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Mekelle University
College of Business and Economics
Department of Management
A Thesis on Perception of Management and Internal Audit Staff on the
Importance of Internal Audit Efffectiveness Measures in Bahir Dar and
Mekelle Universities
By
Aderaw Gashayie
Email: aderaw_g@yahoo.com
Submitted in Partial Fulfillment of the Requirements for the
Masters Degree of Business Administration/MBA in Finance
Principal advisor: Aregawi G/Michaeal (Asst.Prof.)
Co-advisor: Getnet Baye (Lecturer)
May, 2011
Mekelle, Ethiopia
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DECLARATION
This is to declar that this thesis on the title “Perception of Management and Internal Audit
Staff on the Importance of Internal Audit Effectiveness Measures in Bahir Dar and Mekelle
Universities” submitted in partial fulfillment of the requirements for the award of the Masters
degree of Business Administration in Finance to the College of Business and Economics, Mekelle
University, through the Department of Management, done by me,Mr. Aderaw Gashayie, Id.No.
CBE/PRO43/02 is an authentic work carried out by me. The matter embodied in this project work
has not been submitted earlier for award of any degree or diploma and all sources are acknowledged.
Name: Aderaw Gashayie
Signature
Place and date of submission: Mekelle University, May 2011
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CERTEFICATION
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TABLE OF CONTENTS
Page
Abstract …………………………………………………………………………………………vi
List of tables ………………………………………….…………………………………..............vii
Acronyms ………………………………………………….…………….……………………...viii
Acknowledgements …………………………………………………………...…………………ix
CHAPTER ONE: THE PROBLEM AND ITS APPROACH
1.1 Background of the study ………………………………………………………….……1
1.2 Statement of the problem ………………………………………...…………………….3
1.3 Objective of study…………………………………....…………………………….…....4
1.4 Significance of the study……………………………………….……………………….5
1.5 Delimitations of the study……………………………………………………….…….. 5
1.6 Limitation of the Study…………………………………………….………………….. 6
1.7 Research methodology……………………………………………….………………....6
1.7.1 Procedure……………………………………………………………………..6
1.7.2 Population…………………………………………………...………………..7
1.7.3 Census………………………………………………………………………...7
1.7.4 Instrument design………………………………….……………………….....7
1.7.5 Validity and Reliability of instruments……..…………...........……………..…..7
1.7.6 Statistical analysis …………………………………….………………………8
1.8 Organization of the study ……………………………………………………….……...9
1.9 Operational definitions ………………………..………………….….…………………9
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Theoretical framework for the study ……………………………………………..…....11
2.1.1 Definition of IA…………………………………………………………………11
2.1.2 Objectives of IA………………………………………………………………....12
2.1.3 Roles of internal auditor ……………………………………………………........13
2.1.4 Types of internal audits services..……………………………………………..….14
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2.1.5 The internal audit process …………………………………………………..…...15
2.1.6 Higher education auditing environment………………….……………………....18
2.2 Empirical framework for the study
2.2.1 Prior research studies on audit effectiveness measures and its impact on internal
audit effectiveness…………………………………………..………………………20
2.2.2 Dimensions of internal audit efeectiveness measure……………….…………....27
2.3 Conceptual frameworks for internal audit effectiveness measures …………………….33
CHAPTER 3: PRESENTATION AND ANALYSIS OF DATA
3.1 Summary statistics of the respondents………………………………………………....36
3.2 Hypothesis testing and data analysis……………………………………………….....37
3.2.1 Procedures for data analyses………………………………………………....37
3.2.2 Testing hypothesis one………………………………………………………39
3.2.3 Testing hypothesis two……………………………………………..…….......41
3.2.4 Testing hypothesis three……………………………………………………..43
3.2.5 Testing hypothesis four ……………………………………………………..46
3.2.5 .1 Testing hypothesis four factor one ……………………………….47
3.2.5 .2 Testing hypothesis four factor two………………………………. 50
3.2.5 .3 Testing hypothesis four factor three …………………………….. 52
3.2.5 .4 Testing hypothesis four factor four……………………………… 55
3.2.5 .5 Testing hypothesis four factor five………………………………. 57
CHAPTER 4: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
4.1 Summary ……………………………………………………………………………...61
4.2 Conclusion ……………………………………………………………………………63
4.3 Recommendations…………………………………………………………………….64
BIBLIOGRAPHY…………………….……..,.………………………………………...………..66 APPENDICES ……………………………………………………………..……………………70
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ABSTRACT
The purpose of this study was to predict managements’ and audit staffs’ perceptions on the importance of
selected factors utilized to evaluate internal audit effectiveness in Bahir Dar and Mekelle Universities. In this
study, reasonable and meaningful findings and recommendations, auditee’s response and feedback,
professionalism of the internal audit department, adherence to audit plan ,and absence of surprises were used
as a criteria to predict managements’ and audit staffs’ perception (difference/similarity) on the importance of
internal audit effectiveness measures. To this end, the study conducted in Bahir Dar and Mekelle
Universities. By census methods, I obtained the data from 10 presidents, 43 directors and 8 intrnal auditors.
Questionnaire was the instruments used for data collection. The data collected through the questionnaire were
analyzed using precentage, z-test for proportion and one way ANOVA.Findings from the data analysis
indicated that all the three groups were significantly different in perceptions on the importance of these five
factors to use as criteria in evaluating internal audit effectiveness. The implication of this finding was that
auditors evaluated on the wrong /erroneous criteria or on a different set of criteria than that of adopted by
internal audit staffs. Following the findings and conclusions drawn, it is recommended that presidents,
directors and audit staffs need awareness training in general on internal auditing and in particular, on
importance of internal auditing effectiveness measures to narrow the perceptual difference on internal audit
effectiveness measures and to increase internal audit effectiveness in the university environment. Further study
on full scale of dimensions need to be conducted.
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LIST OF TABLES
No. Descripition
Page No
Fig 1 Summary of selected emperical studies 25
3.1 Respondents profile 36
3.2 The value for each item, and maximum and minimum value for one factor 38
3.3 The maximum and minimum value for all factors and items included in
each factor
38
3.4 Z-scores measuring audit staffs’ perception on importance of factors
for evaluating internal audit effectiveness
40
3.5 Z-Scores measuring directors’ perceptions on importance of factors
for evaluating internal audit effectiveness.
42
3.6 Z-Scores measuring presidents’ perceptions on importance of factors
for evaluating auditing effectiveness
43
3.7 Summary of the first three hypotheses 46
3.8 Meaningful and reasonable findings and recommendations as perceived
by the three groups
47
3.9 Tukey HSD post hoc multiple comparison 48
3.10 Adjusted Tukey HSD homogeneous subsets 49
3.11 Auditee's response and feedback as perceived by the three groups 51
3.12 Tukey HSD post hoc multiple comparison 51
3.13 Adjusted Tukey HSD homogeneous subsets 52
3.14 Professionalism of the internal audit department as perceived by the
three groups
53
3.15 Tukey HSD post hoc multiple comparison 53
3.16 Adjusted Tukey HSD homogeneous subsets 54
3.17 Importance of adherence to audit plan as perceived by the three
groups
55
3.18 Tukey HSD post hoc multiple comparison 56
3.19 Adjusted Tukey HSD homogeneous subsets 56
3.20 Absence of surprised as perceived by the three groups 57
3.21 Tukey HSD post hoc multiple comparison 58
3.22 Adjusted Tukey HSD homogeneous subsets 58
3.23 Summary of hypothesis four for the five factors 59
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ACRONYMS
ACUA =Association of College and University auditors
AICPA-American Institute of Certified Public Accountant
ANOVA-ANalysis of Variance
BDU-Bahir Dar University
CIPFA-The Chartered Institute of Public Finance and Accountancy
ECA=executive chief auditor
IA-Internal Audit
IC-Internal Control
IIA-Institute of Internal Auditor
MOE –Minstry of Education
MU-Mekelle University
SAS1=score for audit staff one
SD1=score for Director one
SOX=Sarbanes-Oxley Act
Sp1=score for president one
SPPIA- Standard Professional Practice of Internal Auditing
µAS1=mean of audit staff one
µD1= mean of director one
µp1=mean of president one
µ-Population parameter=mean (symbol)
mµD1=mean of mean for director one
mµP1=mean of mean for president one
mµSAS1=mean of mean for audit staff one
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ACKNOWLEDGEMENTS
I would like to express my heartfelt gratitude to my principal advisor, asst.prof. Aregawi G/Michael,
whose deep concern, constructive comments and suggestions have contributed tremendously to the
successful accomplishements of the study.
My appreciation also goes to my co-advisor, Getnet Baye (MBA) who gave me valueable comments
and to others who have displayed kind of collaboration while conducting this study.
To my wife, W/ro Abebech Nigussie, I extend my love and gratitude for the many sacrifices she has
made over the past two years. Her encouragement, understanding and support have been my most
important source of inspiration for successful accomplishements of the MBA program.
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CHAPTER ONE
THE PROBLEM AND ITS APPROACH
This part describes background of the study, statement of the problem, hypotheses tested in the
study, objective of study, significance of the study, delimitations of the study, limitation of the Study,
research methodology, organization of the study and operational definitions.
1.1 Background of the study
Higher education institutions are fundamental for the creation of vital human resources, such as
teachers, healthcare professionals, lawyers, engineers, managers, businesspersons, and researchers
for socio-economic development of a nation (Teshome, 2003).
However, higher education institutions worldwide facing new challenges and problems which
require reforms in their management and governance styles. The major challenges and problems
facing higher education institutions includes the rise of new stakeholders, internal factors,
globalization and the rapid pace of knowledge creation and utilization which are among the recent
developments. While higher education institutions have responded rather slowly in the past to
changing circumstances, there is now an urgent need for them to adjust rapidly in order to fulfil their
missions and the needs of stakeholders (Jowi, 2003).
Similarly, higher education institutions in Ethiopia are facing these challenges and problems. Public
higher education institutions can function effectively only when inherent risks/challenges that may
prevent mission accomplishment have been properly identified, assessed and managed (Ministry of
Education [MOE], 1997).
Management is responsible for maintaining an adequate system of internal control system to manage
risks that challenge higher education institutions. Internal audits are key components of the
organization [university] control structure. Internal audit is the ultimate risk management tool for
managers (Pickett, 2010).
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Effective internal auditing has a significant role in the management of higher education institutions.
Effective internal auditing has become progressively more varied in scope and objective to assist all
levels of management in assuring internal and external constituencies that financial resources are
being properly managed and accounted for and that the institution is complying with applicable
policies and laws (Association of College and University Auditors [ACUA], 1992).
Specifically, according to Pickett (2010) internal audit provides assurance, consulting and
investigation services to management, the board and the audit committee in terms of reviewing the
adequacy of systems of internal control to promote and facilitate the development of effective
systems of risk management and internal control, which remain the responsibility of management. Thus, internal audit provide advice on addressing problems that remain the responsibility of
management.
Over the past years, the effectiveness of internal audit has become a subject of interest in the
internal auditing literature(AICPA,1970; Bethea ,1992 ;Clark et al. ,1981 ;Dessalegn & Aderajew
,2007;Glazer & Jaenicke, 1980;Traver ,1991). According to Dittenhofer (2001) to assess internal
audit effectiveness, considering four dimensions (identification of auditee goals and objectives,
identification of measure, quantification of measure and actual measurement) are important but
quantification of measures are difficult. One difficult literature issue that has emerged, relative to
internal audit effectiveness, is to quantify proper and sound measures of the IA department’s
effectiveness measures. Similarly, Sarens (2009, pp.1-7) has raised the question “when can we talk
about an effective IA function measures quantification?” in his editorial about future perspectives of
IA research. Looking at the existing literatures, there is no unique answer to this question.
Quntification of IA effectiveness measures are complicated since different authors have related IA
effectiveness measures to different matters such as IA procedures, outputs and outcomes.
