ABSTRACTThe importance of internalaudit quality is increasing in the public sector as well as private sector.With respect to public sectors, the primary objective of internal auditing isto help the public sector organizations to attain their objective through anorganized way.
Keeping this situation in view, Author believe that there is aneed for a research to examine the factors which determine the quality ofinternal audit of an organization. For this purpose author need to examine theeffects of four variables on internal audit quality those four variables arethe organizational independence of internal audit, the use of IT in auditprocess, competence and performance.The data for this study willbe collected using questioners distributed among the auditors of differentfirms. Different types of statistical techniques will be used to obtain theresults from the collected data. The results of this paper will be used toinform the members of board of directors, audit committee, internal auditorsand external auditors to use the findings to better prepare internal auditfunction to use it in their organization. The findings of this study will showthe relationship between internal audit quality (dependent variable) and use ofinformation technology, organizational independence of internal auditors,competence and performance (independent variables). One of the study’s aims willbe to know the most important determinant within these four. Therecommendations of our study will be used by the organizations to takeinitiatives to ensure the availability of the key factors to achieve thequality of internal audit.
- Thesis Statement
- Structure and Outline
- Voice and Grammar
- Conclusion
INTRODUCTION and BACKGROUNDTheimportance of internal audit in increasing in corporate governance structurewithin an organization. The recent corporate failures have increased thesignificance of internal auditing. In the recent years, the importance ofinternal audit within the organizations is increasing as well as the role ofauditing technology in increasing the value of an organization.
Internal auditsprovide services to company management in number of ways. It may includedetection and prevention fraud, analyzing internal control, and checkingcompliance with company policies and government regulation. Companies onsmaller scale may need these functions even more than companies on largerscale. Employee fraud, waste, or agovernment fine simply cannot be afforded by a small business. Initiation aninternal audit function helps in the growth of a small business. Internal auditing is nowgetting importance in business today. The role of the internal auditor in the businessesis often ignored which results in major losses in companies, attention has recently been given to internalauditing.
Sarbanes-Oxley act is also making the organizations to implementinternal audit functionProminent benefits of Internal Audit function are:· Improve the “control environment” of theorganization· organization becomes process-dependentinstead of person-dependent· works as an Early Warning System, helps toidentify deficiencies and remediated ona timely basis · Ultimately increase accountability within theorganization· With an internal audit function, managementwould have an advocate, a risk manager, a controls expert, an efficiencyspecialist, a problem-solving partner Taking in view that internal audit function has a significantimportance within an organization whether it is small or large, there are someissues which are becoming constraints for internal audit function.Those may include management interventions, increasedresponsibilities of internal auditor other than his auditing responsibilities,lack of competence and no adequate use of information technology in the processof auditing.The problem arise when the managementunable to find desired results of auditing even when they are implementing theinternal audit function.
This is because their internal audit quality is not upto the mark. Those firms should get to know how to improve the quality ofinternal audit, or in other words, that organization should know all thosefactors which determine the quality of internal audit functionCurrent research will be a step towards examiningthose factors which are directly or indirectly determining the quality of theinternal audit function.Thereare already exist much of the research in this area which are determining theimportance of the auditing quality for financial reporting quality (Lawrence,Daugherty, Parker & Peters, 2016) and some research are conducted fordetermining the importance of internal audit but some of the research gap wasindicated in those research papers as well for which author is going toinitiate the study.A researchshows that the most important determinants of internal auditing quality areperformance and competence (Deribe, 2014). That study identifies that there isa significant gap in the area that this study concentrated only on the banking sector so, futurestudies could investigate internal audit qualities of other industries. Thesurvey study carried out in this study was concentrated on few variables, thus,future studies could incorporate including other important variables in thestudy.
Author will nowinvestigate the factors other than those used in that study. Also to the bestof author’s knowledge, there is no significant study in related field inPakistan so, the present study is an attempt to cover the gap.Present study is considering four variables and their effecton internal audit quality and those variables are useof IT in auditing process, organizational independence of internal auditors,performance and competence.
LITERATURE REVIEW According to the Institute of Internal Auditors (2011),internal auditing is an independent, objective assurance activity which isdesigned to increase value and improve the operations of the organization.Using internal auditing, an organization achieve its objectives by bringing anorderly, controlled approach to evaluate and improve the effectiveness of riskmanagement, control and governance processes. In other words, using internalauditing, the firms monitors the effectiveness of the internal controlprocesses that have been established by management.
Auditing is originally afinancial management concerned with assessing practice for the internalfinancial status of the organization and the evaluations of the financialperformance of the organization. (Manal, 1999)Internal Audit helps in maintaininggood corporate governance in organizations. It helps to improve management andaccountability, both financial and non–financial. to provide assurance to theboard of directors, it is important to have internal audit function.
the auditcommittee, and the chief executive officer, and stakeholders that theorganization is working effectively.Much of the research is already beingdone in finding the determinants of internal auditing quality. A study suggest that the mostimportant determinants of internal auditing quality are performance andcompetence (Deribe, 2014). That study indicates that there is a significant gapin the area that this study concentrated only on the banking sector so,future studies could investigate internal audit qualities of other industries.The survey study carried out in this study was based on few variables, thus,future studies could be done including other important variables in the study.At this point, there are enougharguments that the role of internal audit is now essential for the corporategovernance. It could be said that the role of internal audit has the potentialto be fundamental, but this depends upon the performance of the audit department.
