Internal auditing is a dynamic and ambitious profession that is reacting to a turning demand for quality confidence in private and public sector administrations. The profession started deriving acknowledgment in the early 20th century in the aftermath of company growing. The original function of the IA was the protection of company assets and the bar and sensing of fraud. This function was extended upon the formal acknowledgment of the profession in 1941 with the constitution of the IIA. Today, IIA criterions aid advance planetary harmonization of the IAF ‘s operations[ 1 ].
1.1.2 Public Limited Liability Companies
PLCs listed on the MSE are considered to be public involvement entities and therefore hold a greater duty for answerability to stakeholders. The demands for answerability and the accent for good administration and better hazard direction in the wake of the recent fiscal crisis, implies a greater demand for an IAF.
1.2 NEED FOR THE STUDY
The IAF is turning in importance as stakeholders ‘ outlooks of direction to supply ‘an independent reappraisal of a company ‘s operations and fiscal histories, have been raised ‘ ( Laker 2004 ) . The IAF can be an highly valuable plus to the company in supplying such independent reappraisals. However, there are certain challenges and barriers that need to be overcome to enable the map, where it already exists, to do a value-adding part ; and to promote its debut where it does non be.
This survey focuses on barriers to Maltese IAFs and how they can be overcome. This country was chosen because to day of the month, there has been no survey that specifically tackles barriers to internal auditing in Maltese PLCs. Furthermore, such a survey virtues specific attending due to the fact that there are several Maltese PLCs that have non yet set up an IAF.
1.3 OBJECTIVES OF THE STUDY
The chief aims of this survey are therefore the followers:
To place barriers to Maltese bing internal audit units and their work and measure how these are being managed
To place the chief barriers to the debut of an IAF in companies where this does non be
1.4 SCOPE AND LIMITATIONS
Companies chosen to be portion of the research for this thesis are divided into two groups. The first group includes companies that have an IAF and the 2nd of companies that do non hold this ; nevertheless, the little sample used means that the survey ‘s decisions to the full population of Maltese PLCs. However, this thesis highlights really of import points that must be taken into consideration for internal audit maps in Maltese PLCs. The research takes into consideration developments up to 31st March 2013.
1.5 DISSERTATION OVERVIEW
Chapter 1 provides background information and describes the demand for the survey, its aims, range and restrictions and the lineation of the thesis.
Chapter 2 contains information on the theoretical background to the survey. It explains the function and maps of the internal hearer, Maltese legal demands for PLCs, the barriers to internal auditing and suggested ways to get the better of such barriers.
Chapter 3 explains the methodological analysis used for the thesis.
Chapters 4 and 5 present severally the consequences of the primary research conducted and a treatment of these consequences.
Chapter 6 summarises the research findings and draws relevant decisions. It besides includes recommendations for the Maltese scenario and for countries of farther research.
2.1 BACKGROUND
The official definition of internal scrutinizing given by the Institute of Internal Auditors is the followers:
‘Internal Auditing is an independent, nonsubjective confidence and consulting activity designed to add value and better an organisation ‘s operations. It helps an organisation carry through its aims by conveying a systematic, disciplined attack to measure and better the effectivity of hazard direction, control, and administration procedures. ‘
( IIA, 2013, Standards and Guidance, Definition of Internal Auditing )
The construct of internal auditing subdivisions out from the general definition of scrutinizing as a:
‘systematic procedure of objectively obtaining and measuring grounds sing averments about economic actions and events to determine the grade of correspondence between those averments and established standards and pass oning the consequences to interested users ‘ .
