Audit in small businesses
It is true that the smaller companies are not legally bound to conduct an external audit every year. However, it is very important to state that the small companies can hire audit firms to perform an audit to identify their weaknesses and exact financial performance. Most of the small or medium size businesses are run by a sole proprietor or the partners, and it is very difficult for the owners of the business to check their own financial statements for the errors and manipulations. Moreover, self check is not enough for the future growth of the business. Therefore, in these circumstances, it is highly probable that a small or medium size business must hire external audit firm to conduct an audit after every three to four years. (Clements, 2014)
The main source of finance is a small or medium size business is the loans and the capital invested by the owners. It is highly probable that the businesses can face financial problems if the banks reject their loan application on the basis of their financial performance. Therefore, in these circumstances, it is advised to the management of a small or medium size organization to hire the audit firms for the internal testing of the business operations. This audit will be helpful in reducing the’ operating costs’ of the business and secure the processing of the business. For example, the staff members are involved in the purchase of expensive materials and the marketing department is not approaching new clients accordingly. In these circumstances, the external auditor will identify the weaknesses in the operations of the organization and ultimately the business will generate more profit and there will be no need for the loan arrangements. (Smallbizaccountants.com, 2011)
If the small or medium size organization does not afford the fee of the audit firm, then, the management can hire the ‘Internal Auditor’. However, it is important to state that there is no regular or defined concept of internal auditing in real business. An appointment of a non-executive director or internal auditor, can keep a check and balance on the employees of the business. Moreover, the management of the business remains busy in the operations of the business to maximize the profit, and it is very difficult for the management to check the low level operations. Therefore, in these circumstances, the hiring of an internal auditor can assist the management in the decision makings and the setting of the budgets for the lower staff. (Jeffrey, 2014)
The main disadvantage of hiring the external audit firm or internal auditor for the small and medium size firms is that it is too expensive for the businesses. The small and medium size firms normally don’t have extra funds to hire auditors. However, it is recommended to have employees in the core areas of the business to check the movement of the operations. For example, the management must install the computer software and thumb impression machines to minimize the stolen inventory cases. (Vitez, 2014)
Clements, J. (2014). The Importance of an Audit System to Companies. [online] Small Business - Chron.com. Available at: http://smallbusiness.chron.com/importance-audit-system-companies-14705.html [Accessed 7 May. 2014].
Jeffrey, J. (2014). The Importance of the Internal Audit Function in a Company. [online] Small Business - Chron.com. Available at: http://smallbusiness.chron.com/importance-internal-audit-function-company-21496.html [Accessed 7 May. 2014].
nibusinessinfo.co.uk, (2014). Can you file abbreviated accounts?. [online] Available at: http://www.nibusinessinfo.co.uk/content/can-you-file-abbreviated-accounts [Accessed 7 May. 2014].
Smallbizaccountants.com, (2011). Financial Audits and Your Small Business | Small Business Bookkeeping and Payroll Accountants. [online] Available at: http://www.smallbizaccountants.com/financial-audits-and-your-small-business [Accessed 7 May. 2014].
Vitez, O. (2014). What Are the Benefits of an External Audit?. [online] Small Business - Chron.com. Available at: http://smallbusiness.chron.com/benefits-external-audit-4068.html [Accessed 7 May. 2014].