An audit unto itself isn’t a scary thing. It’s nothing more than a detailed examination, most typically of an individual or company’s finances. An official audit by the IRS, CRA, HMRC, or equivalent might be the very definition of nightmare for most people, but by auditing your business yourself from time to time, you can virtually eliminate the possibility of ever having to go through one.
An audit is primarily to verify the validity and reliability of financial information. This is done through financial records and documentation. As a business owner, you need to ensure that all applicable records are kept up-to-date, whether you do it yourself or via an accountant. Whatever you choose the responsibility is ultimately yours as the owner.
An audit examines all financial records. You need to keep records for everything related to your business, and typically for a period going back at least three years. The financial documents that you need to have available include:
- Tax Records
- Bank Statements
- Purchase Orders
Keep these records on hand and systematically go through them at least a few times per year. If you take care in the filing and organizing on a daily basis, then your self-audits should be straightforward and quick. For the sake of simplicity and speed, file purchase orders and receipts together with invoices and bank statements that indicate the corresponding deposit or withdrawal...the point is to verify the validity and reliability of information. Having at least two documents to support any claim goes a long way towards that. Store related documents and files together, and accessing and finding that information later is a snap.
There is no one way to conduct an audit, As stated above, the overall point of an audit - either self-imposed or by government request - is to verify your financial records. Every claim, no matter how small or large, should have supporting documentation for it.
1. Your Income:
- Bank statements that show deposits
- Invoices for services rendered/products sold
- Contracts between yourself/your business and someone using your service(s), stating the time period and financial remuneration
- Accounting ledgers
2. Your Expenses:
- Purchase Orders
- Bank statements that show withdrawals
- Accounting ledgers
Do your records verify your tax filing exactly? It should. To the cent...
Every dollar going in or out should have at LEAST one paper or digital file that supports it, and the more the merrier. If you can’t find at least one, you need to investigate that claim further to determine its validity: is it a fraudulent claim, or is the record-keeping simply sloppy? Either way, you need to identify and fix the shortcoming in your records.
This is also a good time to consider cost-cutting changes. Are you buying supplies from too many different sources? If so, is it possible to reduce that number and buy from fewer suppliers (which might make a bulk purchase discount possible)? Do you have any recurring monthly purchases - especially office or production supplies - that could be reduced to bi-monthly or even less frequently? Examine your office supply “closet” or production warehouse...do you have a lot of that material/item in surplus? If so, reduce the automatic order. An audit is a great time to see exactly where your money is going each month, giving you the opportunity to trim away the excess on a regular basis.
The Red Flags
The tax collection agency in your country likely has the same “red flags” as every other agency in the world. It doesn’t matter where you live, these business deductions can often trigger an official audit:
- Meals, entertainment, travel
- Work Vehicle
- Home Office
- Too many years operating at a loss
Use these very carefully. They are legitimate tax deductions, but you a) need to have impeccable records to back them up (multiple sources), and b) need to thoroughly understand the specifics for your country of residence. Check with the tax agency or accountant to be sure. Too much of any one, and you’re practically begging to get a phone call or visit.
An official audit seems terrifying. It’s not...unless you can’t support your claims and deductions. Avoid any possible trouble by conducting your own simple audit a few times per year. Be meticulous. Be honest. And you’ll likely avoid all trouble...and even save money because you’ll know exactly where every dollar is going, allowing you to explore ways to cut expenses throughout the year (rather than once - or never - per year). Audit, audit, audit...and rest easy.