Is Internal Audit Important for SMEs?

Internal audits can have a range of functions, from determining the financial health of an organization to looking at how efficient and effective it is. Internal audits can also assess the non-financial areas of an entity. However, small and medium-sized enterprises (SMEs) have particular needs in terms of internal auditing. The accounts of very small businesses, for example, are less complex than those of larger organizations, and they can neither afford, nor do they probably need, the services of qualified auditing professionals.

An internal audit can vary from encompassing all areas of a business to focusing on a very narrow and specific aspect of an enterprise’s operations and systems. However, performing a successful small business audit is likely to involve examining various areas, including: cash flow, accounts receivable, accounts payable, quality, human resources, procurement, payroll, IT, and profitability. Auditing these areas helps to ensure that the small business is able to meet its main goal, which is to generate a profit.

As survival is the key requirement for any SME, understanding cash flow is essential. Auditing cash flow involves examining the receipts of the business and determining the sources from which they are derived. This will highlight key factors, such as dependence on a particular source or the volatility of receipts, and will reveal how much money is flowing in and out the business. Examining the accounts receivable highlights how long money is tied up before it is released for the business and the results may prompt a revision of credit policy. Examining accounts payable will determine how much money is owed to suppliers, and such an examination should leave the managers better positioned to control cash flow. Examining quality, which involves looking at products, marketing, advertising, and the overall image of the business, as well as human resources, will highlight any problems in these areas. Examining profit enables a business to ensure that its assets and liabilities are correctly balanced, as well as whether a business is generating sufficient profit to justify the investment that has gone into it.

Advantages
  1. Performing an internal audit of a SME can provide assurance that it is operating as efficiently as possible, as it will highlight any problem areas that need to be addressed.
  2. Internal audits can also be used in a preventive fashion. An internal auditor may, for example, spot potential problems and risks in business operations, allowing management to take pre-emptive action that stops the potential problem from developing.
  3. Carrying out an audit can deter or detect fraud and other crimes. Knowing how many computers your company owns, for example, can protect against theft. A bigger risk in a small organization is likely to be inadequate controls when people perform multiple tasks.
Disadvantages
  1. Carrying out an internal audit can be time-consuming, diverting key staff from core activities.
  2. Internal audit has a cost, and the benefits must outweigh the cost.
Action Checklist
  1. The purpose of the audit should be discussed and agreed by the SME’s management. The auditor should establish the audit’s scope and objectives, as agreed with the relevant managers.
  2. Establish how frequently the audit should be carried out. The riskier units of a SME should be audited more frequently than other departments.
  3. They should also be audited more intensely.
  4. Policies and procedures should focus on continuously improving how work is performed.
  5. Management should review all organizational policies and procedures on an annual basis to ensure that they reflect the changing business environment.
  6. If, as the result of an audit, a SME’s net income is found to be low, corrective strategies must be implemented in the affected areas to correct the problem and restore the business to financial health.

Dos and Don'ts:

Do
  1. Ensure that the person carrying out the audit is given the authority to act independently and produce results without fear or favour.
  2. Ensure that the internal auditor is given specific reporting guidelines, a time frame, and access to all files so as to avoid conflict within departments or among superiors.
Don’t
  1. Don’t provide any unrequested or extraneous information. If you are unsure about the information and how it may relate to the audit, but the auditor has not specifically requested it, consult with the managers responsible for the internal audit first so that a decision can be made on how to proceed.

OACO’s Internal Auditing Approach:

Outsourcing Arrangement

At OACO, we have dedicated team of professionals who will take up the responsibility of the entire Internal Audit service delivery of your organisation with quality and effective delivery of service. We work to a set of core values that influence our actions and behaviour and we believe that you will experience the difference this makes. The team is made up of knowledgeable and experienced individuals with extensive Internal Audits, Internal Control and Risk Management Advisory expertise.

Co-sourcing Arrangement

In case you already have an Internal Audit Function, we have dedicated team of professionals who will work in partnership alongside with your Internal Audit teams to enable quality and effective internal auditing delivery of service. Quality of work and service delivery is the message we pass across and this can be evidently seen in the quality of our services.

Our Thoughts

In Internal Auditing, Size does not Matter.

The survival of every organisation depends on the effective and efficient utilisation of its resources; these resources cut across the entire organisation and can be seen from the employees working in the organisation to the machineries and the materials used in the production process. An independent assurance is very vital to the stakeholders, especially the owner of the business that these resources are used in an efficient and effective manner to meet up with the profitability objective of the organisation.

Internal Auditing is seen as providing this independent assurance to the owners of the business that funds and resources have been utilised in an efficient manner, and that there is no room for fraud and irregularities in the process and procedures of the organisation.

SMEs generally due to their sizes do not seem to take this independent assurance so serious, and this has actually posed a lot of risk and failure to so many SMEs globally. The owners of the businesses are seen to be the Accountant, the Internal Auditor, the Decision makers, etc and this has actually affected the growth of the businesses and also exposed the businesses to a lot of fraud and other irregularities.

A qualified trained professional must be available at our disposal as SME business owners in order for us to be able to manage our business risks efficiently and to minimise the cases of fraud and enhance the optimal utilisation of resources.