Audits have transcended their traditional role as compliance exercises to a critical trust-building mechanism. But the real challenge is to identify their strategic potential for sustainable growth. Audits offer assurance so essential to shareholders, lenders, regulators, and tax authorities that the financial reports are symbolically transparent. Transparency plays a key role in unlocking financial assistance and creating lasting stakeholder connections.
Despite this, companies still tend to think of internal and external audits as two distinct exercises. Whereas external audits are not a requirement for all SMEs, they are a best practice that can act as a major credibility booster. This incongruity has the potential to create inefficiencies, inconsistencies, and lost opportunities.
Understanding Internal and External Audits
Internal audits are the internal examination of operations, controls, and risk management procedures. They offer constant assurance regarding business performance, flag inefficiencies, and verify compliance with internal policies and procedures. Although not legally mandatory for SMEs, it is still advisable as it provides extremely valuable information for strategic decision-making.
In contrast, External audits are conducted by independent registered firms. It provides objective opinions on financial statement accuracy and compliance. In the UK, external audits are mandated for companies exceeding two of these thresholds:
- £10.2 million turnover,
- £5.1 million in assets,
- Over 50 employees
Many SMEs below these thresholds voluntarily undertake external audits to build credibility with investors, banks, and regulators.
The primary difference is really in perspective and purpose – internal audits are about improving operations and reducing risk, and external audits are about the reliability of financial statements and regulatory compliance.
Understanding the Gap: Why SMEs Struggle with Bridging Internal and External Processes
The disconnect between both audit processes is often driven by structural and cultural issues. Most firms initially don’t have a dedicated audit or risk management team, and they usually depend on external audits with little internal preparation. This indicates that the audits are done reactively, only once a year, with minimal groundwork or internal checks beforehand.
This results in a fragmented understanding of audit expectations. Small business owners may not be diligent in performing regular internal audit reviews; the result may be scrambling to meet an external auditor’s requests, or discovering issues far too late, or incurring unnecessarily higher fees because the business is disorganised.
Moreover, internal audits are often dismissed as unnecessary overhead, especially when not mandated by law. This overlooks their value as cost-saving, risk-mitigating tools that can directly influence the outcome and ease of external audits. When done right, internal audits create an audit-ready environment, one where an external audit can be done efficiently.
The Strategic Need to Bridge Internal and External Audits for SMEs
The imperative to bridge internal and external audits extends far beyond operational efficiency. A survey by the European Federation of Accountants and Auditors For SMEs (EFAA) highlights that SMEs implementing aligned audit processes experience measurable business advantages across multiple dimensions.
Financial Performance Enhancement
Bridging audits help businesses identify weaknesses in accounting systems and, therefore, implement means for improvement. This systematic approach facilitates advice on business performance, expected margins, as well as strategies to target financial targets while tightening internal controls to reduce fraud risk and improve tax planning effectiveness.
Governance and Assurance
External auditors rely on the presence of strong internal controls. When internal audits routinely evaluate governance frameworks, they strengthen compliance culture and risk awareness across the organisation. Boards and senior management gain deeper assurance that reported figures align with day-to-day operations, reducing exposure to reputational damage or regulatory scrutiny.
Stakeholder credibility
Well-aligned audits improve the quality and consistency of financial reporting. It enhances the credibility and reliability of financial figures for potential purchasers or investors while protecting and improving credit ratings.
Operational excellence
Bridging this gap allows businesses to move beyond compliance and turn auditing into a decision-making asset. It demonstrates the entity’s capability to identify, assess, and manage business risks effectively while ensuring appropriate and complete financial disclosures meet regulatory requirements.
UK Regulations and Standards Reshaping Audit Expectations
The regulatory environment in the UK is becoming considerably narrower, with Making Tax Digital (MTD), HMRC, and increasing investor demand for transparency creating additional layers of compliance. These regulatory changes create a necessity for SMEs to align both internal and external audits, so that their success is achieved from this point.
The Government Functional Standard GovS 009, initially developed for public bodies, now guides SME best practice by offering a framework for structured internal audits based on risk-based planning and continual improvement. The Internal Audit Code of Practice suggests that internal audit teams assess emerging risks such as cultural risks and cyber security, to meet the expectations of a changed stakeholder landscape.
Externally, the creation of the Audit, Reporting and Governance Authority (ARGA) is set to replace the Financial Reporting Council (FRC). It signals a new era of audit accountability and rigour. From January 2025, the revised UK Corporate Governance Code will require boards to demonstrate effective risk and control systems, with internal audits central to providing that assurance.
Further pressure comes from initiatives like the Cyber Security and Resilience Bill, which mandate periodic audits and robust internal checks regardless of a firm’s size or sector.
A Practical Framework for Bridging SME Audits
SMEs can implement a structured approach to bridge this gap without overwhelming their resources. The foundation begins with conducting regular and simple internal audits. Even informal reviews create valuable documentation and control awareness.
Building a culture of accountability requires documenting controls, risks, and mitigation actions consistently throughout the year. It provides a basis for more efficient external audits. SMEs can partner with accountants or consulting firms to implement minimal viable internal audit processes that scale with the entity.
The key is starting small and building systematically. SMEs should focus on critical business processes first, establishing documentation standards that satisfy both internal management needs and external audit requirements.
Leveraging Technology for Integrated Audit Readiness
SMEs can strengthen audit readiness by adopting financial intelligence solutions that unify accounting, banking, and real-time data. Pulse, for example, supports this integration by offering robust controls aligned with ISO/IEC 27001:2022 standards, helping SMEs maintain audit-ready records and streamline lender and investor reporting.
With solutions like aiPredict for cash flow forecasting and DebtorIQ for accounts receivables management, Pulse equips SMEs with structured insights that support internal audit maturity while aligning with external audit expectations. The result of investing in such technological infrastructure pays in reduced audit complexity, tighter financial control, and increased stakeholder assurance. Book a demo today to learn more about Pulse.
Conclusion
Audits have long been seen by smaller firms as a necessary compliance exercise, but things are changing now. They can increase operational strength, financial transparency, and lender preparedness by coordinating internal and external audit needs.
The regulatory climate, capabilities from technology, and stakeholder expectations all combine to make audit bridging beneficial and a necessity to grow SMEs. Acknowledging this mindset shift and putting in place coordinated approaches to bridge the internal and external audit interfaces represents a future-oriented approach that adds direct measurable value to the organisation, as well as establishing governance pillars to help achieve long-term benefits.