However, as pointed out by preceding scholars’, considering how stakeholders perceive internal
auditing is an important factor in measuring internal audit effectiveness. For example, Barrett (1986,
pp.30-35) notes, “effectiveness can be described but it is difficult to quantify and therefore,
effectiveness is determined by the perception of clients and auditees.” According to Kondalkar
(2007), people who are in different work settings have different objectives and uses different
performance measurement standards as a result they have different perceptions on measurements.
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In the higher education institutions environment, presidents and directors are two of the most
important clients and auditees of the internal audit department that took different positions.
While maintaining effectiveness, internal audit staff needs to meet or exceed the expectations of
university management. In particular, in the ever-changing higher education institutions, internal
audit staffs and managements need internal audit effectiveness measures to evaluate whether internal
audit services is as expected or not. However, in the Ethiopian context, research on university
managements’ and audit staffs’ perception on the important criteria used to judge internal auditing
effectiveness in the university environment has been none existent.
1.2 Statement of the problem
It has been observed that an expectations gap arises when audit customers (for example senior
management) do not recognize the value of the internal audit (IA) function. In order to function
effectively, internal auditors and the customers of audit services should possess a similar
understanding of what makes internal auditing a value-adding activity. Failure to reach this
understanding could result in the perception that internal audit simply is an obstacle to achieving
organizational objectives. The difference in perceptions’ of different groups of managements and
audit staffs towards to the importance of internal audit effectiveness affects internal audit
effectiveness measures. This can result in underused audit services and ignored audit
recommendations (Flesher & Zanzig, 2000).
As highlighted by Dessalegn and Aderajew (2007), audit findings and recommendations would not
serve much purpose unless management is committed to implement them. Implementation of audit
recommendations is, therefore, highly relevant to audit effectiveness (Sawyer, 1996). The extent to
which managers consider internal auditors’ work valuable and decide to exploit it influenced internal
auditors on their achievement of corporate objectives (i.e. their effectiveness). In such view, the
effectiveness of IA depends on the quality of effectiveness measure perceived by the auditees.
Given the central role of auditees’ perceptions in relation to IA effectiveness measure, this study was
to predict university managements’ (presidents and directors) and internal auditing staffs’ percepition
on the importance of internal auditing effectiveness criteria in Bahir Dar and Mekelle universities.
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More specifically, the study attempts to obtain reliable responses for the following research question:
1. Is there statistically significant difference between the scores of internal auditing staffs
perception on the importance of five selected factors used to evaluate internal auditing
effectiveness?
2. Is there statistically significant difference between the scores of directors’ perception on
the importance of five selected factors used to evaluate internal auditing effectiveness?
3. Is there statistically significant difference between the scores of university presidents’
perception on the importance of selected five factors used to evaluate internal auditing
effectiveness?
4. Is there statistically significant difference among mean scores of internal auditing staffs,
directors and presidents’ perception on the importance of five selected factors used to
evaluate internal auditing effectiveness?
1.3 The objective of the study
The general objective of this study was to predict managements’ (presidents and directors) and
internal auditing staffs’ percepition on the importance of internal auditing effectiveness criteria in
Bahir Dar and Mekelle universities. In order to meet the study objective, the following four null
hypotheses were formulated and tested against the alternative hypothesis that says, “Significance
difference was observed” in this investigation:
1. H1: There is no statistically significant difference between the scores of internal auditing
staffs’ perception on the importance of five selected factors used to evaluate internal
auditing effectiveness.
2. H2: There is no statistically significant difference between the scores of directors’
perception on the importance of five selected factors used to evaluate internal auditing
effectiveness.
3. H3: There is no statistically significant difference between the scores of university
presidents’perception on the importance of selected five factors used to evaluate internal
auditing effectiveness.
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4. H4: There is no statistically significant difference among mean scores of internal auditing
staffs, directors and presidents perception on the importance of five selected factors
used to evaluate internal auditing effectiveness.
1.4 Significance of the study
This study is expected to give the following benefits:
• Helps predict universities internal audit staffs’ and managers’ view on internal audit
effectiveness criterion.
• Internal auditing professionals and professional organizations for formulating training
programs for internal auditors to improve the focus and delivery of their services to auditees
and customers.
• University internal auditors use the results of this study to better coordinate and direct their
work efforts and reports.
• Ministry of Education and Ministry of Finance and Economic Development may use the
result to design appropriate internal audit effectiveness measures.
• Throwing light on what has been a gray area about internal audit effectiveness measures
since little has been known about it.
• Encouraging others to undertake further study in internal audit effectiveness measures.
1.5 Delimitations of the study
Although other stakeholders (Ministry of Education and Board of Dierctors) have a role on internal
audit effectiveness measures, this study delimited to presidents, directors, and internal auditing staffs
of Bahir Dar and Mekelle universities.
Based on availability of literature and its manageability, the measurement criterias delimited to the
five dimensions (reasonable and meaningful findings and recommendations, auditee’s response and
feedback, professionalism of the internal audit department, adherence to audit plan and absence of
surprises).
Taking the time and the finance required in carrying out the data collection process in to
consideration, the study was delimited to Bahir Dar and Mekelle universities in Ethiopia. The
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selection of the universities as a setting for the study was based on the researcher’s experience as a
student in these two universities.
Though there are many background variables that affect perceptions of individuals in organizations,
this study was delimited to work setting /job setting/position.
1.6 Limitation of the study
This study had the limitations in assuming the possible outcomes or findings in the very first place
as there are no studies that look the audit staffs, directors and presidents’ perception on the
importance of selected criteria used to evaluate internal auditing effectiveness within the Ethiopian
context. Therefore, after all statistical analysis was undertaken, the conclusion for this study was
given and infered only to the specified universities about other internal audit criterias.
1.7 Research methodology
This part describes the methodology of inquiry used in this study. The basic research design used for
this study was a non-experimental survey design. The data collections accomplished with
questionnaire.
1.7.1 Procedure
A complete list of managerial and audit staffs positions in Bahir Dar University and Mekelle
University were compiled. The questionnaires were distributed in the third week of March 2011 and
returned by the second week of April 2011. A repeatedly personal follow-up was made for those
surveys not returned by the last day of appointement. Earl Babbie (1973) has indicated that a 70%
return rate is considered very well for survey studies, 60% return is good but 50% return is worth
analysis. The goal for this study was 70% or greater and actually 95% returned. All returned surveys
were checked for errors, omissions and inconsistencies prior to entry into a computerized statistical
program for analysis and one survey was not found worth analysis and rejected. The SPSS version-
16 was used for this study.
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1.7.2 Population
The population base for this research study was managements and audit staffs of Bahir Dar and
Mekelle Universities. The population of interest was totally 61 of which 10 presidents, 43 directors
and 8 internal audit staff of these institutions.
1.7.3 Census
In this study, since the population was relatively small, the study used census survey methodology. A
complete list of all presidents, directors and audit staffs obtained from each respective universities
and the likelihood that the target population represented was 100%.
1.7.4 Instrument design
According to Mullins (2004), effectiveness scale instrument was the only instrument used to collect
data that reflected the perceptions of presidents, directors and internal audit staff concerning the
importance of factors used to evaluate internal auditing effectiveness. The scale was designed based
on the criteria used by Albrecht et al. (1988). The criterias were reasonable and meaningful findings
and recommendations, auditee’s response and feedback, professionalism of the internal audit
department, adherence to audit plan and absence of surprises.
The five point likert scale was designed based upon the above criteria and separated into two
sections as shown in appedix 2. Section I of the scale contained background information for the
study. Section two of the scale contained a set of fifteen items about five selected factors used to
evaluate audit effectiveness.
1.7.5 Validity and Reliability of instruments
This instrument will be subjected to a small “pilot test” (n=5)before circulating the questionnaire
widely, a small number of test responses were sought, in order to gauge the validity and realibility of
the questions, the overall “sense” of the questions, and the time required to complete the
questionnaire. Feedback from this was used to refine and update the questionnaire before printing.
Important to any instrument of this nature was validity and reliability.
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Validity
Two types of validity were considered and addressed in this study. “Face validity” is to what degree
the instrument looks like it measures what it is supposed to measure. This was one type of validity
addressed in this study. More importantly, “Content Validity” addressed the degree to which an
instrument actually measures what it purports to measure. This issue is important to survey research
(Litwin, 1995). If an instrument does not measure what it was designed to, findings will be
misleading and impossible to interpret accurately.
To obtain acceptable content-validity, the researcher used a panel of five judges. Individuals serving
as judges were knowledgeable of auditing practices, procedures and concerns but were not part of
the research population. Each judge was asked to rate the items for relevance and appropriateness
on a five-point scale. This process provided ratings for the fifteen items separately and the
instrument as a whole. Judge were also asked to comment on the time taken to complete the scale,
“bad” items, and to add items they ‘strongly’ feel included on the instrument. This procedure was
accepted by the reseacher and used many times over the years (Litwin, 1995).
Reliability
Consistency of measurement is a concern in all studies, particularly survey-research. Internal
consistency was a major concern in this study. It was conducted a test of internal consistency/
reliability on this instrument. This was done in a pilot test (N=5). The split-half reliability correlation
method was employed and it was found that the realibility of the instrument is 86% as shown in
apendix1. Therefore, this was consistent with Nunnaly (1978) who rported there is not a generally
agreed cut-off but usually 0.7 and above is acceptable. Once a coefficient was calculated for half of
the instrument, the Spearman-Brown Correction Factor was used to determine reliability for the
total instrument. Ferguson (1998) opined this to be an effective method to establish reliability of
tests or surveys.
1.7.6 Statistical analysis
Both inferential and descriptive analyses were used in this study. First, Hypotheses one, two and
three were tested using the z-test for population proportions. The proportion of respondents
addressing the importance of effective measures was tested to determine if it is significantly different
from the population as a whole. To test hypothesis four, the single-factor analysis of Variance
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(ANOVA) was used with the appropriate “post-Hoc” test. The procedures are often used in
inferential research and are robust enough to deter type-one errors (Ferguson, 1998). The 95%
confidence level is significant for this study.
It should be noted that as with any research initiative, the study unable to control how data
distributions looked once data is collected. It is hoped the data would be relatively “normally
distributed’ with equal variance. These are basic assumptions for “parametric statistics”. However, if
descriptive analyses revealed large skewing of data, it should be necessary to revert to other
procedures. If this became necessary, “non-parametric” tests would be employed. This method of
analysis was recommended in situations such as this (Moore & McCabe, 1993).
1.8 Organization of the study
This study was organized into four main chapters. Chapter one provides the problem and its
approach. Chapter two deals with review of related literature. Chapter three provides the
presentation and analysis of the data and finally the summary, conclusion, and recommendations of
the study were presented in chapter four.
1.9 Operational definitions
According to Leary (2001), operational definitions define concepts by specifying precisely how they
are measured or manipulated in the context of a particular study. Operational definitions are
essential for replication, as well as for non-ambiguous communication among scientists.
Thus, in this research study, the following definitions were used:
1. Directors: Middle level managers which includes Business Manager /process owners/case
teams/deans/directors/responsible for supervision of low-level managers and directly
responsible and accountable to the vice president.
2. Higher education: education in the arts and sciences offered to undergraduates and
graduate students who attend degree programmes through any of the delivery modes
(Higher Education Proclamation No. 650/2009).
3. Internal audit effectiveness: the outcome/the impact that outputs have in meeting perceived
need or achievement of goals and objectives using the factor measures. Effectiveness is
about the extent to which an entity’s predetermined objectives have been achieved.
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4. Internal auditing: An independent appraisal of the diverse operations and controls within
an organization to determine whether acceptable policies and procedures are followed,
established standards are met, resources are used efficiently and economically, and the
organizations objectives are being achieved (Sawyer, 1983).
5. Internal Control -- organization, policies, and procedures – are tools to help program and
financial managers achieve results and safeguard the integrity of their programs .
6. Measure - a parameter used to quantify the efficiency and/or effectiveness of past action.
7. Null hypothesis - A hypothesis about a population parameter. The purpose of hypothesis
testing is to test the viability of the null hypothesis in the light of collected data.
8. Perception: The dynamic and complex way, in which individuals select information (stimuli)
from the environment, interpret and translate it so that a meaning is assigned which will
result in a pattern of behaviour or thought (Mullins, 2004).