( Council on Foundations, Definition of Auditing, 2003: Handout 3 )
This helped develop the traditional function of internal auditing: that of analyzing the dependability and unity of fiscal information reported internally and externally by the house. The audit function of the IAF besides extends to operational audits, an scrutiny of the efficiency and effectivity of the house ‘s operations based on hazard prioritisation.[ 2 ]
Another of import function of the IA is guaranting appropriate corporate administration procedures and that direction has implemented a sound control system that minimises hazard to the house, ensures the accomplishment of aims, and precautions the house ‘s assets. It is the IA ‘s occupation to guarantee that direction has built a system of cheques and balances within the house ‘s operations to guarantee minimal exposure to hazard. The IA usually does this by agencies of an independent hazard direction appraisal.[ 3 ]
2.2 LEGAL REQUIREMENTS FOR PUBLIC LIMITED LIABILITY COMPANIES IN MALTA
MFSA Listing Rules require ‘an issuer whose securities are admitted to merchandising on a Regulated Market runing in Malta ‘ to put up an audit commission ( AC ) composed of at least three managers, one of these being independent and ‘competent in accounting and/or scrutinizing ‘ . The duties of the AC are shown in the infusion below.
An of import issue to observe here is that the Listing Rules do non necessitate companies listed on the Malta Stock Exchange ( MSE ) to hold an IA. Additionally, these regulations do non include specific mention to the function and duties of the IA. This is a major barrier to the development of the IAF in Maltese PLCs and could explicate why many still do non hold such a map.[ 4 ]
The state of affairs is different in local Bankss. The MFSA Banking ordinances incorporate the demands of the Basel II model. Under Basel II the IAF is to be implemented as the 3rd line of defense mechanism in a company, executing independent reappraisals of the first line of defence- the concern units, and the 2nd line of defence- the hazard administration responsible for supervising hazards.
With the proposed execution of the Solvency II model in Malta in 2014, insurance companies will be ‘obliged to follow with internal control demands by agencies of set uping a bespoke hazard direction map, a conformity map and an internal audit map on the footing of the guiding regulations outlined in the Directive ‘ .
Despite Basel II and Solvency II demands, the IAF in Maltese houses demands to be given more prominence in local statute law to advance the development of the map.
The undermentioned subdivisions deal with factors that must be taken into consideration to assist cut down or extinguish barriers to an effectual IAF.
2.3 INTERNAL AUDITOR INDEPENDENCE
The IIA describes independency and objectiveness as important elements in the work of the IA. Indeed, the credibleness and value of the confidence services provided by the map are derived from its ‘independence of head and independency in visual aspect ‘ ( Stewart & A ; Subramaniam 2009 ) .
IIA Standard 1100 states that “ the internal audit activity should be independent, and IAs should be nonsubjective in executing their work. ” Despite this, Spencer Pickett, in his text edition on internal auditing, explains that the deficiency of independency is the greatest barrier to the work of IAs present in houses today.
In 2001, the IIA published “ Independence and Objectivity: A Framework for IAs ” as a usher to IAs. The model high spots menaces to IA independency, chiefly: economic involvement ; societal force per unit area ; personal relationships ; acquaintance and self-review.
The IA has a alone place because s/he is employed by direction but is besides expected to reexamine direction ‘s actions. Therefore, there is a certain tenseness faced by the IA as s/he depends on direction for employment but must measure it objectively. Whether the IA can keep objectiveness in this instance is a point of uncertainty ( Paape 2007 ) .
The menace of personal relationships impeding the IA ‘s independency is peculiarly strong in Malta, given the little size of our island.
A self-review menace may originate when the IA reviews his/her ain work. This might be the consequence of the double function of the IA within the administration with regard to direction and the AC.
The IA acts as a adviser to direction, urging betterments in the efficiency and effectivity of operations and assisting direction to make the house ‘s aims. The function of the IA when functioning the AC is to supply confidence that the full house is following with the controls set up by the AC and this is done by agencies of scrutinizing the house ‘s operations.
Due to these different functions, the IA faces a struggle. The confidence responsibilities performed for the AC consist of scrutinizing what has been antecedently recommended to direction by him/her, therefore showing a self-review menace.
Many faculty members have questioned whether this double function of the IA is possible ( Hermanson and Rittenberg 2003 ; Anderson 2003 ) ; and Flesher and Zanzig ( 2000 ) noted that this struggle could hold negative deductions on the credibleness of the map.
