To anyone who owns a business, the term “audit” is on a par with “blunt force trauma.” But, unfortunately, audits happen.
The most important thing you can do when faced with a business audit, is “be prepared.” Make sure you do your homework before hand; have all of the requested documents ready to go before the actual audit begins. If you do not, the process could be lengthy and expensive (at least blunt force trauma is over fairly quickly).
Although audits are fear inducing, if you are honest and organized, you should sail right through the process. The purpose of an audit is to verify that you are in compliance with Generally Accepted Accounting Principles (GAAP) and accounting methods for your particular industry. Your financial statements will be perused to ensure that there is no fraud or misrepresentation to third party investors, or to federal and state governments.
Many times, the auditor (whether it’s the IRS, an insurance company, or the state) will give you a list of items to have readily available for review. In addition, it’s a good idea to have the following items in order:
1. Bank reconciliations for the year. Likely, your cash and investment accounts will be checked; this is one reason why it’s a good idea to stay on top of your bank recons throughout the year. After your books have been reviewed, the auditor will seek confirmation from your bank and personal investment company.
2. Accounts Receivables. Typically, auditing agencies will want to take a look at your income and cash potential, so seeing what is owed you is part of that process. Again, outside verification will likely occur.
3. Capital Assets. You may be asked for a list of all capital expenditures you made for the year, as well as a review of the depreciation method you’re using.
4. Accounts Payable. In addition to providing an accounting of what you are owed, you will be asked for one with regards to what you owe to others. Have your paperwork ready, verifying the terms of both short term and long term loans you may have.
Additionally, you will be asked for documentation backing up any investments that show up on your balance sheet.
It’s a good idea to have your CPA involved in the process from the get go, because there will likely be a good deal of correspondence between the tax professional in charge of your returns, and the auditing agency. Having your CPA at your side will also help you remain focused and calm throughout the procedure.
If you are impeccable with your record keeping, your auditing experience should go relatively smoothly. If, however, the extent of your record keeping exists in a shoebox you keep in your closet, you will have a much more difficult go of it.
Again, if you are honest, and your record keeping is neat and straightforward, you will likely discover that your dread of the procedure isn’t matched by reality.