Is a business audit coming up? While it can be stressful, audits can serve as a great tool for your organisation. They can help you ensure tax compliance, check your business finances, and identify operational inefficiencies.
When it comes to a small business audit, you have the option to do it yourself (DIY) or engage professional help. The question is, when is it worth investing in a professional audit?
In this article, we’ll explore the differences between DIY and professional audits to help you choose which is more suitable for your business. We will also provide a comprehensive overview of audit types and how to conduct a DIY audit.
Table of Contents
What is a business audit?
- General ledger and trial balance
- Bank statements and reconciliations
- Accounts receivable and payable records
- Inventory records and valuation methods
- Fixed asset register and depreciation schedules
- Loan agreements and debt schedules
- Revenue recognition policies and documentation
- Expense records and supporting documentation
Tax audit
A tax audit verifies that you’ve correctly filed your tax returns and payments. In Australia, the Australian Taxation Office (ATO) conducts tax audits to ensure compliance with tax laws and to deter tax evasion. If the ATO detects unusual claim patterns or discrepancies in reported income, this may trigger an audit.
During a tax audit, the ATO may check the following documents:
- Tax returns for the period under review
- Business activity statements (BAS) for GST reporting
- Payroll tax records and superannuation payments
- Fringe benefits tax (FBT) records
- Capital gains tax (CGT) calculations and supporting documents
- Deduction claims and supporting receipts
- Income records, including cash sales and bank deposits
- Logbooks for vehicle expenses
- Records of any tax credits or offsets claimed
Compliance audit
A compliance audit checks adherence to regulations and policies. Through this type of audit, you can make sure that your business is operating in accordance with relevant laws and internal policies.
For instance, a compliance audit might assess whether a company is meeting all necessary health and safety standards.
A compliance audit may check various documents, including:
- Company policies and procedures manuals
- Licenses and permits relevant to the business operations
- Occupational health and safety records
- Environmental compliance documentation
- Employee contracts and workplace agreements
- Privacy policy and data protection measures
- Industry-specific regulatory compliance records
- Corporate governance documents
- Records of staff training on compliance matters
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Operational audit
An operational audit evaluates business operations to identify areas for improvement. It comprehensively looks at internal operations and processes to assess their effectiveness, efficiency, and compliance.
Operational audits can lead to improved efficiency, reduced costs, and enhanced business performance.
There are several items you might check through an operational audit:
- Organisational structure and job descriptions
- Process flow charts and standard operating procedures
- Key performance indicators (KPIs) and metrics
- Quality control records and customer feedback
- Inventory management systems and records
- Supply chain documentation and vendor agreements
- Production schedules and capacity utilisation reports
- IT systems and data management processes
- Cost analysis reports and budgets
- Employee productivity and efficiency metrics
Collectively, these audits help your business maintain transparency, comply with legal requirements, and improve overall performance.
How to conduct a DIY business audit
Here are the steps you should follow if you choose to conduct a DIY audit. This can be a cost-effective approach if you are well-versed in the intricate nature of audits and will help you build awareness around your company’s finances and operations.
| Step | Description | Key Activities | Benefits |
| 1. Prepare for the audit | Set objectives, define scope, gather documents | Define audit goals, create a timeline, and inform team members | Ensures an organised approach |
| 2. Review financial statements | Analyse financial health | Generate financial statements, identify trends, and reconcile transactions | Provides financial insights |
| 3. Assess income and expenses | Optimise financial resources | Categorise income and expenses and identify cost-saving opportunities | Improves profitability |
| 4. Check tax Compliance | Ensure tax obligations are met | Review tax returns, verify deductions, and stay updated on tax laws | Avoids penalties and maximises deductions |
| 5. EvaluatA business audit is a systematic examination of your company’s financial records and operational processes. The goal is to ensure accuracy, compliance, and efficiency. There are several types of audits relevant to small businesses. Let’s take a closer look at these. Financial auditA financial audit checks the accuracy and compliance of financial statements. This type of audit helps verify that a company has correctly reported its finances and that there are no errors. For example, a financial audit might review transactions, procedures, and balances to provide an audit opinion. You can then share this opinion with lenders, creditors, and investors.Typically, a financial audit will check the following documents: Financial statementsBalance sheete business operations | Assess operational efficiency | Review inventory management, supplier payments, and employee productivity | Enhances operational efficiency |
| 6. Identify potential risks | Identify financial and operational risks | Review accounts receivable, outstanding debts, and compliance issues | Mitigates potential risks |
| 7. Document findings and create an action plan | Summarise audit results, plan improvements | Prioritise issues, assign responsibilities, and set deadlines | Ensures implementation of changes |
Here’s a more in-depth step-by-step guide to help you navigate the process effectively.