The IIA ‘s recommendation is that the IA should describe straight to the AC alternatively of to upper direction. The relationship between the AC and the IA was examined by Abbott in 2007. The three aspects of the relationship studied were: the coverage lines, expiration rights and budgetary control.
The consequences showed that when the AC has a stronger influence on the IAF than direction, the responsibilities of the IA would progressively dwell of internal control ratings. However, from the sample interviewed, it was found that the IA was carry throughing responsibilities at the direction of both direction and the AC and non holding one chief organic structure to reply to.
The IIA emphasises that if the AC expects the IA to analyze the company ‘s internal control system, so it should supply equal resources to the IA to put to death its audit program.
Lack of fiscal support could present several menaces to the work of the IA. First, there could be a decrease in the range of the work ; secondly, skilled IAs might be discouraged to use for a place in the IAF of a house that does non apportion sufficient financess ( Jefferson Wells 2004, Hermanson 2002 ) . Last, a tight budget could take to IAs non being given the necessary preparation on current issues related to their field.
Another recommendation of the IIA Independence and Objectivity Framework is the pulling up of an audit charter that specifically establishes the intent, authorization and duty of the IAF ; a formal support of the map ‘s independency and objectiveness in the house.
One could reason that outsourcing the IAF would besides assist to work out the independency issue as an external service supplier does non hold the struggle of an employee. However, an external service supplier would non hold the same in-depth cognition of the house as an employee, and might still act in the same manner as an employee as his payment besides depends on direction.
Mautz and Sharaf ( 1961 ) suggest three elements of IA independency within a house. These are: ‘programming independency ‘ , enabling the IA to command the audit plan ; ‘investigative independency ‘ , giving the IA entree to all necessary grounds ; and ‘reporting independency ‘ , leting the IA to describe freely.
In add-on to independency, the IIA Standards besides emphasise the importance of objectiveness: a province of head that must be maintained by the IA in the public presentation of his/her responsibilities. The IA should seek to avoid struggles of involvement and keep an indifferent attitude by avoiding the audit of operations in which s/he was involved and subjecting his/her work to a higher authorization ( Attribute Standard 1120 ) .
Staff rotary motion is besides another step to retain objectiveness. An extra precaution would be for the IA to be capable to quality confidence reviews to guarantee that objectiveness and professionalism are maintained.
Many IAs use the IIA Code of Ethics as a point of mention. The Code specifies that the IA must do a balanced appraisal of all relevant fortunes, avoid state of affairss which would do prejudice, and unwrap all material facts relevant to the activities being reviewed.
2.4 INTERNAL AUDITOR RELATIONSHIP WITH MANAGEMENT
Van Peursem ( 2005 ) mentions the bureau theory as underpinning the relationship between direction and the IA. In a state of affairs where direction places the company ‘s aims above its ain personal involvements, the IA would non be needed. However, in pattern, the IA is needed to guarantee that direction acts in the stockholders ‘ involvement.
The IIA Practice Advisory 1110-2 takes another position of the affair and recommends that the IA should describe administratively to direction in order to derive support for its mundane activities. Top direction can assist the IA by bespeaking bad countries to be tackled in the audit ( Arena & A ; Azzone 2009 ) ; and by exposing assurance in the IA ‘s capablenesss through the execution of his/her recommendations. The latter is indispensable in assisting to organize a good perceptual experience of the IA ‘s work, enabling it to present value to the house ( Sarens & A ; De Beelde 2006 ) .
Lack of direction support is a chief hinderance to the work of the IA. Mark Schlageter, of Thomson Reuters, stated that the AC and executive direction should ‘visibly and vocally show support ‘ for the IAF to do the undertaking of internal scrutinizing easier. An unfastened communicating line between direction and the IA would enable this support to be felt through information flow and feedback ( Loss 2000 ) .
A Maltese survey by Noemi Martin ( 2010 ) examined the relationship between the IA and direction by questioning both parties in 10 Maltese companies. The chief issues quoted were: timing, resources proviso, direction execution of recommendations and direction attitude to hazards. However, overall the relationship was stated to be a good one.
