The Impacts of Internal Audit Quality and Accounting Information Systems Effectiveness on SME Manager’s Perceptions of External Audits

Abstract

External audits for SMEs are often voluntary, leaving the decision to managers or owners. This study examines how the effectiveness of accounting information systems (AIS) and the quality of internal audits influence SME managers' perceptions of external audits in a developing economy. Using Structural equation modeling, survey data from SME managers were analyzed. The results reveal that effective AIS and high-quality internal audits significantly enhance positive perceptions of external audits. Effective AIS, characterized by clear policies and adherence to accounting standards, improves financial transparency and decision-making. High-quality internal audits strengthen oversight, fostering trust in external audits. The findings highlight the interconnectedness of internal systems and external auditing, especially in SMEs transitioning to formal economies. By focusing on a developing market context, the study contributes to the literature by addressing the increasing importance of voluntary audits amid regulatory reforms. SME managers view external audits as beneficial for enhancing credibility, accessing loans, and ensuring financial reliability. The findings offer practical implications, emphasizing the need for stronger internal systems to support external audit adoption.