The Impact of Internal Audit on financial performance of SMEs

Internal Audit and SMEs definition

Internal audit has been defined as an independent, objective assurance and consulting activity designed to add value and improve an organisations operations (Anita,1998). Small and medium enterprises (SMEs) are said to be responsible for driving innovation and competition in many economic sectors globally ( Institute of internal auditors research foundations, 2004). Raja (2002) argues that the increase of internal audit normally adds value and improves on an organisations operations because of its objectivity and the consultative forums with other departments in the organisations.

Internal Audit Roles

An organisation could either employ internal auditors full time or on contract to tackle the same internal audit tasks as the need arises. Small and medium enterprises exceed large companies by a wide margin. SMEs are of different categories depending on the type of business one is engaged in. In any country around the globe, SMEs are of major contribution in terms of backing the economy, giving it both the boost and the stability.

SME owners consequently, during the course of the audits, may have an opportunity for frequent and open communication between the auditors and the affected managers. The auditors ought to be aware of matters of significance to the owners and examine issues within the scope of the audit.

Financial Performance of SMEs

SMEs typically grow to a point where the owners can no longer make all operational decisions and thus forced to delegate duties as well as come up with management and control policies. At such a stage in any business, an audit can add considerable value in identifying controls, managerial and systematic issues as well as providing regulatory oversight.

Internal auditing of SMEs has also been seen as an obligatory concern especially when the said organisation wishes to obtain preferential finance facilities. Finance providers are always influenced by the the existence or otherwise of audited financial information and statements provided with a tax return. A history of audit delivers the message that there has been regular internal or external oversight by an independent expert into the affairs of the SME.

The audit of SMEs is likely to focus on risks that may arise due to their relatively small size and their evolving management structures. In contrast, audit of large listed entity is more likely to focus on areas of risk arising from diversity in operations.