-recurring transactions in the current year, contact the auditors to seek clarity. Don’t leave it until year-end. Things like acquisitions, property sales, incentive plans for management, significant leases and more need to be recorded in the correct way.
6. New Accounting Rules
Keep on top of new accounting pronouncements, or changes to existing ones, because they happen frequently. For example, check up on recent changes to the rules for revenue recognition. You need to pay close attention to effective dates since these change and often lead to more work being needed than you might expect.
7. Customer Ageing Reviews
Every month, you should review the accounts payable and accounts receivable ageing for any old/outstanding items. Establish a process of collecting to follow up on any findings. Take the time to research old vendor balances and make adjustments on a continuous basis as needed.
8. Balance Sheet Reconciliations
These need to be done every month. A clean, reconciled balance sheet is a sign that your finances are in good health. This is a simple way to identify errors or other issues in the accounting process. In fact, go beyond reconciliations and take the opportunity to find discrepancies, correct errors and amend processes all year round. Research and fix issues swiftly – your time will be limited at year-end.
There must be proper records of expenses at year-end. Analyse subsequent disbursements to catch things that may have slipped through the cracks. By reviewing year-on-year and budget-to-budget expense variances, you will identify recording errors and anything else that needs to be accrued at year-end.
10. Accurate Revenue Recording
Accurate recording of revenue is crucial, so you should have a process in place to verify the timely billing of all shipments and services. Can you make sense of your year-to-date revenue and gross margin? Implement robust processes to ensure adequate year-end sales cut-off, as this is sure to be looked at very closely by audits.
There is a lot to do in preparation for an audit, but it is more easily manageable if you keep up with everything on an ongoing basis. ERP software can help with every single aspect of preparing for an audit, so if the work is a source of stress, it may be wise to look into it. Sage 200 and NetSuite are very powerful resources that will help with audits and much, much more. In any case, the key takeaway is that preparation is everything when it comes to external audits
Why choose Eventura as your ERP implementation partner?
Eventura has been providing robust business solutions to countless organizations for over two decades. We are ERP experts and can identify all of your business needs, and deliver a comprehensive ERP solution that works for you.
As Sage 200 Partners and NetSuite Solution Providers, we can help you identify which solution will fit your business needs the best. Our expert team of business analysts, developers, consultants, technicians and support staff can guide you through your entire project, from initial scoping through to implementation and on-going support.
We’re also managed IT service providers meaning we can help you identify your entire IT infrastructure requirements from day one. If you would like to speak to one of our ERP experts to discuss your options or request a free demo, you can request a free call back here.