After interviewing two auditors with over fifty years of combined experience, I’ve come up with this list of the biggest audit mistakes to avoid.
The first is overall lack of preparation and record keeping. Preparation and proper recordkeeping start at the beginning of the policy year and you can’t put this off until right before your audit. If you don’t know the audit rules up front and if you haven’t kept the proper records, you’ll likely get burned on your audit. This is exactly why I produced this video.
The second is that you should maintain summary documents on your payrolls and sub expenses and should not totally rely on source documents like checkbook registers. Auditors hate reviewing checkbook registers and their frustration can lead to incorrect assumptions.
The third is that you should never commingle your personal expenses with your business expenses. This makes for an auditing nightmare and the auditor will likely pick up personal exposures that were not even insured under the policy.
Next is being uncooperative with your auditor by missing appointments, not being prepared, or by being combative. Some unprofessional auditors will likely hold such actions against you and will be less willing to give you the benefit of the doubt on matters relating to classification and material credits.
Perhaps one of the most important mistakes to avoid is for an owner to not be present during the audit. It is unlikely that your back office support person or your CPA will be able to answer all questions related to what type of work is performed by each employee and sub.
Next, be sure to take advantage of payroll credits such as overtime, double time, sick pay, and severance pay.
Next, know how to take advantage of division of payroll rules to save money where a single employee performs different duties that have different classification codes.
Next, make sure that you collect valid certificates of insurance from all subs prior to paying them.
And finally, make sure that all invoices break out labor vs materials.
If you know these rules up front and have a plan to deal with them and execute the plan, you’ll save a lot of money and grief.