Small Medium Enterprises (SME) performs a crucial function as a spine in the nation economy as it represents the largest percent of formations in Malaysia. It is vital for SMEs to prepare the company’s financial statements based on the Company Act 1965 regulations and other compliances such as Financial Reporting Standards (FRS). Furthermore, the accounts are required to be audited by an independent party to ensure its true and fair view against the accounting standard which has been followed by other companies as well. However, due to the new regulations of Company Act 2016, audit exemption is given to small size and dormant companies. Hence, several companies might not be audited by an independent party in ensuring their accounts are true and fair view. Prevalence of fraud might occur due to weak of internal controls even though it involves small businesses which are being exempted. It is necessary that the business should consider at least an internal audit function either internally established or to be outsourced in monitoring the companies’ internal controls. Few studies have been done in outsourcing the internal audit functions to oversee the significant impacts and effects of it among SME in Malaysia. Therefore, this conceptual paper aims to provide an overview of the possible effects on the demands of internal audit outsourcing among SMEs. Therefore, two theories which are the Transaction Cost Theory (TCT) and Resource Based Views Theory (RBV) are being used to determine the awareness of the internal audit function, the perceived benefits of internal audit function and perceived financial cost. This study shall contribute further insight and awareness to the SMEs on the importance of internal audit function and provides an overview analysis of determinants of internal audit outsourcing. Moreover, researchers are able to make use of this study as an extended research which can further improved the performance of SMEs in Malaysia