2.5 THE INTERNAL AUDITOR AND THE FIRM ‘S INTERNAL CONTROL SYSTEM
An of import inquiry that is posed by stakeholders of a house is whether the company is ‘in control ‘ . The concern stems from the fact that companies like Enron, Worldcom and HBOS had issued a statement ( harmonizing to the applicable statute law ) saying that they were ‘in control ‘ , but in world there were strategic jobs in control within the house.
The formal definition of internal control is as follows:
A procedure, effected by an entity ‘s board of managers, direction and other forces, designed to supply sensible confidence sing the accomplishment of aims in the undermentioned classs:
Effectiveness and efficiency of operations ;
Dependability of fiscal coverage ;
Conformity with applicable Torahs and ordinances ;
Safeguarding of assets.
( COSO Framework, December 2011, p. 1 )
Swinkels ( 2009 ) suggests the undermentioned points as of import to be taken into consideration by the IA in guaranting a sound internal control system for the house.
The IA has to guarantee that top direction have non merely put aims, but have systems that check the conformity of operations with these aims, for illustration ; guaranting that what is taught to employees is really practised and measuring organizational civilization which straight affects steadfast public presentation.
The IA must besides see the house ‘s external environment, and how this will impact company scheme, and in turn the direction control model. With regard to this function, one barrier could be the frequence of alteration in the house ‘s environment, systems and procedures which might be excessively rapid for the traditional audit attack to work efficaciously ( Spira & A ; Page 2002 ) .
2.6 THE INTERNAL AUDITOR AND RISK MANAGEMENT
In a PWC 2012 survey on the province of the internal audit profession: ‘Aligning internal audit ; are you on the right floor? ‘ ; stakeholders pointed out that the IA needs to hold a higher criterion of public presentation in order to efficaciously back up the administration ‘s hazard direction system.
Less than 45 % of those surveyed stated that they are happy with how hazards are being managed. Even though the direct duty for hazards is that of direction, the IA is employed to derive an apprehension of the house ‘s hazard environment, to guarantee that direction has employed a good control system and to confer with and give recommendations as to how best to extenuate these hazards to better steadfast public presentation.
One of the most outstanding positions of the literature is that deficiency of resources and staff, and organizational and cultural opposition, are besides barriers to the IA in his/her responsibilities with regard to put on the line direction. These are usually resolved through trust-based relationships built over clip, where stakeholders value the IA ‘s parts.
Stakeholders in the study indicated that the IA is expected to ‘navigate the new hazard landscape ‘ of the house by placing the top hazards as communicated by direction, and following up by moving upon these hazards. The IA could besides amend the audit program in existent clip, giving an expert response to direction actions and apportioning resources to the important countries.
2.7 MEASURING INTERNAL AUDITOR EFFECTIVENESS
One of the chief barriers to the work of IAs is the trouble in mensurating the effectivity of their work. If stakeholders do non measure the work of the IA in a proper mode, they can ne’er genuinely know the part that the IA is giving to the house.
IIA Standards usually concentrate on five chief countries to find IA effectivity: independency, professional proficiency, range of work, public presentation of audit work and direction of the IAF ( Dittenhofer 2001 ) .
Productivity must besides be taken into consideration. The IA may follow with criterions but still remain unable to lend something of value to the company ( Dittenhofer 2001 ) . Dittenhofer emphasised the importance of mensurating the IA ‘s part to the accomplishment of company ends and the quality of the auditee ‘s control operations.
At operation degree, the part can be seen by agencies of cost nest eggs. At a higher degree, portion monetary value additions, net income additions, growing and sound corporate administration could reflect IA effectivity, every bit good as betterments in hazard direction and internal control processes ( Arena & A ; Azzone 2009 ) .
In a survey by Ziegenfuss ( 2000 ) CAEs considered auditee satisfaction and the per centum of IA recommendations followed as more suited steps. IIA Attribute Standard 1300 proposes a more formal rating by agencies of a quality confidence plan that continuously monitors the IAF in the house.
