Unique Audit Problems of Small Businesses that Operate under Managerial Dominance
Dan M. Guy*
American Institute of Certified Public Accountants
Many practitioners with small business clients believe that pronouncements of the Auditing Standards Board (ASB) are not responsive to their needs. Typically, the criticisms pertain to implementation problems stemming from existing statements on auditing standards. Commentators usually are not advocating that the profession should have two sets of generally accepted auditing standards (GAAS)—one set for public companies and another set for nonpublic companies. Rather, they ask questions like, how do you apply the guidance in SAS No. 12, Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments, if your client does not retain an attorney?
The purpose of this paper is to:
• Identify the characteristics of small businesses that generate unique audit problems.
• Briefly describe how the ASB is responding to the problem.
• Review existing AICPA and international guidance that addresses unique audit problems of small businesses.
• Review guidance contained in other published literature.
• Identify some of the implementation problems and possible solutions.
Characteristics of Small Business
The term "small business'' as used in this paper is best described as an entity with some or all of the following characteristics:
1. Concentration of ownership or operational control in the hands of one or a few individuals.
2. Management personnel that have limited accounting experience and capability combined with an attitude that is not conducive to hiring employees having accounting expertise.
3. Internal accounting control weaknesses resulting from:
• limited segregation of functions within the accounting system because of the small number of employees.
*The author wishes to express appreciation to Ellen C. Downey, Manager, and Martin J. Rosenblatt,
Practice Fellow, Auditing Standards Division, AICPA, for their contributions to this paper. The
views expressed by the author are personal and do not represent the views of the AICPA or any of its