I keep hearing this term from my accountant friend and have absolutely no idea what it means. I tried googling it but that just left me even more confused than I was.
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It means checking that things happened the way that you say they did.
At a high level, accounting audits check that you spent the money you said you spent, on the things that you said you spent it on, for the purpose you said you spent it for.
So, if I said “I spent $300 on print outs to advertise my new products”, and I spent $300, and it was on those print outs, and those print outs were to advertise my new products? That’s fine. It’s a business expense, there’s no problem here.
But if I said “I spent $300 on print outs to advertise my new products”, but the reality was that I spent $250 on print outs to advertise my new products, and pocketed $50? That’s a problem. It probably means that I claimed too many expenses for my business and I could wind up in trouble for expensing more than what’s reasonable on top of some minor accounting fraud.
If I said all that, and I spent the $300 on my personal car payment and there were no printouts? That’s also a problem.
If I said all that, and there were printouts, but the printouts were invitations to a party unrelated to my business? That’s also a problem.
Audits are there to confirm the truth of these sorts of claims. So the auditor might pick an expense, we show them the receipt, and if they have a reasonable need to dig further we might show them evidence of the product that the receipt was for.
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