Another formal attack to mensurating IA public presentation is benchmarking which has been defined as:
‘The procedure of continuously mensurating and comparing one ‘s concern procedures against comparable procedures in taking administrations to obtain information that will assist the administration identify and evaluate betterments ‘
( Andersen and Pattersen, 1996, p. 4 )
A Maltese survey by Balzan and Baldacchino ( 2007 ) revealed a hapless consciousness of benchmarking in Maltese houses: local IA rating techniques were described as ‘mere fundamental comparings, basically backward and inward-looking in nature ‘ .
2.8 INTERNAL AUDITOR RELATIONSHIP WITH EXTERNAL AUDITORS
In a survey by Soh and Martinov-Bennie ( 2011 ) , main audit executives interviewed stated that there was a good relationship between the internal and external hearers, with both parties working together to avoid duplicate and promote cost efficiency. Cohen et Al. ( 2010 ) found that external hearers ( EAs ) perceived IAs to be more independent, dependable, and collaborative and holding a greater position in the administration than in old old ages.
However, the IAs in the survey by Van Peursem ( 2005 ) did non see themselves as holding a proper relationship with the EA, with some depicting the relationship as being distinguishable and intimidating.
Guidance for the relationship between the external and internal hearers is provided in ISA 610: ‘Using the Work of Internal Auditors ‘ ; and ISA 315: ‘Identifying and Measuring the Risks of Material Misstatement through Understanding the Entity and Its Environment ‘ .
Coordination between the internal and external hearer could heighten audits performed because IAs have a elaborate cognition of the company which EAs do non possess, while EAs are exposed to a wider assortment of clients and issues. ISA 610 provinces that the internal and external hearer have different aims ; nevertheless, the manner in which they achieve aims may be similar. Without coordination, there would be a waste of clip for the IAF as it may double work already done by the EA.
Wood ( 2004 ) recommended the followers for the IAF: taking enterprise in seeking coordination with the EA, following with criterions, converting stakeholders of the benefits from the EA ‘s work and following up on control lacks identified by the EA. Throughout the twelvemonth, changeless communicating should assist both parties to accomplish better audit coverage, and interrupt down the barriers which frequently exist between the IA and the EA.
3.1 PRELIMINARY RESEARCH
The aim of the survey was to happen out what barriers, if any may be for the IAF in Maltese PLCs and if so, the grounds for these. The field of survey was chosen after a thorough analysis of Faculty of Economics, Management and Accountancy past thesiss. This was complemented by extended research on the capable affair and a elaborate preliminary treatment with an experient Maltese IA.
3.2 DATA COLLECTION
Data was collected from both primary and secondary beginnings. Secondary information was obtained from books, thesiss, diaries, research documents, online databases and web sites, in order to obtain an apprehension of the bing organic structure of cognition on the topic. Both Maltese and foreign surveies were referred to ; nevertheless, there was no Maltese survey specifically related to barriers to IAFs. Primary information was collected by agencies of semi-structured interviews which included both quantitative and qualitative inquiries.
3.2.1 Sample and Response Rate
The analysis was limited to PLCs since the population of all local limited liability companies, was considered by the supervisor to be excessively huge in position of the clip restraint and word bound for this thesis.
A list of local PLCs was obtained from the MFSA in order to choose a sample to be interviewed. The following measure was to find which companies in the list have an IAF and which companies do non. A assorted sample gives a much better penetration into the local state of affairs than a sample concentrating entirely on companies holding an IAF.
Such a sample was particularly required in this thesis in order to foreground barriers that companies without an IAF face in puting up IAFs, and in order to happen the ground behind the deficiency of IAFs in such Maltese PLCs. Companies in the sample that have an IAF were selected to look into whether they besides face any such barriers and if so how they manage these barriers to derive an effectual part from the map.
In choosing the sample, it was found that a figure of PLCs were merely the ‘financing arm ‘ of the private company and hence in this instance, outside the range of the survey. Such companies were excluded from the population when choosing the sample.
Due to the short clip available merely twenty five companies from the list were contacted. These included companies of different size and operating in different industries, viz. : gambling, travel, insurance, hotels, banking, fabrication, retail, telecommunications, and IT.
