How to Conduct a Financial Audit for Your Business

Sailing a ship without a captain might lead you straight into an iceberg. Likewise, you can’t build a profitable business without financial audits.

You may think you’re on course, but without regular financial audits, your business’s health and future will be at stake.

Conducting a financial audit allows you to gain a thorough understanding of your business’s financial statements and internal controls. However, you must know about an extensive financial audit checklist.

In this blog, we will break down various parts of financial audits and learn how to conduct one. So, without further ado, let’s get started!

What is a Financial Audit?

A financial audit is an objective examination of your financial statements to ensure they are accurate, complete, and in compliance with accounting standards. It is like a health checkup of your company’s financial records.

The process usually involves analyzing the company’s assets, in-depth financial records, and accounting policies to ensure that everything is in order and to identify any areas that might need improvement.

What are the Types of Audit?

There are two types of financial audits; let’s know about them in detail-

1. Internal audit

An internal audit is a systematic review of your company’s financial operations, records, and reporting processes that is usually conducted by the company’s management or an auditing firm. It is done to ensure the following:

• Accuracy of financial statements
• Compliance with laws and regulations
• Efficiency of financial processes
• Detection of fraud or errors

2. External audit

External audit is conducted by an independent, qualified auditor who examines your financial statements to ensure they’re accurate, complete, and comply with accounting standards. External audit is crucial for:

• Improving credibility among investors and partners
• Fraud detection
• Highlighting areas where your financial practices can be improved
• Legal Compliance

Steps to Conduct a Financial Audit for Your Business

Here is the financial audit checklist and the steps involved for conducting one-

Step 1- Planning for the Audit

The audit journey does not start when the auditors arrive at your doorstep. Planning for the audit involves:

1. Selecting an auditor- You should ensure that the auditor you choose is qualified and experienced, who can understand your industry in-depth
2. Defining the scope- Decide which financial statements need to be audited, what areas you need to audit, and how frequently there is a need to perform audit
3. Gathering documents- Gather all the required financial records that need to be audited, such as bank statements, invoices, and tax returns

You must ensure that all accounting standards and policies are followed. Any error in the procedure might result in redoing the statements.

Step 2- Gathering the financial information

Before the audit begins, gather and organize the documents so that they become easy to navigate. Nowadays, people opt for digital documentation over hard copies as they are easy to maintain and involve low stakes for the latter to lose.

To organize the documentation, you can categorize them into different categories, such as-

1. Investments
2. Expenses
3. Payables
4. Receivables
5. Debts
6. Fixed assets
7. Cash

Once you sort all the data, store the soft copies in password-protected software and provide access only to selected people to keep it secure.

Step 3- Notify your employees

Unless you are doing a surprise audit, inform your employees about the financial audit. Once you know the time when you wish to conduct the audit, you must-

1. Inform the employees involves in the audit
2. Ask other departments for any documents required from them for audit
3. Add the audit schedule to the company calendar to keep everyone informed

Note: Give your employees enough time to gather all the information and documents required for the audit.

Step 4- Begin data analysis

This step involves analyzing the collected data, which is done by an external auditor. They review payroll, financial statements, receipts, refunds, and all other financial transactions within the time period.

When conducting a business audit, keep all the required documents handy, review business processes, and speak to concerned employees to learn more about their skills. It is recommended to shadow an employee while doing the audit as it becomes easy to learn about their work.

Step 5- Keep financial security in mind

Your financial records contain sensitive information. Having said that, giving access to this information in the wrong hands, could lead to identity theft.

Thus, it is vital to secure audit processes and maintain this confidentiality, helping you keep your financial matters private. Maintaining security during these audits is a legal requirement. Failing to do so could result in severe penalties or legal repercussions.

Pro tip: Limit access to financial data and conduct regular security audits of your financial systems.

Step 6- Check the tax status

Checking your tax status ensures that you comply with all relevant tax laws and regulations. By verifying your tax status during a financial audit, you ensure that your financial statements are accurate and tax liabilities are correctly calculated.

A thorough review of your tax status will help you find out about tax credits you weren’t aware you were eligible for and deductions you might have been missing out on.

Furthermore, a clean tax status builds trust with potential lenders and improves credibility with customers and partners.

Step 7- Document and report your findings

After analyzing all the financial records, the auditor can send the collected findings to the leadership team. They create a report that includes the responsibilities of the auditors and directors, the scope of the audit, and the auditor’s opinion.

Do not forget to save this report, as you might need it in the future. You can request different types of reports so that this crucial information can be read and understood by relevant people in your organization, including a business partner, investors, or upper management.

Step 8- Make changes

Many companies just forget about these reports. But that shouldn’t be the case. You should analyze them carefully and determine what alterations to make to improve your audit findings, such as updating outdated policies and record-keeping systems or providing additional training to employees.

In fact, this report should be shared with all the relevant parties so that they can monitor it and consider its impact.

Benefits of a Financial Audit

Let’s look at some of the significant advantages of doing a financial audit-

1. Error Detection

By closely examining the financial records of your business, auditors ensure that every penny is accounted for and every transaction is recorded accurately. This helps identify all the discrepancies and issues in the financial books.

2. Uncover hidden treasures

From identifying traditional processes to spotting potential cost-saving measures, auditors help identify areas for improvement, streamline the auditing process, and ensure cost-cutting.

3. Resource allocation

Doing a financial audit also makes decisions on how to spend available capital, make investments, do expansions, and create strategic pivots. As the report states, you can make the right decisions based on the organization’s goals in the areas where finances are overspent or underspent.

4. External reporting

A clean audit report is like a gold star for your company, signaling to investors, lenders, and partners that your finances are in order. Plus, it also builds trust by presenting your company’s financial processes and ability to repay.

Bottom Line

An actual audit is not about just following the financial audit checklist; it is about getting an in-depth understanding of your business’s financial status and using that knowledge to drive growth and success.

Preparing for an audit might feel like tiresome work, but you don’t have to worry, as numerous financial experts in India can help you with it. Some good reasons to hire financial experts include many years of experience, intricate knowledge of financial systems, and strategic insights that can propel your business toward your financial goals.

Ready to take your finances to the next level?