What is an audit?

Audit (definition)

An audit is a detailed inspection of tax returns, financial records, internal processes, or operations to check for accuracy and compliance.

The term ‘audit’ is most commonly used to refer to tax and financial audits. However, there are also other kinds of audits related to industry and statutory compliance.

Most audits are conducted by an independent, external party. A business can initiate an internal audit if it wants to check on its own processes and procedures, but to maintain objectivity, it should still have an external party handle the audit.

Types of audits

There are a few different types of audits:

  • Tax audit: The tax authorities can audit a business’s tax returns to check their accuracy. They look at tax returns, profit and loss statements, and deductions. If selected for a tax audit, the business will need to back up the reported details. Reasons for triggering an audit could range from random selection to discrepancies in the business’s returns.
  • External audit: An independent group may audit finances, operations, or other aspects of a business, usually for compliance purposes. Financial audits can check for issues like fraud and verify the accuracy of a business’s financial records – this can be critical for trying to get a loan or attracting a new investor. Operational audits can check that processes are compliant, for example with quality standards such as ISO (The International Organization for Standardization).
  • Internal audit: When an internal team, or an external hire, audits the business’s processes and controls to look for vulnerabilities, compliance with internal regulations, or opportunities for improvement.

An audit process

An audit has several stages:

  • Planning: The auditor starts by outlining the scope of the audit and learning more about the business.
  • Gathering information: The auditor works with the business owner, manager, or accountant to gather information.
  • Evaluation: The auditor examines the gathered information to see if the financial records and processes align with standards and regulations.
  • Audit report: A detailed report is provided, sharing findings and giving an opinion or decision. For example, with a tax audit, the auditor will either accept the tax return as filed, or they’ll suggest changes. In most cases, the business has a chance to dispute the findings and present more information if necessary.

Importance of audits

Tax and financial audits are mainly designed to ensure that a business is compliant with tax and legal requirements. These types of audits can also help the business identify accounting errors and detect fraud, and make the necessary changes.

Another benefit of an audit is that it can also provide the business with insights that improve decision-making. And audited records can boost credibility with investors, lenders, suppliers, and other stakeholders. It shows the business is committed to transparency, quality and accuracy.

Audit checklist

A business can make an audit process more efficient and less daunting by:

  • maintaining accurate and well-organised records – Hubdoc can make data capture easy
  • keeping tax records for at least five years and checking with the local tax authority to learn about special situations where records may need to be kept for longer
  • documenting and regularly maintaining policies and procedures for operational and industry audits
  • doing periodic internal audits to monitor and improve processes
  • being compliant with legal and accounting regulations – you can search for accountants and bookkeepers in our advisor directory

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.