There should be a competent auditing department performing auditing techniquesto add value to the business and to help the board and audit committee exercisetheir directing and oversight role respectively. Much depends on whether theauditor is competent to do this job. Each internal auditor should possesscertain knowledge, skills, and other competencies (Pickett, 2004).Moeller (2005) prominent that everyprofession requires a set of principles to govern its practices, generalprocedures, and ethics. These principles allow experts performing similar workbeing professionals because they are following a known and reliable set of bestpractice principles. The key standards for internal auditors are the Instituteof Internal auditors’ (IIA’s) Professional Standards for the Practice ofInternal Auditing. The IIA revised its standards in 2004 after comments derivedfrom a lengthy exposure draft.
previous empirical evidence indicatethat extent to which external auditors rely on the internal audit work will begreater when the internal audit department possessed the characteristicsassociated with competency (Messier andSchneider, 1988). The findings of the study of Haron, (2004) indicated thattechnical competence is the most important criterion that external auditorsconsider in their reliance on internal auditors.Salehi and Husini (2011) have foundon their study, IT causes remarkable changes in internal auditing and ITincreases the quality of internal audit. IT helps auditing by improving the qualityof different aspects of internal auditing. The findings of the study of Haron,Chambers, Ramsi, & Ismail (2004) indicated that technical competence is themost important criterion that external auditors consider in their reliance oninternal auditors.Venables and Impey (1991) identifiedthat: “Quality assurance is essential to maintaining an internal auditingdepartment’s capability to perform its functions in an efficient, effectivemanner.
Quality assurance is also important in achieving and maintaining a highlevel of credibility with management, the audit committee, and others who relyon the work of the internal auditing department.” (IIA Statement of InternalAuditing Standards no 4).Schneider (1988) indicate internalaudit work performance is the most important factor that determines the extentof external auditors’ reliance on internal audit work.Chambers et al.
(1987) argued to makesure that the chief internal auditor measures internal auditing performance andtakes corrective action to improve performance.After knowing the importance ofinternal auditing, it is important to maintain the quality of auditing in orderto have maximum benefits. So the management should know how to maintain thequality of the internal auditing or in other words the management should knowthose factors which are effecting the quality of internal auditing.
Research Gap and Contribution Much of the research is already beingdone in finding the determinants of internal auditing quality. But thosestudies were focused on banking sector, also to the best of author’s knowledge,not a single study is carried out in Pakistan. A study suggest that the most important determinants ofinternal auditing quality are performance and competence (Deribe, 2014). Thatstudy indicates that there is a significant gap in the area that thisstudy concentrated only on the banking sector, so, future studies couldinvestigate internal audit qualities of other industries. Matarneh, (2011) incorporate onlythree variables (competence of internalauditors, objectivity of internalauditor , performance quality ofinternal auditing) in a similar sort of study, indicating that futurestudies can also use other variables, and also that study was focused only on aparticular bank, other studies can also be done on other industries. Munro and Stewart, (2011) indicatesthat the sample size used in that study was small due to which the outcomes ofthe study are not generalizable to other population, so the author aims to addressthis gap by having larger sample size to have more generalizable findings.Hanefah, (2016) argues that someorganizations are not willing to disclose their financial records and also notopenly provide required data so, future studies should collect data only frominterested groups in internal audit.As no similar study in carried out inPakistan so the Author aims to address that gap by conducting the research onorganizations in Pakistan.
Also this study will not be focusing on bankingsector as the study will incorporate private service industry using morevariables than in previous studies to come up with more consolidated and moregeneralizable findings.As previous studies were having smallsample size so the author will also address this gap by having larger samplesize to have more generalizable findings. Also to the best of author’sknowledge there is no particular study having these four variables in contextof Pakistani organization which the current study is using. So the results ofthe study can be used in broader perspective. RESEARCH OBJECTIVESThe prime objective of the study is to examine the effect oforganizational independence in audition process and use of informationtechnology in auditing process on the internal audit quality of private servicesindustries in Pakistan and then use those finding to improve the internalauditing quality in organizations.Furthermore some of the secondary objectives are as follow:· To understand the importanceand advantages of the internal auditing within an organization · To explain how an InternalAuditor can contribute to organizational performance · To examine the relationshipbetween effective internal auditing functions and organizational performance · To propose measures toincrease organizational performance through an effective internal auditservice. RESEARCH METHODOLOGYForthe purpose of data collection, Author will collect information from the topmanagement and internal auditors (Chief Internal Auditors (CIAs) or Chief AuditExecutives (CAEs)) of selected organizations and for this purpose questionerswill be distributed among them and personal interviews will also be conducted.
The surveyquestionnaire will have two parts; first part will include demographic characteristicswhile the second partw ill be designed to test the four main variables of thestudy, each set questions will form a field statements, which covers thequestions of the study. The main parts of the questionnaire participants willbe asked, according to their insights and perceptions, to state the extent towhich they agreed or disagreed with the statements provided in the four scalesof the study (objectivity, competence, performance and Information technology).Five point- Likert scale will be used as a measure to reflect the views ofrespondents regarding the statements contained in the questionnaire, which willbe allocated weight (5) for the situation strongly agree, and (4) for agree,and (3) for the situation is neutral and (2) for disagree, and (1) for StronglyDisagree. This study will identify the factors that influence internal auditquality.
Thus, the multiple regression equation (OLS regression model) will be usedto analyze the data obtained via a structured questionnaire using SPSS(statistical package for social scientists).Datawill be collected from selected companies. Different statistical techniqueslike regression and correlation will be used to analyze the collected datausing SPSS software Dependentvariable: The dependent variable used by the study is the internal auditquality.
Independentvariables: The independent variables used by the study are competence,performance, and Information Technology of internal auditors, organizationalindependence.