I recently audited a new clients’ accounting system. The client had advised that they wanted Xero to be the ‘source of truth’ for their business. Over the years I’ve done a number of these audits and each one has thrown up some consistent issues, so I thought I’d share a few of these and explain why they are so important:
Incorrectly Reconciled Transactions
First and foremost you need to ensure that bank transactions are being matched correctly against either Sales Invoices, Purchase Costs or Staff Expenses. Where a receipt isn’t possible against a payment, have your bookkeeper create a rule in the system to sort this.
You should also have your bookkeeper check for ‘unreconciled’ receipts and payments periodically as well. I recently had a scenario where a bookkeeper had marked a £9k Sales Invoices as paid when it hadn’t been paid. This led the client to believe that they weren’t owed the invoice when they actually were.
No Receipts against Payments
This is a big one. I’ve encountered a number of occasions where supplier bills weren’t being put onto the accounting system. Effectively, the bookkeeper was running everything from the bank. For a business that isn’t VAT registered this isn’t such of an issue, however once VAT registered there’s a couple of issues. Firstly, HMRC will want to see a copy of the original bill in the event of a VAT inspection. Using a system such as Receipt Bank to capture the original bill works great for this. You can then discard the bill/receipt once it’s in the accounting system. Secondly, you need to ensure that you’re reclaiming VAT where you should be, and the bill helps to confirm this. I recently encountered a situation where a business hadn’t been claiming VAT on several VAT-able costs. By unpicking transactions, uploading Bills and matching to bank payments we were able to reclaim several thousand pounds of overpaid VAT.
Bank/Credit Card Accounts not reconciled against statements
This is a stage that’s often ignored in the cloud accounting world. Although systems such as Xero have direct bank feeds (connecting to online banking systems to pull through transactions in real-time), from time to time these connections can have a wobble! You need to ensure that either at month-end or quarter-end your bookkeeper is reconciling the balances in Xero to the online banking systems. Once this is done you can be confident that you have all the transactions in your accounting system, thus giving you the full picture.
Getting the data correct in your accounting system leads to everything else that comes next: saving tax, planning, forecasting and increasing retained profits. You need to be confident in the foundations of your finances to make well-informed decisions about the future of your business.
Not sure if your financial picture is showing the ‘true’ picture? Get in touch for a free Xero Audit on 07866200275 or email martyn@agencycfo.co.uk.