9. Presidents: The Top-level managers responsible for managing the day-to-day operations of
a university that includes President or Vice Presidents. The President is the chief executive
officer of the institution. The president shall be appointed by the Minister of Education or
by the head of the appropriate state organ from a short list of nominees provided by the
Board.The president is usually appointed by the university’s Board of directors on a
continuing, delegating basis (Higher Education Proclamation No. 650/2009).
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CHAPTER TWO
REVIEW OF RELATED LITERATURE
This chapter presents an overview of the literature that relates to the topic under investigation and
consists three separate subsections. The first subsection describes theoretical framework of internal
auditing (definition of IA, objectives IA, role of IA, internal auditing process, the types of internal
audits in university environment and higher education internal audit environment). The second
subsection deals with the emperical framework of the study, that is, prior research studies on audit
effectiveness measures. The final subsection presents the research model for the study.
2.1 Theoretical framework for the study
2.1.1 Definition of IA
Simmons (1999) assertted that internal audit professionals should look to the standards for the
professional practice of internal auditing (SPPIA) for guidance on and understanding of the auditor’s
role and the nature of internal auditing. According to Moeller (2004, P.165) in the 2001 international
conference of the institute of internal auditors, the board of directors approved an updated
definition of internal auditing as follows:
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Internal audit is concerned with controls that ensure reliability and integrity of financial and operating information, effectiveness and efficiency of operations, safeguarding of assets and compliance with laws, regulations and contracts).
There have been other attempts to define internal auditing. CIPFA (1997, P.81) described internal auditing as
An independent and objective appraisal service within an organization: Internal audit is an assurance function that primarily provides an independent and objective opinion to the organization on the degree to which the internal control environment supports the achievement of the organization’s objectives. In addition, internal audit’s findings and recommendations are beneficial to line management in the audited areas. Internal audit can also provide an independent and objective consultancy service specifically to help line management improve the organization’s internal control environment. The service applies the professional skills of internal audit through a systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organization’s objectives, and through recommendations for improvement. Such consultancy work can contribute to the opinion which internal audit provides on the internal control environment.
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United kigdom Government Internal Audit Manual (2006, P.131) defined internal auditing as An independent and objective appraisal service within an organization: Internal audit primarily provides an independent and objective opinion to the Accounting Officer on risk management, control and governance, by measuring and evaluating their effectiveness in achieving the organization’s agreed objectives. In addition, internal audit’s findings and recommendations are beneficial to line management in the audited areas. Risk management, control and governance comprise the policies, procedures and operations established to ensure the achievement of objectives, the appropriate assessment of risk, the reliability of internal and external reporting and accountability processes, compliance with applicable laws and regulations, and compliance with the behavioural and ethical standards set for the organization.Internal audit also provides an independent and objective consultancy service specifically to help line management improve the organization’s risk management, control and governance. The service applies the professional skills of internal audit through a systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organization’s objectives, and through recommendations for improvement. Such consultancy work contributes to the opinion which internal audit provides on risk management, control and governance.
There are many similarities in the above definitions of internal auditing. Most revolve around the
view of internal audit as an independent service to the organization reviewing systems of internal
control. These definitions signify that internal audit has undergone a paradigm shift from an
emphasis on accountability about the past to improving future outcomes to help auditees operate
more effectively and efficiently.
2.1.2 Objectives of IA
In the revised statemaent of responsibilities of internal auditing issued by the institutet of internal
auditors (1990, P.86) as part of standard fromework, the section on objectives states:
The objective of internal auditing is to assisst all members of management in the effective discharge of their responsibilities by furnishing them with analysis, appraisal, recomandations and pertinent coments concerning the activities revised. The internal auditor is concerned with any phase of business activity where he can be of service to management .This involves going beyond accounting and financial records to obtain a full understanding of the operations under review.
Concerning these objectives, Sawyer (1996) noted four benefits managers have gained from internal
auditing assisstance. Those benefits were:
1. Providing managers with the bases for judgement and action; 2. helping managers by reporting weaknesses in control and performance and in
recomanding improvements; 3. providing counsel to managers and board of directors on the solutons of business
problems ;and
4. Supplying information that is timely, reliable and useful to all levels of management.
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Additionally, the statement set forth the types of services that should be performed and the kinds of
activities carried on by the internal audit function in attaining the overall objectives:
1. Reviewing and appraising the soundness, adequacy and application of accounting,
financiaal and other operating controls,and promoting effectiveness control at
reasonable cost;
2. Ascertaining the extent of compliance with estabulished policies,plans,procuders,laws
and regulations which could have a significant impact on operations and reports;
3. Reviewing the means of safguarding assets and as apprapriate veryfing the existance
of such asets;
4. Appraising the economy and effeciency with which resources are employed; and
5. Reviewing operations or programes to estabulished objectives and goals and whether
the operatins or programs are being carried out as planned.
2.1.3 Roles of internal auditor The IA role is unique because the IA is an agent that monitors the actions of another agent
(management), both of whom are employed by the same principal (Adams, 1994). The author
discussed the role of agency theory in explaining the role of internal auditing within different
organizations. He proposed that agency theory can be used as a framework to explain several
phenomena within the internal auditing profession. IA plays an important role in evaluating the
effectiveness of control systems, and contributes to an ongoing effectiveness of the organization.
Before the enactment of (SOX) 2002, internal audit services were focusing on detection not
prevention. Flesher and Zanzig (2000) found evidence that some audit customers do not recognize
the value of IA, and may even restrict the IA role to internal control evaluation over traditional areas
such as accounting and finance. IA was moving from a confrontational approach to collaborating
with management and moving from a control approach to a risk-based approach and they were
focusing on consulting services (Roth, 2002).
The Sarbanes-Oxley Act (SOX) of 2002 has increased not only the need for IA, but also their stature
in the eyes of those who hire them as well as those who aspire to be them. The IA roles are
increasing dramatically due to Sarbanes-Oxley compliance (Karl, 2003). IA today do not just focus
on financial information as typically been a priority at many firms but nowadays, IA have a much
broader responsibility. Management today are reliant upon IA not just to reduce the cost of external
14
auditing, but to provide assurance, confidence and trust that the internal controls (ICs) are operating
effectively and that the business itself is efficient (Al-Twaijry et al., 2003). IA seem to serve best
where they can skillfully walk the line between providing advice to management and, at the same
time, provide assurance to others(Burns et al., 1994).
Lara and Peter (2007) study on Maltese internal audit unit, identifies organizational and cultural
barriers that are keeping the IA out of reach of its potential benefits. IA plays a crucial role in the
spread of “best practices” through their own developed company wide network (risk and control
communication). Management often benefits from IA as a benchmarking source for the
effectiveness and efficiency of their risk assessment and internal control practices. Communication
role contributes to the creation or further improvement of risk and control awareness.
IA role in risk management from a comparison studies between the Belgian and US Company
revealed that IA proactive involvement in the development and improvement of ICs are considered
as an important aspect of their pioneering role. IA plays a valuable role because they actively
enhance risk and control awareness on behalf of the management. Internal control is an integral part
of IA responsibilities, because certain management levels do not realize that they are responsible for
internal controls (Gerrit & Ignace, 2006).
The divergence of interpretation of the audit role is explored in terms of the way we may in practice
move away from the standard definition. Internal auditing is performed in a variety of ways, each
with its own approach and style. Accordingly, it is important that a formal definition is devised and
agreed since it will have a vital impact on the perceived role of the audit function. Management
often asks auditors exactly what they are responsible for, and a variety of responses may be received.
Some auditors feel that they should police the organization while others are convinced they must
check the accuracy of accounting records. Still others feel obliged to search out poor value for
money or new and improved ways of using resources. Much depends on the audit charter and
management expectations. One must have a model developed by the profession, which represents
the true scope of internal auditing. In this study, management is clearly responsible for controlling
risks to ensure objectives are met, while the scope of audit work is based on reviewing risk
management and controls.In general internal audit plays the following eight roles: control oversight
role, decision support role, risk management support role, communication role, governance role,
system involvement role, technical role and management intimidation role.
15
2.1.4 Types of internal audit services
The types of internal audits in university conduct of their institution’s organizations, functions,
programs, activities and funds have been identified by individuals and professional associations who
have focused their research on internal auditing. ACUA (1992) identified five general classifications
of audit services:
1. Financial auditing: The review and testing of reliability and integrity of financial
information and the systems, which deliver this information. Internal audit staff support
of external auditors is generally grouped in this classification.
2. Operational auditing: The review of the economy, efficiency, and effectiveness of
administrative operations.
3. Compliance auditing: The review and testing of the organization’s compliance with
statutory, regulatory, and internal policy requirements.
4. Information technology auditing: The review and testing of computer systems which
process financial and non-financial information to assure the integrity of that
information.
5. Investigative (Fraud) Auditing: The review of activities targeting irregularities, their
magnitude and rate of occurrence.
2.1.5 The internal audit process
The internal auditing process generally followed by most internal auditors consists of four elements:
Planning, Fieldwork, Reporting, and Follow-up.
The first fieldwork standard for conducting internal audits is that the audit work be adequately
planned. In planning, internal auditors should define the audit’s objectives and the scope and
methodology to achieve those objectives. Reider (1994, p.21) stated, “The purpose of the planning
phase is to determine whether a situation needs improvement. Whether it is significant, and what
should be done about it.”
In addition, McDaniel (2000) listed ten activities, which comprise the planning phase of the audit:
1. Reviewing the risk assessment results and comments.
2. Reviewing audit objectives and prior audits
3. Obtaining and reviewing relevant information including the mission
statement and goals and objectives of the auditable entity.
16
4. Performing an analytical review
5. Meeting with the audited/client
6. Interviewing key management and staff members
7. Identifying and following the key processes instrumental in the
accomplishment of the entities goals and objectives
8. Identifying potential risks associated with key processes
9. Evaluating potential risks without controls considered in place
10. Designing the audit program to address high-risk areas identified.
Further, in this planning phase internal auditors should look for the kinds of management controls
that will help reduce or mitigate risks. Improprieties stemming form inadequate controls in high
risks areas can be catagorized under the four generally accepted elements of management: Planning,
Organizing, Directing, Controlling.
Sawyer (1983) identified violations of four generally accepted elements of management as:
1. Improper planning results in not setting or updating goals or standards, not prescribing a
system of review and approval, developing plans that are incompatible with company
objectives, not providing for the measurement of the performance needed to carry out plans.
2. Improper organizing results in failing to establish unity of objectives within organizational
units of the enterprise, failing to provide equality of authority and responsibility, failing to
establish clear lines of responsibility which extend from the top of the organization to the
lowest level of supervision, failure to delegate authority so as to permit decisions to be made
at the lowest practicable level of management.
3. Improper directing results in not training or instructing subordinates, not providing for
coordination of plans, objectives, policies and procedures of the unit with those of the
company and interfacing units, not making sure that people read and understand
instructions.
4. Improper Controlling results in not providing schedules and budgets for each job, not
fixing responsibility for work performed, not providing for feedback on the quality and
acceptable of the work performed, not comparing results with expectations and investigating
variances.
Following the planning phase of the audit, the necessary fieldwork is performed to accomplish the
audit objective. Fieldwork is performed to accomplish the audit objective. Fieldwork primarily
17
carries out the basic instructions in the audit program. Essentially, it is directed toward measurement
and evaluation. Measurement cannot be objective unless standards of measurement have been
established and units of measurement have been identified. Without standards, audit results are
subjective opinions instead of objective conclusions (Sawyer, 1983).
Generally accepted auditing standard provide four basic forms of fieldwork: Observation, Inquiry,
Inspection, andConfirmation. The data gathered thought these procedures must be evaluated and
interpreted. The results of audit fieldwork provide the support upon which internal auditors base
their opinions as to the unit being audited. After completion of fieldwork, a final report is issued.
