How to Prepare your Small Business for an Audit

There are many practical reasons your small business might need an audit. For one, banks and other private lenders are more confident in loaning money if your business has been audited. An audit can also point out flaws in your processes that you might have overlooked, which you can fix to safeguard your finances and help you run your company more efficiently. 

Should you decide on having one, here’s a checklist of what you can do to prepare your small business for an audit:

1. Document Everything All Year Round

Audit preparation starts on the first day of your company’s financial year, not a week before. Record every transaction your small business makes. For unusual transactions, write down an explanation for how you came to your decisions. 

Store all documentation in an organised manner for easy access. You do not want your auditor spending unnecessary time just looking for relevant records during the audit. 

2. Perform Monthly/Quarterly Reconciliations

Part of the year-round audit preparation process is reconciling issues with your finances on a regular basis. 

By scheduling monthly or quarterly reconciliations, you avoid having to rush to solve problems right before the audit starts. This includes going through your bank accounts, accounts receivable, accounts payable, and inventory.

3. Ask Your Auditor for an Early Planning Meeting

Communication with your auditor prior to the audit is key to ensuring the process goes as smoothly as possible. 

Ask them to have a planning meeting with you in advance so you can discuss issues that will be relevant during the audit. Find out what the auditor might need help with such as obtaining important documents. Both parties might also bring up topics that either one didn’t foresee before the meeting. With an early planning meeting, you and the auditor can accomplish tasks that could shorten the actual audit.

This is also your opportunity to establish which items to be audited are of high priority. Request a prepared-by-client (PBC) list from your auditor. These are documents that an auditor has yet to review or correct.

The PBC should include company information that has a material impact on your small business, including:

  • Balance sheet accounts
  • Cash flow
  • Revenue and expense accounts
  • Organisational charts
  • Contracts, etc.

During this meeting, you should also inform your auditor about other inspections you had done for your company. Reports and recommendations from previous reviews can be helpful references for your upcoming audit.

4. Inform Your Staff

Guaranteeing the audit goes off without a hitch requires coordination, not just between you the business owner and the auditor, but also with your staff. 

Small businesses, with their limited size, often have every single employee managing important parts of the business. Therefore, the need to inform each one about the audit is critical. 

Assign an audit liaison who will be in charge of providing all the necessary resources to the auditor. It is usually the head of finances taking on this role, as they are most familiar with how money flows in and out of your company. 

Part of the audit liaison’s responsibilities includes directing the auditor to your business’ subject matter experts (SMEs). These are the people who know exactly how your internal processes work. They are best equipped to answer questions the auditor might have about specific issues. 

When briefing your SMEs, you need to tell them what standards the company is going to be held up to. In turn, they can tell you what actions must be taken to meet those standards. 

5. Clear Time for the Scheduled Audit

An audit will disrupt your daily operations and can take a long time. Since you’ll know when it will take place, you should clear that period of work. SMEs will also have to set aside their tasks to prepare for their part in facilitating the auditor. 

Another concern that should be addressed as soon as possible to avoid frustration among your employees is the scheduling of time off. If you have been in contact with your auditor, you should know when the audit will take place well in advance. Staff members that need to be present for the audit can adjust their schedules accordingly, whether it’s for a business trip or a holiday out of town.

6. Gather All Appropriate Files and Records

As the audit draws near, you need to prepare to submit all the important documentation regarding your finances. The following is a list of some records you can expect your auditor to request:

  • Primary accounting records
  • Outline of your company structure and ownership
  • Year-end bank reconciliation and bank account statements available for the fiscal year
  • Balance sheet breakdown including invoices 
  • Aged debtor report and creditor listing
  • Payroll records 
  • P11D returns
  • Hire purchase and leasing agreements
  • VAT returns and workings

Additional information such as meeting minutes made throughout the year and any details regarding the changing of share ownership might also be requested by your auditor.

7. Anticipate Questions on Variances

The expectations you had at the beginning of your business’ fiscal year and the realities of your financial situation at the end of the year matter in the audit. You need to be able to explain your budget-to-actual variance, which is your planned budget compared to your actual expenses. 

Be ready to answer questions about year-over-year changes as well, especially if there has been drastic growth since the last audit.

Do Your Due Diligence

Your audit need not be a stressful experience. By putting the same level of effort into preparations as you do into running your small business, you minimise the time it will take to get through the audit. 

If you need expert help getting your business ready for an audit, feel free to get in touch with our professional accounting team and they can talk you through what’s involved.