internal audit benefits

7/24/2019 internal audit benefits

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THE EFFECTIVENESS OF INTERNAL AUDIT AND INTERNAL CONTROL

A Thesis Proposal

Presented to St Paul School of Business and Law

In Partial Fulfilment

of the Requirements for the Degree of

Bachelor of Science in Accountancy

ncina! "aiser #$

#ante! %al&in Rey '$

(y! Leo&igildo )r D$

Section code* +,,

,*-- . /*-- #0F


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Chapter 1

THE PROBLEM

This chapter presents the 1ac2ground of the study! statement of the

pro1lem! scope and delimitation! the significance of the study to inform users! the

conceptual paradigm! the assumptions or hypothesis of the study and definition

of terms$

Introducton

3&er the past years! the scope of auditing has 1roadened due to the dramatic

changes in its impact to organi4ations$ It has always 1een carried out in di&erse

en&ironment within organi4ation depending on the structure! si4e and purpose

5Faud4iah! 6aron 7 )antan +--/8$ %ompulsorily! all registered companies under

the %ompanies and Allied #atters Act in 9igeria must audit their financial

statements after a certain period of time$ %ompanies 1enefit from the audited

financial statement in a large &ariety of ways$ (sers of financial information such

as in&estors! stoc21ro2ers and financial e:perts sees the audited financial

statement as a ma;or thing to loo2 out for when deciding on a choice of company

to in&est$ These people rely on the auditor


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does not generate re&enue! some regard it as a unit whose &alue is not

appreciated$

Therefore! while some appreciate the ad&antages that are deri&ed from ha&ing

internal auditors others 1elie&e they are irrele&ant and waste of money$ 'one are

the days when auditing is ;ust a1out re&iewing records or detecting irregularities

and frauds$ #odern auditing has de&eloped and has thus increased the need of

in&estors in requesting for credi1le financial statements$

According to Adeni;i 5+-=+8! Auditing is defined as an independent! o1;ecti&e

assurance and consulting actions esta1lished to add &alue and help to impro&e

an organi4ation8$ There must not 1e any form of

interference with the independence of an auditor in discharging his or her duties$

An auditor should 1e gi&en freedom in planning! e:ecuting! analy4ing and

reporting his findings without 1een 1iased$

The nature of the internal audit function is also an important consideration that

may potentially affect its &alue to an organi4ation$ %ompanies may use their own

staff 5insource8! use an e:ternal firm 5outsource8 or a com1ination of the two$

0hile outsourcing the internal audit function does not significantly affect users8 found that auditors are more li2ely to 1e sued

when they fail to detect common misappropriations that would result to

decreased re&enues! and the e&aluators 1elie&e that the fraud could ha&e 1een

detected 1y other auditors$ The auditor s accounta1ility for detecting fraud is

e:tended 1y Reffett s 5+--E8 study which predicted that auditors are more li2ely

to 1e held accounta1le 1y e&aluators when the auditors fail to detect fraud after

they had identified the fraud occurrence as a fraud ris2$ The result of Reffett s

study shows an increase in auditors lia1ility when an audit fails! after the

auditors had identified the perpetrated fraud as a fraud ris2 and performed

procedures to in&estigate the identified fraud ris2$ The findings support Reffett s

prediction$


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Attri1ution theory thus ad&ocates for auditors to report on the effecti&eness of

firms internal control$ Auditors are therefore e:pected to gain a 1etter

understanding of the internal controls in =? place! assess the design and

implementation of the internal controls! and test the operating effecti&eness of

the internal controls$ This is deemed necessary for the auditors reliance and

possi1ly scaling 1ac2 of other su1stanti&e audit procedures for the required

re&enue generation$

According to Bonner 5+-->8! e&aluators can use the audit processes as a

1asis to determine negligence if auditors fail to detect internal control related

fraud that may occur$ The attri1ution theory suggests that when fraud occurs!

