What is an audit?
An audit is the in-depth financial investigation into your business of an existing system, entity, or report. It is usually conducted by either an internal or external party, based on the situation. 3 types of audits can be conducted, as mentioned below.
- Internal Audits
- External Audits
- IRS Audits
Internal Audits
An internal audit is specially designed to evaluate the key risks business is facing like the internal controls, accounting processes, effectiveness of the business in managing those risks along with the control processes that the management has implemented. Internal auditors usually do the role of an advisory by issuing necessary recommendations that make the business remain in compliance with all the laws, regulations to support management in improvising the systems, controls to maintain the accuracy, timely reporting of financial issues and also to identify any type of deficiencies in few business areas.
Having an internal audit more often will be a great help. The business owners can get a clear view about the pain points, the ways to operate them efficiently, which in turn gives the details to understand the potential issues in the business workflow and certain areas that need careful attention before they become visible in an external audit. Having regular internal audit also allows well-safeguard against frauds, risk management, objectives, and other financial issues in the business.
o Process of an Internal Audit
Initially, the management will analyze and identify the department for which they want to conduct the audit. After this, an internal auditor will focus on understanding the current internal control and process assessments. And then conduct fieldwork testing. Now, the actual auditing of that chosen department starts. Once the process of evaluation is done the auditor send’s the official auditor’s report to the management and the organization with clear details that state the identified issues, prepares the review, and also results in recommended changes being implemented.
It can be summed up as Identify->Audit->Report->Follow-up
o Things that happen during an Internal Audit
When an internal audit begins, the auditor who is being assigned will observe, identify, gather relevant data, take notes, review all the necessary documents, and contact the employees. Internal auditors might be the employees of your own firm, or sometimes the firm owner may decide to outsource its internal audit services.
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The assigned internal auditor will also ask questions to the employees to test their knowledge about the organization’s details, objectives, training, compliance rules, regulations, and other safety standards. After all the investigation is done from the auditor’s side they will give the details to the concerned management of the firm with all the results.
And there will be a meeting with the management, where the auditor will mention the identified weaknesses and strengths of the department and also suggest the changes wherever required. The internal auditor will also check the details with the management for better accuracy. Later on, the auditor creates a detailed report. Then both the auditor and the management keep a deadline to correct the identified issues. Once all the issues get implemented the audit gets closed officially.
External Audits
An external audit is also known as an ‘independent audit’. It is an audit that an organization conducts with the help of someone who is outside the organization. That is, through an accounting firm or independent accountant. This is also called an independent audit because the auditor who gets assigned for this task has no responsibility towards the business in any way that might create a conflict of interest. Many large organizations usually have audit departments, but smaller business firms opt to employ just one or two people to conduct audits. Many businesses irrespective of their size conduct independent external audits to comply with some kind of legal requirement.
o Process of an External Audit
The external auditor will give an audit report that generally follows all accounting principles. In the report, it will be clearly mentioned with an opinion as to whether the particular organization has passed the audit or not. Initially, the process of an external audit begins with either the appointment of an independent auditor. Then the audit gets started where the assigned external auditor collects data, assesses, and also interprets it to attain a complete understanding of the organization’s activities. The external auditor examines all the details related to the business that includes looking through financial statements, accounting records, verifying compliance to get the relevant proofs, standard accounting policies, and confirming the assets that have been bought.
Once the external auditor gets satisfied with the investigation, they submit the report. An external auditor’s report and objective opinion will have a great impact on the brand building, future as well as reputation of a company.
It can be summed up as Appointment->Audit->Report
o Things that happen during an External Audit
The shareholders of the organization usually appoint an external auditor. An appointed external auditor should be able to act independently to a concrete and objective approach to the audit process. The external auditor process includes comparing the business to the others, checking the records to create financial statements, identify irregularities and differences that have incorrect financial reporting. At last, the external auditor creates a detailed report and submits it.
IRS Audits
An IRS audit is a formal investigation that usually occurs when the Internal Revenue Service (IRS) finds potential mistakes in the tax return. This service takes place to verify that the information that has been presented in the business tax returns is completely correct and accurate. There are several factors that these IRS audits can be triggered by unordinary or sometimes unusual deductions, claiming losses for multiple years in a row, forms of income listed on the tax returns, report high-income levels, or sometimes just random selection, these are the major risk aspects that result in the IRS audit. The chance of being selected for an IRS audit is extremely low; it is less than 1% for most types of businesses. But, if somehow your company gets into an IRS audit first you will be notified in writing and then you should make sure that an accountant, tax professional, or business attorney should be available to present the audit.
o Process of an IRS Audit
The process of an IRS audit will be based on the kind of audit the business is selected for. Three types of tax audits are conducted by the IRS.
- Mail Audit
- Office Audit
- Field Audit
o Things that happen during an IRS Audit
In an IRS audit, there will be a particular agent who investigates the relevant documentation. These also include forms of income, tax deductions back up, tax credits that have been claimed during the tax returns. Once the investigation is done, with anyone among the three findings:
- Agreement
- Disagreement
- No Change
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