An accounting audit examines a company’s whole financial condition with a focus on assuring compliance with relevant reporting standards and encouraging suitable cash handling policies and internal controls. For publicly traded enterprises in most countries, frequent audits by outside firms are necessary. Small enterprises, on the other hand, are generally not subject to as stringent reporting rules and controls, and hence are not subject to forced audits. Learning how to conduct a basic internal accounting audit on your own small business can provide you a thorough picture of the financial strengths and weaknesses of your organisation.
Getting Ready to Conduct a Basic Financial Audit
1 Recognize financial audits. Simply put, financial audits exist to ensure that the financial information in your company is “accurate and fair.” The key concern for small businesses is that all expenses and revenues are accurate so that the IRS is aware of the company’s financial situation and can certify that all deductions are genuine. 
- A formal audit is when a qualified third-party examines financial accounts (typically a chartered public accountant, or CPA). The IRS often audits small businesses because of worries about correct reporting, whereas major public organisations pay external auditors (and have internal auditors) to ensure financial information is accurate for shareholders. 
- Despite this, you can “self-audit” your firm (i.e., make sure your financial information and procedures are accurate and fair) to improve your company and avoid an IRS audit.
2 Understand why a financial audit is necessary. There are various reasons and advantages to auditing your finances on a regular basis. While a basic audit can be done by the business owner (who should be checking financial information and procedures on a regular basis), hiring a CPA to complete a systematic review of your finances is a good idea. 
- Financial audits can guarantee that data is accurate and conforms to accounting rules (like the Generally Accepted Accounting Principles, or GAAP).
- Financial audits ensure that all legal and tax regulations are followed, perhaps avoiding an IRS audit or other legal concerns that may develop when fraudulent or erroneous information is supplied to the public or investors.
- They can also educate the business owner about how their company operates and how it can be improved.
3 Avoid having your small business audited by the IRS. A simple accounting audit of your firm can help you avoid an IRS audit, which can be stressful and time consuming. There are a few preliminary steps you may take to better your financial situation and avoid an IRS audit before diving deeper into your accounts. 
- Make certain that your deductions are reasonable and not excessive (especially for business meals, travel, and entertainment).  Daily travelling to a regular job, for example, is not an acceptable deduction, nor is claiming any personal expense as a company expense. If the expenditure is essential to generate income, it can be subtracted.
- For any and all deductions, be sure you have proper receipts and records.
- Any large variations between years should be explained and documented. If you donate much more to charity one year than the next, explain why on your tax return and include any receipts or other supporting evidence. 
Method 2 Creating an Audit Trail in Accounting
1 Check to see if your company has a suitable accounting audit trail. The paper and electronic sources that document the history of a business’s transactions make up an accounting audit trail. Financial data is traced from the general ledger to the source of the transaction/funds using audit trails. A good audit trail includes a detailed chronological list of the procedures taken to initiate and conclude transactions.
- Determine whether your current accounting standards allow you to document the entire course of a financial transaction. Otherwise, in order to produce an adequate accounting audit trail, your accounting processes must be upgraded. For example, if you’re buying products from a supplier, find the transaction’s documentation (such as an invoice), put it in the proper account (such as the expense or accounts payable account), and figure out what kind of transaction it was (buying goods from a supplier).
- Create an electronic accounting audit trail for your company using accounting software. Accounting software will help you to effortlessly save and evaluate accounting data by logging your business’s financial activity.
2 Examine your small business’s current record-keeping procedures. All financial data should be kept in a safe, secure, and well-organized manner. Bank statements, cancelled checks, and cash register tapes should all be kept at least until the end of each reporting period. Having this data saved and accessible can assist you in resolving any difficulties or discrepancies that may emerge. 
- Every transaction should have accompanying paperwork, including necessary justifications for transactions that will be utilised for deductions. For example, if you spent $100 on petrol to drive to meet a potential client, you should keep track of not only the receipts (or bank records) but also the fact that the $100 was spent to hire a new employee.