identified parties should 1e held accounta1le and auditors! 1eing the pu1lic

watch dogs are most li2ely to 1e held accounta1le if e&aluators determine

su1standard audit ser&ices were pro&ided 5Reffett! +--E8$

Relia1ility theory simply descri1es the pro1a1ility of a system completing its

e:pected function during an inter&al of time 5'a&rilo& and 'a&rilo&a! +--=8$ It

was originally a tool used to help nineteenth century maritime insurance and life

insurance companies in computing profita1le rates to charge their customers$

According to the relia1ility theory! an internal control system comprises of

components that are interrelated and each for component! there needs to 1e a

defined measure of success$ As such! the state of a component is determined

1y whether the component is Msuccessful or Mnot successful $ The relia1ility of a

component is defined as the pro1a1ility of the component 1eing found in the

Msuccess state$ In addition! the relia1ility of the entire internal control system is a


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1inary com1ination with two possi1le &alues! Msuccess and Mfailure $ This study

considered the part of the relia1ility theory which relates the internal control

system to component relia1ilities$

The tracta1ility of relia1ility theory to the e&aluation and design of internal

control systems ha&e appeared in the professional literature 1ut no applications

ha&e 1een reported that draw upon the su1stantial power of the theory of

relia1ility 5"inney! +---8$

The two potential users of the =, relia1ility theory are the e:ternal auditor and

organi4ation management$ "inney 5+---8 states thatC during the e:ternal audit!

e&idence is gathered to support a professional opinion$ Internal control systems

ha&e a primary purpose of assessment and control of ris2sC that a material error

was not 1e pre&ented or detected on a timely 1asis 1y the system lea&ing to

losses$ 0ea2 internal control systems result in more su1stanti&e wor2 and hence

greater cost$ According to 'a&rilo& and 'a&rilo&a 5+--=8! the determination of the

Nwea2nessN of any internal control system is primarily ;udgmental$ (pon the

formulation of the process and system relia1ility estimates! comparison with data

from the organi4ation s past performances or other firms may pro&ide a more

solid 1asis for ;udgment of the impact of an internal control system on the firm s

income ris2 and hence pro&ide for more rational allocation of the auditors time

and effort$ #essier )r$ and Austen 5+---8 state that one of the primary

ad&antages of the relia1ility theory is its close relationship to the auditors needs

regarding understanding the internal control system and control ris2 assessment$


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According to Stratton 5+--E8! recent de&elopments ha&e increased the &alue to

management of o1;ecti&e methodologies for the e&aluation of internal control

systems$ Firm managers are therefore required to assure the accuracy of these

systems$ Stratton 5+--E8 also adds that the process of e&aluation of the internal

control system 1y 1oth management and e:ternal auditors is ;udgmental in

nature$

6owe&er! the few attempts at modeling internal control systems ha&e not

1een implemented 1y firms due to the lac2 of realism! difficulty of modelling

1eha&ioural systems! lac2 of cost effecti&eness! and lac2 of understanding 1y

practitioners$

Parad%! o" the Stud&

Evaluation

Efectiveness ointernal audit

Efectiveness ooperation

Analyse odata throughquestionnaire

, andstatisticaltreatment

Prole o internalauditors

a. Se

!. Age

c. "or#ingEperience

d. $ield o study

$actors afecting %nternalAudit efectiveness

a. &anagementSupport

!. &anagementPerception o internal

audit unction

c. 'rgani(ational%ndependence

d. adequate competent

internal audit staf


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F%ure 1) E""ect(ene** o" nterna$ audt and nterna$ contro$*

