5 Things Auditors Want Small Business Owners in Kansas to Know

It is helpful for small business owners in Kansas to understand what auditors look for during an audit, even if an audit is not immediately on the horizon. By preparing in advance, you can help the process run smoothly and potentially uncover issues that need to be addressed in your financial records and processes.

Here are five things auditors want small business owners to know:

1. Separate your business and personal finances

One of the most common errors auditors find in small businesses is the mixing of personal and business expenses. A business owner's bank statements will provide a clear picture of all business activity if personal transactions are kept separate.

• What to do: Open dedicated bank accounts and credit cards solely for business-related transactions. For any loans made between yourself and the business, keep meticulous records.

2. Practice consistent and accurate record-keeping

Auditors need to examine your financial records to ensure their accuracy and compliance with tax laws. Inconsistent or missing information will likely trigger additional scrutiny and prolong the audit.

• What to do: Use accounting software to accurately record all income and expenses. Scan and digitize receipts, invoices, and other important documents and store them in a centralized, secure location. Reconcile your bank statements with your financial records on a regular basis to catch discrepancies early.

3. Implement strong internal controls

Internal controls are the policies and procedures that protect your business’s assets and ensure financial data is accurate and reliable. Strong controls can help prevent errors and detect fraud, which is particularly important for small businesses that may have fewer resources.

• What to do:

  • Separate duties: Avoid having one person responsible for authorizing, recording, and processing payments. For example, have a different person pay the bills than the person who approves them.

  • Review transactions: Implement a formal process for approving all financial transactions.

  • Control cash: Establish clear procedures for handling and reconciling cash.

4. Understand your industry and tax regulations

Auditors compare your business's financial data with industry benchmarks to identify any unusual outliers. For example, if your travel expenses are drastically higher than other similar businesses, it may raise a red flag. It is also essential to know and comply with all applicable tax laws.

• What to do:

  • Stay informed: Keep up to date with federal, state, and local regulations that affect your industry and tax filings.

  • Know your numbers: If an expense is legitimately higher than average, have documentation ready to explain why.

  • Seek expert advice: If you are unsure about tax regulations, consult a tax lawyer or accountant.

5. View an audit as an opportunity, not a punishment

While an audit can be intimidating, it is not necessarily a sign that you have done something wrong. Auditors want to see that you are committed to financial transparency and have systems in place for reliable reporting. An audit provides an opportunity to receive valuable feedback and insights for improving your financial processes and overall management.

• What to do:

  • Be transparent: When an audit occurs, cooperate with your auditor and provide the requested documents in a timely manner.

  • Learn from feedback: Use the auditor's findings and recommendations to improve your internal controls and financial practices for the future.