ABSTRACT those four variables are the organizational independence of

ABSTRACT

The importance of internal
audit quality is increasing in the public sector as well as private sector.
With respect to public sectors, the primary objective of internal auditing is
to help the public sector organizations to attain their objective through an
organized way. Keeping this situation in view, Author believe that there is a
need for a research to examine the factors which determine the quality of
internal audit of an organization. For this purpose author need to examine the
effects of four variables on internal audit quality those four variables are
the organizational independence of internal audit, the use of IT in audit
process, competence and performance.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The data for this study will
be collected using questioners distributed among the auditors of different
firms. Different types of statistical techniques will be used to obtain the
results from the collected data. The results of this paper will be used to
inform the members of board of directors, audit committee, internal auditors
and external auditors to use the findings to better prepare internal audit
function to use it in their organization. The findings of this study will show
the relationship between internal audit quality (dependent variable) and use of
information technology, organizational independence of internal auditors,
competence and performance (independent variables).

One of the study’s aims will
be to know the most important determinant within these four. The
recommendations of our study will be used by the organizations to take
initiatives to ensure the availability of the key factors to achieve the
quality of internal audit.

 

INTRODUCTION and BACKGROUND

The
importance of internal audit in increasing in corporate governance structure
within an organization. The recent corporate failures have increased the
significance of internal auditing. In the recent years, the importance of
internal audit within the organizations is increasing as well as the role of
auditing technology in increasing the value of an organization. Internal audits
provide services to company management in number of ways. It may include
detection and prevention fraud, analyzing internal control, and checking
compliance with company policies and government regulation. Companies on
smaller scale may need these functions even more than companies on larger
scale.  Employee fraud, waste, or a
government fine simply cannot be afforded by a small business. Initiation an
internal audit function helps in the growth of a small business.

Internal auditing is now
getting importance in business today. The role of the internal auditor in the businesses
is often ignored which results in major losses in companies,  attention has recently been given to internal
auditing. Sarbanes-Oxley act is also making the organizations to implement
internal audit function

Prominent benefits of Internal Audit function are:

·        
Improve the “control environment” of the
organization

·        
organization becomes process-dependent
instead of person-dependent

·        
works as an Early Warning System, helps to
identify deficiencies  and remediated on
a timely basis

·        
Ultimately increase accountability within the
organization

·        
With an internal audit function, management
would have an advocate, a risk manager, a controls expert, an efficiency
specialist, a problem-solving partner

 

Taking in view that internal audit function has a significant
importance within an organization whether it is small or large, there are some
issues which are becoming constraints for internal audit function.

Those may include management interventions, increased
responsibilities of internal auditor other than his auditing responsibilities,
lack of competence and no adequate use of information technology in the process
of auditing.

The problem arise when the management
unable to find desired results of auditing even when they are implementing the
internal audit function. This is because their internal audit quality is not up
to the mark. Those firms should get to know how to improve the quality of
internal audit, or in other words, that organization should know all those
factors which determine the quality of internal audit function

Current research will be a step towards examining
those factors which are directly or indirectly determining the quality of the
internal audit function.

There
are already exist much of the research in this area which are determining the
importance of the auditing quality for financial reporting quality (Lawrence,
Daugherty, Parker & Peters, 2016) and some research are conducted for
determining the importance of internal audit but some of the research gap was
indicated in those research papers as well for which author is going to
initiate the study.

A research
shows that the most important determinants of internal auditing quality are
performance and competence (Deribe, 2014). That study identifies that there is
a significant gap in 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 concentrated on few variables, thus,
future studies could incorporate including other important variables in the
study. Author will now
investigate the factors other than those used in that study. Also to the best
of author’s knowledge, there is no significant study in related field in
Pakistan so, the present study is an attempt to cover the gap.

Present study is considering four variables and their effect
on internal audit quality and those variables are use
of 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 is
designed to increase value and improve the operations of the organization.
Using internal auditing, an organization achieve its objectives by bringing an
orderly, controlled approach to evaluate and improve the effectiveness of risk
management, control and governance processes. In other words, using internal
auditing, the firms monitors the effectiveness of the internal control
processes that have been established by management. Auditing is originally a
financial management concerned with assessing practice for the internal
financial status of the organization and the evaluations of the financial
performance of the organization. (Manal, 1999)

Internal Audit helps in maintaining
good corporate governance in organizations. It helps to improve management and
accountability, both financial and non–financial. to provide assurance to the
board of directors, it is important to have internal audit function. the audit
committee, and the chief executive officer, and stakeholders that the
organization is working effectively.

Much of the research is already being
done in finding the determinants of internal auditing quality. A study suggest that the most
important determinants of internal auditing quality are performance and
competence (Deribe, 2014). That study indicates that there is a significant gap
in 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 enough
arguments that the role of internal audit is now essential for the corporate
governance. It could be said that the role of internal audit has the potential
to be fundamental, but this depends upon the performance of the audit department.
There should be a competent auditing department performing auditing techniques
to add value to the business and to help the board and audit committee exercise
their directing and oversight role respectively. Much depends on whether the
auditor is competent to do this job. Each internal auditor should possess
certain knowledge, skills, and other competencies (Pickett, 2004).