H&pothe** o" the Stud&

In order to achie&e the o1;ecti&es raised a1o&e 1ased on the statement of the

pro1lem! the following hypothesis were formulated$

The management supports are positi&ely related to the internal audit

effecti&eness

The 1etter the management


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A**u!pton* o" the Stud&

The following assumptions are enumerated 1y the researcher*

=$ Fraud can 1e pre&ented when internal control system is in place

+$ Independence is a critical component of an effecti&e internal audit acti&ity$

?$ sta1lishing a culture of integrity is a critical component of fraud control$

,$ Ris2 and control assessment is an important tool in detecting fraud$

/$ The audit recommendation of internal auditors can help management in

ma2ing decisions

De"nton o" Ter!*

Ter!* that are de"ned conceptua$$&-

Audt)An un1iased e:amination and e&aluation of the financial statementsof

an organi4ation$ It can 1e done internally 51y employees of the organi4ation8 or

e:ternally 51y an outside firm8$ 5Spyroo! +--=8

Contro$ en(ron!ent$ Is a term of financial audit!internal

auditand nterprise Ris2 #anagement$ 5Aguilar! +-=?8$
http://www.investopedia.com/terms/f/financial-statements.asphttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Enterprise_Risk_Managementhttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Enterprise_Risk_Managementhttp://www.investopedia.com/terms/f/financial-statements.asp


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E""ect(ene**) Is a1out doing the right tas2! completing acti&ities and

achie&ing goals$

Interna$ Audt)is designed to review what a company is doing in order to identify

potential threats to the organization's health and profitability, and to make

suggestions for mitigating the risk associated with those threats in order to minimize

costs. ( Yuri, 2000)

Mana%e!ent Support) This is when high le&el managers in a corporation

see2 to help lowerle&el employees to de&elop entrepreneurial 1eha&ior$ 5Da&is!

+-==8

Ter!* that * de"ned operatona$$&*

Independence) This is the a1ility if an auditor to carry out his wor2 o1;ecti&ely

without any 1ias or influence from any1ody$

Interna$ audtor) This is the staff that heads the Internal Audit Department or

(nit in an organi4ation$

Interna$ Audt Depart!ent.Unt)This is the department that is set up to carry

out the internal audit wor2 in an organi4ation$

Interna$ Contro$) This is the whole system of controls! financial and

otherwise! esta1lished 1y the management in order to carry on the 1usiness of

the enterprise in an orderly and efficient manner! ensure adherence to

management policies! safeguard the assets and secure as far as possi1le the

completeness and accuracy of the records$


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Mana%e!ent Contro$) This is the means 1y which organi4ation carries out its

o1;ecti&e effecti&ely and efficiency$

Chapter II

RESEARCH METHODOLO'/

This chapter presents the research design! research su1;ects which

include their characteristics! sample si4e! sampling methods! research locale of

the study$ It co&ers research instrumentation! and statistical techniques applied in

the treatment of data$

Re*earch De*%n

This study utili4ed the descripti&e method of research$ As widely accepted!

the descripti&e method of research is a factfinding study that in&ol&es adequate

and accurate interpretation of findings$ Descripti&e research descri1es a certain

present condition$ Relati&ely! the method is appropriate to this study since it aims

to descri1e the effecti&eness of internal audit and internal control$ The technique

that was used under descripti&e method is the normati&e sur&ey approach and

e&aluation! which is commonly used to e:plore opinions according to

respondents that can represent a whole population$ The sur&ey is appropriate in

this study 1ecause it ena1les the researcher in formulation of generali4ations$


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The direct data included in these study is questionnaire sur&ey$ The

questionnaire sur&ey respondents were gi&en ample time to assess the factors

that affect the effecti&eness of internal audit and the components of internal

control in the selected national go&ernment agencies in Leyte$

The purpose of employing the descripti&e method is to descri1e the nature

of a condition! as it ta2es place during the time of the study and to e:plore the

cause or causes of a particular condition$

The researcher opted to use this 2ind of research considering the desire to

acquire first hand data from the respondents so as to formulate rational and

sound conclusions and recommendations for the study$ According to %reswell

5+--,8! the descripti&e method of research is to gather information a1out the

present e:isting condition$ Since this study is focused on the effecti&eness of

internal audit and internal control! the descripti&e method is the most appropriate

method to use$

In terms of approach! the study employed quantitati&e approach$ The

quantitati&e approach focused on o1taining numerical findings was used with the

sur&ey method$

Re*pondent* o" the Stud&

The study will ha&e respondents directly from the chosen national

go&ernment agencies in Leyte 5D3ST8$ This include internal audit staffs$ All of

these participants were selected through random sampling$ This sampling


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method is conducted where each mem1er of a population has an equal

