The prospect of undergoing a financial audit can be intimidating, but it’s a necessary part of running a business, especially when raising venture capital. Financial audits are often required during the due diligence process for startups seeking Series A funding and beyond, particularly for those utilizing accounting & reporting services.
While preparing for an audit can be time-consuming and stressful, it doesn’t have to be. By maintaining good financial practices, your business can always be audit-ready, ensuring you’re prepared whenever an audit is required.
This article will discuss the various types of financial audits that startups may encounter, the situations that may trigger an audit, and provide practical steps to ensure your business is prepared. Additionally, we will share best practices to follow if your startup is asked to undergo a financial audit.
What is a Financial Audit?
A financial audit is an independent examination of a company’s financial statements and related operations to ensure accuracy and compliance with accounting standards and regulations. Conducted by external auditors, the audit assesses the integrity of financial reporting, identifies any discrepancies or fraud, and provides stakeholders with confidence in the company’s financial health. The process involves reviewing financial records, transactions, and internal controls, culminating in an auditor’s opinion on the financial statements’ fairness and accuracy. Financial audits are crucial for maintaining transparency, gaining investor trust, and meeting regulatory requirements.
Steps to Prepare for a Startup Audit
Whether you’re preparing for your first audit or have been down this path before, below are five important steps you can take to ensure your startup business finances are audit-ready on an ongoing basis:
1. Keep all of your financial documents
To navigate a financial audit successfully, it’s crucial to keep all your financial records, including receipts for purchases over $75. Always request an itemized invoice before processing payment for any service provided to your business, whether it’s from vendors, developers, marketing professionals, or other hourly skilled workers.
Establish an email alias such as [email protected] for all financial-related correspondence. This provides a simple way to capture important financial documents from within your organization and from third-party vendors. Use this email address as your billing contact when making business purchases to ensure all receipts are collected. As a best practice, attach all receipts and invoices to the corresponding bill in your accounting software or ERP system for support documentation.
2. Maintain organized records
It’s essential to keep your company’s financial information well-organized and error-free. Disorganized or incomplete financial data can make it difficult to locate important information when needed. Failing to maintain organized financial records regularly will require you and your team to spend significant time revisiting past financial transactions during the audit. This not only wastes valuable time but also creates a poor impression on the external party requesting the audit.
3. Follow GAAP accounting standards
Auditors use Generally Accepted Accounting Principles (GAAP) as the standard to evaluate and compare your company’s finances. Investors, board members, and bankers also rely on these principles. If your company is not following GAAP standards, the audit process will take longer as financial statements will need to be restated to meet these common standards.
4. Set controls, and adhere to approval workflows
Setting up distinct controls and approval workflows facilitates effective segregation of duties within an organization. These mechanisms, akin to “checks and balances,” prevent any individual from unilaterally authorizing expenditures or vendor payments without supervision.
Designing and implementing these controls and approval flows can be straightforward. Depending on the organization’s compliance mandates and prevalent financial transactions, workflows may be structured around factors such as monetary thresholds, departments, projects, or categories.
5. Get the help you need
Ace Advisory specializes in assisting technology startups, ensuring they remain audit-ready at all times. Tax documentation can be perplexing, making it difficult and time-consuming to prepare everything independently. This challenge is amplified for newcomers to the business world facing their inaugural audit. Attempting to manage all financial records independently can lead to errors in paperwork.
Conclusion
Preparing for a financial audit is essential for businesses to ensure compliance, transparency, and trustworthiness. By following the steps outlined in this guide, including organizing financial documents, implementing strong internal controls, and maintaining open communication with auditors, startups can navigate the audit process with confidence. Remember, being proactive in preparing for audits not only reduces stress but also fosters a culture of accountability and efficiency within the organization. With thorough preparation and attention to detail, businesses can not only pass audits successfully but also strengthen their financial management practices for long-term success.
