How Internal Audits Help SMEs Meet Regulatory Standards and Improve Efficiency

It is a common practice to associate internal audits with large organizations, with the fallacy that only such companies require these processes. However, internal audits are equally essential for small and medium enterprises (SMEs). The scope of internal audit is no longer limited to just compliance and financial controls – by evaluating internal processes, systems, and controls and identifying improvement areas, SMEs can make well-informed business decisions and judgements. It would increase the credibility of any organization by providing unbiased assurance, risk-reduced recommendations, improved security and compliance checks.

In the Article below, we shall discuss the Benefits arising out of performing Internal Audit Process and how it improves the efficiency and meet standards of any organisation

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SME Audit Solutions

Before proceeding further, let’s discuss what actually Internal Audit refers to
“Internal Audit is an independent activity which is designed to add value and improve the operational efficiency of any organisation”.

But What will be the significance of Internal Audit for Small and Medium Enterprises?

How Internal Audit helps organisation?

1. Address organizational challenges
2. Ensure regulatory compliances in a dynamic environment
3. Identify and mitigate operational risks
4. Strengthen internal controls
5. Enhance growth, efficiency, and scalability

Key Benefits of Internal Audit for SMEs

1. Regulatory Compliances:

An organization comes under various statutory obligations and regulatory requirements that are to be met on timely basis. Compliance with these requirements and the industry standards are vital for the organisation in long-term and its repute in the industry as well.
The organisation comes under different Legal Regulations on both Domestic and International Level which shall be considered for complying with the same.

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2. Improved Operating Efficiency:

The Regular Assessments by the Internal Auditors helps them identifying potential risks and gaps affiliated to different operational processes that exists in the organisation and suggest corrective action that need to be taken for the same.
Internal Audit Process helps in recognition of Ineffectiveness and Inefficiencies that might exist in the process which shall be streamlined and helps in optimal utilisation of resources.

3. Risk Management:

The Internal Auditor evaluates the impact of risks so identified and recommend the corrective action that need to be taken in a systematic manner for minimising the risk to an acceptable low level. Controls are further evaluated as well frequently to ensure the control effectiveness.

4. Boosting Investor Confidence:

The Confidence of Investor holds a crucial role in the growth of an organisation.
On regular assessment, diverse controls are implemented which on explaining to the stakeholders about the numerous controls, risks management, etc. help them gaining assurance on the organisation.

Planning: Setting the Stage for Success

Internal Audit involves structured step wise process to ensure thorough evaluation.

1. Planning the Audit:

• Before starting the auditing process, planning is done to define the scope of work and objectives for achieving the auditing needs of an organization. 

• Detailed Plan of Audit Procedures and Timelines is prepared in order to keep track on the Internal Audit process and its timely completion.

2. Fieldwork and Data Collection:

• Data is gathered by performing process and system walkthrough, reading relevant documents, and observing in the organisation.

• Testing of controls is done by performing sample testing and variances are identified upon comparing with the expected controls.

3. Reporting:

• Data from Documents on equating with the Fieldwork is assessed and deviations in the same, if exists, are reported along with the scope of improvements.

• Draft Report is prepared for the same which after getting reviewed from the management is finalised and the Final Audit Report with all the findings is submitted.

4. Follow-ups:

• Management puts all the recommendation by the Internal Auditor in action with proper planning as per the Audit Report submitted.

• Internal Auditor on a regular basis keeps check on the implementation of controls as per the action plan recommended and agreed with the management.

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Common Control Risks SMEs Face

1. Financial Risks:

• Few common Financial Risks that all the organisation goes through are like, Incorrect Interest rate rates charged by bank, non-utilization of idle funds, credit monitoring, etc.

• Collusion might exist, and internal weakness of an organisation can be a big resistance for organisation’s growth. All such things need to be assessed during the Internal Audit Process and variations between the expected and real things if exists shall be reported.

2. Operational Risks:

• Inefficiency and Ineffectiveness is a major problem in the organisation having diverse processes as not all can be managed at once. But one need to identify the concerns that exists in these processes.

• Wastage of resources, Unskilled Employees, Inadequate Systems, Technology failures, etc. are few examples of operational risks.  

3. Compliance Risks:

• There are many compliances that an organisation needs to make, both at Domestic and International Level and all should be catered so that no disputes arise. Example, TDS, GST, PF, PT, ESIC, Shops and Establishment Act 1948, etc.

• With increasing regulatory complexities, there are high chances that organisation cannot meet the industry standards and fail to adhere to the industry regulations.

That’s when, Internal Audit Process comes into the picture. Identifying the approaching vulnerabilities and providing the organisation with an Actionable Solution that shall be taken so that the risks so identified can be mitigated and minimised to an acceptably low level.

How Internal Audit Drive Efficiency Improvements

As mentioned above the benefits that arises upon conducting Internal Audit, let’s just look upon the core values that it adds to the business –

1. Streamlining of Process:

Continuous check on the process, and repeating the task of control testing and implementation helps the organisation get their process reorganised. Modifications done in the processes helps in eliminating the redundant tasks that might be happening and thus resulting in improving the workflow.

2. Cost Reduction:

Performing Internal Audit Process helps organisation identify the operational inefficiencies in the organisation. Working constantly on improving them helps organisation eliminating wastage of resources which altogether helps organisation in minimizing the cost.

3. Data-Driven Decision-making:

Internal Audit provides management with valuable and evaluated insights about the organisation and its performance. The prospective risks that are anticipated and suggestions for their mitigation helps management prepare an action plan which shall be strategically implemented makes the organisation making decisions based on the data which is gathered from the field.

Conclusion

Quoting with the same line that was mentioned in the beginning ---
“Internal Audit isn’t just meant for Large Organisation, it’s a necessity for all the organisation for a smooth workflow, check on compliances and regulations, bringing efficiency in operations, and much more.”

Conducting Internal Audit will help Small and Medium Enterprises derive all the benefits out of it and ensuring operational growth in future making them sustain in the industry. Efficiency of the organisation gets a boost and safeguards the long-term success.

Thus, Internal Audit shall be viewed as an Investment rather than mere expense and shall be done regularly in order to ensure sustainable growth of the organisation.