Friday, December 20, 2013

The Basics of Auditing for Business Owners

Basics Of Auditing

When people hear of accounting, one of the first things they think about is an audit. While auditing is an essential part of business, not every company would need to have one. Auditing is done by an auditor, who is a person qualified to make assessments whether or not a company's financial statements are free of errors.

What Is In an Audit?

An audit is basically an unbiased study and evaluation of the financial statements of an organization or business entity. It can be made internally (by employees or in-house auditors), or externally (by a third party accounting firm). The IRS (Internal Revenue Service), a government agency responsible for tax collection and enforcement, also performs their own audit for establishments to ensure that everything is true and accurate.

Audits can be done annually or when required by law. There are are also cases wherein shareholders of a corporation or business would request for it. Small private firms normally don't need an audit. These companies typically do not exceed 50 employees and have gross assets not more than $12 million. In general, audits are done on public companies only – unless a private organization is deemed 'large' enough to undergo it as well.

Understanding Audit

What Is an Auditor Looking For?

He cannot make the right judgment if there are missing documents; so first and foremost, a company needs to have complete paperwork of every sale or loss that they have incurred during the past year(s). An auditor is mainly looking for two things: accuracy and reliability. Documents and records must be an accurate representation of what really took place, and all he needs to do is interpret them based on generally accepted accounting principles (GAAP).

All paperwork must also contain vital dates and figures. He would also like to believe that everything stated on the records are genuine. So if his client has reported a sale of $5,000; it should hold true (and not a lesser amount just because the company wants to avoid paying a bigger tax). Other things he would check for is the list of assets and liabilities owned by the corporation prior to the audit date. Examples of assets can be vehicles, machinery, and real estate. Liabilities would include debt and account payables.

Where to Get an Auditor

Hiring an experienced auditor is the first step towards fulfilling tax obligations. There are plenty of accounting firms offering various auditing services tailored to specific industries. Various businesses would require different auditing approaches; what is needed in an automotive audit for instance, is not necessary for an audit in the entertainment sector.

Getting an audit is particularly stressful; so preparing ahead of time is crucial. Get referrals for an auditor through fellow entrepreneurs in the same field. Bankers and lawyers also have great networks of financial experts. Before hiring, ask plenty of questions and check for experience. A good auditor must have had prior auditing done with several clients. By getting a highly-skilled auditor, the process will not only be cost-effective, it can also be done in a timely manner for everyone involved. 


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