ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
58
FEATURES OF AUDITING SMALL AND MEDIUM ENTERPRISES:
IDENTIFYING CASES OF FINANCIAL STATEMENT FRAUD
Muydinov Erkin Jamaldinovich
PhD in Economics, Associate Professor, Doctoral Student at Tashkent State
University of Economics
https://doi.org/10.5281/zenodo.16893648
In the context of globalization and Uzbekistan’s integration into the
international economic space, the share of small and medium-sized enterprises
(SMEs) in the country’s gross social product is steadily increasing. By 2025, it is
projected that the share of SMEs in the gross domestic product (GDP) will reach
55%, in industry — 34%, in exports — 34%, and in employment — 75% [1].
Under these circumstances, it becomes increasingly important for SMEs to
provide reliable financial information that corresponds to the concepts and
principles of International Financial Reporting Standards (IFRS).
Ensuring the reliability of financial reporting requires improving the
methodology of auditing SMEs in accordance with IFRS [2]. When adapting the
methodology to international standards and assessing risks, it is necessary to
take into account the specific features of SMEs — such as limited resources, the
instability of the external environment, and a high degree of dependence on a
narrow circle of owners and counterparties.
The main issue that needs to be examined during the audit process is
assessing the degree of reliability of the financial statements published by SMEs
and, accordingly, forming the auditor’s opinion. Although International
Standards on Auditing (ISA) do not explicitly require auditors to specifically
detect cases of falsification in financial reporting, in practice, the possibility of
manipulating financial indicators to conceal fraudulent activities exists.
Therefore, this issue remains a key focus of attention for auditors during the
audit process.
For this reason, in this article, we examine the system of indicators of
financial statement falsification in SMEs and construct an integrated risk-
oriented matrix necessary for analysis.
The system of indicators of falsification of SMEs’ financial reporting consists
of the following elements:
1. Financial–Analytical Indicators
(Based on financial statement analysis and calculated ratios)
1.
Abnormal fluctuations in financial indicators;
2.
Unusual ratios of items in the statement of financial position;
3.
Illegal changes in the recognition period of income and expenses;
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
59
4.
Numerous unjustified transactions at the end of the reporting
period.
2. Operational Indicators
(Identified during the analysis of business activities)
1.
Inconsistency between production and financial data;
2.
Excessive dependence on one or a few clients/suppliers;
3.
Poorly maintained documentation practices;
4.
A large number of unjustified mutual settlements.
3. Behavioral Indicators
(Relating to corporate culture, transparency, and ethical aspects)
1.
Resistance to providing requested information;
2.
Accumulation of conflicting job responsibilities in one person’s
hands;
3.
Frequent changes of company accountants and/or auditors;
4.
Unrealistic goals set that encourage manipulation of reporting, tied
to the incentive system.
4. External Indicators
(Factors of the business environment)
Negative news about owners/managers;
Sharp changes in the industry not reflected in the company’s financial
statements;
Discrepancies between company reports and information provided by
state or tax authorities;
Litigation, fraud allegations, or claims related to breach of contracts.
5
Final Integration into a Risk-Oriented Approach
When assessing the level of falsification in SMEs’ financial statements, it is
important
not
to
limit
the
analysis
to
a
single
indicator.
In our view, an effective methodology should include the following elements:
Cumulative Assessment
– the presence of 3 or more indicators from
different groups increases the likelihood of falsification.
Weighting Factors
– financial indicators carry more weight than
behavioral ones.
Continuous Monitoring
– not a one-time assessment, but recording
recurring irregularities.
Based on the above, an integrated risk-oriented matrix can be developed for
small enterprises. This serves as a tool that unifies risk assessment, control
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
60
measures, and key business processes in a single framework. The matrix is
considered integrated because it incorporates several dimensions:
Risks
(e.g., financial, operational, legal, business, IT-related...);
Impact on business objectives
(e.g., income stability, compliance with
legislation, maintaining business reputation...);
Existing controls
(working control procedures, IT capabilities, policies...);
Residual risk assessment
(after mitigation measures are applied);
Prioritization of actions
(what should be addressed first).
This matrix is particularly useful and effective for SMEs in the following
situations:
Enables a systematic approach to risk management even with limited
resources;
Provides the ability to make better decisions by considering the impact of
all indicators within a single working document;
Allows the enterprise to demonstrate to investors and banks that it
maintains control over risks;
Creates the opportunity to align the maturity level of existing controls
with international standards such as
COSO
or
ISO 31000
.
We recommend that SME management and specialists adopt and
implement such a matrix.
Integrated Matrix of Indicators for Falsification of Financial
Reporting in Small Enterprises (Sample)
Indicator
Block
Indicators
Detection Method
Risk
Level
Financial
Difference in profit and
cash flow ≥20%
Analysis of profit and loss
statements and cash flow
reports
High
…
…
…
…
Behavioral
Pressure from management
on the chief accountant
Interview, observation
Medium
…
…
…
…
Current
Lack of transparency in
contracts with related
parties
Contract analysis
High
…
…
…
…
ACADEMIC RESEARCH IN MODERN SCIENCE
International scientific-online conference
61
Indicator
Block
Indicators
Detection Method
Risk
Level
External
Court proceedings
involving large amounts
Review of litigation-related
documents
High
By continuously implementing targeted measures such as improving the
effectiveness of internal control, ensuring full compliance with legal
requirements, using licensed software in business operations, and enhancing the
company’s business reputation in the external environment, it is possible to
reduce existing risks. Furthermore, by attracting highly qualified employees to
the company, these risks can be effectively managed.
The information from this matrix can be used by auditors during the
planning and execution of an audit; by business owners for internal monitoring
of transparency in their operations; and by banks and investors to assess the
reliability of borrowers or partners.
References:
1.
President of the Republic of Uzbekistan. (2025, March 19). Decree No. PF-
50 on measures to increase the role of small and medium-sized businesses in the
economy. Tashkent.
2.
International Accounting Standards Board (IASB). (2009a). International
Financial Reporting Standards (IFRS) for Small and Medium-Sized Entities
(SME).
Retrieved
from
http://www.ifrs.org/ifrs-forsmes/Pages/ifrs-for-
smes.aspx
