3 Types of Audits Your Small Business Could Face
Small businesses are not immune to audits just because your business is not a large corporation. There are a few different types of audits that small businesses may face at one point or another. Audits do not always mean that something is wrong or that your business is in trouble. In fact, audits can be extremely helpful for identifying where your business is and mapping out how you can grow to be more profitable. Below, we will discuss the 3 types of audits your small business could face, and what to do in each scenario.
An IRS audit is an audit conducted by the Internal Revenue Service, a government agency. Small businesses being audited by the IRS will first receive contact via the mail that they are being audited. Then, the IRS will reach out with a series of questions, document requests, and may even conduct in-person interviews with several people in the company.
There are a couple of different reasons a small business might be audited by the IRS. The most common reason is that a discrepancy is found on a tax return or that someone forgot – or neglected – to file a tax return. There are also scenarios where small businesses are randomly selected by the IRS to be audited.
If you are notified that your small business is being audited by the IRS, the first thing you need to do is contact an accountant immediately. An accountant will be able to organize tax documents, look for discrepancies, and prepare your business leaders for what to expect throughout each step of the process.
An internal audit is an audit that is conducted by the small business and for the small business. This is an independent review, not something that is being ordered to be done by an overarching agency. Internal audits are an excellent way to forecast financials in the future, find areas where spending can be cut, and also find areas where the business can be investing more money into. An internal audit may also be set up as a safeguard against potential fraud or misuse of company funds.
When conducting an internal audit, a small business will employ an auditor, such as a professional from RMG. Internal auditors will assess all accounting information, financial reports, IT information and more. All of this will be leveraged to determine a small business’ financial picture.
The internal auditor will then present their findings, just like an internal consultant would. This valuable information can then be utilized by leaders of the small business to make important decisions and ensure the longevity of their business.
External audits are an audit process designed to provide oversight and information for investors and regulators. This is typically a financial audit performed by a Certified Public Accountant (CPA). An external audit ensures accounting and financial reporting within a company are accurate and complete. This is especially important information for investors, as false statements by a business about their financial standing is dangerous — and often criminal.
External audits are great because they show a business is transparent and utilizing accepted methods of accounting. It protects against fraud and keeps the business in good legal standing on all fronts.
Learn More About Small Business Audits
Is your small business facing an audit, or would you like to conduct an internal or external audit? RMG CPA, LLC. is a leader in the NJ and NY metropolitan areas in helping small and mid-size businesses. From audits to accounting and tax advisory, our CPAs are here to help your small business. Contact us today to learn more.