Elements that are generally included in comprehensive internal audit reports include the following:
Introduction, Background, Summary, Scope and opinion, Findings and recommendations, and
Exhibits (ACUA, 1992). Also according to McDaniel (2000), the final audit report issued should
address:
� High risks not appropriately addressed/mitigated to allow for the successful
accomplishment of key goals and objectives of the entity reviewed.
� Strategies, solutions and alternative systems/procedures necessary to permit the
accomplishment of the predetermined goals and objectives.
� Agreed upon timetable for implementing necessary changes identified.
Reports are the auditor’s opportunity to get management’s undivided attention and to show how
auditors can help them.
Standards for the Professional practice of Internal Auditing and generally accepted Government
Auditing Standards require internal auditors to follow up on known material findings and
recommendations from previous audits. They should do this to determine whether the
auditee/client has taken timely and appropriate corrective actions.
Audit fieldwork activities include examination of documents, interviews with applicable personnel
and observations of the auditee’s operations. The data gathered through these procedures must be
evaluated and interpreted. Reider (1994, p.21) stated, “The purpose of the planning phase is to
determine whether a situation needs improvement, whether it is significant, and what should be
done about it.”
18
The audit report represents or symbolizes the internal auditing department and constitutes the
output of the college or university internal audit staff. The purpose of the report is to bring the
results of the audit, including findings and recommendations, to the attention of those having an
interest in or responsibility for the findings (Reider, 1994). Audit reports need to be supported by
sufficient documentation to ensure the credibility of reported results.
Follow-up audit work is needed to determine if corrective action has been taken and if
recommendations have produced the intended results. This information is of particular interest to
management and board members. Audit follow-up is also useful in targeting future audit work.
2.1.6 Higher education auditing environment
As the 20th Century closes, the higher education environment is faced with numerous challenges of
change that university internal auditors need to be aware, in order to be effective, some of the higher
education literature has focused on these challenges.
Elliott (1994) addressed the challenges facing urban universities in the delivery of higher education
to the “New Majority” made up of women, minorities, displaced workers, senior citizens and career
professionals. Horne (1995) noted that criticism has increased from politicians, government officials
and others about the time faculty spends in the classroom the value of research, and the quality and
preparedness of students. Mercer (1993) described the growing concern among legislators, parents,
and students about the amount of tuition that higher education is charging and how this concern is
causing compus leaders to seek new ways of keeping costs in line to reduce the need for tuition
increases, and/or to find other sources for finding.
Petrson et al. (1997, P.xix) in planning and Management for a Changing Environment – A
Handbook on Redesigning Postsecondary Education stated:
In this new context, higher education instructions need critically examine their programs and processes, adapting where possible and reorganizing and restructuring where necessary. Most critical to the long-term effectiveness of higher education is thoughtful attention to the design of institutional processes for planning, management, and governance. The ability of colleges and universities to adapt successfully to the challenges they face depends a great deal on an institutions collective ability to learn successfully implement appropriate change, and continuously improve the core technologies of the organization.
19
Further, relative to the environmental challenges facing higher education Rowley et al. (1997, P.7)
stated:
the move of the country since the 1980s toward more conservative politics, whether temporary or not, is signaling a diminution of the days of government largesse, especially in national funding of research, stat- supported growth and the subsidy of tuition under the umbrella of accountability and efficiency. Governments are increasingly interested in cutting perceived waste and in balancing budgets.
These challenges of change will directly affect the work of internal auditors. Management is
responsible for maintaining an adequate system of internal control to manage risks to the
organization. Internal audit will provide assurance services to management, the board and the audit
committee in terms of reviewing the adequacy of these systems of internal control. Internal audit
will also provide a consulting role in helping promote and facilitate the development of effective
systems of risk management and internal control. In addition, and subject to the availability of
resources, audit will seek to respond to management’s requests for investigations into matters of
fraud, probity and compliance. Internal audit will provide advice on addressing these problems,
which remain the responsibility of management. Furthermore, internal audit shall have no
responsibilities over the operations that it audits over and above the furnishing of recommendations
to management. The results of consulting and ad hoc projects requested by management will be
used to inform internal audit’s position on assurances where appropriate (Pickett 2010).
Johnson’s (1992) study on internal auditing in higher education contained a reference to a
publication by the public accounting firm listed key audit areas of the Twenty-First century
university as:financial auditing,operational auditing,compliance auditing,information technology
auditing,investigative (Fraud) Auditing.
Because of the changes taking place in the higher education environment, Bruegman (1995) has
advocated that higher education change to the corporate model as an administrative /participatve
organizational model based on the following reasons:
1. The present organization of higher education institutions is too complex and unmanageable,
2. Higher education’s rigid decentralized culture has created a fragmented, specialized
administrative structure.
3. Colleges and universities are drowning in policies, procedures and paper because there are so
many layers of supervision. This stifles entrepreneurship.
20
4. Higher education’s core mission – teaching – is being diluted.
5. Today’s organizations have produced no leaders.
2.2 Empirical framework for the study
2.2.1 Prior research studies on internal audit effectiveness measures and its
impact on internal audit effectiveness.
The subject of auditing effectiveness and factors used to evaluate auditing effectiveness has been
discussed in the internal auditing literature. In the mid-1970s the American Institute of Certified
Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 9 titled the Effect
of an Internal Audit Function on the Scope of the Independent Auditor’s Examination. The
purpose of this publication was to provide guidance to external auditors who relied on the work of
internal auditors in the performance of an institution’s annual audit. The statement made it a
requirement that external audit function evaluates internal audit in terms of three criteria: (1)
objectivity, (2) Competence, and (3) performance.
Clark et al. (1981) conducted a study of internal auditor objectivity. Participants in the study included
25 partners and managers of international public accounting firm who were asked to indicate their
perceptions of the importance of five criteria:
1. Internal audit department independence:
2. The level to which the internal audit staff reported;
3. The internal audit department’s ability to investigate any area within the organization;
4. Top management support of internal audit; and
5. Adequacy of the scope of audits
Although the consensus of ranking was in the order of the five criteria listed above, the study
provided evidence that more specific evaluative criteria may be needed to assure consistent
assessment of internal audit staff objectivity.
In a 1990 exposure draft issued jointly by the AICPA and Canadian Institute of Chartered
Accountants of the external auditor’s consideration of the internal audit function in a financial
statement audit, the following factors were recommendation for consideration when evaluating the
quality and effectiveness of the internal auditors’ work:
21
1. The scope of work is appropriate to meet audit objectives,
2. Audit programs are adequate,
3. Working papers adequately document the work performed,
4. Conclusions are appropriate; and
5. Reports be consistent with the result of work performed (AICPA. 1990).
Glazer and Jaenicke (1980) constructed a framework approach to evaluating the internal audit
function based on criteria set forth in the Standards for the Professional practice of Internal
Auditing. The evaluation was a compliance review against the criteria defined in the Standards. The
five major performance measures specified were: (1) independence (2) Professional proficiency, (3)
Scope of audit work, (4) management of the internal auditing department and (5) performance of
audit work (Institute of Internal Auditors, 1978).
Salmon and Chadler (1981) considered the compliance to standards approach to evaluating an
internal audit function to be an incomplete analysis of effectiveness. They suggested that a review of
the audit function take into consideration such elements as:
1. Environmental characteristics
2. Infrastructure
3. Audit process
4. Audit management and
5. A review of the audit function
Farbo (1985) investigated the effectiveness of the internal audit function within universities by
comparing and contrasting the importance of selected internal audit attributes as perceived by the
internal audit director, his/her immediate superior and the institution’s external or independent
auditors at both public and private institutions.
The study was conducted through use of a survey questionnaire. The concept of effectiveness
evaluated was modeled as a function of internal audit attributes: (1) audit objectivity, (2) auditor
competence, and (3) auditor performance or productivity. The sample consisted of individuals
associated with the internal audit department of western region members of the Association of
College and University Auditors. The survey was sent to the internal audit director his/her
immediate superior and the institution/s external auditor. Statistical analysis included Kendall’s
22
Coefficient of Concordance with 0.05 level of significance, 2-tailed test of significance and
Spearman’s Rank Correlation Coefficient with0.05 level of significance, a two-tailed test of
significance. A split –plot analysis of variance was computed for each of the five major performance
areas defined as elements of auditor performance.
Findings indicated significant agreement among perceptions of audit objectivity and auditor
competence attributes, as identified by the audit director, immediate supervisor and external auditor.
The statistical strength of agreement, ranged considerably. In addition, findings revealed a significant
difference between perceptions of the audit performance attribute relative to audit professional
proficiency for audit directors and their supervisors in 25 public institutions. Comparisons of the
mean responses for the three other major performance factors (independence, due professional care,
quality assurance and improvement program) did not identify significant differences.
Albrecht et al. (1988) examined the attributes of America’s most effective internal audit departments.
To select the sample, the researchers requested the Board of Directors and members of the
Research Committee of the Institute of Internal Auditors to identify the most effective and
respected internal audit departments known to them. This process resulted in thirteen companies
participating in the study. Interviews, using a structured interview guide, were conducted with the
chief executive officer, chief fiscal officer and operating management of each company. The findings
from the study was the identification of fifteen factors used as criteria to judge the effectiveness of
internal auditing departments. They further classify these factors into three distinct kinds of criteria
as follows:
1. Feedback effectiveness or effectiveness as perceived by others and best exemplified
by the factors by auditees’ response and feedback as an effectiveness measure.
2. Qualitative or indirect and judgmental measures of effectiveness. The factors ranked
as most important of this kind were reasonable and meaningful findings and
recommendations, professionalism of the Internal Audit Department, and Absence
of surprises.
3. Quantitative or direct and objective measures of which the factor adherence to audit
plan ranked as the most important of this kind of criteria.
The researchers compared the responses of top management representative and found the there was
agreement on the overall order of perceived importance of these factors.
23
Traver (1991) studied differences in perceptions of audit directors and their immediate supervisors
of the importance of factors, which have an impact on audit effectiveness. The sample consisted of
326 audit directors who were members of the Association of College and University Auditors. Two
hundred thirty-five responded. In addition, the 235 immediate supervisors of those auditor directors
who responded were included in the study. Subjects were asked to complete a researcher created
questionnaires of twenty-four questions utilizing six factors: professionalism, objectivity, scope,
independence, performance, and audit management. The statistical test used to compare mean
responses of the audit directors and their immediate supervisors was the t-test.
Findings showed significant difference on perceptions of importance between audit directors and
their immediate supervisors for all factors. The study concluded that further work is indicated to
unify the view of perceived importance between audit directors and their immediate supervisors.
Azad (1992) examined the perceptions of college and university auditors’ concerning the importance
of selected factors for the successful performance of operational auditing. The factors studied were
categorized in eigth attribute group: Independence, audit plan, audit program, audit supervision,
continuing education, training, audit report and audit follow-up.
A survey questionnaire of twenty-nine factors categorized in the eight-attribute groups associated
with operational auditing in university was used to gather the data. The survey questionnaires were
mailed to 328 members of the Association of College and University Auditors. Two hundred and
seven responded. Mean ratings and standard deviations for the importance of each factor were
calculated.
Results indicated that all factors perceived by internal auditors as most important for the successful
performance of operational auditing relative to each attribute category were:
1. Reporting to the audit committee
2. Establishing the audit objectives
3. Establishing steps for evidence accumulation
4. Reviewing audit reports
24
5. Attending professional conferences and seminars for continuing professional
educational purposes
6. Training in operational auditing
7. Communicating material facts accurately and unequivocally and
8. Responding by the auditee in writing to the audit report in a timely manner
Bethea (1992) examined the perceptions of chief internal auditors of the importance of audit
funding levels and 12 selected audits and training attributes with regard to the roles and
responsibilities of internal auditing in higher education. The selected audit and training attributes
included organization reporting status, scopeofwork, staffcertification, independence, objectivity,
continuing education, training, audit planning, audit programs, audit supervision, professional
organization and academic culture.
The sample consisted of 363 chief internal auditors within the Association of college and University
Auditors. Both public and private institutions located in several regions throughout the United
States and a few institutions outside the United State were included in the study. The test used to
evaluate the 10 null hypotheses was the split-plot analysis of variance. The test was a two-tailed test
at a .05 level of significance.