opportunity to 1ecome part of the sample$ As all mem1ers of the population ha&e

an equal chance of 1ecoming a research participant! this is said to 1e the most

efficient sampling procedure$ In order to conduct this sampling strategy! the

researcher defined the population first! listed down all the mem1ers of the

population! and then selected mem1ers to ma2e the sample$ For this purpose! a

selfadministered sur&ey questionnaire in Li2ert format was gi&en to the

respondents to answer$

In*tru!ent o" the Stud&

The sur&ey questionnaire was used as the main datagathering instrument for

this study$ The questionnaire was di&ided into two main sections* a profile and

the sur&ey proper$ The profile contains sociodemographic characteristics of the

respondents such as age! gender! the num1er of years they had ser&ed the

company and field of study$ The sur&ey proper e:plored the perceptions of

internal audit staff on personality questionnaire! particularly on its usa1ility and

relia1ility as an employment selection and appraisal tool$ The questions were

structure using the Li2ert format$ In this sur&ey type! four choices are pro&ided for

e&ery question or statement$ The choices represent the degree of agreement

each respondent has on the gi&en question$ The scale 1elow was used to

interpret the total responses of all the respondents for e&ery sur&ey question 1y

computing the weighted mean*

, O %ompletely true 5E@ to =-- true8


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? O 'enerally true 5/= to E/ true8

+ O Partly true 5+@ to /- true8

= O 9ot at all true 5 - to +/ true8

E*ta#$*h!ent o" Va$dt& and Re$a#$t&

Data gathering employed two sets of sur&ey questionnaire for the internal

audit staffs$ They were de&eloped 1y the researcher with the appro&al of the

ad&isory committee$ In order to test the &alidity of the questionnaire used for the

study! the researcher tested the questionnaire to fi&e respondents$ These

respondents as well as their answers were not part of the actual study process

and were only used for testing purposes$ After the questions ha&e 1een

answered! the researcher as2ed the respondents for any suggestions or any

necessary corrections to ensure further impro&ement and &alidity of the

instrument$

The researcher re&ised the sur&ey questionnaire 1ased on the suggestion of

the respondents$ The researcher then e:cluded irrele&ant questions and

changed &ague or difficult terminologies into simpler ones in order to ensure

comprehension$

Stat*tca$ Treat!ent

The researcher will use the following statistical treatment process data*


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Percenta%e) According to A1ergas 5+--@8! This to get the proportion of the

whole$

Formula* Percentage O fH9 : =--

0hen* f . frequency

9 . Population

0eighted #ean$ It refers to the set of data ta2en from the a&erage of the

population 5Broto! +--@8

Formula* 0#O fx

N

0here* 0# . 0eighted #ean

fx . sum of the products of the frequency with weights

9 . sample si4e


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REFERENCES

Adams! #$B$ 5+--,8! Agency theory and the internal audit * #anagerial Auditing

)ournal! ol$ 5>8! pp$>=+

Anderson! ( $ 5+--?8$ Quality Assurance for Internal Auditing! Institute of Internal

Auditors * Altamonte Spring! Florida! ?+E,+$

Arena! #$ and A44one! '$ 5+--8! Identifying 3rgani4ational Dri&ers of Internal

Audit ffecti&eness * International )ournal of Auditing! ol$ =?! ,?@-$

Balna&es #$ and %aputi P$ 5+--=8! Introduction to Quantitati&e Research

#ethods! an in&estigati&e approach* Sage Pu1lications! London!

Thousands 3a2s and 9ew Delhi$

Bou . Raad! '$ 5+---8! internal auditors and a &alue . added approach* the new

1usiness regimeN* #anagerial Auditing )ournal! =/5,8! pp$=>+=>@$


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%oram P$ Ferguson! %$ and #oroney R$ 5+-->8! Internal Audit! Alternati&e

Internal Audit Structures and the Le&el of #isappropriation of Assets

Fraud * Accounting and Finance! ,>! pp$/,?/

Dechow! P$ Sloan! and A$p$ Sweeney$ +--@$ %auses and consequences of

earnings manipulations* An analysis of firms su1;ect to enforcement

actions 1y the S%$ %ontemporary Accounting Research =?5=8 * =?@$

Dunn! P$ +--,$ The impact of insider on fraudulent financial reporting$ )ournal of

