Financial audits thoroughly examine a company’s financial situation and examine accounting, internal control policies, cash reserves, and other sensitive financial areas. Publicly traded companies are regularly subject to external financial audits, and even small, privately held companies may be subject to external audits by the IRS or other government agencies.
By knowing how to do your own accounting, you can prepare for a possible external audit, keep your accounting system in order, and prevent internal fraud and theft.
This usually means digging into the company’s assets, including cash and investments, detailed financial records, and accounting policies to ensure the financial audit provides a complete and objective picture. The output of this process is usually a report to the company’s management, which is then used to lead changes in policy or strategy to improve the organization’s financial position.
Any financial audit can be divided into three stages.
- Reporting and implementation
So, how do you do it? Here are six steps to conduct a financial audit.
- Gather financial documents
- Data storage
- Review the accounting system
- Compare internal and external records
- Tax records
- Review of internal control policies
Let’s explore them:
Gathering Financial Documents
This step involves collecting all the necessary financial records, such as invoices and bank statements, which serve as the foundation for accurate financial analysis and reporting.
Ensuring secure and easily accessible digital storage for financial information allows for efficient data management and quick retrieval when needed for analysis or review.
Reviewing the Accounting System
This step ensures that the company’s accounting system accurately records and reflects all financial transactions, thereby maintaining the integrity and reliability of the financial data.
Comparing Internal and External Records
By cross-checking the company’s internal records, like cash inventory and sales, with external records such as receipts, auditors can identify any discrepancies or irregularities that may indicate potential issues within the financial reporting.
Analyzing Tax Records
By carefully examining the company’s tax receipts and returns, auditors can ensure that the company is compliant with tax regulations and that the reported financial information aligns with the corresponding tax documentation.
Review of Internal Control Policies
This step involves evaluating the company’s internal control measures, such as segregation of duties and authorization procedures, to identify any weaknesses that could potentially pose a risk to the company’s financial well-being and integrity.