Many people immediately associate audits with the IRS or state labor boards.

While most audits focus on financial statements, operational audits widen the scope to include policies and procedures.

But those aren’t the only kinds of audits that small business operators should know about.

In this article, we’ll cover 10 different types of audits that a business might need to prepare for or choose to conduct.

What Are Audits?

An audit is a methodical, objective analysis of an organization’s operations to check for errors, inefficiencies, areas of noncompliance, or signs of fraudulent activity. Typically, the process culminates in a formal report or opinion that compares the auditors’ findings against established benchmarks and enables the organization to take corrective actions.

Since ancient times, audits (derived from the Latin word for “hearing”) have been conducted by public officials to verify bookkeeping records. In recent years, the practice has expanded to encompass numerous different business functions and can be performed by in-house teams as well as outside authorities.

1 Internal Audits

In contrast to the more notorious IRS or labor audits, these are initiated and conducted by businesses themselves. Businesses can define their own scope and procedure based on their capacities and objectives.

2 External Audits

These may be performed by a certified public accountant (CPA) or another outside expert tasked with determining the accuracy and completeness of a company’s finances or other records. Publicly traded corporations are required to undergo external financial audits that conform to generally accepted auditing standards (GAAS). Private companies may also seek out external audits to prepare for major transactions, funding requests, or insurance needs.

3 Tax Audits

The IRS and state taxation departments conduct audits to ensure that businesses are properly reporting their income and expenses. These may be conducted onsite or remotely, and they generally involve the inspection of randomly selected records.

4 Financial Audits

These focus on a business’s balance sheets and income statements and provide vital information for investors, lenders, and the firm itself. They include both external and internal audits, with the aim of validating bookkeeping practices and overall financial health.

5 Operational Audits

While most audits focus on financial statements, these widen the scope to include formal and informal policies and procedures. The ensuing report might provide recommendations for streamlining workflow, maximizing space, or saving energy.

6 Compliance Audits

These are intended to evaluate how a company measures up to laws and regulations, industry standards, and internal policies. Key areas include workplace safety, quality control, record retention, and correct classification of employees and contractors.

7 Information System Audits

As small businesses increasingly go high-tech, these have become essential for ensuring efficiency and security. Audits can help guard against cyberattacks and employee fraud, as well as costly and disruptive system failures.

8 Payroll Audits

Typically, these are performed internally to verify the accuracy of pay rates, withholding, and employee information. These types of errors can quickly compound into bigger financial and legal problems, so early detection pays off.

9 Pay Audits

Not to be confused with payroll audits, these are designed to ensure that overall compensation practices are equitable and competitive. Businesses must comply with federal and state fair pay laws, and it’s wise to stay abreast of prevailing wages and market trends.

10 Special Audits

Countless other types of audits focus on specific business practices or are triggered by specific incidents. Examples include sustainability, marketing, inventory management, business continuity, and intellectual property.

Why Audits Are Important

As we’ve seen, audits can serve many different functions in the business world. While audits by tax or labor authorities are meant to enforce the law, other types of audits can help firms proactively identify issues. Small businesses can also use audits to defend against fraud, target inefficiencies, and optimize their financial health.

By stepping away from the day-to-day and examining their operations from a different critical perspective, business operators can gain valuable insights for long-term success.

We’re Here With an Ear

For more individualized guidance on optimizing your operations, consult your financial institution.

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