For those not aware, an audit is an examination of a person or company’s financial assets. This may include risk management work and to understand the macro and micro risks impacting the company’s finances overall, and supply chain management may be involved, too. An audit may be done right before the business tax season, to ensure that a company is not unfairly paying too many taxes or illegally paying too little. Identification of risks may be done with an internal audit, and to understand the macro and micro risks impacting the company’s finances is to take the initiative on the company’s present and future. A manager who can understand the macro and micro risks impacting the company’s bottom line may avoid some expensive and legal complications later on. And where international trade and business is concerned, to understand the macro and micro risks impacting the relationship between foreign businesses can save a lot of trouble, too.
When an Audit is Necessary or Not
A small business may not need any audits early in its existence, since its function is quite narrow and its revenue and expenses are relatively easy to keep track of. A start-up, for example, is not yet diversified into a number of sectors, nor does it have a large and possibly unwieldy list of salaried employees, income sources, or international transactions and partnerships to consider. Most everyday American citizens may not need auditing work either, since they are paying modest taxes and have straightforward sources of income and expenditures alike. An ordinary American citizen preparing for tax season may consult some experts for guidance, but an audit is unlikely to take place.
When a business grows, however, it may start needing auditing services, internal or external, after a certain point of growth. There is no single concrete threshold for when a growing company needs an audit, and this will be left to the manager’s or owner’s discretion. A skilled and responsible manager will know when business tax season is coming, and know whether his or her company will need an audit to keep all of the numbers straight. For example, if that growing company is diversifying, it may need an audit because the in-house employees may soon start making mistakes in tracking the brand’s income and expenses, and this may lead to some inconsistencies. It may also mean that no one is entirely clear on the company’s net profits or its expenses and liabilities, and that lack of clarity could mean trouble during tax season.
A company may also need some audit work if it is the victim of white-collar crimes. Embezzling, for example, is the act of secretly pocketing some of the company’s money on the criminal employee’s part, which can lead to some inconsistencies in the financial reports. In other cases, an employee may commit securities or stock fraud, meaning that they are falsifying or distorting financial and other information to fool other parties into making financial moves that they would normally not make. These are highly illegal acts and heavily punishable, but every year, they happen. Investors may soon demand an audit of a company if someone is committing such fraud, for example, or the manager may perform an audit if one or more employees is embezzling money. White-collar criminals try to act discreetly, but sometimes, their actions may lead others to suspect foul play and investigate with an audit.
A company may also undergo auditing if it is officially bankrupt and in the middle of a bankruptcy court case. Many companies go bankrupt every year, and smaller ones tend to file for chapter 11 bankruptcy for debt relief. During this time, the creditors or even the court may request an audit to be done on the debtor company. This may help all involved parties determine the debtor’s financial status, no matter how dire, and this information may help all parties determine a solution to the case. Debtor companies tend to create debt repayment and reorganization plans during such court, and if the audit shows that the plan is consistent with their finances, this can be a source of relief. Audits may also reveal dishonest behavior on the debtor’s part, however, and this may incur some penalties such as a loss of “debtor in possession” status.