Internal control practices: a study conducted on small and medium enterprises (SMEs)

Abstract

This internship report, titled ‘Internal Control Practices: A Study Conducted on Small and Medium Enterprises (SMEs)’, has been prepared as a partial fulfillment of the requirements for the Bachelor of Business Administration (BBA) degree at the BRAC Business School of BRAC University. The research has been based on the practical experiences of auditing during my internship tenure as an Audit Associate at Hasan Mohin Chartered Accountants. The main purpose of this report is to identify and evaluate the internal control processes of SMEs and the common lapses identified during the audit procedures. Even though internal control processes are critical for financial reporting, asset protection, and regulatory issues, SMEs commonly experience difficulties in their control processes because of a multitude of factors. The research takes a descriptive research methodology since the primary data can be gathered from direct observations of audit assignments, analysis of working papers, current and previous, and professional discussions with audit team members. Out of all available client audit reports or audit assignments, five client organizations belonging to SMEs have been selected as a prerequisite was established where the chosen organization must have written SOPs and therefore could be scrutinized for their control lapse in said policy. All identities will be anonymized to promote confidentiality as internal reports by nature are for management only or very select users and not general users and stakeholders. Secondary information is only used to validate the analysis done using literature from academic and professional circles. The results highlight the poor and anarchic state of internal control procedures of SMEs in Bangladesh. Lapses identified include the lack of written policies or continuous updates, ineffective or nonexistent authorizations, poor documentation, lack of segregation of duties, little to no reconciliation procedures, and inconsistent management reviews. A presence matrix was created to highlight the results and the extent to which control policies exist and are followed. The report finds that weaknesses in internal controls in SMEs mainly arise because of weak enforcement, supervision, and resource constraints, but not due to a lack of awareness. The report proposes simple, inexpensive ways of dealing with such weaknesses, which include written procedures, enhanced controls over authorization, reconciliation, and management review. The proposed measures will enable SMEs to strengthen their internal controls.