25 Nov What Is Audit Preparation?
Audit preparation is all about having the correct documentation to prove that your income and expenses are accurate. One of the most critical parts of this process is staying on top of your finances and bookkeeping. If you are required to undergo regular audits, having this documentation ready is essential to ensure everything goes smoothly.
Importance of Audit Preparation
Audit preparation is crucial, especially during a tax audit, because you need to justify your deductions or credits. As I often say, you can do whatever you can successfully argue in court. To back up your tax return, you need the correct documentation. For some deductions, it is as simple as providing a receipt. But for others, like meals or travel, you need to show the purpose, who you were with, what was accomplished, and how much time was spent. Documenting all of this is critical in case it is questioned down the road.
I have had clients who did not keep the necessary records, and when the IRS conducted an audit, they ended up paying more in taxes because they could not justify their deductions. The IRS treated the unverified deductions as additional income, resulting in higher taxes, fines, and penalties for underpaying when they filed. It is an unpleasant situation, to say the least.
Common Types of Audits
Common types of audits include tax audits. Tax audits are what everyone dreads. Another frequent type is a workers' compensation audit, where auditors review what your employees and subcontractors are doing to adjust your insurance rates. There is also the financial audit, though it is only common for small businesses if required by a bank or bonding company. These audits are usually necessary for financial reporting or securing loans.
Key Steps in Audit Preparation
Companies can prepare for audits by maintaining thorough records. When hiring employees, having all their documentation properly filed is essential. For subcontractors, ensure you have a W9, certificate of insurance and a master subcontractor agreement. These documents will protect you in case of an audit involving 1099 workers.
Compliance with Industry-Specific Regulations
There are also industry-specific regulations and audits. Workers' comp and general liability audits are widespread in the construction industry. Workers' comp is essential, and general liability audits follow a similar process. These are the two big ones to prepare for, alongside the tax audit—everyone's least favorite but important to avoid.
Internal Controls and Risk Management
It is essential to have a documented process for hiring subcontractors and employees, as well as for cash disbursements and receiving payments. Having standard operating procedures in place gives your employees clear guidelines to follow, which will make the audit process much quicker and smoother.
Benefits of Professional Audit Preparation Assistance
When you work with us, we integrate everything with QuickBooks as much as possible, and we also use additional apps to track travel, mileage, and meals. A receipt alone is not always enough—you need a proper justification to back up those receipts. We make sure you gather that documentation throughout the year so that when tax time comes, you are ready to claim as many deductions as possible.
Conclusion
Proper audit preparation can be the difference between a smooth audit process and an expensive, stressful experience. By staying organized, maintaining thorough records, and following industry-specific guidelines, you will protect your business, maximize your deductions, and avoid penalties. At Foundation Accounting & Consulting, we streamline your preparation, integrating QuickBooks and other tools to ensure you are always ready for whatever audit comes your way. With suitable systems and support in place, you can confidently approach audits, knowing your documentation is in order and your business is protected.