The findings indicated private institution audit funding levels are higher than public institutions, thus
indicating a stronger commitment to the audit functions. There were significant differences among
chief internal auditors of the perceived importance of 10 of the 13 selected audit attributes. The
attributes showing no significant differences were Audit planning, audit supervision and professional
organization. In addition, public institutions were found to offer more training than private
institutions.
Dessalegn and Aderajew (2007) investigated to identify factors that affect the effectiveness of
internal audit services. The factors were internal audit quality, management support, organizational
setting, audit attributes.
The study was conducted by case -study method by distributing questionares to audit personnels and
identified the following major findings:
25
• Internal audit quality and management support strongly affect
internal audit effectiveness.
• Organizational setting and audit attributes do not have strong impact
on audit effectiveness.
Ahmad et al (2009) identified five key factors that contribute to the effectiveness of internal audit
functions. According to their importance the factors are internal audit quality, support of top
management, adequate resources, cooperation from auditor and interaction with audit committee. A
survey questionnaire for 200 internal audit staff in symposium was distributed and 99 were collected.
The prior research studies on internal audit effectiveness measures and its impact on internal audit
effectiveness is summarized in figure 1.
Figure 1: summary of selected empirical studies.
N0
.
Author and date,Research
(R) Standard(S),
suggestion Factors
target group/countr
y
Findings on
perceptions
Difference(D)/
Similar(S) on importance
factors 1 AICPA(1970s)
,S
1. objectivity, 2. Competence, and 3. Performance.
USA All are equally
important
2 Clark et al
(1981), R
1. Internal audit department
independence:
2. The level to which the internal audit staff reported;
3. The internal audit department’s ability to investigate any area
within the organization;
4. Top management support of
internal audit; and
5. Adequacy of the scope of audits
Partner vs
Managers.
USA
Importance
decrease
As we go down.
3 AICPA and
CICA (1990),
S
1. The scope of work is appropriate to meet audit objectives,
2. Audit programs are adequate, 3. Working papers adequately
document the work performed,
4. Conclusions are appropriate; and 5. Reports be consistent with the
result of work performed
USA and
Canada
All are equally
important.
4 Glazer and
Jaenicke(198
0),suggestio
n
1. Independence 2. Professional proficiency, 3. Scope of audit work, 4. management of the internal
auditing deparment and
5. performance of audit work
USA All are equally
important.
5 Salmon and
Chadler
1. Environmental characteristics 2. Infrastructure
USA All are equally
important
26
(1981),
suggestion
3. Audit process 4. Audit management and 5. A review of the audit function
(addetional
Consideration
For No 4).
6 Farbo (1985) 1. Audit objectivity,
2. Auditor competence, and
3. Auditor performance or
productivity.
Internal
External
Audits
CEO.
USA
S except audit
professional
proficiency.
7 Albecht et
al (1988),
R
1. Reasonable and meaningful
findings and recommendations
2. Auditee’s response and feedback 3. Professionalism of the internal
audit department
4. Adherence to audit plan 5. Absence of surprises
Top
managements
USA
S on all
factors.
8 Traver
(1991),R
1. Professionalism 2. Objectivity 3. Scope 4. Independence, 5. Performance, and 6. Audit management
Internal
audit heads
And CEO.
USA
D on all
factors.
9 Azad
(1992),R
1. Independence, 2. Audit plan 3. Audit program 4. Audit supervision 5. Continuing education 6. Training 7. Audit report and 8. Audit follow-up.
Internal
auditors.
USA
All are equally
important.
10 Bethea(1992)
,R
1. Organization reporting status 2. Scope of work 3. Staff 4. Certification 5. Independence 6. Objectivity 7. Continuing education 8. Training 9. Audit planning 10. Audit programs 11. Audit supervision 12. Professional organization and 13. Academic culture
Chief
internal
auditors of
private and
public
institutions
.
USA
D except audit
planning, audit
supervision and
professionalism
.
11
Dessalehn
and Aderajew
(2007),R
1. Internal audit quality 2. management support 3. organizational setting ,and 4. audit attributes
Internal
audit
personnel
Ethiopia
The first two
has strong
impact but the
last two do not
have strong
impact on
Internal audit
effectiveness.
12
Ahmad et al
(2009),R
1. internal audit quality, 2. support of top management, 3. adequate resources, 4. cooperation from auditor ,and 5. interaction with audit committee
Internal
audit staff.
Malaysia
Importance
decrease
As we go down.
27
From the above empirical studies, the researcher concludes a promising research area on audit
staffs’, directors and presidents’ perception on the importance of internal audit effectiveness
measures/criteria used to jugde internal audit effectiveness. These scholars were not using
effectiveness/outcome criteria (only they used process/outcome criteria) to evaluate internal audit
effeciveness and at same time, they did not consider stakeholders /managements and internal audit
staffs simultaneously as study group.
2.2.2 Dimensions of internal audit efeectiveness measures
In recent years, researchers and practitioners have widely discussed the need for internal auditors of
adding more value to their companies operations, and contributing to the achievement of corporate
objectives. Rickard (1993, pp.21-23) stated that,
I think it is quite clear that the performance indicators [measures] for internal audit that have been developed over the years fall into the category of administrative performance. They are workload oriented, introspective, and provide only a snapshot of how efficiently the resources of internal audit are used. They provide no information about the impact of internal audit work on the operation of the organization.
Some eleven years later Blackburn (2004, P.22) provides a similar argument stating that, However, the trouble with these targets [efficiency and effectiveness measures] is that the operational goals chosen may not reflect the overall purpose of internal audit. That is:to provide assurance to the management, the audit committee and the board on the system of internal control and risk management; and to assist management to improve its operations, risk management and internal control.So if we rephrase "was the internal audit function effective?" as "to what extent did the internal audit function provide us with assurance? What evidence do we have of improvements in operations, risk management and internal control?” We are closer to what we would like to know but the answers may not be as readily quantifiable.
This seems to indicate that in the period from the early nineteen nineties up to the present day little
progress has been made in moving internal audit performance measurement forward beyond the
traditional measures which based mainly on budget and a simple time recording system. (Blackburn,
2004).
This new perspective has focused increasing attention on issues such as performance evaluation and
effectiveness of internal auditing (Dittenhofer, 2001). Several parties advocated the need to assess
internal auditing (IA) effectiveness, though, at present; there is not a shared framework of reference
to this scope (for instance Desalegn & Aderajew, 2007; Dittenhofer, 2001; Sawyer, 1995; Barrett,
1986). Recently, Sarens (2009, pp.1-7) have raised the question “when can we talk about an effective
IA function?” in his editorial about future perspectives of IA research. Looking at the existing
28
literatures, there is no unique answer to this question. Different authors have related IA
effectiveness to different issues, focusing on IA processes, outputs and outcomes.
Certain authors’ related IA effectiveness measures with the quality of IA procedures, such as the
level of compliance with IIA standards or the ability to plan, execute and communicate audit
findings (for instance Fadzil et al., 2005; Spraakman, 1997). However, this approach suffers from a
major limitation as it is based on the hypothesis that IA activity is effective if IA procedures are
carried out properly, without considering the needs of the main stakeholders in each individual audit
(Lampe & Sutton, 1994). This is in contrast with the current trend that stresses the relevance of
value-added activities and indicates stakeholders’ satisfaction as one of the critical performance
categories for IA activities (see, for instance, the Practice Advisory 1311-2).
A second stream of research relates IA effectiveness to the output of IA activities (Frigo, 2002),
looking for instance at the ability of IA to respond to auditees’ needs (see, for instance, Frigo, 2002;
Ziegenfuss, 2000; Barrett, 1986). In this context, a recent work by Ziegenfuss (2000) has highlighted
that the survey results of auditee satisfaction and the percent of recommendations that are
implemented are the performance measures considered by the CAE to be most suitable to evaluate
IA effectiveness.
Finally, a few authors went further, relating IA effectiveness measures to the outcome of the audit
activities (i.e. the impact of a certain output of the audit process). According to Boland and Fowler
(2000, pp.417-44) define what is meant by an outcome, and go on to explain why measuring
outcomes is inherently difficult,
Hence it is necessary to define an additional term, namely "outcome", defined here as the impact that outputs have in meeting [this] perceived need. This is generally thought of in qualitative terms that imply that outcomes are difficult, in themselves, to measure. Furthermore, the process is also frequently complicated by the length of time it takes for such impacts to be identified. Finally the impact of outcomes arising from the actions of other agencies, working in related policy areas, adds further complexity.
Dittenhofer (2001, pp.443-50.24) states that the measurement of internal audit effectiveness must
consider aspects that relate closely to the intended outcome of the audit process. He argues that, when evaluating the effectiveness of the internal auditing operation, a positive response would be given when the internal auditor: (1) audits the achievement of the auditees’ objectives and finds no
29
problems, and no problems surface following the audit; or (2) audits and finds problems; and recommends solutions to the problems; and the solutions resolve the problems.
The logical extension of this statement being that internal audit effectiveness, or outcomes can be measured by:
1. recording control failures, or surprises 2. Implementation of Recommendations 3. the amount of cost savings generated as a result of internal audit work 4. Measurement Targetry and Dysfunctional Behaviour 5. stakeholders and their needs and expectations 6. Role of Internal Audit.
1. Recording control failures, or surprises that occur after the audit, because either they were not
identified in the first place, or the recommended solution failed to prevent the problem. Whilst
this is intuitively attractive, Boland and Fowler's identification of the problems in measuring
outcomes are particularly relevant. Firstly it may be difficult to attribute events to specific
individual control failures, or surprises may be qualitative and therefore difficult in themselves
to define. Secondly how long after the audit review or implementation of actions is it
appropriate to take such measures? Thirdly how is it possible to isolate the internal audit
contribution (and so measure its performance) when failures may occur due to the actions or
inactions of staff or management, or be caused by changing environmental conditions not
present at the time the review was undertaken?
Rickard (1993, P.21) argues that to be useful, internal audit activities should aim to improve performance [of the organization] by;improving management's understanding of the function, program or product which is the subject of the inquiry; developing the knowledge, skill and appreciation of controls to be used; assisting management in the development of options for addressing problem areas and the implementation of recommendations, and so on.
This description draws on the work of Sawyer in his model of Process Consultancy. This stresses the
helping relationship between consultant (auditor) and client (manager) whereby the role of the
consultant is to, Create a relationship with the client that permits the client to perceive and understand and to act upon the process events that occur in the client's internal and external environment in order to improve the situation as defined by the client (Sawyer, 1983, pp.41-44).
The measurement of the outcome of such a role that can be attributed to the consultant is however
inherently difficult.This inherent difficulty is reflected in the lack of evidence from the literature of
outcome measures actually used, even if some are discussed. However, one measure that is used
almost as a substitute or proxy for outcome is the implementation of recommendations made.
30
2. Implementation of recommendations
Implementation of recommendations is a frequently quoted performance measure for internal audit,
but is at the same time frequently criticised as a measure. Blackburn (2004, P.35) argues that such a
measure is an indicator of an effective internal audit function. This measures both the
responsiveness of management and the skill of internal audit in agreeing improvements that
management is prepared to action.
Two objections are commonly raised to this measure.These are:
1. The potential for dysfunctional behaviour: If internal auditors
know that they are measured against this, they may join management
to avoid agreeing actions if they are difficult to implement, or will
accept that actions have been implemented without obtaining
sufficient positive evidence to support this.
2. The lack of direct contro1: Management implementation rates are
likely to be outside the control of internal audit.
Chambers (2003, P.19) repeates the views of Boland and Fletcher, ...time delay is likely to be too great to make it a useful measure of internal audit performance. So it might be more practical to measure in accordance with the listing of performance measures but stopping short of trying to evaluate whether or not an implemented audit recommendation was successfu1.
In Salierno (2000) a number of the critic surveyed are critical of the measure for a range of reasons;
it could prove misleading; the qualitative differences among recommendations are not accounted for
using this measure; this often proves difficult to measure and is subject to factors beyond the control
of the internal audit function; responsibility for the implementation of recommendations does not
rest with internal audit and so it should not be used as a measure of internal audit's performance.
