Skip to main content Skip to search

tips for avoiding an audit

What Does an Audit Report Contain?

Most audit reports on financial statements give the business a clean bill of health, or a clean opinion. At the other end of the spectrum, the auditor may state that the financial statements are misleading and should not be relied upon. This negative audit report is called an adverse opinion. That’s the big stick that auditors carry. They have the power to give a company’s financial statements an adverse opinion and no business wants that. The threat of an adverse opinion almost always motivates a business to give way to the auditor and change its accounting or disclosure in order to avoid getting the kiss of death of an adverse opinion. An adverse audit opinion says that the financial statements of the business are misleading. The SEC does not tolerate adverse opinions by auditors of public businesses; it would suspend trading in a company’s stock share if the company received an adverse opinion from its CPA auditor.

One modification to an auditor’s report is very serious – when the CPA firm says that it has substantial doubts about the capability of the business to continue as a going concern. A going concern is a business that has sufficient financial wherewithal and momentum to continue it normal operations into the foreseeable future and would be able to absorb a bad turn of events without having to default on its liabilities. A going concern does not face an imminent financial crisis or any pressing financial emergency. A business could be under some financial distress but overall still be judged a going concern. Unless there is evidence to the contrary, the CPA auditor assumes that the business is a going concern. If an auditor has serious concerns about whether the business is a going concern, these doubts are spelled out in the auditor’s report.

 

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more

Tips for Preventing a Tax Audit

Despite what individuals may have been told in the past, an audit by the Internal Revenue Service (IRS) isn’t random. The IRS utilizes a state-of-the-art software program to flag tax returns for auditing. The software is called Discriminate Income Function (DIF). It flags returns for investigation by comparing the deductions an individual or business takes compared to others that are within the same income bracket.

There’s no reason taxpayers should be afraid to take the deductions to which they’re legally entitled, as long as they have the appropriate documentation to support what they’re claiming. There’s no foolproof way to be protected against an IRS audit, but there are steps individuals can take to minimize the potential.

Targeting Factors

Some jobs, careers, tax brackets, and geographical locations are more likely than others to be targeted for an audit, along with the very rich and the very poor. Individuals with an annual income of less than $25,000 have an audit rate of about 0.69 percent, a figure that’s 50 percent higher than all others.

Areas with a large African-American, Hispanic, Native American, and poor population are audited more. People that regularly receive tips such as hairdressers, waitresses, and bartenders are audited with more frequency, along with accountants, doctors, and attorneys that typically keep their own books. It’s a good idea for anyone in these categories to avoid miscellaneous deductions.

Self-Employed & Small Business

Small businesses and the self-employed are favorite IRS targets. Many choose to incorporate or form a limited liability company as they’re audited less often. File any pertinent worksheets, avoid amendments, know when to file, and hire a professional to prepare tax returns.

Know What’s Questioned

Keeping exemplary records is critical. Home office deductions, medical expenses, casualty losses, and business costs for travel, entertainment, and meals are some of the most often questioned.

Neatness Counts

Being neat really does make a difference. Returns that are difficult to read or have blank lines are more likely to be audited. It’s better to use a zero on a line than to leave it blank.

Do the Math

Use a calculator, double check the math, and make sure federal and state returns match. For those that use online tax preparation software, if it says there’s a problem and something needs to be revisited – pay attention.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

Contact Us Today

Read more