In order to find which of these 20 five companies have an IAF and which do non, a thorough analysis was made of the corporate administration statements in the published fiscal statements of these companies. Consequences showed that eleven out of 20 five companies 44 % – do non hold an IAF. This is a significant per centum when sing that these are listed companies of a certain size and stature ; hence the demand to obtain a sample representative of the local state of affairs.
From the 20 five companies contacted, twelve companies replied, giving a response rate of 48 % . Therefore, the concluding sample drawn up consisted of 12 companies and a sum of 12 face-to-face interviews were conducted. Five of the 12 companies interviewed 42 % – stated that they do non hold an IAF, go forthing 58 % of the sample that was made up of companies that have an IAF.
Table 3.1: Respondent Features
No. of org.
Type of IAF
Head Count
In-housed
Out-sourced
No IAF
Administration
IAF
1-50
51-500
501-1000
1000+
1-5
6-10
11+
12
6
1
5
2
6
2
2
5
1
1
3.3 RESEARCH INSTRUMENT
The chief research instrument was the one-to-one semi-structured interview conducted with 12 administrations. Personal interviews were conducted in penchant to get off questionnaires in order to enable more information to be gathered from a elaborate treatment with the participants.
3.3.1 Interview Schedule Design
Two separate interview agendas were prepared. One agenda was designed for companies that do non hold an IAF and the other for companies that do hold this map. The agendas were divided into subdivisions as shown in Table 3.2.
Table 3.2 Interview Schedule Design
Companies holding an IAF
Interview conducted with head IA
Companies non holding an IAF
Interview conducted with Financial Controller/Audit Committee Member
Reason for non holding an IAF
Q1
Role and Function of the IA
Q1 – 2
Role and Function of the IA
Q2 – 3
Independence
Q3 – 7
Independence
Q4 – 8
Role Conflict
Q8 – 11
Role Conflict
Q9 – 12
Relationship with Management
Q12
Relationship with Management
Q13
Hazard Management
Q13
Hazard Management
Q14
Measuring IA Effectiveness
Q14 – 16
Measuring IA Effectiveness
Q15 – 17
Internal Audit Profession
Q17
Internal Audit Profession
Q18
Relationship with EA
Q18 – 19
Relationship with EA
Q19
Both interview agendas consisted of open-ended and closed-ended inquiries. Open-ended inquiries were used where a more luxuriant account of the construct was needed. Closed-ended inquiries consisted of statements presented to the interviewees for which they had to bespeak their degree of understanding harmonizing to a five-point Likert graduated table.
3.3.2 Conduct of Interviews
Interviews were held during the period from December 2012 to March 2013 at the interviewees ‘ premises and lasted on mean 40 five proceedingss. The interview inquiries were e-mailed to the interviewees in progress to enable a preliminary analysis of the inquiries prior to the meeting.
3.4 DATA ANALYSIS
Quantitative informations consisted of numerical replies to Likert-scale inquiries. On the advice of Dr. Frank Bezzina, the average rank for each inquiry was calculated for both groups separately and in entire. The median was chosen instead than the mean to avoid fishy consequences due to outliers. A Mann-Whitney U trial was used to prove for differences between the ranks of the two groups.
Qualitative information was analysed in order to compare responses between the two chief interviewee groups. Common responses and differences were highlighted.
3.5 LIMITATIONS
A figure of restrictions were encountered during the research stage:
The low response rate obtained
Groups were made up of less than eight respondents each, while eight is the preferable minimal figure for a Mann-Whitney U trial
Due to the clip restraints and word bound, merely a little sample could be chosen ; a larger sample would hold resulted in more information for analysis
Due to the needed word bound, the analysis of qualitative informations was restricted to the more of import remarks made
Despite the above restrictions, this research worker believes that the findings and the decisions reached in this survey shed utile visible radiation on the capable affair of the survey.