#anagement ?- 5?8 * ?E . ,=+

Fad4il! F$h$! 6aron! 6$ and )antan! #$ 5+--/8! Internal auditing practices and

internal control system* #anagerial Auditing )ournal! +-5>8! pp$ >,,@@$

6ellman 9$ 5+-==8! %hief Financial 3fficer Influence on Audit Planning*

International )ournal of Auditing! =/5,??8! pp$+,EE,

Institute of internal auditors 5+--=8! Standards for the Professional Practice of

Internal Auditing 5SPPIA8* Audit ToolsH9ewIIAStandards$htm!

"infu! )$ 5+--=8! Accounting and auditing in thiopia* a historical perspecti&e!

proceedings of the First 9ational %onference of thiopia Studies! Institute

of thiopian Studies! Addis A1a1a (ni&ersity! Addis A1a1a! =>++/

"hotari! R$%$ 5+--,8! Research methodology* methods and techniques! +ndd$

9ew Delhi* 9ew Age International 5P8 Ltd$! Pu1lisher$


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Leung! P$ and %ooper! B$)$ 5+--8! Internal audit . an AsiaPacific profile and

the le&el of compliance with Internal Audit Standards * #anagerial

Auditing )ournal! +,58! pp$>@=>@+$

Lemma Argaw! 5+---8! Proceedings inaugural ceremony of IIA . %! The State

of internal Auditin in thiopia! The 0ay Forward to Professionalism! pp+=

?E$

Lindow! P$$ and Race!)$D$ 5+--+8! Beyond traditional audit techniques* )ournal

of Accountancy! =,5=8! +??$

#ihret! D$'$ and Jismaw! A$0$ 5+--E8! Internal audit effecti&eness* and

thiopian pu1lic sector case study* #anagerial Auditing )ournal! ++5/8!

,E->,$

#inistry of Finance of conomic De&elopment 5+--,8! Internal Audit Standards

and %ode of thics for Internal Auditors and Internal Audit Procedural

#anual* #inistry of Finance and conomic De&elopment$

9eumann! 0L$ 5+--@8! Social Research methods* Qualitati&e and Quantitati&e

Approaches! Si:th edition! Pearson! Boston$

3


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Reynolds! #$A$ 5+---8! Professionalism! thical %odes and Internal Auditor* A

#oral Argument< ! )ournal of Business thics! 5+,8! ==/=+,$

Sey! #$ 5+-=?8! Importance of internal auditors of a company! %ase* Lintas

'hana limited 7 "asapre2o %ompany limited$

Simple studies 5+-=,8! (RL* www$simplestudies$com

Tysiac! "$ 5+-=,8! Stop using audit failure terms in P%A3B report! (RL* http*HH

www$;ournalofaccountancy$comH9ewsH+-=,>++$htm$

ite4! 3$ 5+-=,8! 0hat are financial management o1;ecti&es! (RL* http*HH

small1usiness$chron$comHfinancialmanagemento1;ecti&es,E+/$html$

0eetman! P$ 5+-==8! Financial Accounting* An introduction! / th ed! Pearson

ducation limited$

PR3BL#* T6 FF%TI9SS 3F I9TR9AL A(DIT A9D I9TR9AL

%39TR3L

Q(STI399AIR F3R I9TR9AL A(DIT STAFFS

I$ PRS39AL DATA S6T

DIR%TI39S* Please pro&ide pertinent information to the items 1elow 1y

chec2ing the appropriate 1lan2 andHor 1y supplying the answer on the 1lan2s

9A# 53PTI39AL8* A'9%J*

P3SITI39*

=$ 0or2ing e:perience as head of agency
http://www.simplestudies.com/http://www.simplestudies.com/


