Financial Auditing for Start-up/SMEs

Why Financial Auditing for Startups/SMEs is necessary?

Financial auditing is a process of analyzing financial statements, identifying risks, and ensuring that financial information presented in the statements is reliable. It is an independent verification of the financial statements by a qualified, objective third party.

Ensuring that financial information is reliable is critical for startups and SMEs. This ensures they are making effective decisions on funding, cash flow management, growth, etc. However, not all startups or SMEs conduct financial audits. In this blog, we’re covering why it’s important for a startup to do so and how to implement it effectively.

What is financial auditing?

Financial auditing is a process of reviewing the financial statements of a company to ensure accuracy and compliance with the applicable laws.

Financial auditing is usually mandatory for larger and public companies but not for small or mid-sized companies. It involves various activities like data processing, immaterial assets evaluation, cash management, data analysis, etc.

This helps startups/ SMEs analyze their financial performance in an unbiased manner and enables them to draw accurate conclusions regarding their business health. Besides, financial auditing also involves disintermediated financing tools such as crowdfunding. This helps startups/ SMEs find potential investors without any intermediaries. Thus, it is a vital process for startups/ SMEs to get their finances audited for their own benefit, even if it is not mandatory.

Benefits of financial auditing for startups/SMEs

Financial auditing is a process of checking the financial statements of a business and verifying their accuracy, completeness, and consistency. It includes assessing the company's financial statements to identify any potential issues, such as misstatement of income or assets, overstated expenses, or material non-compliance with accounting standards.

The benefits of financial auditing for startups/SMEs are many.

• Financial auditing can ensure that business transactions are carried out in accordance with financial reporting standards and legal requirements. This will help startups/SMEs attract investors and partners by providing transparent and simple-to-read financial records.
• Additionally, accountants for startups provide essential services such as maintaining and organizing financial records, preparing financial statements, budgeting and forecasting, tax compliance, and auditing. Thus, they can help businesses manage their cash flow more effectively, ensuring that they have the resources to meet their financial obligations. This can help startups/SMEs adhere to legal and regulatory requirements by ensuring that accounting practices are consistent across organizations.
• Finally, financial auditing can help businesses make informed business decisions by providing objective guidance on how to account for costs and revenues accurately and efficiently.

Common mistakes made during financial auditing

A financial audit is an independent, objective assessment of the financial statements of a business or entity. This helps to ensure that the financial statements provide a fair and accurate view of the economic performance of the business or entity.

A financial audit helps to uncover any accounting discrepancies and errors that may exist in a financial statement. A financial audit also finds areas where improvements can be made to strengthen the internal controls of a business and enhance its financial reporting ability.

Financial auditing is vital for SMEs as it assures they are operating their business as per norms and regulations. It also helps them prove their ability and credibility in the market. Lack of skilled workforce and funding, poor business ethics, inadequate formal mentoring, mismatching in data or numbers, and no analysis of cash-flow reports are some common mistakes made during financial auditing.

Different types of audits used for startups/SMEs

Startups and SMEs are not legally obligated to get their financial statements audited but can do so for their own benefit. Financial Auditing is a practice of helping organizations create and maintain organized financial records, and prepare financial statements, budgeting, and forecasting.

A bookkeeper is a person responsible for recording a company’s financial transactions in organized books of accounts and generating common reports such as Profit & Loss Statements (P&L), Balance Sheets (BS), and Cash Flow Statements (CF). Bookkeeping is an essential part of financial accounting that helps organizations track and communicate financial data.

Unlike accountants who provide assurance on the accuracy of financial data, a bookkeeper ensures that all financial data is accurate, organized, and consistent. A Financial Auditor specializes in auditing the financial statements of businesses. Besides serving as a technical resource for businesses, he/she can provide key insights into accounting practices and methods.

Ultimately, a Financial Auditor provides assurance of the accuracy of financial data from an external perspective. His/her role can play an important part in startup/SMEs' growth.

When should a startup/SME conduct an audit?

Audits are a vital component of financial health for SMEs. They can provide a snapshot of a startup’s financial health, helping them plan for the future. There are a number of benefits businesses can get from auditing their financial records.

• Firstly, it provides an overview of the business’s finances and helps them make informed decisions regarding investments, growth, and expansion. It also provides a benchmark against which they can measure the performance of their business over time and identify areas requiring attention.

• Importantly, audits help businesses to establish a history of financial transactions and outcomes. This is essential as it helps them understand the business’s financial performance in detail and identify potential issues early on.
• Audits can also help businesses manage their financial resources more efficiently and effectively. By identifying areas conducive to increased revenue or cost reduction, they can make informed decisions that will help them reach their financial goals quicker.
• Finally, audits ensure that businesses are in compliance with all relevant tax laws and regulations. This not only ensures that all money earned is accounted for but also maintains public confidence in business finance practices.

How to implement financial auditing for a startup/SME?

Financial auditing is an essential part of startups or small and medium enterprises (SMEs) as it helps maintain financial records in a structured way. The chart of accounts is a vital tool for financial auditing, which consists of accounts, sub-accounts, and related items. As a startup/SME grows, the bookkeeping system becomes increasingly complex, and it is important to have a well-organized chart of accounts.

This helps in tracking all financial transactions systematically and ensuring financial discipline. Auditors evaluate the internal controls of a business and make recommendations to improve efficiency and effectiveness.

An accountant should be hired to ensure tax compliance and help create financial statements such as income statements, balance sheets, and cash flow statements. Internal audits should be conducted by accountants to verify the accuracy of financial records. Bookkeepers should generate reports such as profit & loss statements, balance sheets, and cash flow statements on a monthly basis.

Conclusion

Financial auditing is a vital function for any business. It helps to maintain accurate financial records and ensure that the business is following a fair and accurate accounting process. Audits help identify areas of improvement, support decision-making, provide a historical perspective of financial performance, and reduce the risk of misstatements in financial statements. For startups and SMEs, it’s even more critical as they usually lack the resources to ensure their financial statements are accurate and complete.

Besides ensuring financial statements are accurate, audits also help improve operational processes. It also reduces operational risks such as unexpected surprises from a tax or financial authority audit or penalties for non-compliance with regulations. To conduct an effective audit, every business must have a documented policy on auditing. This can be done by developing an audit policy that outlines the objectives of conducting audits, the responsibilities of employees, and how audits will be conducted.