The audit, as defined, is an official inspection of an organization’s accounts, typically by an independent body.
The audit is the examination or inspection of various books of accounts by an appointed body or an individual to verify the business records followed by physical verification to ensure the transactions are recorded as per Statutory Rules and Procedures. It also does an objective assessment, accuracy & transparency of financial statements provided by the organization.
An audit can be done by Internally with the help of the Internal team or Internal Audit as we call it.
While an Internal Audit can help streamline the regular business process and help run the checks on the large volume of data within the setup, but an external audit brings
- Integrity of the Financial Statements
- Professional Competence and Due Care to the Process
- Confidentiality; &
- Install Professional Behavior
Audits not only reduce the risk of business failure but emboldens smaller businesses with a method to develop best business practices that enable them to grasp opportunities & thereby mitigating risk. To develop & nurture a successful SME market it is often seen that an audit can provide the essential outcomes and requisite skills necessary to do so.
Auditing standards require close examination of an entity and its environment, including the entity’s control environment and internal control. Auditors are required to assess how management identifies and mitigates risk as part of the audit risk assessment.
Business Goals & Internal Controls
Decision-making in the SME sector is also enabled and substantiated with Third Party Records & thus contribute to solid economic performance & growth overall.
Good corporate governance in small and medium-sized entities (SMEs) is equally important for sound decision-making within other stakeholders to build on applied Best Practices and Internal Confidence therein.
Simple examples of internal Controls & Business risk with Significant financial impacts may include a scenario where an SMB who has entered into the business of Imports & Exports and does not have appropriate procedures in place to recognize and mitigate foreign exchange risk.
At a broader level, an SME is not familiar with the way GST compliance and lapses therein with ref to its products or service, may be faced with unwanted notices an unexpected demand that may an adverse impact on their cash/ fund flow projections. Thus Business needs a validation from a third eye and hand-holding from Experts on Global Best Practices.
External & Internal stakeholders in SMEs
Audit costs were considered to be additional, unwanted to the business owners sometimes. However, there are various other stakeholders in the game.
The needs of other parties who may be interested in the financial position of an SME are often overlooked.For example, the tax debt obtains assurance from an audited set of financial statements provided with a tax filed return.
Banks and financial institutions are always influenced by the audited financial information when considering any kind of loans or funds for the business.
Hence the audit history with due records in terms of Past Audit Reports impact the ability of an entity to obtain the financial preference. Timely, Good & Relatively Cheap finance is important to enable an SME for a exponential business growth.
An independent audit indicates to all stakeholders that an independent expert has examined adopted business practices, thus validating the business controls and applied functions. If for instance there is no audit or it does not exist, implies that there is a lack of external oversight and thus vulnerable to a collapse.
Auditing standards and accounting standards
Large Listed Entities often have multifarious issues completely different from an SMB Setup. SME Audit is likely to focus on risks that arise due to relatively small size and evolving business structures. Audit at SME may not have complex accounting issues. In addition, Auditor’s role is more on statutory compliance, tax regulations and business restructuring along with tax planning & growth resurrection at small businesses’.