3 Examine the process of transferring financial documents to accounting professionals. Gathering financial documents such as invoices, receipts, and bank statements and handing them off to the accountant or accounting department for processing is the first step in your small business’s accounting audit. The accounting records will deteriorate and become untrustworthy if this process is sluggish or inaccurate.
If you’re self-employed, this step is simplified; instead, make sure you keep track of your own financial transactions and handle them swiftly and often to keep your records current.
4. Set up a system to keep track of your company’s internal controls. Internal controls are rules that aid in the prevention of fraud, theft, and other internal accounting problems. They are the methods followed by your company to ensure the safety of your assets and the accuracy of your data. 
Separate accounting responsibilities as much as possible. It’s ideal not to have the same individual handle cash and conduct the bookkeeping, for example, because this makes it simpler to explain away missing funds. 
- When not in use, safes should be locked, and company software and computers should be password protected.
- In retail businesses, camera systems are useful for monitoring the implementation of internal controls.
- Account reconciliation, such as reconciling bank statements with the chequebook, should be done on a regular basis to ensure that financial data is accurate.
- Internal controls such as document numbering and inspections to prevent duplication are also useful.
5 Think about the accounting and tax rules that apply to your company. You are usually obligated by law to keep detailed accounting records for your firm for tax purposes. It will be easier to deal with a future federal revenue audit if you prepare your accounting records to be in conformity with the law. 
Include IRS processes in your internal audit trail, such as retaining accounting records for at least six years. This way, you’ll already have the procedures in place to respond to IRS and other external audits
The Small Business Administration website is an excellent resource for determining whether laws apply to you. If you have one, you can also consult with your accountant or bookkeeper.
Method 3 Conducting an Internal Audit of Accounting
1 Use industry-standard auditing procedures. Good auditing practises should be your starting point for your internal accounting audit. The best way to guarantee that your internal accounting audit follows generally accepted accounting procedures is to use a business accounting software programme, a tax attorney, or an accountant. 
- The most prevalent auditing standards used to audit private corporations are the General Accepted Auditing Standards (GAAS). When starting an internal accounting audit, keep the GAAS policies in mind.
- The basic rules and standards utilised in auditing are known as GAAS. While they are normally employed by professional auditors, using these fundamental principles to your own personal audit might be beneficial.
2 Make a cross-reference list for each aspect of your accounting system. Examine the general journal, the general ledger, and individual account balances in each place where accounting data is entered. Account balances should be checked on a regular basis, not just before the trial balance is prepared at the conclusion of the accounting month. 
- Ensure that each element of your system has corresponding entries for all entries, and that any differences are immediately handled. A purchase of products to sell, for example, would necessitate a debit to your inventory account and a credit to your cash account.
- Verify your company’s gross income, expenses, and costs using accounting documentation.
- It is okay to take a statistical sample of transactions to investigate individual transactions rather than trying to examine all of them if you have a huge number of transactions
3 Contrast internal accounting records with external accounting records. Compare your personal bookkeeping to external records to ensure its accuracy. You can, for example, compare supplier purchase receipts to your own purchase data. Note that faults that develop throughout this procedure could be caused by external errors, such as supplier or customer miscalculations.
- If you run into any errors, it’s critical to rectify them first. Any mistakes caused by external factors (such as a supplier fault) should be addressed by contacting the responsible party. The next step is to document the problem and ask yourself why the error occurred and who is to blame. Is this a one-time blunder, or is there a fundamental policy issue?
- Physical audits are also required if you have physical products or use equipment in your business. Inventory and equipment, for example, should be tallied and visually inspected.
4Compare your internal tax records to your tax returns. Examine your most current government tax receipts and compare them to your internal records for taxes paid and taxes owed. Keep tax receipts for at least seven years in the United States, as the statute of limitations on tax fraud is seven years.
5 Make a report on the audit. Make a list of your findings and write a brief audit report. An audit report is just a document that outlines your audit’s results. It will detail any issues you discovered, any adjustments you made, and any areas that performed well.
- This does not need to be a formal document because it is your own audit; it should simply be a useful record that you may refer to for your own purposes or show the IRS if your firm is audited.