The importance of audits has increased exponentially over the years. Regardless of the company’s size, the audit tends to be an equally important tool for all companies because of its importance in enabling transparency within these companies.
As a matter of fact, this is primarily because there has been an increasing emphasis on ensuring that all the stakeholder interests are duly protected when it comes to company functioning.
In this regard, companies must consider auditing their financial statements and operations, regardless of their size.
Notably, in the case of Small and Medium Enterprises (SMEs), they need to consider having a holistic idea of their internal operations to evaluate their strategy and possible areas of improvement.
Even though they are not liable to conduct these audits under the law, it benefits them on many grounds.
Importance of Auditing for SMEs
Firstly, it can be seen that these audits greatly help companies to identify the relevant problems in the existing accounting system.
It is helpful for them in that after conducting the audit. They can identify their weaknesses and work towards them to ensure they can get the best possible results.
SMEs cannot always afford costly consultation, and because of this, they are often unaware of the aspects they can work on to extrapolate better results.
Similarly, it can also be seen that SMEs’ audits can help them uncover fraud, including different situations where employees steal money from the company.
Conducting an audit can help SME owners to find out where they are going wrong and what they can potentially do to mitigate the risk of fraud.
Audits for SMEs can also help companies to improve their accounting practices. When an audit is conducted, it can be seen that companies can properly evaluate the options that they have when it comes to different accounting software.
In most cases, SMEs cannot always afford to have designated accountants or accounting departments figure out this issue.
However, it can be seen that by using audit, they can subsequently get consultation about the different accounting software that is present and how it can be used for accounting software within the company.
The consultation facility available to SMEs tends to be one of the primitive advantages of the audit process.
In addition to how this can contribute positively towards guiding them about better accounting practices, it also gives them substantial credibility in tax planning.
This means that it can facilitate SME owners to get advice about filing their tax returns so that they can decide on this strategy in a better manner.
In the same manner, it can also be seen that if the financial statement is properly audited, it builds up the credibility of the company’s financial records in an impressive manner.
If the financial statements have been audited, the stakeholders tend to believe that the company records are free from any material misstatement.
Hence, this adds a layer of transparency to the company’s records, which considerably builds up credibility in this aspect.
The importance of audit for SMEs tends to stem from the rationale that it is used as a preventive measure to ensure that there are no questionable occurrences within the company. This acts as a confidence booster for lenders and creditors.
10 Downsides of Audit for SME
- An audit can be expensive for small and medium-sized businesses. These businesses are already operating on limited resources, so the cost of an audit may be prohibitive.
- An audit can also be time-consuming and disruptive to the normal operations of a business, as staff will need to divert their attention away from their usual duties to answer auditors’ queries and provide documentation.
- Audits can uncover financial or operational issues that need to be addressed, which could require significant changes to business operations or resources.
- Auditors may challenge existing accounting practices and procedures as part of their review process, which could mean making changes that the business management might not have necessarily anticipated.
- Auditors will focus on the accuracy of financial reporting, which could lead to discoveries that could have implications for tax liabilities or other legal issues.
- Possible reputational damage may result from an audit if it reveals serious deficiencies in internal controls or reporting systems, especially if those shortcomings have been in place for some time without being noticed or addressed by management.
- Audit findings may impact contractual relationships with customers, suppliers, or partners, due to new disclosure requirements or changes in the way goods and services are rendered by the business concerned.
- Auditors’ opinions on financial statements are published publicly and may attract unwanted attention from competitors or investors who otherwise would not have known about the company’s results.
- Management must comply with auditor requests for data, making them answerable for any discrepancies discovered during the audit procedure.
- If a public company fails to get a “clean opinion” from its auditors, it runs into regulatory problems with its listing authorities.
Therefore, audit tends to be an important component of SMEs that cannot be denied at any cost. This is something that organizations need to be wary of to ensure that their operations are normalized in terms of no fraud or material misstatements.
This can be treated as a step to help SMEs realize their weaknesses and how they can be tackled for the company to grow and prosper.
Even though it might come off as an additional cost for the company, it can be seen that in the longer run, it pays off because the SME can ensure that they are protected against any possible risks that might harness their reputation or incur financial losses.