Accounting is a comprehensive process that requires you to maintain a proper track record of all the financial transactions that take place in your business. This process is undertaken in order to keep a track of the profits made by the business, to decide what future financial decisions have to be made and to comply with the tax laws. Since this process of record keeping has multiple transactions, mistakes tend to happen. Some mistakes can be costly and you may even end up paying the wrong amount of tax. Therefore, to avoid such discrepancies, a financial audit is created.
Types of Financial Audit
A financial audit can be defined as the process of analyzing your bookkeeping records to verify if the information provided is valid with regards to the statutory compliance. This process is conducted by professionals and is thoroughly done to find any minute mismatch in the bookkeeping. Before you move on to understand more about the purpose of conducting a financial audit, let us understand the different types of the financial audit that exist in Canada.
1. Statutory Audit
A statutory audit is conducted for a business by an external auditor. A statutory audit is mandatory under the law for a company that earns a certain revenue. The need for a statutory audit is mainly in large firms where the ownership of the company and the financial affairs handling is separate. A statutory audit confirms if proper regulations are being followed not only for the government but also to the higher authorities within the company.
2. Operational Audit
An operational audit is also known as an internal audit. It is an initiative taken by the business itself to monitor if their financial records are proper and compliant. This audit is conducted by the employees of the company. The auditor is decided by the board of directors.
3. Public Sector Audit
Public sector audit, as the name suggests, is an audit that is specifically conducted for business and institutes that are owned by the government. This audit is conducted by the auditor general to ensure that these public companies are following a proper financial affair.
4. Forensic Audit
Forensic audits are external audits with legal implications. These audits are conducted by the legal authorities when a business is supposedly indulging malpractices. Situations that generally cause a forensic audit include money laundering, tax evasion, insurance claim fraud, accounting negligence such as entering incorrect entries, etc.
Types of Auditors
Since an audit is an in-depth analysis of your financial statements, it is essential that an expert performs the task. There are three types of auditors you will come across when performing an audit.
1. Internal Auditor
An internal auditor is an experienced accountant assigned from within the company to perform the task of analyzing the financial records internally from time to time. Internal audits help a business to ensure that their financial records are updated and error-free.
2. Independent Auditor
An independent auditor is also known as an external auditor. These are professionals who only work as auditors for different organizations. They conduct the financial audit for different clients with an unbiased opinion.
3. Government Auditor
Government auditors are of two types, a general government auditor and a forensic auditor. A general government auditor performs an external audit for businesses to identify if the company is following all the tax regulations. Forensic auditor, on the other hand, performs an external audit in order to identify if the company is involved in any financial malpractice.
Purpose of Financial Audits
1. Identification of Miscalculation
A company has several transactions to record every day. Your accountant may take care of making a note of every single transaction. However, there are times when you may miss out on a receipt and end up not adding the record to your transaction list at all. When such miscalculation takes place, the business does not get a clear idea of the profit or loss it is making. With the help of a financial audit, such mistakes are caught and rectified.
2. Prevention of Fraudulent Practices
A business owner never handles their own books of accounts. Either the in-house team of accountants manages it, or an accounting agency to whom the process of accounting has been outsourced. Since the owner does not record every transaction that takes place in the business, there are chances that the owner may get fooled by the person handling the accounts. In the end, if a fraud is committed, the business owner will be penalized. To avoid such situations from happening, internal financial audits are conducted at least once a year.
3. Realization of Company’s Worth
There is a huge difference between a financial audit and general bookkeeping. In bookkeeping, you record the monetary transactions that take place in your business. A financial audit, on the other hand, does the complete analysis of your existing records. Regular recording of transactions does not give you significant information about your business. A financial audit gives you details of how your business is performing, and the report generated works as a good credit rating for your prospective investors.
4. Compliance of Taxes
A financial audit is done with the idea to catch discrepancies that were not noticed the first time. One major discrepancy that businesses can end up making is not complying with the tax rules unknowingly. You may miss out on something forgetfully, but the CRA won’t consider it to be a small mistake. So having a financial audit helps you to double check if you have filed your taxes properly. Sometimes, it also helps you to claim some tax deductions you may have not noticed before.
Financial audits do the job of rectifying some serious mistakes. Not conducting an audit could be the reason why you will end up being flagged by the CRA for the wrong reasons. So do not wait for a notice from the CRA for an audit and take the assistance of an experienced accountant for error-free bookkeeping process.