1. Prepare for the audit
Before you do anything else, you should prepare your business for an audit. It’s important to communicate to your team that an audit will be taking place and what aspects of the company you plan to review.
During the preparation stage, make sure to define your objectives and determine the scope of the audit. Do you need a comprehensive evaluation? Is your goal to look only at a specific aspect, like finance or operations? Ensure clarity before starting.
Finally, set a timeline for the audit and get started.
2. Review financial statements
If financial review is part of your process, then the first step is to take an in-depth look at your financial statements. This involves analysing your profit and loss statement, balance sheet, and cash flow statements. These documents provide a comprehensive view of your business’s financial health.
To make this process easier, use financial software to generate these statements. Look for trends, anomalies, or areas where costs can be optimised. Ensure all transactions are accurately recorded and reconciled.
3. Assess income and expenses
Once you have a general picture of your financial health, take a closer look at income and expenses. Identify any inconsistencies or unnecessary spending in your income and expense records.
Next, categorise expenses to pinpoint areas of high spending. Consider implementing cost-saving measures, such as renegotiating contracts with suppliers or reducing non-essential expenses to cut overall costs.
4. Check tax compliance
If you want to avoid costly penalties, it’s important to ensure that you’re properly lodging your taxes. To do so, review your GST and BAS lodgments to make sure they are correct. Also, check that all deductions are properly claimed and reported.
You can use tax software to streamline the process and ensure accuracy. Plus, it’s important to regularly review tax laws and updates to avoid missing deductions or incorrectly claiming expenses.
5. Evaluate business operations
Next, you may want to assess the efficiency of your business processes. The specific steps will depend on the type of business you run. For example, if you sell products, check your inventory management and supplier payments. Meanwhile, a consulting business might look at process efficiency and current contracts.
Ultimately, you should identify areas for improvement – whether in terms of cost, efficiency, or delivery quality.
6. Identify potential risks
An important and overlooked step is to identify potential risks so you can mitigate them. Look for late payments, outstanding debts, or non-compliance issues that could pose risks to your business.
Upon review, set up reminders for payment deadlines and maintain open communication with creditors. You should also regularly review compliance with regulatory requirements to avoid penalties.
7. Document findings and create an action plan
A DIY audit is only worthwhile if you can later improve your business finances, operations, and compliance. To do so, you should first compile all the information gathered during the previous steps into a comprehensive report. This report should detail the financial health of the business, highlight any discrepancies or areas of concern, and note potential opportunities for improvement.
Based on these findings, develop an action plan with goals to address each issue. Assign responsibilities to team members for implementing changes and set realistic deadlines. The objectives should include a clear timeline for follow-up reviews. This step is crucial for turning the audit from a theoretical exercise into practical business improvements.
When should you call an accountant for a business audit?
DIY audits are a great way to save money, but not every business can perform one. There are several scenarios when you may benefit from professional help.
Managing complex financial structures
If your business has a complex financial structure, then hiring an accountant is essential. This could include situations with multiple income streams or overseas transactions.
For example, suppose you are running a multinational corporation (even a small one) with subsidiaries in different countries. In that case, you’ll need an accountant to manage intercompany transactions, consolidate financial statements, and ensure compliance with diverse accounting standards.
