Small businesses tend to have multiple aspects to cover as well for better decision-making. Among a few things, the most technical aspect for small businesses is bookkeeping and other tax compliance.
Small businesses may be required to have their financial statements audited by an independent auditor due to the request from the shareholders, as required by the company’s resolution, meeting the thresholds defined by local regulators, and required by banks and creditors when they are obtaining the loans.
Small businesses have to take pleasure in the adjustment of accounting treatment. Small businesses may undergo internal and external audits as per the requirement of the industry they operate in.
Some small businesses may need to obtain an unqualified audit opinion to secure a business loan. Concerns about employee loyalty and operational inefficiency also lay the major foundation for small businesses to get its book audited.
Like all sizes of businesses, small businesses should have both internal and external audits conducted to assess internal control policies and procedures.
If the books are prepared using an online accounting program, this will fasten the audit process.
External audit opinion helps small businesses to win the confidence of prospective investors and new business partners.
Types of Audits A Small Business Could Receive
Various types of small business audits shall include:
1) Financial Statement Audit
This deals with providing reasonable assurance about financial information. Such audit involves testing of books of accounts, and processes with accounting processes.
This audit ensures that businesses comply with regulatory requirements. The financial statement audit includes an audit of the income statement, balance sheet, cash flow statement, and related disclosures to accounts.
2) Attestation Engagements
This audit deals with providing verification of a business’s financial or other data.
3) Financial Statement Review
This audit provides assurance that the business is running efficiently and recommends the areas of business that would require improvement. Such an audit is useful to some lenders and even bonding agents in rare cases.
Key Process in Financial Audit of Small Business
The objective of the auditor is not to observe employees. But it gives a sense of the environment in which the employee operates.
This helps in determining the strength of an internal audit. Therefore, the auditor shall observe the employees perform their daily tasks to understand the process laid down by the small business being audited.
It may help the business increase efficiency when the auditor would recommend ways to improve the performance realistically.
Review of Management Meetings
The auditor shall review each minute of the meetings. This would help them to identify the issues that are relevant to the organization.
There are various situations in the business that can affect the financial performance of small businesses. This can only be identified by the minutes of frequent management meetings. The auditor should be able to check whether resolutions made in such meetings are actually being implemented.
Verification of Documents and Records
The verification process consists of a thorough and in-depth analysis and examination of the physical and electronic records of small businesses by an auditor.
The records include financial statements, receipts, and invoices. The auditor shall check the transactions for the accuracy and correctness of such documents.
There are not so many transactions in small businesses, and hence, time scope enhances the size of the audit. The auditors may decide to thoroughly verify all the records if possible, rather than using random sampling.
Examination of Tangible Assets
Tangible assets are those assets that have a physical existence. The auditing procedure would naturally require a physical inspection of all the tangible assets of an organization.
The auditor shall compare the company’s asset inventory register with physical assets and ensure the existence of the asset.
The auditor can also examine the various transactions related to assets like purchase vouchers and maintenance vouchers, and authority.
The auditor may also need to make inquiries with employees to get knowledge of the business and the departments.
Further, there may be a need to obtain third-party verification of balances and transactions. These inquiries complement the major audit procedures in small businesses.
The auditors often indulge in the very reliable process of calculating balances to generate audit evidence and complement other balances.
The calculation involves the repeat computation of balances of financial statements and checks their accuracy and correctness.
Scanning means reviewing the books of account rigorously. Scanning aims to look for errors, omissions, and unusual entries in the books.
During the process of scanning, the auditor shall try to locate unusual items as much as possible. Further, the management must check and properly deal with unauthorized debits on revenue accounts and fraudulent credits on expense accounts.