What is an audit? Definition and FAQs

Published Monday 13 October 2025

Table of contents

• Audit definition
• Types of audits
• An audit process
• Importance of audits
• Audit checklist
• How Xero can help with audit preparation
• FAQs on audits

Key takeaways

• Maintain organised financial records throughout the year using digital tools and clear labelling systems, as proper documentation makes audit processes faster and demonstrates compliance with the seven-year record retention requirement.

• Recognise that audits serve multiple business purposes beyond compliance, including fraud detection, error identification, and building credibility with investors and lenders who require verified financial information.

• Prepare for potential audit findings by establishing clear financial policies and working with qualified accountants, as this proactive approach helps identify issues early and ensures you can provide supporting evidence if discrepancies arise.

• Utilise automated accounting software to streamline audit preparation by maintaining real-time financial records, generating instant reports, and creating complete audit trails that auditors can easily review.

Audit definition

An audit is a detailed check of your business's financial records, tax returns or operations to make sure they are accurate and follow the rules.

Most audits focus on financial and tax matters. However, audits can also examine:

• Industry compliance: Meeting sector-specific standards
• Operational processes: Internal procedures and controls
• Statutory requirements: Legal and regulatory obligations

Independent auditors usually carry out these checks to stay objective. In New Zealand, registered audit firms have a quality review at least every four years. You can also do internal reviews, but external auditors give you an unbiased view.

Types of audits

Three main audit types affect small businesses, each serving a different purpose:

Tax audit: The Inland Revenue Department (IRD) examines your tax returns for accuracy and compliance.

• Review tax returns, profit and loss statements, and deductions
• Select businesses at random or when there are discrepancies in returns
• Require documentation to back up reported details

External audit: Independent professionals verify your financial records or operations.

• Check for fraud and verify record accuracy (important for loans or investors)
• Check compliance with standards like ISO, which can change over time. For example, new quality management standards in 2022 meant businesses had to update their practices.
• Use third-party auditors to keep the process objective

: Your team or an independent expert reviews your internal processes.

• Identifies vulnerabilities in business controls
• Checks compliance with internal regulations
• Uncovers opportunities for operational improvement

An audit process

The audit process has four main stages to check your business records:

Planning stage: Auditors define scope and understand your business

• Outline what records and processes the audit will cover
• Learn about your industry and business operations
• Set the timeline and requirements for the audit

Information gathering: Auditors collect relevant documentation

• Request financial records, tax returns and supporting documents
• Interview business owners, managers or accountants
• Review internal processes and controls

Evaluation phase: Auditors analyse collected information

• Compare your records with industry standards and rules
• Identify any discrepancies or compliance issues
• Test the accuracy of your financial data and processes

Final report: Auditors provide findings and recommendations

• Tax audits: Accept your returns as filed or suggest corrections
• Financial audits: Give an opinion on the accuracy of your records
• Dispute process: Let you challenge findings with more evidence

Importance of audits

Audits serve multiple purposes beyond compliance, and can help your business grow:

Compliance assurance: Ensure your business meets tax and legal requirements

• Verify accurate reporting to regulatory bodies
• Identify and correct compliance gaps before penalties occur

Error detection and :

• Accounting errors: Spot calculation mistakes and recording issues
• Fraud detection: Uncover unauthorised transactions or financial manipulation
• Process improvements: Identify weaknesses in financial controls

Business credibility and growth:

• Stakeholder confidence: Build trust with investors, lenders and suppliers
• Decision-making insights: Get clear information to help you make business decisions
• Transparency: Show you are committed to accurate financial reporting

Audit checklist

Audit preparation makes the process easier by keeping your records organised and ready for review:

Maintain organised records:

• Use tools like Hubdoc to digitise receipts and invoices automatically
• Keep financial documents in clearly labelled, accessible formats
• Update your bookkeeping regularly throughout the year

Meet retention requirements:

• Seven-year rule: According to the Inland Revenue Department (IRD), you need to keep these records for at least seven years
• Special circumstances: Check with the IRD for extended retention periods in specific situations
• Backup systems: Make sure your records are secure and easy to recover

Establish audit-ready processes:

• Write clear policies for financial and operational processes
• Review your processes regularly to spot issues early
• Work with qualified accountants and bookkeepers for compliance guidance

How Xero can help with audit preparation

Xero streamlines audit preparation by automating record keeping and making sure your financial data is always ready for review.

Automated record management:

• Match transactions automatically to reduce manual errors
• Capture and store receipts with Hubdoc integration
• Keep your financial records up to date without manual data entry

Audit-ready reporting:

• Generate profit and loss statements, balance sheets and cash flow reports instantly
• Access a complete audit trail for all your financial activities
• Simplify Inland Revenue Department (IRD) reporting with organised, compliant financial data

Ready to simplify your audit preparation? Try Xero for free and keep your financial records organised year round.

FAQs on audits

Here are answers to a few common questions small business owners have about audits.

How long does a typical audit take?

The time an audit takes depends on your business size, the audit scope and how organised your records are. A simple audit can take a few days, while a complex one may take weeks or months.

What happens if the auditor finds issues?

If an auditor finds errors, they will list them in the final report. The report explains the issues and may suggest how to fix them. You can discuss the findings and give more information if needed.

Can I dispute audit findings if I disagree?

Yes, you can dispute an auditor's findings. For a tax audit, there is a formal appeals process. For other audits, you can talk to the auditor and give evidence to support your view.

Do all small businesses need regular audits?

Not all small businesses need regular audits. It depends on your industry, business structure and whether investors or lenders ask for it. Even if not required, an audit can give you useful insights and build trust.

How much does an audit typically cost?

The cost of an audit depends on your business size, industry and how organised your records are. Get quotes from a few accounting firms to find out what it might cost.