Moeller (2005) prominent that every
profession requires a set of principles to govern its practices, general
procedures, and ethics. These principles allow experts performing similar work
being professionals because they are following a known and reliable set of best
practice principles. The key standards for internal auditors are the Institute
of Internal auditors’ (IIA’s) Professional Standards for the Practice of
Internal Auditing. The IIA revised its standards in 2004 after comments derived
from a lengthy exposure draft.

previous empirical evidence indicate
that extent to which external auditors rely on the internal audit work will be
greater when the internal audit department possessed the characteristics
associated with competency  (Messier and
Schneider, 1988). The findings of the study of Haron, (2004) indicated that
technical competence is the most important criterion that external auditors
consider in their reliance on internal auditors.

Salehi and Husini (2011) have found
on their study, IT causes remarkable changes in internal auditing and IT
increases the quality of internal audit. IT helps auditing by improving the quality
of different aspects of internal auditing. The findings of the study of Haron,
Chambers, Ramsi, & Ismail (2004) indicated that technical competence is the
most important criterion that external auditors consider in their reliance on
internal auditors.

Venables and Impey (1991) identified
that: “Quality assurance is essential to maintaining an internal auditing
department’s capability to perform its functions in an efficient, effective
manner. Quality assurance is also important in achieving and maintaining a high
level of credibility with management, the audit committee, and others who rely
on the work of the internal auditing department.” (IIA Statement of Internal
Auditing Standards no 4).

Schneider (1988) indicate internal
audit work performance is the most important factor that determines the extent
of external auditors’ reliance on internal audit work.

Chambers et al. (1987) argued to make
sure that the chief internal auditor measures internal auditing performance and
takes corrective action to improve performance.

After knowing the importance of
internal auditing, it is important to maintain the quality of auditing in order
to have maximum benefits. So the management should know how to maintain the
quality of the internal auditing or in other words the management should know
those factors which are effecting the quality of internal auditing.

Research Gap and Contribution

Much of the research is already being
done in finding the determinants of internal auditing quality. But those
studies 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 of
internal auditing quality are performance and competence (Deribe, 2014). That
study indicates that there is a significant gap in the area that this
study concentrated only on the banking sector, so, future studies could
investigate internal audit qualities of other industries.

Matarneh, (2011) incorporate only
three variables (competence of internal
auditors,  objectivity of internal
auditor ,  performance quality of
internal auditing) in a similar sort of study, indicating that future
studies can also use other variables, and also that study was focused only on a
particular bank, other studies can also be done on other industries.

 

Munro and Stewart, (2011) indicates
that the sample size used in that study was small due to which the outcomes of
the study are not generalizable to other population, so the author aims to address
this gap by having larger sample size to have more generalizable findings.

Hanefah, (2016) argues that some
organizations are not willing to disclose their financial records and also not
openly provide required data so, future studies should collect data only from
interested groups in internal audit.

As no similar study in carried out in
Pakistan so the Author aims to address that gap by conducting the research on
organizations in Pakistan. Also this study will not be focusing on banking
sector as the study will incorporate private service industry using more
variables than in previous studies to come up with more consolidated and more
generalizable findings.

As previous studies were having small
sample size so the author will also address this gap by having larger sample
size to have more generalizable findings. Also to the best of author’s
knowledge there is no particular study having these four variables in context
of Pakistani organization which the current study is using. So the results of
the study can be used in broader perspective.

 

RESEARCH OBJECTIVES

The prime objective of the study is to examine the effect of
organizational independence in audition process and use of information
technology in auditing process on the internal audit quality of private services
industries in Pakistan and then use those finding to improve the internal
auditing quality in organizations.

Furthermore some of the secondary objectives are as follow:

·        
To understand the importance
and advantages of the internal auditing within an organization

·        
To explain how an Internal
Auditor can contribute to organizational performance

·        
To examine the relationship
between effective internal auditing functions and organizational performance

·        
To propose measures to
increase organizational performance through an effective internal audit
service.

 

RESEARCH METHODOLOGY

For
the purpose of data collection, Author will collect information from the top
management and internal auditors (Chief Internal Auditors (CIAs) or Chief Audit
Executives (CAEs)) of selected organizations and for this purpose questioners
will be distributed among them and personal interviews will also be conducted.

The survey
questionnaire will have two parts; first part will include demographic characteristics
while the second partw ill be designed to test the four main variables of the
study, each set questions will form a field statements, which covers the
questions of the study. The main parts of the questionnaire participants will
be asked, according to their insights and perceptions, to state the extent to
which they agreed or disagreed with the statements provided in the four scales
of the study (objectivity, competence, performance and Information technology).
Five point- Likert scale will be used as a measure to reflect the views of
respondents regarding the statements contained in the questionnaire, which will
be 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 Strongly
Disagree. This study will identify the factors that influence internal audit
quality. Thus, the multiple regression equation (OLS regression model) will be used
to analyze the data obtained via a structured questionnaire using SPSS
(statistical package for social scientists).

Data
will be collected from selected companies. Different statistical techniques
like regression and correlation will be used to analyze the collected data
using SPSS software

 

Dependent
variable: The dependent variable used by the study is the internal audit
quality.

Independent
variables: The independent variables used by the study are competence,
performance, and Information Technology of internal auditors, organizational
independence. 

x

Hi!
I'm Eileen!

Would you like to get a custom essay? How about receiving a customized one?

Check it out