4.1 THE ROLE AND FUNCTIONS OF THE INTERNAL AUDITOR
It is interesting to observe that at that place seems to be understanding among the two company groups interviewed with regard to the function of the IA. The two chief facets of the IA function pointed out were: the ‘operational function ‘ , transporting out reappraisals of operations and processs in the company and doing recommendations to senior direction sing the proper operation of controls ; and the ‘ad-hoc ‘ component, being probes into reported concerns.
Such concerns could affect affairs of fraud, which may come up as a consequence of the IA ‘s probes into operations. The term ‘value-adding ‘ was repeatedly mentioned, and besides reflected in a respondent ‘s remark saying that his company ‘really needed ‘ an IAF.
The IA ‘s function is frequently defined in the audit program approved by the AC, altering harmonizing to the ‘risk image ‘ in order to undertake material countries that have a important operational or fiscal impact. As evidenced by one respondent, the function of an outsourced IAF is by and large defined by AC instructions.
A more formal IAF exists within two companies, being the 3rd line of defense mechanism in an organized Enterprise Risk Management model supervising customer-facing units and conformity and hazard direction units.
The construct of the ongoing nature of the IA ‘s work is non popular with all respondents. Some stated that the IA is merely needed to execute occasional topographic point cheques on hazard countries pointed out by the AC.
Companies non holding an IAF were asked whether they believe that the EA entirely is sufficient to supply confidence sing internal operations. All respondents disagreed with this, saying that this is direction ‘s duty ; nevertheless, one interviewee noted that the EA ‘s representation missive does supply some signifier of confidence on the adequateness of internal procedures.
4.1.1 Widening the Internal Auditor ‘s Role
Interviewees had different sentiments on this. One IA explained that IAs should acquire involved at an early phase in the determination doing procedure to do a more relevant part by measuring the relevancy and dependability of the informations and proving the strength of the procedure.
Most IAs believe that there is no demand for a function extension since the map already covers audit countries extensively, executing ‘deep dive audits ‘ for specific high hazard countries, and keeping well-trained staff. Merely one company in the sample made a specific committedness to spread out the function of the current IA and besides employ an extra professional for that function.
4.2 INTERNAL AUDITOR INDEPENDENCE
All respondents agreed that independency is indispensable to the function of the IA. Table 4.1 shows the consequences.
Table 4.1 IA Independence
Median Sum
Median with IAF
Median without IAF
P-value*
The IA must be independent in the public presentation of responsibilities
5
5
4
0.006
1 = Strongly Disagree and 5 = Strongly Agree
*Significantly different between companies holding an IAF and companies without an IAF at a degree of significance a‰¤0.05
Note: With IAF- Group 1, Without IAF- Group 2
Some respondents explained independency in footings of the IA ‘s coverage line to the highest governments in the company. Respondents in the IA group highlighted the importance of organizational construction and the ‘tone at the top ‘ within the company that enables the IAF freedom to take countries for review- the alleged scheduling independency. Merely one respondent, within the 2nd group, was an exclusion to this sentiment, saying that the IA should purely follow AC instructions.
Most respondents mentioned the construct of ‘independence of head ‘ : organizing an indifferent sentiment, knocking ‘systems instead than people ‘ as one IA put it. The 2nd group ( those without an IAF ) highlighted the importance of the IA ‘s opposition to bullying and the objectiveness needed to organize decisions on sensitive issues.
The independency ‘in visual aspect ‘ was mentioned by the caput IA of a big company, underscoring that IAF members should sooner non be associated with reappraisals of sections with which they were antecedently employed.
The p-value in table 4.1 indicates that the ranking in the two groups is significantly different, which is supported by the greater importance attributed to independence in the first group.
4.2.1 Independence at the Audit Committee Level
Respondents agreed on the importance of independency at the AC degree. Table 4.2 shows no important difference between responses given by the two groups.
Table 4.2 Audit Committee Independence
Median Sum
Median with IAF
Median without IAF
P-value*
Independence at the AC degree is of import within a company
4
4
4
0.729
1 = Strongly Disagree and 5 = Strongly Agree
*Note: Significantly different merely if the degree of significance a‰¤ 0.05. No significance in this instance.