3. Cost savings
Another potential outcome measure, the amount of cost savings generated because of internal audit
work, is another seemingly controversial area for measurement, with a range of arguments for and
against its use.
Seaman (1995) make similar arguments for using a financial value upon the work undertaken by
internal audit as a performance measure within the context of a value added approach. This view is
supported in a more recent survey conducted by Cashen and Aldhizer III (2002) who identify that
the third most prevalent measure used by internal audit departments who demonstrate a high value
added service emphasis is future savings generated by audit recommendations. Tilley (1999) in his
31
survey of Australian entities also identifies savings arising from recommendations as one of the most
frequently cited measures.
However, this may overstate the popularity or relevance of this as a measure, as Seaman (1995) cites
that, "If the audit comment refers to an operational matter that involves efficiency or effectiveness it
can admittedly be more difficult to show the value." Taking this in the context of the modern role to
be performed by internal audit covering all aspect of the business it makes the application of this
measure more trivial. This is perhaps reflected in the Tilley study which whilst identifying cost
savings as among the most popular measures, it was still only cited by 15% of the respondents. In
the Cashell and Aldhizer study 58% of respondents cited this measure.
Chambers (2003, P.39) argues that, Measuring cost savings is only a partial measure as the time delays and uncertainty as to what might otherwise have happened make such measures unreliable. It will however never be possible to account for the total value of the audit function to the business as a whole in terms of cost savings. The impact on costs of many accepted and implemented audit recommendations is indeterminable as we can often never know what would have happened if management had not so acted.
Ewert (1997, pp.54-57) goes further and suggests that the internal audit budget is analogous to an
insurance premium, This is not to suggest that the audit department's budget should be cost justified by a quantified list of economic benefits. Approving the internal audit budget and plan is simply a risk management decision. An informed discussion of costs, services, and coverage, normally with the audit committee, would satisfy the cost/benefit criteria.
4. Measurement targetry and dysfunctional behaviour
The use of measures to create performance targets and the potential for this to introduce
dysfunctional behaviour within an audit environment is reviewed by Otley and Pierce (1996) in the
context of time budget pressures. Whilst having an external audit focus this study highlights a
number key points that need to be considered generally and in an internal audit context.
The study provides strong evidence that the perceived attainability of budgets is linked closely to the
incidence of dysfunctional behavior. The dysfunctional behaviors studied were those that lead to
either a reduction in the quality of the work undertaken, or the under reporting of time. It is argued
that to attain maximum motivational benefits from budgetary targets they should be set at tight yet
attainable levels. However this level is likely to vary between individuals and so adverse as well as
favourable variances will occur - both outcome potentially encouraging dysfunctional behaviour.
32
This means that there is an inherent conflict between the planning / motivational functions of
budgets and the control function.
The relevance to this study however is in highlighting two factors. Firstly is the design of the
measures themselves in recognising the potential for such behaviour to be present. Secondly is in the
design of the overall framework that should provide checks and balances to ensure possible
dysfunctions are minimised, or counter balanced by other measures.
5. Customers / Stakeholders
The literature is relatively consistent in defining the range of customers and stakeholders of internal
audit. However there is some diversity of view as to who the key stakeholder is. Cosmas (1996)
provides the most comprehensive list that is representative of that suggested in many articles. This
is: • The Board / Audit Committee • Executive Management • Operating Management • External Audit • Control Agencies
The analysis recognises that this list may vary depending upon the size and context of individual
organisations; and that each stakeholder will have different needs and expectations. Others extend
the list to include suppliers, partners, and the community / society. From a marketing perspective
this is important as it enables market segmentation and so products and services can be designed
and delivered in a tailored fashion. Interestingly however, Ewert (1997,pp54-57) argues that,
"catering for too many customers may be the root of some of the conflicts in perception, needs and
expectations that still plague the internal audit profession." His view is that internal audit should
recognise only one customer, and that is the organisation as a whole so that internal audit activity is
directed at serving the good of the organisation as whole rather than individual parts of it. It is clear
that in designing performance measures it is important to determine who the target of the measure is
and what response to the measure is required, and this means that in designing a measure and a
framework a clear understanding of stakeholders and their needs and expectations is required.
6. Role of internal audit
The final variable to consider for outcome is the role adopted by internal audit within the
organization, and to some extent the role adopted by the organization itself. Daft (1997) identifies
two management paradigms. The first is the traditional paradigm, which is characterized by control,
efficiency, rules and bottom line profit. The second is the modem paradigm that is characterised by
empowerment, creativity, teamwork, collaboration, and top line effectiveness.
33
The impact of this distinction is perhaps best illustrated by the articles on the impact of Total
Quality Management (TQM) on internal audit by Hawkes and Adams (1994). This article illustrate
that if the organisation itself adopts a TQM philosophy - the most visible expression of Daft's
modem management paradigm - then the role internal audit plays, hence the measures of
performance required, will change. Hawkes and Adams (1994) illustrate a range of scenarios for
internal audit ranging from the traditionalist model of independent systems efficiency focus, through
independent supportive reviewer, participative and supportive adviser, to participative catalyst for
change.
Clearly the stance or role adopted by the internal audit unit will affect upon the measures of
performance to be chosen. Applegate et al (1997,pp62-67) illustrate one "quality attributes" model as
an alternative to more traditional performance measures that may be appropriate in organisations
that follow this philosophy. However not all organisations do, and so it is important to consider the
role played by internal audit in choosing an appropriate framework, and measures.
From the above statements it is clear that outcomes address a wide range of aspects, i.e. all the
elements on which audit activities have an impact. These include both efficiency and effectiveness of
the audited processes, and corporate performances. At a process level, for example, the impact of IA
activities has been related to cost savings generated by the implementation of suggested
recommendations (Cashell and Aldhizer III, 2002). At a corporate level, outcome can address the IA
contribution to corporate performance, such as profit, growth, or share price; or its role in the
avoidance of corporate failures by ensuring sound corporate governance.
2.3 Research model for internal audit effectiveness measures
The theoretical and empirical literatures have recorded systematic variations on managements’ and
audit staffs’ perception on the importance of internal audit effectiveness criteria to evaluate internal
audit effectiveness. To test this variation, the following conceptual model was developed by the
study.
34
Figure 2: Perception of management and internal audit staff on measurement
criteria
To test this conceptual model, the fifteen important internal audit effectiveness criterias that was
used by Albrecht et al. (1988) was used. The reason why this criteria was selected is that first it is
comprehensive as compared to others. For instance, this criterion contains both qualitative and
quantitative dimensions. Second while most studies conducted by scholars evaluate internal audit
performance by using process and output indicaters (for instance, following audit standards), only
albrechet et al. (1988) tried to evaluate internal audit performance by using outcome/effectiveness
measures. However, albrecht et al. (1998) studies considered only from the percpectives of
stakeholders especially managements. Thus, the model indicated above was developed by the
researcher to fill this gap. The different group of management and audit staffs’ perception on the
importance of internal audit effectiveness measure affects internal audit effectiveness as showen in
the model.
Albrecht et al. (1988) used fifteen factors which catagarized in to five major factors each contains
again three criterias. The criterias are:
35
1. The usefulness of audit information provided by internal auditing.
2. Internal auditing’s recognition of the institution’s significant problems.
3. Internal auditing’s ability to provide independent reviews.
4. The auditees’ acceptance of audit findings and implementation of
recommendations.
5. The auditees’ assessment of internal audit services.
6. The internal auditing department gaining the cooperation of management.
7. The participation of internal auditor’s in professional organizations.
8. The participation of internal auditors in continuing education programs.
9. The practice of professional ethics by internal auditors.
10. Internal auditing ensuring that riskier areas receive higher audit priority in the
audit plan.
11. Completion of the annual audit plan by internal auditing.
12. The development of a long-range plan by internal auditing to cover all
significant areas.
13. The need for internal auditing to alert management to potential problems
befor they occur.
14. Internal auditing’s early warning of problems in operations and control.
15. Internal auditings’s ability to establish appropriate audit priority based upon a
formalized risk assessment by internal auditing.
The fifteen items were designed to provide three-item groupings of the five factors used to judge
internal audit effectiveness. The fifteen items were randemly distributed on the questionairre to
increase realability of the response and the five factors serving as the bases for the items in this scale
are:
1. Reasonable and meaningful findings and recommendations 1,6,11
2. Auditee’s response and feedback 5,10,15
3. Professionalism of the internal audit department 2,7,12
4. Adherence to audit plan 4,9,14
5. Absence of surprises 3,8,13
The item statements are grouped by their relationship to one another based on Albrecht et al (1988).
36
CHAPTER 3
PRESENTATION AND ANALYSIS OF DATA
Introduction Under this chapter, results of data analysis based on the questionnaires survey were presented. The
first subsection presents summary statistics of respondents who participated in the study. Subsection
two involved testing of four hypotheses mentioned in section 1.3 by using z-test for proportion and
one way ANOVA.
3.1 Summary Statistics of the Respondents In this study, the targeted respondents were presidents, directors and audit staffs of Bahir Dar and
Mekelle Universities. They were chosen since they occupy the position in their respective
universities. Total answered questionnaires received were 59 out of 61(96.72%) of respondents.
Although, the total number of questionnaires received were 59, only 58 observations were used
which represent a net response rate of 95%. Respondents were eager to participate with 15% of
respondents being presidents, 71% directors and 14 % of internal auditing staffs from the total
census.
Table 3.1: Profile of the respondents
Gender % Age % Education level % Work experience %
Male 100 21-25(N=2) 3 Bachelor(N=8) 14 <1 years(N=1) 2
Female 0 26-30(N=10) 17 Masters(N=23) 40 1-5 years(N=7) 12
31-35(N=18) 31 PHD(N=27) 46 6-10 years(N=17) 29
36-40(N=12) 21 11-15 years(N=19) 33
>40(N=16) 28 16-20 years(N=8) 14
> 20 years(N=6) 10
Table 3.1 shows the profile of the respondents. The overall distribution of males in the census was
100 percent, with 100% of males within the universities in top positions. In this analysis,
respondents age ranged from 21 – 41 and above. The age of the respondents were grouped into five
categories. In reference to respondents working experience indicates that the duration of work
experience ranging from less than 1 year to more than 20 years. The highest duration of work
experience are between 11 to 15 years (33%) followed by 6 to 10 years are (29%). Apparently the
37
least year of work experience among the respondents is less than 1 year (2%). On the other hand,
education level of the respondents revealed that higher percentage level of respondent’s education is
PHD, which accumulates 46% and 40%, has master degree qualification. The least percentage (14%)
of respondents has academic qualification of Bachelor Degree level.
3.2 Hypothesis testing and data analysis The hypothesis testing was done based on the four (4) hypotheses that were determined in Chapter
1 of this research. The hypothesis was developed based on the research model that shown in part
2.3. Two test has been used namely z-test and one-way analysis of variance. The z- test is being
carried out to determine the significant difference between the scores of university presidents,
directors and audit staffs of the perceived importance of five selected factors used to evaluate
internal auditing effectiveness as measured by the questionnaire. One-way analysis of variance was
carried out to explore statistically significant difference among mean scores of presidents, directors
and internal auditing staffs on the perceived importance of five selected factors used to evaluate
internal auditing effectiveness as measured by the questionnaire. However, before the testing
hypothesis four, data was tested for data compatibility for the ANOVA assumptions. The results of
normality and homoginity of data distribution was displayed in appendix 1.
3.2.1 Procedures for data analyses
Firstly, to address hypotheses one, two and three, scores were converted to two categories for the
five factors/criteria used to evaluated internal audit effectiveness based on measurement scale
provided on questionnaire in part two. Each item contributed to a total score for each of the
respondents. The total score obtained indicated to what degree these selected factors were important
as a whole. The highest score a respondent could have was 15 and the lowest score was three.
Therefore, the median, would be nine [(3+15)/2] indicating average importance. Table 3.2 and 3.3
shows the value for each item, and maximum and minimum value for one factor and the maximum
and minimum value for all factors and items included in each factor.
