It’s time to conduct an audit for your business, but which industry terms and conditions do you need to know?

Here’s a quick list of concepts to know—and tips to consider—before your business is audited this tax season.

 

AUDIT: a systematic review of your business transactions; a review of your financial records to verify whether they are accurate (typically conducted once per year).

There are three different types of audits:

1. Internal – conducted by you or someone in your business
2. External – conducted by a third-party auditor
3. Government – conducted by a government agency

 

To prepare for your audit, make sure you:

1. Calculate the most accurate numbers (do not round up or down)
2. Track your deductions, but don’t deduct anything of outrageous or irrelevant value
3. Present all facts and figures legibly
4. Save all checks, sales slips, invoices, and receipts
5. Share business logs, diaries, appointment books, and calendars
6. Keep business equipment and auto records
7. Document business travel and meal expenses

  

AUDIT EVIDENCE: facts and figures identified during the audit; used to help auditors form an opinion regarding financial statements.

Audit evidence can include:

•   Financial statements
•   Accounting info
•   Bank accounts, statements, or confirmations
•   Management accounts
•   Registers and ledgers
•   Payroll listings
•   Invoices and receipts

There are seven different ways auditors collect audit evidence:

1. Inspection – looking at physical assets, records, or documents
2. Observation – looking at business processes and operations
3. External confirmation – reaching out to third parties to verify information
4. Recalculation – pairing third-party calculations next to yours
5. Reperformance – conducting business tasks as listed to identify deficiencies
6. Analytical procedures – analyzing your financial records to find discrepancies
7. Inquiry – talking with your senior management to understand your business

 

AUDIT PLAN: an outline of audits to be conducted over a pre-set period of time; includes description, schedule, scope of work, and objectives.

To build an audit plan:

1. Define audits to be performed – What are you auditing?
2. Prioritize risk assessments – What risks do you need to address?
3. Designate resources – Who will work on your audit?
4. Establish a timeline – When will you (or a third party) conduct your audit?
5. Set up planning meetings – Which stakeholders need to be involved?

 

 AUDIT PROGRAM: policies and procedures that govern the audit process.

  

AUDIT RISK: a potential instance wherein financial statements are deemed erroneous or fraudulent

There are three different types of audit risk:

1. Inherent risk – the likelihood that your audit will be deemed inaccurate based on the nature of your business
2. Control risk – the likelihood that your internal controls won’t detect or prevent mistakes
3. Detection risk – the likelihood that a third-party auditor won’t detect or prevent mistakes

 

Other important audit terms and conditions include:

 

CHARTER: a document approved by major company stakeholders; defines responsibilities and authorities for all audit functions.

 

CONTROLS: methods put into place to preserve the integrity of information, meet objectives, and/or communicate policies; see also: secondary control; see also: tertiary control

 

DUE PROFESSIONAL CARE: the process of gathering evidence to support the financial statements of your business; see also: controls; a.k.a. governance

 

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP): standard U.S. guidelines for accounting activities when conducting audits.

 

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS): standard U.S. guidelines for auditing activities when conducting audits.

 

GOING CONCERN: the expectation that your business will continue to operate for at least 12 more months.

 

INDEPENDENCE: the absence of a close or special relationship between auditor and audited.

 

LIKELIHOOD: the probability of a risk occurring; see also: inherent risk.

 

MANAGEMENT ASSERTIONS: claims made by management regarding aspects of a business; used by auditors to test the validity or accuracy of an audit.

 

MATERIALITY: a concept used to describe the importance of an audit item; i.e., the more material something is, the more of an impact it will have on your audit.

 

OPINION: the statement expressed by an independent auditor at the conclusion of an audit.

There are four possible opinion outcomes:

1. Adverse audit opinion – indicates that financial statements have been misrepresented 

2. Disclaimer of audit opinion – indicates that the auditor is distancing themselves from offering a formal opinion on the financial statements provided

3. Financially unqualified audit opinion – indicates that the auditor is satisfied with the financial statements provided, a.k.a. a clean report

4. Qualified audit opinion – indicates that audit controls were ineffective

 

PROFESSIONAL SKEPTICISM: the process of approaching an audit with a questioning mind. 

 

SAMPLING: the process of selecting a small but appropriate number of records to represent all of the records.

  

WORKPAPERS: documents that list all activities and evidence obtained during an audit.

  

Need a hand with your business audit?

We can help! Call us at 716.839.9001 or contact us online today!