Tax filing season becomes stressful for everyone. Once you file your tax returns, you breathe easy and feel relaxed. But sometimes the relaxation doesn’t last for long when you receive a notice of an audit from the Canada Revenue Agency (CRA). Often business owners go in a panic mode as an audit is not something they want to go through. But an audit is not something to be scared of as it is just a simple process that includes some basic procedures that tax accountants in Edmonton can take care of.
Tax audits conducted by the CRA are generally of three main types. These audit types include:
Audits In-OfficeWhen you receive an audit notice, you will be informed about the type of audit. In an in-office tax audit, you will be asked to visit the local CRA office. This type of audit is conducted by the CRA when they want you to be present to justify your tax documents in detail. When you are called for an in-office audit, make sure you carry all the tax filing documents along with you.
Audits by MailAudits of local and small businesses are a minor task for the CRA and hence a majority of them are conducted through the mail. In a mail audit, you receive a notice about the audit along with a list of documents needed by the CRA to justify the returns filed by you. You can simply mail the documents needed by the CRA and the matter can get resolved.
Field AuditsField audits take place at your business premises. In such an audit, you first receive a notice and then a CRA officer visits your premises for a detailed investigation of your financial documents. Such audits generally take place for businesses that have too many suspicious transactions.
After an Audit is CompletedAfter the audit process is completed, the next step that takes place is the place where the CRA gives a decision based on your documents. This decision-making process includes:
After the CRA scrutinizes your tax returns, the agency verifies that your documents are complete and as per the regulations. Once your documents are verified, you need to sign the report and the returns can be filed.
If there are certain details that were missing initially in your report, the CRA will ask you to make the necessary changes and alterations in your returns and file them.
If in case the CRA found a major discrepancy but you do not agree with the CRA, you can file an appeal for reconsideration.
Though an official audit is a process initiated on discrepancy suspicions, it is not necessary that there will be major issues to worry about. Sometimes an audit can also take place for minor mistakes. So next time you get an audit notice, do not worry and simply take the assistance of trusted tax accountants in Edmonton.
An accounting audit is a process of examining a company's financial position. It also places emphasis on ensuring compliance with relevant reporting standards, cash handling policies, and internal controls. Accounting audit is an effective way to understand the financial health of a company. It also plays a vital role in creating and maintaining investor’s confidence and unlocking the valuable insights of business. Here’s how you perform a basic accounting audit.
Determine the Accounting Audit Trail
An accounting audit trail consists of electronic sources and hard copies that document the history of a firm’s transactions. They are chronological records of financial transactions that are used to trace financial data of a business. Check if your existing financial practices can allow you to track the entire process of financial transaction with documentation. You can also employ accounting software that electronically tracks your accounting trail for your business.
List Down all the Financial Transactions
Gather all your financial documents like invoices, receipts, and bank statements and hand it over to either your accountant or the accounting department of your firm. These documents should be forwarded so that all the records of the company are updated in the books of account. If this process is slow, the accounting records will suffer and become unreliable. Hence, make sure that your books of account are updated accordingly.
Compare the company’s stored external records and the selected transaction with the internal records. This will help you identify if there are any manipulation or mistakes between the two records. You can then refer to your financial documents and make the necessary changes accordingly.
Create a System for Internal Controls
Internal control systems protect your business from theft, fraud, and other internal accounting issues. Therefore, create a system effectively for your internal controls to ensure that all your data is protected. Install a camera in the corridors of your company to monitor the execution of internal controls. Invest in safes that can be locked when not in use. Protect your computer and the software with the help of a password.
Analyze your Tax Returns
Maintain your tax records for at least a period of seven years. Compare these records with the previous years. Review the range of credits and deductions claimed on the recent tax returns and look for areas of dubious reporting. The best way to analyze your tax return is with the help of an accountant who is well-versed with the taxes services in your province.
Follow the Accounting and Tax Laws
Preparing your accounting records in compliance with the laws will make a potential federal revenue audit easier to comply with. By following the accounting and tax laws, you will be able to respond to the external audits as well as other external parties. To find out what laws are relevant for your business, consult an accountant for a better and clear understanding of these laws.
Hire the Right Audit Firm
Conducting financial audit can be a tiring and a time-consuming task. You can decide to hire a professional firm to conduct an audit of your financial statements. A professional firm not only understands the industry thoroughly but also has years of experience in auditing. While hiring the right firm, consider key factors like their professionalism, the company’s objectives, their approach toward auditing and their cost. Choose a firm that is able to explain you every detail properly and make you understand what changes need to be done.
At the end of the day, an audit is a necessary part of every business. For more information on conducting a financial audit, consult a professional accounting firm to help you out.
