Internal and External Audits: Understanding Their Impact on Small Businesses

Mentioning the word "audit" in a small business can raise the stress level of employees, but a lot of good information results from these examinations. Internal and external audits are completed by accounting professionals for a variety of reasons, but both can help to point out areas where a business is lacking in internal controls, operational efficiency, or regulatory compliance.

What is an Audit?

Before discussing the need for internal and external audits, it's helpful to understand what an audit entails. At the most basic level, an audit is simply an independent examination of a process or procedure. Even internal audits should be performed by an independent person (someone who did not perform the work being examined). Audits are useful because they provide validation to financial stakeholders that a company's written policies and procedures are actually being carried out as intended. Positive audit results provide proof that a company is operating in a sound fashion.

External Audits

An external audit is typically performed by a certified public accounting (CPA) firm. External auditors follow strict guidelines in regard to staying independent, and they adhere to rules and regulations set by the American Institute of Certified Public Accountants when issuing a final opinion. Most small businesses hire external auditors to test financial statement accuracy. They will select material amounts on a financial statement (usually any individual line item greater than a certain percentage of total assets) and test the accounting controls and processes surrounding this amount. For example, if the company holds a large cash balance, external auditors will request bank statements and compare the amounts on the statements to the company's general ledger entries. As part of an audit, expense invoices may be reviewed for accuracy while inventory is counted to confirm figures.

Internal Audits

Internal audits can be performed by a certified internal auditor or other accounting professionals. Small businesses do not generally employ internal audit staff, but may still perform self-audits as a means of verifying that proper internal controls are in place. Self-assessment tools are available online to help small businesses evaluate managerial, financial, and operational policies and procedures. A self-audit process can also be built into an employee's daily routine — for example, printing out confirmations of monetary transactions and tying them to the general ledger is one way to verify that the numbers are correctly reported.

The Audit Opinion

The end result of both internal and external audits should be a written audit opinion. This opinion states the scope of the work performed, which policies and procedures were tested during the audit, and the results of the testing — positive or negative. Any material differences noted during the testing procedure should also be described, as well as recommendations for future changes or additional internal controls needed.

Why Small Businesses Engage Auditors

Some small businesses may be required to undergo internal or external audits due to industry regulations. Others may need to produce a positive audit opinion in order to secure a business loan. Suspected fraud, concern about employee theft, or operating inefficiency are also valid reasons for company management to choose to engage an audit firm for independent testing.

Internal and external audits each serve their own purpose, but both are conducted in order to evaluate internal control policies and procedures. Making sure your finances are in order and properly filed, especially through an online accounting program, may help expedite the auditing process. A satisfactory audit opinion issued by an external auditor can help small businesses win the confidence of investors, customers, and business partners.