Impact of Audit Quality on Financial Sustainability of SMEs in Karachi, Pakistan

Abstract

This study examined the impact of audit quality on the financial sustainability of Small and Medium Enterprises (SMEs) in Karachi, Pakistan. The primary objective was to investigate whether audit quality significantly influences financial sustainability and to evaluate the effects of auditor independence and compliance with auditing standards on SME sustainability. A quantitative and explanatory research design was adopted to achieve the study objectives. Data were collected from 210 respondents, including SME owners, managers, accountants and financial officers, using a structured questionnaire based on a Likert scale. The collected data were analyzed using SPSS through descriptive statistics, reliability analysis, correlation, regression, ANOVA and hypothesis testing.

The findings revealed that audit quality and financial sustainability were perceived positively among SMEs, with mean 3.82 and 3.76, respectively. Reliability analysis confirmed strong internal consistency, with Cronbach’s Alpha values of 0.81 for audit quality and 0.84 for financial sustainability, indicating the reliability of the research instrument. Correlation analysis demonstrated a moderate to strong positive relationship (r = 0.62) between audit quality and financial sustainability. Regression results further confirmed that audit quality significantly affects financial sustainability with a beta coefficient (β = 0.58, p = 0.000), indicating a positive and statistically significant impact. The model summary showed an R² value of 0.38, meaning that 38% of the variation in financial sustainability was explained by audit quality. Furthermore, the ANOVA results (F = 153.25, p = 0.000) confirmed the statistical significance of the model. Hypothesis testing results indicated that all three hypotheses were accepted, confirming that audit quality, auditor independence and compliance with auditing standards positively influence SME sustainability.