Most small businesses seem to have a negative association with the term “audit.”

They automatically think that having an audit means that the IRS is knocking on their door looking to find back taxes owed or problems with their books. However, audits are not always a bad thing.

In fact, conducting internal audits can be a valuable tool for small businesses.

Timely internal audits are very beneficial for your small business bookkeeping department. But when is it appropriate to do this?

I’ve identified the best times to conduct internal audits for small businesses. Use this guide as a reference to plan and execute all your internal audits moving forward.

Prior to Raising Capital

If your business needs money, you might go to a local bank or credit union for a loan. Alternatively, you may look for a VC investor to buy some equity in the company.

Regardless of the situation, it’s smart to conduct an internal audit before you seek any type of loan or investment.

Before an investor or lender will give you any money, they’ll likely go through a full review of your financial reports. Imagine what their response would be if they find any errors or inaccuracies.

It’s likely that you won’t be able to secure the capital if this happens.

Even worse, any errors could look like you were trying to hide something or cover something up to make your company look better on paper. That’s not the type of reputation you want to have, especially in the VC world.

This occurrence could make it more difficult for you to get an investment from someone else, even after the mistake has been corrected.

The best way to avoid this is by checking all your statements and data with an internal audit before you try to raise money.

When Mistakes Are Discovered

It’s not uncommon for your bookkeeper to find some discrepancies in your books at the end of the month.

At times, this could be an account that has more or less money than you were anticipating. Rather than just writing it off and moving on, you should take the time to figure out where the mistake came from.

All your numbers should be adding up exactly. That’s the beauty of bookkeeping. Numbers don’t lie.

So, any time that’s not happening, it means that there was a mistake made along the way. It could be human error or some other factor.

But you’ll never know what the problem is unless you conduct an internal audit.

While these discrepancies may seem small or meaningless, they could be warning of a larger problem with one of your processes. An internal audit will help your small business identify any weaknesses that need to be changed or improved to ensure this won’t happen again at a larger scale.

When Essential Employees Are Leaving

Any time one of your key employees is leaving the business, you should conduct an audit in the departments that they were involved with. This should happen before their last day of work.

For this to go smoothly, you should encourage your staff to give at least two weeks of notice before they leave.

So, don’t just tell an employee to go home the moment they give their notice. Otherwise, moving forward, your staff will be reluctant to give proper notice.

Unless there was a problem or some type of misconduct, you always want your staff to leave on good terms with the business.

You don’t want to find yourself in a situation where you don’t understand what’s going on, and the only person who can clarify things no longer works for the company.

When an employee gives notice, thank them for letting you know, congratulate them for the new opportunity, and give them your best wishes. Make it clear that you want their transition to be as smooth as possible.

Shortly after this conversation, start to conduct an internal audit before they’re gone.

If Cash Flow or Revenue is Decreasing

Everything may seem fine with your business. As far as you’re concerned, nothing has changed.

But then as you look over your financial statements, you see that there has been an unexplainable decline in revenue. Or maybe cash flow is running lower than expected based on your forecasts.

What’s the problem?

Rather than just ignoring this, blaming the economy or other market conditions, conduct an internal audit to see if you can find the issue.

You may discover that you’re not doing a good enough job of collecting accounts receivables. Or maybe you’re mismanaging expenses.

Audit your inventory. Take a closer look at your invoicing procedures.

On a Regular Basis

So far, I’ve described specific instances that should trigger an internal audit. But with that said, those situations don’t always present themselves.

That doesn’t mean that you should wait until something happens to audit your small business.

It’s good business practice to conduct internal audits on a regular schedule

Some of these can be done on a smaller scale, such as counting cash daily or monitoring inventory each month. You could conduct more in-depth audits on a quarterly basis as well.


Internal audits are usually handled in house. But it’s always a good idea to get another set of eyes on your statements.

Someone who is unbiased or not too close to the situation will be able to identify any errors or potential inefficiencies.

Working with an outsourced bookkeeping service or an interim CFO can be extremely helpful whenever you’re conducting internal audits for your small business.