Audit

What is an audit?

An audit is a formal examination of your financial records by an independent party. The auditor reviews your books, verifies transactions, checks for errors, and ensures your financial statements accurately represent your business's position. Audits can be required by law, requested by lenders, or conducted internally to catch problems early.

For most small businesses, full audits are uncommon, but understanding the concept helps you maintain audit-ready records.

Types of audits

Businesses may encounter different audit types:

• External audit — Independent review by outside accountants, often required for larger companies
• Internal audit — Self-review to identify issues before they become problems
• Tax audit — IRS or state review of your tax returns and supporting documents
• Compliance audit — Review to ensure you're following specific regulations

Staying audit-ready

Good record-keeping protects you. Keep organized documentation for all transactions, reconcile accounts regularly, and retain records for at least seven years. If the IRS does audit you, clear records make the process much smoother.