Accounting Policies for SMEs: How to Set Them Up to Reduce Audit Friction

27th Jan

kohlimaudit

Accounting Policies for SMEs: How to Set Them Up to Reduce Audit Friction

For many SMEs in Singapore, accounting policies sound like something meant only for large corporations. In practice, they are one of the most effective tools SMEs can use to reduce audit queries, avoid repeated adjustments, and speed up year-end closing.

Most audit friction does not come from complicated standards—it comes from unclear, inconsistent, or undocumented accounting policies. When policies are missing or vague, auditors must ask more questions, challenge judgments, and perform extra work.

This article explains—in plain English—what accounting policies really are, why auditors care so much about them, and how SMEs can set up simple, practical policies that make audits smoother year after year.

What Are Accounting Policies (In Simple Terms)?

Accounting policies are the rules your company follows when recording transactions.

They answer questions such as:

When do we recognise revenue?
How do we depreciate assets?
When do we make provisions?
How do we treat foreign currency transactions?

In other words:

Accounting policies explain how management turns business activity into financial numbers.

They are not about theory—they are about consistency and clarity.

Why Accounting Policies Matter So Much in Audits

Auditors do not audit businesses—they audit financial statements. To do that, they need to understand:

What rules management applies
Whether those rules are reasonable
Whether they are applied consistently

Regulators such as Accounting and Corporate Regulatory Authority expect financial statements to be prepared using appropriate and consistently applied accounting policies that result in a true and fair view.

When policies are unclear, auditors must:

Ask more questions
Challenge assumptions
Perform additional testing

This is where audit friction begins.

Common SME Misconception: “Our Accountant Knows What to Do”

Many SME directors believe:

“Our accountant handles accounting policies.”

While accountants help document policies, policies are management decisions, not auditor or accountant decisions.

Auditors assess:

Whether policies reflect the business reality
Whether management understands them
Whether they are applied deliberately—not accidentally

If management cannot explain why a policy exists, auditors become uncomfortable.

The Most Common Accounting Policy Weaknesses in SMEs

1. Policies That Are Copied and Forgotten

Many SMEs use:

Generic templates
Boilerplate disclosures
Policies copied from unrelated businesses

Auditors often see policies that:

Do not match actual practice
Contradict how transactions are recorded
Are outdated

This immediately triggers audit questions.

2. Inconsistent Application Year to Year

Examples include:

Changing depreciation methods without explanation
Switching revenue recognition approaches
Altering provision methodologies casually

Auditors expect consistency, not perfection.

3. Policies That Are Too Vague

Statements like:

“Revenue is recognised when appropriate.”

mean nothing in an audit.

Auditors need:

Clear triggers
Clear timing
Clear treatment

Vagueness equals risk.

Key Accounting Policies Auditors Focus On (For SMEs)

Not all policies carry equal risk. Auditors usually focus on judgment-heavy areas.

Revenue Recognition

Auditors ask:

When is revenue recognised?
Is it based on delivery, completion, or invoicing?
Are there multiple performance obligations?

Poorly defined revenue policies are one of the top audit friction points.

Accruals and Provisions

Auditors expect policies that explain:

What types of accruals are recognised
How estimates are determined
When provisions are recorded or reversed

Without this, auditors must re-evaluate management judgment from scratch.

Fixed Assets and Depreciation

Policies should clearly state:

Capitalisation thresholds
Depreciation methods
Useful lives

Changing useful lives without justification is a common audit issue.

Impairment of Receivables

Auditors look for:

How doubtful debts are assessed
Whether ageing or customer-specific reviews are used
Whether policies reflect actual recovery patterns

Flat percentages without rationale invite scrutiny.

Foreign Currency Transactions

For SMEs with overseas dealings:

Which exchange rates are used?
How are FX differences treated?
When are balances retranslated?

This area frequently causes avoidable audit adjustments.

Why Good Accounting Policies Reduce Audit Work

Clear policies allow auditors to:

Understand management intent quickly
Test compliance efficiently
Reduce back-and-forth questions

From an audit perspective:

Clear policies = lower risk = smoother audit

Auditors are far more comfortable auditing well-documented judgment than undocumented decisions.

How to Set Up Practical Accounting Policies (Without Overengineering)

Step 1: Base Policies on What You Actually Do

Do not write policies you cannot follow.

Ask:

How do we really recognise revenue?
How do we actually approve expenses?
How do we currently assess bad debts?

Then document that reality—not an idealised version.

Step 2: Keep Policies Simple and Specific

Good policies are:

Short
Clear
Business-specific

Example:

“Revenue from service contracts is recognised monthly based on services performed, as evidenced by service reports approved by customers.”

This is far better than a generic paragraph.

Step 3: Apply Policies Consistently

Auditors value consistency more than cleverness.

If a policy needs to change:

Document the reason
Disclose the change
Apply it consistently going forward

Undocumented changes raise red flags.

Step 4: Align Policies With Financial Statement Disclosures

Policies disclosed in the notes must:

Match actual accounting treatment
Be updated when practices change

Auditors often test this alignment directly.

Accounting Policies vs Accounting Estimates (Important Distinction)

SMEs often confuse these two.

Accounting policy: the rule (e.g. depreciate over 5 years)
Accounting estimate: the amount (e.g. this year’s depreciation)

Auditors expect:

Stable policies
Estimates that reflect current conditions

Changing estimates is normal. Changing policies casually is not.

How Weak Policies Increase Audit Fees (Quietly)

Even if auditors do not explicitly say so, weak policies:

Increase audit hours
Increase review work
Increase partner involvement

This often shows up as:

Longer audits
More queries
Higher fees over time

Good policies are a cost-control tool, not an administrative burden.

Director Responsibility (Often Overlooked)

Directors approve the financial statements. This means they:

Accept the accounting policies
Endorse management judgment
Are responsible for consistency

Auditors may ask directors:

“Do you understand and agree with these policies?”

Silence or confusion weakens governance perception.

When Auditors Push Back on Policies

Auditors may challenge policies if:

They do not reflect business reality
They appear aggressive
They change profit outcomes without justification
They contradict accounting standards

This is not adversarial—it is part of audit duty.

Well-thought-out policies usually withstand scrutiny.

Signs Your SME Needs Better Accounting Policies

Same audit comments every year
Repeated adjustments
Frequent “why is this treated this way?” questions
Late-stage audit disputes
Confusion between management and accountants

These are policy problems—not audit problems.

Why Accounting Policies Improve More Than Just Audits

Strong accounting policies also:

Improve internal decision-making
Support bank discussions
Reduce staff confusion
Strengthen governance
Prepare the business for growth or exit

They are foundational—not optional.

Final Thoughts

Accounting policies are not about satisfying auditors. They are about clarity, consistency, and control.

For Singapore SMEs, the fastest way to reduce audit friction is not to argue with auditors—but to:

Set clear policies
Apply them consistently
Document judgment properly

When policies are aligned with reality and understood by management, audits become confirmation exercises, not interrogation sessions.

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