Should You Audit Your Bookkeeper?

What is the audit process?

Hearing the word “audit” can cause stress for most people ― especially business owners trying to manage a small business’s finances. It isn’t easy to open your doors ― and your financial records ― to an outside party for scrutiny. Busy small business owners typically aren’t experts in bookkeeping and accounting and may feel overwhelmed by the audit process. 

Most people are familiar with IRS tax audits. However, audits can take various forms and employ different methods to assess a business’s finances and ensure accuracy and compliance. An audit focuses on finding solutions for vulnerabilities and risks in your business.

In an audit, an independent party (either a person or organization) inspects an organization’s accounts (or its documentation and quality control processes). It ascertains that the company is following specific standards, such as generally accepted accounting principles. It’s also an opportunity to find opportunities for improvement inside the organization. 

The audit process generally involves the following steps:

• Planning: Your auditor will review policies and statutes relevant to your industry and business type and prepare a program to meet your needs.
• Notification: Those involved in the audit process will be notified and invited to an opening meeting.
• Initial meeting: An initial meeting will cover the audit’s purpose and program and define the roles and responsibilities of those involved.
• Fieldwork: Your auditor and their team will conduct interviews and gather information internally to support their work.
• Creation of a report: A report will be drafted that includes relevant findings and recommendations for any identified corrections or improvements needed.
• Management response: Your management team will have an opportunity to review and respond to the recommendations made.
• Closing meeting: A meeting will be held with organizational management to review and discuss the report with an opportunity for questions and answers. The final report will be discussed.
• Final report distribution: The final report will be shared with those involved in the audit and other vital external stakeholders. 
• Follow-up: Many organizations will review and follow up on a biannual or annual basis, with the initial audit report serving as a baseline.

What are the types of audits?

There are three types of audits: operational, financial and compliance:

• Operational audits: Operational audits, or internal audits, are voluntary actions an organization takes to determine the effectiveness of risk management and internal controls. These audits aim to facilitate specific objectives. This type of audit is conducted by employees of the organization who will report their findings to the board of directors.
• Financial audits: Financial audits are necessary for all companies, which are usually done externally. This type of audit is also known as an accounting audit. It’s used to examine and analyze account statements to determine if the organization is compliant with regulations.
• Compliance audits: Compliance audits focus on an organization’s policies and procedures. They aim to determine if the company is complying with internal, regulatory and accounting standards.

Should you outsource your bookkeeping audit?

It’s a good idea to hire another person or entity ― known as a controller ― to handle your bookkeeping audit. If you can afford it, consider hiring a certified public accountant (CPA) to act as your controller. This financial expert will check your bookkeeper’s work and bring tax expertise your bookkeeper likely lacks. A CPA can thoroughly review your financial records to ensure everything matches up with your tax returns and find deductions you may have overlooked.

One of the biggest benefits of outsourcing your bookkeeping audit to a third party is ensuring accuracy and credibility. A third-party review by an experienced professional who isn’t part of your organization helps avoid any semblance of bias. 

Outsourcing a bookkeeping audit is also advisable for the following reasons: 

• Regulatory compliance: In some settings, regulatory compliance requires the use of a third-party review.
• Advisory expertise: Outsourcing your audit can also provide access to advanced skills, expertise and experience you may not have in-house. 
• Saving time and resources: Outsourcing may be the most time-saving and cost-effective option. Your internal staff will have other responsibilities that may make it hard for them to focus on the audit as a top priority. 

However, outsourcing an audit may not be advisable in specific situations, such as the following: 

• Proprietary information: Some businesses may have concerns about revealing proprietary or competitive information to a third party.
• Data security: Data security may also be a concern for some businesses.
• Control: Outsourcing offers less control of the bookkeeping audit process.
• Costs: For some organizations, the cost of an audit may also be prohibitive.

Businesses must consider many factors when determining whether to outsource a bookkeeping audit. There is no right or wrong answer; each organization will determine the best path forward based on its unique needs and circumstances. 

4 tips to help you prepare for an audit

Whether you’re conducting a bookkeeping audit or preparing to handle a tax audit, a few straightforward best practices can ease the process:

1. Enter the audit process with a plan: Don’t jump into any auditing process, whether internal or external. Take the necessary time to clarify expectations and desired outcomes and ensure you understand the key inputs that will be required based on your industry and your company.
2. Organize documents, paperwork and resources: If this is your first formal audit, you may need significant time to organize the process and gather the necessary inputs. After getting organized and preparing the correct documents, the process should run smoothly. Necessary inputs include financial data like your revenue, expense history, debt listings, investments, fixed assets and more.
3. Stay involved in the audit process: Even if you’re using an external resource ― perhaps especially ― stay closely involved. Assign one individual to be the point person and organizer to ensure a clear flow of communication and follow-up. Stay attuned to organizational and operational changes and ensure they’re considered in the audit process. For instance, you may offer new products and services, gain new partners and collaborators and see significant market changes.  
4. Develop and adhere to a timeline: Allow time for adequate planning, review and input. Share the timeline with your accountant and everyone involved in the audit and ask participants to alert your point person as soon as possible if barriers or conflicts emerge. Update and redistribute the timeline as necessary. 

Even when working with professional and experienced bookkeepers and CPAs, remaining involved in the audit process is crucial. Ask questions and gain clarity when necessary. Whether you opt for scheduled or random audits and conduct them internally or externally, it’s still your business. You must understand its financial performance.  

Stay on top of your business finances

A bookkeeping audit isn’t a one-and-done event. Instead, it’s a process that should be continuously monitored, reviewed and improved to ensure the best outcomes for your business. 

In addition to conducting random audits, some excellent financial oversight practices include reviewing invoice copies before signing checks to ensure everything is legitimate and making frequent, unscheduled requests to see petty cash receipts or review bank reconciliations. Another good rule of thumb is distributing financial duties and responsibilities so one person doesn’t handle all financial tasks. For example, you could require counter signatures on all checks. Careful financial habits help you stay compliant and free from errors and fraud.

Adam Uzialko contributed to this article.