10 Oct Financials Startups Audits: Why, When, and How

Introduction

Having someone with the title of “auditor” involved in the finances of your financials for startups is a scenario that instils fear and terror in the hearts and minds of several entrepreneurs. And yet receiving an audit is a practical and effective way for startups to review their financial books and ensure the business meets accounting standards. It can also reassure nervous investors that many startups remain entrepreneurs unfamiliar with the accounting follows and methodologies required to produce compliant financial reports and information.

An audit can find and shoot these problems, anticipating future tax or legal issues. Yes, audits from an outside vendor can be very stressful, but if you want your business to avoid lawsuits or allegations of fraud and negligence, you’ll be grateful for them in the long run. And some investors need them as part of their investments, so avoiding them could keep your startup from getting much-needed cash as it grows.

Unfortunately, collecting the necessary materials for an audit can be a cumbersome procedure if you are unprepared. So, in

In addition to giving you the background on when and why a startup might need a financial audit, we’ve compiled a list of helpful tips for keeping your financial records in order and ready to audit.

Financials For Startups

An audit can give founders a good summary of how their finances remain managed: the pros and cons. We suggest that startups only consider having an audit when generating significant revenue; doing so earlier would likely be a sub-optimal use of scarce cash.

It leads to the following question: What circumstances would require an audit?

• Your investors are asking for it. Series B or C investors generally require it, and sometimes even Series A rounds need it as well;
• The bank to which you have applied for a facility is requesting security on its financial statements and records;
• You are planning to sell your business in the future, and you are aware that many buyers will not consider buying your business unless you have several years of audits under your belt;
• You are planning to make your company a community; and,
• Your board must confirm that your financial statements are exact and have met economic outlooks. They may suspect accounting errors or deficiencies.

Great. So, what certification do you need to provide to the auditor?

• Your trial balances and all supporting documentation for the year in question (and sometimes the year before so you can feel comfortable with opening balances)
• major contracts;
• Employment agreements;
• All documents related to equity and debt financing;
• Integration Documents
• Auxiliary records include shipping/tracking numbers, payroll records, tax returns, and whatever is related to the company’s finances.

It cannot remain overemphasized that your startup’s accounting team should ensure that all historical balance sheet schedules are maintained. All supporting documents remain retained.

Make sure all your records are accurate and up to date. This financing for startups is integral to your business, whether you are preparing for an audit or not.

Meeting With The Auditor – Financials For Startups

Preparedness and communication are two keys to audit success. The first steps are initial meetings with the audit team. To help facilitate this process (and keep anxiety at bay), ask the auditors how they will perform the audit. It will give you a clear idea of what to expect.

In addition to providing auditors with the necessary documents, you also need to be clear about the deadlines: when do auditors need what, when will they be in the office, when should they wait for preliminary and final audit reports, etc.

Also, note that since an audit is a slow and detailed procedure, the audit team will most likely need your full time and attention during the first week of the audit. If your company is working on a project where you have an active role, then you will have to delegate until the auditors no longer require your attention temporarily.

Preparing For An Audit – Financials For Startups

In addition to reviewing your financial and accounting records, an audit can also check your startup’s cybersecurity policies to ensure you provide satisfactory protection from theft and fraud. Do you have internal control safeguards that include different employees taking care of specific accounting tasks? Or password-protected accounting software that tracks precisely who does what and when?

Another component of the audit is comparing internal cash flow, income and expenditure records with external ones. In this case, the auditor shall compare the suppliers’ income over a specified period with the internal documents or compare the cash flow records with the revenue recorded in the accounting records.

Preparing For An Audit

In addition to having your documents professionally prepared, ensure they are well organized and easy to navigate. It will speed up the audit procedure, making it as painless as probable.

Conclusion

And this applies to whether you’re close to having an audit or not. Having vital financial records for all your transactions, even those that don’t affect your cash flow and balance sheet is not just simple business knowledge but the key to your startup’s success. All this audit preparation work is a critical element of financial for startups.