6 Ways Ecommerce Companies Should Prep for Financial Audits

E-commerce companies have experienced rapid growth in recent years, which is why it's important to be prepared for financial audits. Financial audits can provide insights into the company's financial health and help detect any discrepancies in the financial records. For e-commerce businesses, which often deal with complex financial transactions, being well-prepared for financial audits is crucial. Let’s explore some strategies that can facilitate this preparation.

Preparation for Financial Audits

1. Organize Financial Records

Ensure that financial records are accurate, up-to-date, and well-organized. This will make it easier for the auditor to review the information and avoid any potential errors.

For e-commerce companies, areas that are often overlooked, and can cause complications down the road are reconciling your Shopify, Venmo, Zelle, Amazon, eBay, and PayPal accounts. If you don’t know how to do this correctly, it is well worth your time and your money to hire an expert to do so for you. We often see transactions hiding in certain clearing accounts in the balance sheet, which means non-accurate financials are being provided at year-end. This has major tax implications. Another common issue is the incorrect implementation of sales tax systems. It’s very important to ensure that your sales tax system is working properly to ensure no issues arise during the audit.

2. Review internal controls

Companies should review their internal controls to ensure that they are functioning effectively. This includes checks and balances, such as segregation of duties, to prevent fraud and ensure accurate financial reporting.

In e-commerce settings, where transactions are predominantly digital, setting strict permissions within Enterprise Resource Planning (ERP) systems is vital. This measure helps prevent unauthorized access and misuse of financial information, safeguarding the company’s financial integrity. We’ve seen some “creative” ways that people have used their access improperly. You want to get ahead of this and set up the appropriate processes and permissions.

3. Ensure compliance with tax laws

Tax laws change frequently, so companies need to stay informed and ensure that they are compliant with current tax laws.

In the e-commerce arena, the biggest tax laws that we see causing trouble are sales tax and nexus law and payroll. You must ensure you are compliant when hiring outside your headquartered state, and you need to work with a consultant to establish your proper sales tax compliance.

4. Maintain accurate inventory records

Tax laws change frequently, so companies need to stay informed and ensure that they are compliant with current tax laws.

In the e-commerce arena, the biggest tax laws that we see causing trouble are sales tax and nexus law and payroll. You must ensure you are compliant when hiring outside your headquartered state, and you need to work with a consultant to establish your proper sales tax compliance.

5. Prepare for questions

It's important to be prepared to answer any questions the auditor may have. This includes questions about financial statements, business practices, and internal controls. Understanding the rationale behind financial decisions and being able to articulate them clearly can significantly streamline the audit process.

6. Engage an experienced auditor

Engaging with knowledgeable and experienced auditors can bring invaluable insights into the financial practices of an e-commerce business. Experienced auditors not only scrutinize the financial records but also provide recommendations for improving financial procedures and controls, which can enhance the overall financial health of the company.

E-commerce companies should be proactive in preparing for financial audits. This involves meticulous financial record-keeping, vigilant internal control reviews, strict compliance with tax regulations, diligent inventory management, readiness for auditor queries, and collaboration with experienced auditors. When in doubt, seek the assistance of experienced accounting professionals to help guide you through the process seamlessly.

By adhering to these strategies, e-commerce companies can navigate financial audits effectively, using them as an opportunity to strengthen their financial processes and enhance their overall business strategy. Plumb’s extensive knowledge and our commitment to serving our clients can help you be well-prepared for your financial audit. We are here to help guide you through the process with our professional services and to answer any questions you may have. Please let us know if you’d like to schedule time for a free consultation. We’d love to help.