Types of Audits That Every Small Business Owners Should Know

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There are many different types of audits that you can have to ensure that your small business is in good standing. Audits help show your business is being managed effectively and keep your financial records in good order.

They are used to protect your business by helping identify areas where improvements can be made while also helping to prevent future fraud and losses. But many small business owners are unaware of which audits they should be participating in. 

The purpose of this post is to describe some of the most important audits every small business owners should know and what they entail.

What is an audit?

An audit is a systematic examination of a system or component to evaluate its compliance with requirements and thus ensure that the system will operate reliably and efficiently. Audits are used to ensure consistency in data and ensure that the company follows all regulations. Audits also check for things like making sure the company follows all laws. 

Types of Audits That Every Small Business Owners Should Know_

Audits are essential in the business world because they provide a way to identify and fix problems in the company. The audit will reveal areas where improvement is needed to operate more efficiently and focus on its core competencies. 

Audits are also necessary if the company seeks to become certified for its products or services. They provide a complete and independent assessment of the strengths and weaknesses of the business, its risks, and opportunities for improvement. They can be an effective way to identify any potential risks that may lead to a disaster. 

Industry-specific audits

Industry-specific audits are done for various industries like banking, finance, and healthcare. These audits help companies figure out what is wrong with their operations and fix them before getting into trouble. An industry-specific audit usually involves auditing or checking the records of a company to find out how it has performed in the past. It is essential in the audit process because it determines which areas need to be examined more closely. 

Typically, these audits examine specific aspects of a company and are required only by businesses within that particular industry. For example, 13485 audits are designed for medical device manufacturers, while an AS9100 Audit is focused primarily on ensuring that aerospace manufacturers meet stringent safety requirements when creating their products.  

Industry-specific audits

An industry-specific audit is an audit that looks at the various aspects of a business to understand better how the company works and what changes need to be made. The audit is done with a specific industry scope in mind. Therefore, you must check to see what industry-specific audits your business might benefit from. 

What are the general audits that all small businesses should engage in?

Audits are one of the most critical parts of a company's hygiene check-up. They provide a way for companies to benchmark themselves against other industries and see where they need to improve or work on going forward. Audits are necessary because they help companies stay informed about their progress and identify areas where there may be room for improvement.

Most audits can be further broken down into: 

  • 1. Internal
  • 2. External

Internal

Internal audit is a type of auditing that focuses on the quality and efficiency of the organization's internal processes. This type of auditing is done by an independent third party within the organization, usually by someone who doesn't have any vested interest in the company. Internal audits are often done to ensure that company policy and the process are followed or improve operational efficiency. 

For example, an internal auditor may be hired to review an organization's safety procedures and recommend safety improvements. They may also be conducted to ensure compliance with government regulations or standards imposed by other regulatory agencies.

Furthermore, internal audits can also help organizations comply with what we call "best practices." These are standards developed through the use of expertise and research to create more efficient processes in certain areas.

External

An external audit is an independent examination of an organization's financial records, management practices, and internal control to assess the risks according to generally accepted accounting principles. 

Internal external audits

When it comes to external audits, a business will contract with an outside company to evaluate its operations and improve its performance. The external auditor will often examine key aspects of the business, such as risks, governance, control systems, and controls

Tax

An audit is a systematic examination of an individual or company's financial records and reporting. Tax audits are performed by the Internal Revenue Service (IRS) and other tax authorities. A tax auditor is a person that completes a tax audit. They must be skilled in accounting and know various laws and regulations that pertain to taxes. 

Financial

A financial review is one of the most common forms of auditing. As part of a financial audit, the auditor examines the company's financial statements for accuracy and fairness. To undertake a financial audit, auditors examine transactions, operations, and accounts.

After the audit is completed, the third party typically issues an audit opinion regarding your firm to lenders, creditors, and investors. 

Operational

An operational audit is a thorough and detailed review of an organization's operations and performance. An operational audit examines an organization's operations to evaluate compliance with specific standards, best practices, or applicable legislation. 

The primary purpose of an operational audit is to identify opportunities for improvement within an organization's operations. This includes both short-term fixes and long-term strategies. This audit will review how employees operate daily to uncover any errors or mistakes that may be costing the business money.

Other types of operational audits may include: 

  • Environmental audits: These examine the organization's adherence to environmental laws and regulations.
  • Governance audits: These assess the organization's internal management systems concerning its governance structures.
  • Physical security audits: This audit reviews its physical security measures concerning its policies.

Compliance 

Compliance audits are a form of quality control. They are a necessary part of running a company and ensuring that the business is functioning as it should. Audits can be specific to a particular department or cover the entire company. Depending on what is needed, they are usually done by an outside agency or within the company. Audits may also be required by regulation, such as following an FDA recall. 

Compliance audits

It is important to remember that compliance audits can be for any business, not just those in regulated industries like food service and healthcare. The key to compliance has a sound risk management system in place. These include the identification of risks and how they can be mitigated. 

Data security 

Data compliance audits are essential for businesses that want to ensure that their data is not at risk of being hacked. The audit aims to ascertain whether or not the company's practices are in accordance with current legislation, and if they are not, to find out what changes need to be made to ensure this.

This type of audit can also be referred to as a privacy assessment. It may also be called a GDPR assessment or a DPA assessment. This might also show up issues surrounding your website such as out of date or missing SSL certification

Payroll

A payroll audit reviews an organization's human resource records to ensure accurate documents. The objectives of a payroll audit are to verify the accuracy of the data on hand, identify any errors or discrepancies in payroll transactions, and determine if any changes are necessary for future transactions. 

A typical audit will include: 

  • Examining employee personnel records.
  • Contacting employees who have left the company to confirm their termination date.
  • Review any discrepancies in pay rates between employees on different job titles or duties.
  • Examining pay stubs and timecards for accuracy.
  • Analyzing all deductions taken from an employee's paycheck.

Employee benefit plan

This is an audit of an organization's employee benefit plans to determine whether it has met its legal obligations in providing benefits. The purpose of the audit is to ensure compliance with laws and regulations that mandate specific minimum standards for employee benefits, such as minimum levels of contributions, whether health care benefits are offered, and deductibles. 

Information system

An information system audit systematically examines an information system's design, development, installation, operation, and maintenance. This examination can be as informal as a meeting among the stakeholders to analyze the environment or as formal as a detailed evaluation that takes weeks to complete. 

Informal audits are often used when there is a problem with an information system, and it needs to be identified. They assess what went wrong and how it can be fixed. A more formal audit may evaluate the efficiency of an information system and how it can be improved. 

A thorough IT audit will usually include examining its network infrastructure, databases, servers, laptops, and desktops. Companies need to regularly get an external audit of their systems to identify potential issues before they become serious problems. 

Conclusion: types of audits that every small business owners should know

Having an overview of the various audits is an excellent way to understand what you might need as a small business owner. Although some of the audits in this article are specific to certain types of business, the critical lesson here is that you should always be ready for an audit.

You should always stay on top of your operations throughout the year to ensure that you can pass any audit that might be required.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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