38
Table3.2: the value for each item, and maximum and minimum value for one factor
No The value for one item No. of items for
one factor
Scale
1 Greate importance=5 3 15
2 Above average=4 3 12
3 Average importance=3 3 9
4 Below average importance=2 3 6
5 No importance=1 3 3
Table3.3: The maximum and minimum value for all factors and items included in each factor
Factor
Code Factors
Items in the
questionaire
Max
Min
1
Reasonable and meaningful findings and
recommendations
1,6,11 15 3
2 Auditee’s response and feedback 5, 10, 15 15 3
3 Professionalism of the internal audit
department
2,7,12 15 3
4 Adherence to audit plan 4,9,14 15 3
5 Absence of surprises 3,8,13 15 3
The scale provides a total score concerning the importance of internal auditing factors used for
measuring internal audit effectiveness based on the 5 selected responses. Each response is an
increment, which adds to respondent's total score. Having many measurements to provide an overall
measurement for a dimension (importance of factors) is statistically more desirable than one
measurement. It increases reliability of the Scale (Borg & Gall. 1989).
More specifically respondents with average scores more than nine (median) were considered above
average importance; those below the median were considered below average importance. The scores
for the groups (presidents, directors and audit staffs) were converted in this fashion and tested
independently (each group separately) using the z distributions to ascertain if the population
proportions can be expected to exist in the three populations are significant. Confident intervals
were also computed at the 95% level.
39
Secondly, to test hypothesis four, mean scores of presidents, directors, and internal auditing staffs
were calculated and input into a single-factor analysis of variance (ANOVA) model to ascertain if
there was a significant difference between the mean scores.
All items and factors come from Section two of the questionnaire. Each factor was measured by
three items, totaling fifteen items for that section. Respondent mean scores for each factor were
calculated by adding the items (for each separate factor) and providing a total score. This resulted in
five total scores for each respondent. Mean scores for the three groups were derived from these
total factor scores.
3.2.2 Testing hypothesis one
Hypotheses one stated that there was no statistically significant difference between the scores of
audit staffs of the perceived importance of the selected five factors used to evaluate internal auditing
effectiveness as measured by the questionnaire. The analysis of the five factors individually indicated
that audit staffs proportionally perceived the individual factors above average importance to use for
evaluating internal audit effectiveness. When the z-test of population proportions was used to test
siginificance difference between the scores of audit staffs on these factors, only two factors
(reasonable and meaningful findings and recommendations, and professionalism of the internal audit
department, and the factors as a whole) found to be significant, that is, audit staffs did not agree on
the benefit to use these factor as acriteria to evaluate internal audit effectiveness. Audit staffs had
insignificant difference on the remaining three factors (auditee's response and feedback, adherence
to audit plan, and absence of surprises), that is they agreed on the benefit of these factors to use as
criteria for evaluating internal audit effectiveness.
The analysis of factors as a whole indicated that the statistics results of factors as whole exceed the
critical value (z = 1.96) needed to reject the null hypotheses.There was significant difference in
perception between audit staffs, that is, there was no agreement on the benefits of these two factors
to use as criteria for evaluating internal audit effectiveness. Table 3.4 shows the results of the
analysis.
40
Table3.4: Z-scores measuring audit staffs’ perceptions on importance of factors for fvaluating
auditing effectiveness
Factors %below %above Z critical Z observed Two tailed probability
1 .17(N=1) .83(N=5) 1.96 2.68 0.00740
2 .33(N=2) .67(N=4) 1.96 1.06 0.28920
3 .14(N=1) .86(N=6) 1.96 3.06 0.00222
4 .37(N=3) .63(N=5) 1.96 0.77 0.44120
5
.29(N=2)
.71(N=5)
1.96 1.42
0.15560
Whole
.26(N=9)
.74(N=25)
1.96 3.37
0.00076
86% of audit staffs’ respondents rated the factor of professionalism of the internal audit department
as the first above average important factor used for evaluating internal auditing effectiveness.
Conversely, 14% of the audit staffs’ viewed the factor of professionalism of the internal auditing
department as a criterion of below average importance for judging auditing effectiveness. This
negative view of the professionalism factor by audit stafs may be explained by those audit staffs’ lack
of understanding of the relationship of professionalism to the overall performance of the internal
auditing program.
83% of audit staffs’ respondents rated the factor of reasonable and meaningful findings and
recommendations as the second above average important factors used for evaluating auditing
effectiveness. On the other hand, 17% of the audit staffs viewed the factor of reasonable and
meaningful findings and recommendations of the internal auditing department as a criterion of
below average importance for judging internal auditing effectiveness.
71% of audit staffs’ respondents rated the factors of absence of surprises as the third above average
important factors used for evaluating auditing effectiveness. A reason which may explain why audit
staffs’ rated the factors of absence of surprises to be the third above average important factor is that
audit staffs’ understand the benefit of risk management. Audit staffs’ alert presidents to potential
problems before the occurance of problems.In contrast 29% of the audit staffs’ viewed the factors
of absence of surprises of the internal auditing department as a criterion of below average
importance for judging auditing effectiveness. This is because internal auditers play a watchdog role
and as the result this is not useful to measure internal audit effectiveness.
41
67% of audit staffs’ respondents rated the factors of auditee's response and feedback as the fourth
above average important factors used for evaluating auditing effectiveness. On the contrary 33% of
the audit staffs’ viewed the factors of auditee's response and feedback of the internal auditing
department as a criterion of below average importance for judging auditing effectiveness.
63% of audit staffs’ respondents rated the factor of adherence to audit plan as the fifth above
average important factor used for evaluating auditing effectiveness. Alternatively, 37% of the
presidents viewed the factor of adherence to audit plan of the internal auditing department as a
criterion of below average importance for judging auditing effectiveness. The explanation for factors
auditee's response and feedback, and adherence to audit plan for being below average may be that
presidents may not consider feedback information from audited units and others' views about
auditing to be important in their evaluations of internal auditing effectiveness
Lastly, 74% of audit staffs’ respondents rated the all factors of measuring internal audit effectiveness
as the above average important factor used for evaluating auditing effectiveness. Alternatively, 26%
of the presidents viewed all factors of measuring internal audit effectiveness of the internal auditing
department as a criterion of below average importance for judging internal auditing effectiveness. As
the result of this hypothesis one is rejected, that is, audit staffs are not agree on the benefit of these
factors to evaluate internal audit effectiveness.
3.2.3 Testing hypothesis two
Hypotheses two states that there is no statistically significant difference between the scores of
directors of the perceived importance of the selected five factors used to evaluate internal auditing
effectiveness as measured by the questionnaire. The analysis for the five factors indicated that
directors proportionally perceived the individual factors and the factors as a whole to be of above
average importance. Z-test for proportion showed that directors have significant difference on all
factors to use as criteria to judge internal audit effectiveness. Individual factors and factors as whole
exceed the critical value (z = 1.96) needed to reject the null hypotheses. It is concluded that directors
do not agree on the importance of these factors for evaluating internal audit effectiveness; the null
hypothesis was rejected. Table3.5 shows the results of the analysis.
42
Table 3.5: Z-scores measuring directors' perceptions of the importance of factors for evaluating auditing effectiveness
Factors %below %above Z critical Z observed Two tailed probability
1
.09(N=3)
.91(N=32)
1.96 4.44
0.00001812
2
.13(N=5)
.87(N=34)
1.96 3.34
0.00084000
3
.19(N=6)
.81(N=26)
1.96 2.4
0.01640000
4
.14(N=5)
.86(N=32)
1.96 3.20
0.00138000
5
.23(N=7)
.77(N=24)
1.96 1.97
0.04880000
Whole
.15(N=26)
.85(N=148)
1.96 14.08
0.00000200
Of the five factors, reasonable and meaningful findings and recommendations was rated by 91% of
the directors as being the first above average important factor for judging internal audit
effectiveness. Reasonable and meaningful findings and recommendations are the essence of the
quality of the work produced by internal auditors and may explain why directors perceived this
factor to be first in importance for evaluating auditing effectiveness. This factor also carries the
implication of value-added to the entity. Alternatively, 9% of the directors viewed the factor of
reasonable and meaningful findings and recommendations of the internal auditing department as a
criterion of below average importance for judging auditing effectiveness.
The Auditee's response and feedback were rated by 87% of directors’ respondents to be the second
above average important factors for evaluating internal audit effectiveness. A reason that may
explain why directors rated the factors of auditee’s response and feedback to be the second above
average important factor for judging internal audit effectiveness is that directors provide valuable
comment as input for quality internal auditing. In contrast, 13% of directors viewed the factors of
auditee's response and feedback of the internal auditing department as a criterion of below average
importance for judging auditing effectiveness.
Also worth mentioning is that 86% of directors participants viewed the factor of adherence to audit
plan as being third above average important factor for evaluating internal auditing effectiveness. An
explanation for directors rating the factor adherence to the audit plan as the third above average
43
important factor for judging effectiveness may be that they are clients to the internal audit function
and as a result tended to give more attention to planning aspects of the internal audit department.
Otherwise, 14% of the directors viewed the factor of adherence to audit plan of the internal auditing
department as a criterion of below average importance for judging auditing effectiveness.
81% of directors’ participants viewed the factor of professionalism of the internal audit department
as being fourth above average important factor for evaluating internal auditing effectiveness. The
directors’ closeness to the audit department, as a client, may also explain their selection of the
professionalism of the internal audit department as the fourth important criteria for judging
effectiveness of internal auditing. Directors may have perceived that auditors must be professionals.
Conversely, 19% of the directors viewed the factor of professionalism of the internal auditing
department as a criterion of below average importance for judging auditing effectiveness.
77% of directors’ participants viewed the factor of absence of surprises of the internal audit
department as being fifth above average important factor for evaluating internal auditing
effectiveness. Directors expect auditors to alert them to potential problems before the occurance of
problems. In contrast, 23% of directors viewed the factors of absence of surprises of the internal
auditing department as a criterion of below average importance for judging auditing effectiveness.
Finally, 85% of directors’ respondants perceived factors as a whole to be of above average important
criteria for evaluating internal auditing effectiveness. Alternatively, 15% of directors viewed all
factors of measuring internal audit effectiveness of the internal auditing department as a criterion for
judging internal auditing effectiveness is below average importance.
3.2.4 Testing hypothesis three
Hypotheses three states that there is no statistically significant difference between the scores of
university presidents of the perceived importance of the selected five factors used to evaluate
internal auditing effectiveness. Table 3.6 highlights the z-test results.
Table 3.6: z-scores measuring presidents' perceptions on the importance of factors for evaluating
internal auditing effectiveness
Factors %below %above Z critical Z observed Two tailed probability
1 .11(N=1) .89(N=8) 3.71 0.00020000
44
1.96
2
.12(N=1)
.88(N=7)
1.96 3.4
0.00068000
3
.29(N=2)
.71(N=5)
1.96 1.42
0.15560000
4
.14(N=1)
.86(N=6)
1.96 3.06
0.00222000
5
.12(N=1)
.88(N=7)
1.96 3.4
0.00068000
Whole
.15(N=6)
.85(N=33)
1.96 6.4
0.000002oo
The data displayed indicated that though more favorable toward some than others, presidents
perceive the five factors to be generally of above average importance to be used as a criteria for
evaluating internal audt effectiveness. To see the magnitude of importance of these factors as
criteria, Z test for proportion is used and the results showed that presidents have significant
difference, which contradict the findings of Albrecht et al (1988), on the importance of four factors
(reasonable and meaningful findings and recommendations, auditee’s response and feedback,
adherence to audit plan and absence of surprises) to use as a criterion for measuring internal audit
effectiveness. Presidents have insignificant differece, which supports the findings of Albecht et al
(1988), on the importance of professionalism of the internal audit department for evaluating internal
audit effectiveness. Based on the results obtained, the null hypothesis was rejected; and it is
concluded that there is a significant difference between presidents.