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= year and 1elow ===/ years

+/ years =@+- years

@=- years += years and a1o&e

+$ Field of study

Accounting conomics

#anagement 3ther 5specify8

II$ FF%TI9SS 3F I9TR9AL A(DIT A9D I9TR9AL %39TR3L

DIR%TI39S* Indicate the degree to which you thin2 the following

statementsHindicators are true or false$

, O %ompletely true 5E@ to =-- true8

? O 'enerally true 5/= to E/ true8

+ O Partly true 5+@ to /- true8

= O 9ot at all true 5 - to +/ true8


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I9DI%AT3RS , ? + =

I) EFFECTIVENESS OF INTERNAL AUDIT

A) Mana%e!ent Support

=$ I recei&e full cooperation! access to records and

information from my officeHsector

+$ I can get the necessary resources 5facilities8 that help

me to perform auditing acti&ities as needed$

?$ The officeHsector supports me 1y pro&iding training in

order to impro&e my s2ill and update with the field$

,$ The officeHsector supports me to introduce myself with

new technology! policy or procedures when it is

necessary$

/$ The officeHsector supports Internal Auditing staffs 1y

1udgeting funds for certification to ha&e rele&ant

education in auditing that allows them to audit all of the

organi4ationsHsector


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assessment! and consultants 7 ad&iser particularity into

controls associated to management performance and

internal operations$

C) Or%anatona$ ndependence=$ I perform the auditing acti&ities without any

interference from any1ody and without any influence

from the officeHsector$

+$ I freely decide the scope! time and e:tent of auditing

procedures 1ased on auditing standards and the

officesHsectors policy$

?$ I o1;ecti&ely e:amine auditing issues only meeting on

relia1le audit e&idence and no management interest is

in&ol&ed for ad;ustment 1eyond auditing standards 7

&alues$

,$ I feel free to include any audit finding in my audit wor2

and report directly to responsi1le 1ody$

/$I can freely access necessary documents! information

and data a1out the organi4ationHsector for my audit

wor2$

D)The ade2uate co!petent nterna$ audt *ta""

=$ #y officeHsector has sufficient s2illed internal auditors$

#ost of them ha&e certification in auditing$

+$ It is possi1le to audit and re&iew each acti&ity on time!

and co&er the planned scope of auditing acti&ities$

?$ The audit procedures and e&idence collections are

completed on time! since enough and s2illed internal

auditors are a&aila1le or employed$

,$ The internal audit staff num1er 7 their s2ill matches

the scope of officesHsector


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/$ The wor2 of internal audit is performed with modern

technology that uses computeri4ed data tools and

specific IA software

E) The appro(ed nterna$ audt charter=$ Internal audit charter is maintained 5a&aila1le8 in my

office Hsector$

+$ The purpose and authority of internal audit is clearly

defined in charter$

?$ The purpose and authority of internal audit charter is

in line with Standards for the Professional Practice

formulated 1y the Institute of Internal Auditors,$ The IA charter specifies the internal audit acti&ity


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1een communicated so as to pro&ide effecti&e direction

to employees on ris2 assessment and control issues$

+$ #anagement appropriately e&aluates ris2 when

planning for new product or acti&ity$?$ There are sufficient staff mem1ers who are

competent and 2nowledgea1le to manage company

acti&ities and these ha&e 1een pro&ided with adequate

resources$

,$ Technology issues are considered and appropriately

addressed$

Significant internal and e:ternal operational! financial!

compliance and other ris2s are identified and assessed

on an ongoing 1asis$

C) CONTROL ACTIVIT/

=$ Policies and procedures e:ist to ensure critical

decisions are made with appropriate appro&al$

+$ Processes e:ist for independent &erification of

transaction 5to ensure integrity8?$ There is a system in place to ensure that duties are

rotated periodically$

,$ Processes are in place to ensure that policy o&errides

are minimal and e:ceptions are reported to

management

/$ People in the %ompany ha&e the 2nowledge! s2ill and

tools to support them in their duties in order to

effecti&ely manage ris2 and achie&e company

o1;ecti&es$

D) INFORMATION AND COMMUNICATION S/STEMS

=$ There are effecti&e reporting procedures in


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communicating a 1alanced and understanda1le account

of the company


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to ree&aluate ris2s and ad;ust controls in response to

changes in its o1;ecti&es! 1usiness! and e:ternal

en&ironment$

internal audit benefits

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