What is Auditing? Everything Business Owners Need to Know
The word “audit” is typically associated with the Internal Revenue Service (IRS). The IRS generally opens an audit on a taxpayer when their taxes don’t quite add up. This can certainly be stressful, which is why “audit” seems to be a dirty word.
However, audits have purposes outside of tax season and are used by businesses regularly to keep their operations in order.
Let’s look into how auditing relates to business operations.
What is Auditing?
Auditing is a very broad concept, which we’ll dive into in our next section. However, the most common type of auditing in the business world for the sake of a definition is financial auditing.
A financial audit is an objective examination, as well as an evaluation of a business’s financial statements and documents. Financial audits are done to make sure that the financial records of a business reflect an accurate representation of the operational transactions they claim to represent.
Typically, a financial audit is carried out by an employee of the business, a public accountant, or a third-party platform.
For the most part, financial audits are carried out on a yearly basis and involve examining a company’s income statements, balance sheets, and cash flow statements. Shareholders and investors typically request an audit of the company they support. This is done to make sure that all legal and financial bases are covered, and no fraudulent activities are being carried out in the business itself.
Essentially, an audit is a thorough investigation of a business’ activities to make sure needs are being met.
In additional to the basic financial audit, there are a number of other business-related audits that are commonly carried out in a company. And not all of them are mutually exclusive, either.
What is the Purpose of Auditing in Business?
Auditing has many purposes in the business world, so it’s important to know the difference between all the different types of audits.
As we covered above, financial audits are typically conducted internally, but can also be conducted externally. It is done to make sure that the business in question is adhering to operational policies and that their paper trail of finances is accurate. This can be done to prepare for tax season and for investors to check in on the operations of the business they support.
External and Internal Auditing
An internal audit is conducted by employees of the business in question. On the other hand, an external audit is conducted either by company employees or outside accountants to verify that the business, or a member of the business, is not committing fraud or hiding funds.
Product Quality Auditing
In a product quality audit, auditors will look at the processes used to produce the product. This is often done so that companies can make sure that their production and manufacturing processes are following federal guidelines and requirements. Product quality audits are often conducted to also make sure that corporate and stakeholder requests are being followed.
Product quality audits are very useful for reassuring consumers that the products they are purchasing are safe and reliable for use.
Information technology audits take place when a business personally invites special niche auditors to look at the security and protection of their electronic or digital information. These special auditors will thoroughly check the business’ computers and networks for security flaws or breaches. They will also look at programs used by the company to make sure that hacking is easily prevented.
IT audits also involve checking a company’s overall processes for the purpose of upgrading and changing obsolete software. Recovery systems and back-ups will be examined proactively to see how data loss can be prevented. These audits don’t just involve network-based losses, either. The actual offices themselves will be examined for fire prevention, burglary, and power failures in order to prevent data loss. More often than not, these types of audits are exclusively sought out by the business themselves for security purposes.
These types of audits aim to detect evidence of fraud within a company, significant waste of resources, asset abuse, and any other illegal activities that may be taking place in a business. Such illegal activities that investigative auditors will look for include the laundering of money, terrorist financing, bribery, and overall corruption.
Auditors will look at inconsistencies in funds used by a company’s personnel and executives. An investigative audit that is conducted with the suspicion that employees are skimming money is often initiated by the business owner or stakeholders without the personnel’s knowledge.
Tax auditing, as we mentioned previously, is an audit conducted by the IRS to make sure that a business or individual is completely transparent about funds involved in the business’ operations. Sometimes businesses or executives of a business will commit tax fraud to save money, and such as, an audit is done to make sure that federal taxes submitted during tax season are accurate and not the result of fraud.
Avoiding an Audit with ProfiTrust
If the idea of going through an audit seems intimidating, you can certainly put the responsibility of conducting audits on a third-party platform to help you with your operations and finances.
ProfiTrust can help you save money and avoid auditing costs in your e-commerce business and make sure that your operating expenses are recorded the right way. ProfiTrust is a risk-free way to cover your operational bases– so you can focus more on your business and less on worrying about your finances.
In addition to financial services, we also provide services for asset recovery, claims reviews, payroll, utilities, and more!
You shouldn’t have to worry about auditing when you’re already busy working on other aspects of your company. Contact ProfiTrust today to learn more about how we can work with you!
What do you think about our guide to auditing in business? Tell us about your experience with auditing in the comments section below!