05 Aug How to Prepare for an Audit: A Guide for Startups
By Jeremy Lott
Preparing for an audit can be daunting for any startup, but it is crucial for ensuring financial transparency and compliance. At Foundation Accounting and Consulting, we understand startups' challenges and are here to guide you through the process. From entering transactions in your accounting software to meticulously documenting every expense, our comprehensive approach ensures that your financial records are accurate and complete. We assist in reviewing and reconciling your financials, providing the necessary audit support, and maintaining effective communication with auditors. We aim to make the audit process as smooth and stress-free as possible so you can focus on what matters most—growing your business.
Key Steps for Preparing for an Audit
When preparing for an audit, the process starts with ensuring all your transactions are entered into your accounting software, such as QuickBooks. Documentation for every entry recorded in QuickBooks is essential.
Next, we move on to reviewing and reconciling the financials. This is not just about reconciling your banking and credit card accounts; it also involves reconciling each of your assets and liabilities to ensure those balances are accurate.
Once the reconciliation is complete, the focus shifts to audit support. As the accountant reviews the financials and pulls various reports, we provide the necessary reports and documentation at each step. This ensures a smooth audit process and helps address any questions or issues that may arise.
Common Mistakes
One of the most common mistakes smaller businesses or startups make when preparing for an audit is not keeping copies of receipts. While transactions under $70 might slide by without much scrutiny, anything over $70 requires a receipt.
If your purchases exceed $70, it is crucial to have a system in place to capture and store those receipts. Proper documentation is vital to a smooth audit process, and having all your receipts organized can prevent unnecessary complications.
Capturing and Storing Receipts
QuickBooks offers a handy feature to attach receipts to different expenses, which we highly recommend using. You can utilize the snap receipts function by downloading the QuickBooks app on your phone. This allows you to take pictures of your receipts and directly attach them to the corresponding expenses in QuickBooks.
Utilizing this feature simplifies the documentation process, ensuring you have all necessary receipts properly organized and readily available for any future audits.
Essential Documentation for an Audit
In addition to keeping receipts, companies should also maintain purchase agreements and loan state closing documents to support their various assets and liabilities. For businesses with multiple owners, such as an S Corp or a small C Corp, having a record of shareholders and their contributions is crucial.
Accurately recording shareholder information ensures that the shares they own are reflected at a par value under common stock on the balance sheet. Any amount paid above the par value for the shares should be recorded as additional paid-in capital. This thorough documentation helps maintain clear and accurate financial records, which is essential for a smooth audit process.
Effective Communication
During the audit process, auditors typically work on-site and will request documents directly while there. If they are off-site, they will likely email or message you with a list of the required documents and reports.
The auditors are responsible for informing both the company owner and us, as support, about what they require. Our role is to compile and provide these documents promptly.
I strongly advise maintaining transparency and cooperation with auditors. Attempting to hide or sneak things past the auditors never ends well. Open communication and collaboration are critical to a smooth and successful audit process.
Streamlining the Audit Preparation Process
The biggest risk for a small business just starting out is a tax audit. Proper documentation of all processes is crucial. Every sale should have either a sales receipt or an invoice, and every payment should have either a receipt or a bill.
Tracking and storing documents is essential, whether through QuickBooks or another system, to ensure everything is organized. This level of meticulous record-keeping can significantly reduce the risk and impact of a tax audit, helping your business maintain compliance and peace of mind.
How We Can Help
At Foundation Accounting and Consulting, we assist by managing the entire bookkeeping process, including document management, account reconciliation, and financial review, to ensure your business is audit-ready.
When we come in to help, we work closely with the business owner to locate the necessary
reports and gather the information the auditors request. Auditors sometimes use jargon that can be difficult to understand, and we bridge that communication gap. We aim to make the audit process as smooth and stress-free as possible, ensuring you have everything you need to comply with audit requirements.
I have worked with many nonprofits that operate primarily through grants, which come with numerous requirements to maintain. We have assisted these nonprofits by setting up efficient bookkeeping and accounting processes to ensure all documentation is appropriately managed and entries are accurately recorded.
Our support helps these organizations meet their reporting obligations and ensure compliance with grant requirements. By streamlining their financial processes, we enable nonprofits to focus on their mission while maintaining the necessary financial integrity and transparency.
Conclusion
Preparing for an audit requires meticulous planning and organization, especially for startups. You can significantly ease the audit process by ensuring that all transactions are accurately entered and documented, reconciling your financials, and maintaining open communication with auditors. At Foundation Accounting and Consulting, we are dedicated to supporting startups through every step of this journey. Our expertise in bookkeeping, financial review, and audit support ensures that you are always audit-ready. Let us help you maintain financial integrity and compliance so you can focus on driving your business forward with confidence.
Author Bio
Jeremy Lott's academic journey at Brigham Young University helped him found a landscaping company in 2006. Though the venture was initially successful, the 2008 market crash ultimately led to a heartbreaking bankruptcy.
This pivotal moment spurred Jeremy to take charge of his financial future. Through rigorous self-education and academic pursuit, including an MBA at the University of Utah, he honed his accounting skills and became proficient in tools like QuickBooks.
Now armed with expertise and experience, Jeremy helps business leaders in construction and other industries navigate financial uncertainties. His approach blends bookkeeping proficiency with strategic financial guidance, offering a lifeline to those seeking to transcend financial chaos and achieve lasting prosperity.
