The audit process is important for ensuring that accounting staff is following the appropriate procedures. When you conduct an internal audit, it gives you the opportunity to review samplings of all of the company transactions to identify errors or questionable accounting practices. If you uncover any cause for concern, you may want to consider hiring an external audit firm to help you get to the bottom of it.
Determine what period of accounting records you plan to audit. You may want to conduct a sampling audit of the last fiscal year or the last quarter. Alternatively, you may feel that you need to do a thorough audit of the last month's transactions. If you're auditing a period with large transactions, you may want to do a sampling audit instead of auditing the complete transaction history.
Pull a report that details all of the sales transactions recorded during the audit period. If you're conducting a complete audit, pull the documentation for all of the transactions so you can compare the sales records against the financial ledger. Choose a representative sampling of the transactions that posted in the period if you're conducting a sample audit. Consider the total number of transactions when you choose your samples so you can review a reasonable amount between 5 and 10 percent. Compare the transactions recorded in the ledger against the sales invoices. Match up the amounts among the ledger, the invoice, and the customer's check to ensure accuracy.
Review a report of all of the business expenses for the audit period. If you're conducting a complete audit, pull the invoices, payment records and other documentation to support all of the transactions. Otherwise, select a representative sample, as you did with the sales records. Compare the ledger reporting with the invoices paid and the actual amounts reflected in the bank activity.
Review the bank statements for the audit period. Bank statements can help you identify whether or not money is unaccounted for from the bank account. Compare every transaction in the statement against the transactions recorded in the ledger. Determine that there is a transaction in the ledger to match each bank account transaction. Match each of these to an invoice, a payable statement or other documentation to ensure that it is valid.
Review your payroll records and compare the salary statements against your active employee roster. Verify that hourly rates and salary amounts are accurate in the payroll system. To ensure that your staff can verify that they actually worked the hours that were paid, keep timecards on file to support the payroll processing and review them during audits.
Validate Supplies and Petty Cash
Review the petty cash transaction history. Verify that there are receipts to support each expense and that the information on the receipt is clear. Verify the petty cash reconciliation to ensure that all funds are accounted for. Review the supplies on hand and compare them against the inventory on record. This process may seem inconsequential, but it can help you to identify potential theft.
Tara Kimball is a former accounting professional with more than 10 years of experience in corporate finance and small business accounting. She has also worked in desktop support and network management. Her articles have appeared in various online publications.