Preparing for the tax season or government audits
Your business may benefit from an accountant’s expertise if you are preparing documents for tax lodgement or an ATO audit. This process can be tedious and time-consuming, and an accountant can take a lot of the work off your hands.
For example, if you are facing a government audit, an accountant can review financial documents, identify potential discrepancies, and guide how to address any issues before the audit.
Additionally, tax experts will be able to pinpoint any missed opportunities when it comes to claiming tax benefits and allowances, saving your money.
Growing your business
As your business grows, you’ll be seeing more financial transactions. As a result, managing complexity and scale may become more challenging. An accountant can help streamline financial processes, implement efficient accounting systems, and provide insights into financial performance.
For instance, a rapidly expanding retail business might need an accountant to manage cash flow, optimise inventory levels, and ensure timely payments to suppliers. They can do this, all while maintaining compliance with financial regulations.
Needing expert financial analysis and advice
If your business is undergoing strategic financial planning and optimisation, hiring an accountant is advisable. Accountants can analyse financial data to identify areas for improvement, provide expert advice on financial structuring, and help develop long-term financial strategies.
Ensuring legal compliance and risk mitigation
Finally, accountants can review your business’s financial practices to ensure they comply with Australian laws and regulations. This reduces the risk of penalties and legal issues.
For instance, an accountant can help your business implement robust internal control procedures to prevent errors in financial reporting.
Comparison table: DIY vs. professional audit
| Criteria | DIY Audit | Professional Audit |
| Cost | No professional fees | Professional fees involved |
| Expertise | Limited to owner’s knowledge | Expert knowledge of tax laws and compliance |
| Time | Time-consuming for business owners | Time-saving, allowing focus on operations |
| Accuracy | Prone to errors and missed deductions | High accuracy, minimising mistakes and penalties |
| Strategic Advice | Limited strategic guidance | strategic financial planning |
How an accountant makes a business audit easier
Hiring an accountant can significantly simplify the audit process by offering several key benefits.
Saves time
Accountants handle audits, so you don’t have to. Instead, you can focus on core operations and strategic growth without worrying about complex financial analyses and tax documents.
Provides access to expert knowledge
Accountants deeply understand tax laws, compliance requirements, and financial structuring. They conduct accurate and efficient audits, preventing errors and non-compliance.
Delivers strategic financial advice
Beyond conducting audits, accountants provide valuable strategic financial advice. They can help your businesses develop long-term financial plans, identify opportunities for growth, and optimise financial performance.
Reduces risks
Finally, accountants help minimise risks by ensuring accurate reporting, avoiding penalties, and reducing errors. This protects your business from legal and financial repercussions and enhances its reputation.
FAQ
What is the difference between a financial audit and a tax audit?
A financial audit examines the accuracy of financial statements, while a tax audit verifies the correctness of tax returns and payments.
How often should a small business conduct an audit?
The frequency depends on the business’s size and complexity, but annual audits are common for ensuring compliance and financial health.
What happens if I make an error in my business audit?
Errors can lead to penalties, missed deductions, and inaccurate financial reporting. Hiring an accountant can mitigate these risks.
How much does a professional business audit cost?
The cost varies based on the business’s size, complexity, and the accountant’s fees. Generally, it requires professional fees when compared with DIY but offers greater assurance and expertise.
Business audits and compliance
If your business has a simple financial structure, then it’s likely just fine to run a DIY audit. It’s a good idea to implement it as a regular practice at least once per year.
However, suppose your business is complex, works internationally, is facing an ATO audit, or you run into complicated questions during your DIY audit. In that case, it might be time to turn to a professional. Annual financial audits are compulsory for large proprietary companies and foreign-controlled small proprietary companies who have not applied for exemption.
At the end of the day, your main goal is to ensure compliance across business, industry, and tax laws and regulations, as well as your business’s financial health.
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