Note: With IAF- Group 1, Without IAF- Group 2
Some respondents in group 1 consider AC independency as holding non-executive managers as AC members. Other IAs emphasised the exclusive duty of the AC in puting scheme and reexamining direction, an agent of company stockholders. Merely as the AC needs a strong IA, the IA needs a strong independent AC to back up the map, as explained by one IA.
The state of affairs in pattern is slightly different, with respondents from both groups explicating that control over the map is non purely reserved to the AC, but instead to the whole board, and at times even direction. This is particularly the instance when the AC is merely interested in the ultimate fiscal consequence and operational issues are discussed with direction.
4.2.2 Threats to Independence
The bulk of respondents agreed that independency is largely threatened by the ‘human component ‘ : personal relationships with chap directors being assessed and societal force per unit areas from auditees. Extensive experience within a company was described as a ‘double-edged blade ‘ , enabling a better apprehension of sections ‘ maps but making some tenseness with co-workers during audit reappraisals.
The IA ‘s dependance on company paysheet was besides mentioned by respondents in both groups, with the IA ‘s independency of head being emphasised as important in such state of affairss. However, one respondent from the 2nd group explained that one can non afford to disregard paysheet and equal force per unit areas in little companies.
A corporate civilization of opposition to alter and a perceptual experience of the IA as a watchdog are major barriers that the IA has to interrupt in order to construct trust-based relationships and be consulted by direction as an independent professional within the company.
Self-reviews brought about by the IA ‘s engagement in puting up systems is a major menace to independency, harmonizing to the literature. However, respondents in group two felt that though such segregation of responsibilities is ideal, independency of head should counter the menace. Most respondents in group one feel that threats to independence are good managed in pattern and do non impede the proper operation of the IAF.
4.2.3 Measures to Ensure Internal Auditor Independence
Three solutions were presented to respondents as possible steps to guarantee IA independency within a company. Table 4.3 shows that in all three instances, there is no important difference between the rankings of the two groups.
Table 4.3 Measures to Ensure IA Independence
Median Sum
Median with IAF
Median without IAF
P-value*
a. IA responds to both direction and ultimate government organic structure
3
2
4
0.416
B. Formal audit charter stipulating IA position and duty
4
4
3
0.173
c. Outsourcing the IAF
3
3
3
0.161
1 = Strongly Disagree and 5 = Strongly Agree
*Note: Significantly different merely if the degree of significance a‰¤ 0.05. No significance in this instance.
Note: With IAF- Group 1, Without IAF- Group 2
The general sentiment in both groups was that the IA should hold a direct coverage line to the AC with merely a ‘reporting protocol ‘ to direction to undertake all issues at an early phase. However, one IA who stated that bill of exchange IA studies should travel foremost to direction for their remarks before the entry of the concluding study.
A formal audit charter approved by the AC exists within all companies in group one except for the company outsourcing the IAF where a formal battle missive approved by the AC is prepared explicating the responsibilities of the IA appointed. The audit charter is considered by two IAs as puting the foundation for the IA ‘s function and giving the IA entree to information. It can besides be used to inform employees what to anticipate from the IA, as specified by two group two respondents. However, other respondents believed that this is merely needed for a new IAF and that finally the IA ‘s personal features affect independency.
Respondents seemed unsure if outsourcing the IAF would help IA independency. The bulk of IAs expressed their uncertainties sing the effectivity of a professional who would non hold in-depth cognition and apprehension of the company. Some were besides doubting due to tip dependance, bespeaking the similarity to payroll dependance for an in-house map and the deficiency of committedness by a service supplier having a low fee.
Outsourcing was mentioned as an option for countries in which the company lacks specific expertness. The lone respondent recommending outsourcing was from group two ; nevertheless, the sensed responsibilities of such a professional were described as fact-finding in nature.
4.2.4 Internal Auditor Reporting Responsibility
Respondents from group one stated that they report to the AC and some besides mentioned coverage to the company president. Interviewees from the 2nd group agree with the construct of the IA coverage to the AC with one respondent stipulating that the IA should describe specifically to the AC member with a background in accounting/auditing.