Working capital is the capital used by a business for its day-to-day operations. The formula for working capital is current assets minus current liabilities. This capital has a direct impact on the cash flow as well as on the finances of a company. Being able to effectively manage the working capital can ensure that it meets the business obligations as well as avoids bankruptcy. Hence, follow these ways on how to provide working capital efficiency and manage it as per your business requirements.
Review your fixed and variable costs to determine if there are areas to reduce your expenses. For instance, office supplies, equipment, and technology represent expenses that could be reduced by negotiating with the new suppliers. Thus, by reducing these expenses, you will have more cash available to you for your daily operations.
Review Tax Opportunities
Is your company taking all the tax breaks? Or is it overpaying taxes? Therefore, review all the current tax codes in order to ensure that your business is not paying more than it is liable to. If you are unable to do so, contact a professional to help you navigate the maze of forms, requirements, deadlines as well as following constantly changing tax laws. Hire a professional who offers high-quality tax services and will proactively help you with tax planning which in turn will improve your working capital.
Managing your inventory is an important step if you want to improve the working capital of your business. Therefore, see to it that you do not overstock your inventories. Make sure that all the finished goods are sold as soon as possible and are not in your warehouse for a longer period of time. Also, make it a point to reduce overstocking slow-moving goods. The more time the goods take to sell, the more will be your warehousing and storage costs. As a result, your working capital reduces as you end up spending more money without any cash inflows.
Automate Account Receivables & Payment
Automating your account receivables simply allows you to track the inflow and outflow of your business with ease and effectiveness. Therefore, it is important to have a strong collection team to chase customers who miss out on deadlines. Encourage your customers to pay on time by offering incentives on quick payments. Similarly, if you make payments on time, you won’t be charged any interest. Thus, you do not spend more than what you were supposed to.
Improving the working capital should be the main aim of your business as it has the significant impact on your company. Consider these tips on how to provide working capital efficiency for faster growth and success of your company. If you have any doubts in understanding the functionality of working capital, consult a professional to guide you and assist you in enhancing your working capital.
No one wants to get called by the Canada Revenue Agency (CRA) and be told that your business is being audited, but this is part of the government process. This is CRA’s way of ensuring businesses are paying their taxes and you will help keep this system running. Apart from a call, CRA may send a letter beforehand so that you are aware.
So how do your prepare your business for a CRA audit?
CRA is auditing your records because of any of these three reasons:
- Dig up Six-Year-Old Documents
As a rule, you should have stored business records of the last six years. However, CRA auditors are not going to go through all of them and they will ask for business records for the last two years.
- Original Documents
You need to present original documents and not copies. This includes receipts and other financial documents. Not even your credit card statements qualify.
- Which Documents
This is specifically if you use your business to reimburse your employees and your personal accounts for things like transport, food and entertainment.
- Car: CRA will want a detailed log of your car used for business and this includes a record of the starting mileage, the name of the persons you visited and the relative mileage. If the use of the car is personal, then it must be indicated in the log. The CRA auditors will want to see the recorded mileage for personal and business use. If you haven’t kept a mileage log book, then they might agree on a percentage use of the car for the business, though it will be lower than what you actually use.
Ideally, you should have a mileage book and original fuel receipts (as credit cards statements are not accepted).
- Other Expenses: For other expenses that you claim reimbursement like meals and entertainment, you should have receipts.
At the Office
CRA auditors will visit you at your office. If you have a home office, they will visit that. You need to make sure that your home office is not your bedroom, but an actual place that you conduct business and meet clients.
Cooperate and Know your Records
CRA auditors won’t interrogate you, but they will thoroughly ask you questions. You will be asked many questions and some may even sound unrelated, but you need to answer. Don’t delay your answers, don’t answer "smartly", don’t try to give the wrong answer on purpose. You need to know the finances of your business so that you give the right answer.
Be upfront with the auditors. If you’re aggressive, they’ll be aggressive.
Have a Tax Expert with You
You don’t have to do this alone, you can do it with your tax expert, preferably your own accountant.An accountant can help by providing support, guidance, advice and be present in office with the CRA auditors. That way, if you don’t know the answer, the professional who handles your financial paperwork does.
Even if you have some accounting experience, it is best to get an accountant because there is a chance that things may become heated and tensed, and do you won't be able to give proper replies. Apart from knowing the ins and outs of your business's tax, an accountant can act a bridge between you and the auditors.
An audit from the CRA is not a walk in the park, but neither is it something to fret about. If you keep your books well and have not avoided paying taxes on purpose, you and your business will come out on top. For more information, check out what CRA says about business audits.