Every good business performs an internal audit to determine whether the accounting books match the actual financial state of the company. While it can be scary and downright unsettling, this comparison is essential if the company wishes to maintain a realistic view of itself in order to survive the business world.
Here are the steps in conducting your internal audit:
- Assemble your accounting books and other documentation. An internal audit should involve the last five years of your company or since the last internal audit, whichever is more applicable. All books should be available for review and reference. A digital version is advantageous for easier reference, although it must accurately reflect the physical books. Obtain the latest comprehensive transaction history from the company bank and other financial institutions. Have your contact details ready in order to compare records with all your clients, stakeholders and other institutions.
- Study the past audit. This will let you grasp the extent of the company' audit and will give you ideas on the procedure to follow. You may follow the existing format as established by past audits, modify it to accommodate new information and realities, or replace it altogether should the audit be found inadequate or defective. Be ready to contact the previous auditor in case you have questions or need clarification. Finally, you may want to update your auditing tools and practices so that better techniques can be integrated with your audit.
- Plan your audit strategy. Schedule the audit for the coming weeks and allot a time frame for each activity. Designate key personnel for each task. Provide contingencies in case your audit encounters unexpected obstacles or findings.
- Perform an inventory of your stocks. Physically counting all your wares will reveal imbalances and discrepancies. These should include equipment and supplies.
- Investigate causes of discrepancies. Large discrepancies are a sure sign of incompetence or malfeasance within your company. Smaller anomalies may simply be correctable mistakes, but may also point to a larger, systemic error. Be prepared to deal with severe fraud, embezzlement or other criminal activities by obtaining evidence and cooperating with law enforcement authorities or the district attorney’s office.
- Evaluate and respond to your findings. Note down positive findings and processes for future audits. Provide recommendations to correct present discrepancies and prevent re-occurrence. Clearly label and store documents, provide hard and soft copies then inform the accounting staff of the location of these audit files. Schedule the next audit and leave notes, instructions and reminders.
- Consider hiring an external professional. An impartial professional strictly views your books objectively and will not hesitate on calling out faulty or improper practices or anomalies. The auditor must be given full access and cooperation at all levels if he is to perform his task competently. If your company is already being viewed with suspicion, hire a well-regarded professional to remove all doubt.
A well-performed internal audit will anticipate any questions a tax audit would ask, should the time come. It will also reveal updated information that will let you make educated decisions with the future of the company.