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Reserch paper on the Importance of Auditing Practices in SMEs Financial Performance
Importance Of Auditing Practices In Sm Es Financial Performance
Length: 11 pages (3043 Words)
Importance of Auditing Practices in SMEs Financial Performance
Research Thesis: The poor adherence to auditing practices in SMEs explains their weak financial performance.
Small and Medium Enterprises (SMEs) are among the most promising investment sectors of any economy. In fact, economies aiming at boosting their GDP growth need to reinvest in their SMEs and implement strategic management systems. One of the major problems experienced by SMEs is the implementation of auditing practices. Some SMEs do not survive in the industry for more than two years. One of the common issues behind their downfall has been poor implementation of internal financial controls. Most SMEs are under either sole proprietorships or partnerships. The business is, therefore, under a sole proprietor's or a partner’s management perspective. The lack of a standard management policy or failure to adhere to auditing practices in SMEs could explain the poor performance in the sector. This paper will highlight some of the problems of implementing auditing practices on SMEs at the management level. The study could offer solutions that would assist this sector. As long as SMEs continue to face financial constraints and low-profit growth, the effects of their poor performance will have a ripple effect on the overall economic growth. Therefore, it would be in the best interests of the growing economies to integrate various SME finance controls as part of the standard requirements for all businesses.
Statement of the Problem: The study aims to lay emphasis on the importance of audit practices in SMEs, and how the lack of their implementation leads to their poor financial performance. If the government of Saudi Arabia could re-educate SMEs owners on audit practices and their importance, the economy could see a significant increase on its GDP growth.
SMEs are the most promising sector of a thriving economy and any negligence on their accounting practices would jeopardize the overall growth of a country. Therefore, the study will focus on the best auditing practices for SMEs and their significance to their financial performance. Furthermore, it would be important to highlight the risks of weak accounting practices on SMEs.
The study will focus on the accounting practices used by SMEs and assess if SMEs use auditing practices. So far, there are several problems that most SMEs face in regards to financial controls. Some of the challenges of implementing financial controls in SMEs would require management orientation interventions. In this case, auditing practices are important in ensuring quality controls in the sector and more so, to ensure a consistent standard from practioners (Sherer & Stuart, 166). There are cases where the issue has been the lack of relevant skills in financial management and the overall business management (Jiang, 214). Some of the internal control issues revolve around controlling the activities, the business environment, information and communication, business monitoring and risk assessment (Oseifuah and Agyapong, 241). Most of the times, information and communication processes are within the top positions where the management determines what would work for the company and what would not. Poor risk assessments would mean that the company would be overlooking the need to implement audit controls that could risk the company’s returns on investments. There are also cases when their monitoring activities do not involve thorough scrutiny and analysis of all the company’s audit activities.
There are various types of auditing, and if some of them become a part of auditing in the SME sector, it will not only experience financial growth but also grow into a high performing industry. The study will consider the following types of audits.