While presidents’ respondents perceived all five factors to be of above average importance, 89% of
them rated the factor of reasonable and meaningful findings and recommendations as the first above
average important factors used for evaluating auditing effectiveness. On the other hand, 11% of the
presidents viewed the factor of reasonable and meaningful findings and recommendations of the
internal auditing department as a criterion of below average importance for judging auditing
effectiveness.
88% of presidents’ respondents rated the factors of auditee's response and feedback, and Absence of
surprises as the second above average important factors used for evaluating auditing effectiveness. A
reason that may explain why presidents rated the factors of absence of surprises and auditee’s
response and feedback to be the second most important factor is that the top administration does
not want surprises and their saying as input for quality internal auditing is very important
45
respectively. Presidents expect auditors to alert them to potential problems before the occurance of
problems.In contrast 11% of the presidents viewed the factors of auditee's response and feedback,
and absence of surprises of the internal auditing department as a criterion of below average
importance for judging auditing effectiveness. In the case of auditee's response and feedback factor,
it appears that these presidents may not consider feedback information from audited units and
others' views about auditing to be important in their evaluations of internal auditing effectiveness
86% of presidents’ respondents rated the factor of adherence to audit plan as the third above
average important factor used for evaluating auditing effectiveness. Alternatively, 14% of the
presidents viewed the factor of adherence to audit plan of the internal auditing department as a
criterion of below average importance for judging auditing effectiveness. The explanation for this
factor for being below average may be that presidents may not consider feedback information from
audited units and others' views about auditing to be important in their evaluations of internal
auditing effectiveness
71% of presidents’ respondents rated the factor of professionalism of the internal audit department
as the fourth above average important factor used for evaluating auditing effectiveness. Conversely,
29% of the presidents viewed the factor of professionalism of the internal auditing department as a
criterion of below average importance for judging auditing effectiveness. This negative view of the
professionalism factor by presidents may be explained by those presidents’s lack of understanding of
the connection or relationship of professionalism to the overall performance of the internal auditing
program. Specifically, for example, they may not understand the connection between an auditor's
code of ethics and the integrity of the internal auditing department. Presidents need to understand
that internal auditors view themselves as professionals.
Lastly, 85% of presidents’ respondents rated the all factors of measuring internal audit effectiveness
as the above average important factor used for evaluating auditing effectiveness. Alternatively, 15%
of the presidents viewed all factors of measuring internal audit effectiveness of the internal auditing
department as a criterion of below average importance for judging auditing effectiveness.
The first three hypothese tested above were summarized in table 3.7.
46
Table3.7: summary of the first three hypotheses.
Sig=Significant Insg=insgnificant
3.2.5 Testing hypothesis four
Hypotheses four states that there is no statistically significant difference between the mean scores of
presidents, directors and internal auditing staffs of the perceived importance of the five selected
factors used to evaluate internal auditing effectiveness. First let us see data copatability and then I
test the hypothesis.
Data’s compatibility for one way ANOVA The ANOVA models was used to address the (H4) by investigating the significant differences
among presidents, directors and internal audit staffs on the importance of internal audit
effectiveness measures to assess internal audit effectiveness measures. Field (2005) suggested that,
four (4) basic assumptions should be assessed before running the analysis of variance. The
assumptions are as follows.
Factors
Ranks on importance of factors in judging internal audit effectiveness by using z
scors(sig at p( .05)=1.96)
Audit staffs Directors Presidents
Z-scores Sig Rank Z-scores Sig rank Z-scores sig Rank
1 2.6 Sig 2 4.44 Sig 1 3.71 sig 1
2 1.06 Insg 4 3.34 Sig 2 3.40 sig 2
3 3.06 Sig 1 2.40 Sig 4 1.42 insig 5
4 0.77 Insg 5 3.20 Sig 3 3.06 sig 4
5 1.42 Insg 3 1.97 Sig 5 3.40 sig 2
Whole 3.37 Sig 14.08 Sig 6.40 sig
47
1. Normally distributed data: The prerequisite to use anova is the fullfilment of
normality assumption. According to Andy (2005) this assumption is tested by
looking the frequency distribution in histogram and calculating the z-scores of
skewness and kurtosis at significant level .01(p=2.58) if populatin is less than 200.
According to him an absolute value greater than 2.58 is significant at 2.58, that is, a
data greater than this value is not assumed normally distributed. Accordingly the data
was tested and found normally distributed. See the detail in apendex 1.
2. Homogeneity of variance: according to Morgan (2004) to run ANOVA it should
be tested for homogeneity of variances to assure that variances are same throughout
the data. Given the Levene’s test has a probability greater than 0.05 reasonable and
meaningful findings and recommendations, auditee's response and feedback,
professionalism of the internal audit department, adherence to audit plan ,and
absence of surprises , it is assumed that the population variances are relatively equal.
For detail see apendex 1
3. Interval data: Field (2005) suggested that the data should be measured at least at the
interval level to run in ANOVA. This means that the distances between points of a
scale should be equal at all parts along the scale. According to him, five point lekert
scales assumed interval scale.
4. Independence: this assumption is that data from different participants are
independent, which means that the behaviour of one participant does not influence
the behaviour of another. In this study the behaviour of presedents, directors and
audit staffs are not influnced each other.
3.2.5.1 Testing hypothesis four factor one
When the single factor analysis of variance was employed to determine if a significant difference
existed between presidents, directors and internal auditing staffs regarding factor one(Importance of
Meaningful and Reasonable Findings and Recommendations) as table 3.8 shows F(2,55)=4.819,P
<.05)it was found that a significant difference is existed.
Table3.8: meaningful and reasonable findings and recommendations as perceived by the three
groups
SOURCE Sum of Squares Df Mean Square F P-value
Between Groups 1.644 2 .822 4.819 .012
Within Groups 9.382 55 .171
Total 11.026 57
48
Sufficient evidence was found to reject the null hypothes. Presidents, directors and internal auditing
staffs
have
signific
ant
differe
nce on
the
import
ance of
meanin
gful
and
reasonable findings and recommendations to use as criteria to evalute internal audit effectiveness.
The F ratio only tells us the presence of significant difference among three groups but it does not
indicate where the differnce exactly was? To address this, Tukey HSD post hoc comparison was performed.
Table3.9: Tukey HSD post hoc multiple comparison
*significant at the 0.05 level.
As Tukey HSD post hoc multiple comparisons on table 3.9 evidenced that the siginificance
difference on the importance of meaningful and reasonable findings and recommendations to use as
(I) job position in
the university
(J) job position in
the university
Mean
Difference
(I-J) Std. Error P-Value
95% Confidence Interval
Lower Bound Upper Bound
Presidents Directors .41415* .15203 .023 .0479 .7804
audit staffs .57375* .20069 .016 .0903 1.0572
Directors Presidents -.41415* .15203 .023 -.7804 -.0479
audit staffs .15960 .15963 .580 -.2249 .5441
audit staffs Presidents -.57375* .20069 .016 -1.0572 -.0903
Directors -.15960 .15963 .580 -.5441 .2249
49
criteria to evalute internal audit effectiveness found between presedents and directors(p<.05), and
presedents and audit staffs(p<.05)not between directors and audit staffs(p>.05). But as Morgan etail
(2004) this significant difference may be created by the differences in the population size (N1=9,
N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous subsets. The result was
indicated in table3. 10.
Table3.10: Adjusted Tukey HSD homogeneous subsets
Table 3.10 shows an adjusted tukey that is approprate when population sizes for different groups are
not similar (n=9, n=41, n=8). There is not a statistically significant difference (.626) between audit
staffs and directors because their means are both showen in subset 1. In subset 2 the directors and
presidents means are showen indicating that they are not significantly different (P=.05). By
examining the two subsets boxes, we can see that the audit staffs (M=3.1663) is different from
presidents (M=3.74) because these two means do not appear in the same subset. Therefore, the
significant difference between presidents and directors are atributable to population size difference
whereas the significant difference between presidents and audit staffs are atributed to differences in
the perceptions on the importance of meaningful and reasonable findings and recommendations to
use as criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative
to this factor was rejected.
The three elements included in the factor of "reasonable and meaningful findings and
recommendations” were: (I) the usefulness of audit information provided by internal auditing; (2)
internal auditing's recognition of the institutions significant problems; and (3) Internal auditing's
ability to provide independent reviews. This third element infers the internal auditor's freedom to
report all findings.
job position in the university N
Subset for alpha = 0.05
1 2
audit staffs 8 3.1663
Directors 41 3.3259 3.3259
Presidents 9
3.7400
P-value
.626 .050
Means for groups in homogeneous subsets are displayed.
50
There are several reasons that might explain this significant difference. To begin with, internal
auditors attached more importance to "reasonable and meaningful findings and recommendation" as
a criterion for evaluating audit department effectiveness because this factor provides evidence that
internal auditors are following internal auditing standards. Internal auditors are authorized to make
evaluations of their institution's activities. According to the Standards for the Professional Practice
of Internal Auditing, one purpose of these evaluations is to furnish managers with recommendations
for improvements. Meeting standards are very important to internal auditors.
Another rationale that might explain audit staffs attachment of more importance to this factor is that
through reporting meaningful findings and recommendations, audit staffs are provided with an
opportunity to get management's undivided attention. Reporting significant audit results and
recommendations gives audit staffs an avenue for presenting and selling their products to the
president and other top management team members. To audit staffs way of thinking, the reasonable
and meaningful findings and recommendations contained in the audit report are symbols of their
contributions that resulted in changes that made their institution better overall.
Further, internal audit staffs might have perceived more importance to the ability to provide
independent reviews than directors. Again, in order to comply with the Standards, audit staffs
believe that their departments should be independent, objective and able to render impartial and
unbiased judgments in connection with audit work.
An explanation for presidents perceiving the factor of reasonable and meaningful findings and
recommendation as being of more importance than directors may be, because presidents generally
favor receiving only executive summaries of reports or reports of the most significant audits.
Because of this it is questionable whether directors are in a position to evaluate accurately the quality
of audit findings and recommendations.
3.2.5 .2 Testing hypothesis four factor two The one way ANOVA was coducted to explore if there is no significant difference between
presidents, directors and internal audit staffs in their perceptions on the importance of auditee’s
response and feedback to judge internal audit effectiveness. As table3.11 result shows F (2, 55)
51
=3.832, P<.05), it was found that presidents, directors and internal audit staffs differ significantly in
their perceptions on the importance of auditee’s response and feedback to judge internal audit
effectiveness .The analysis were sufficient to reject the null hypothesis four regarding factor two.
Table 3.11: auditee's response and feedback as perceived by the three groups
SOURCE Sum of Squares Df Mean Square F P-value
Between Groups 2.506 2 1.253 3.832 .028
Within Groups 17.985 55 .327
Total 20.491 57
* significant at the 0.05 level.
As table 3.11 shows mean squares (1.253) for between groups and the mean squares (.327) for
within groups and F(2,55=3.832,p<.05) indicat only the presence of significance difference among
three groups in their perceptions on the importance of auditee’s response and feedback to judge
internal audit effectivenes but does not indicate where the difference exactly existed.
To locate where the difference existed Tukey HSD post hoc multiple comparison should be
conducted. As Tukey HSD post hoc multiple comparisons on table 12 evidenced that the
siginificance difference on the importance of auditee’s response and feedback to use as criteria to
evalute internal audit effectiveness found between presedents and directors(p<.05) not between
presedents and audit staffs(p>.05),and directors and audit staffs(p>.05).
Table 3.12: tukey HSD post hoc multiple comparison
(I) job position
in the
university
(J) job position
in the
university
Mean Difference
(I-J) Std. Error P-value
95% Confidence Interval
Lower Bound Upper Bound
Presidents Directors .55805* .21050 .028 .0510 1.0651
audit staffs .63125 .27786 .068 -.0381 1.3006
Directors Presidents -.55805* .21050 .028 -1.0651 -.0510
audit staffs .07320 .22102 .941 -.4592 .6056
audit staffs Presidents -.63125 .27786 .068 -1.3006 .0381
Directors -.07320 .22102 .941 -.6056 .4592
*. The mean difference is significant at the 0.05 level.
52
But as Morgan et al (2004) this significant difference may be created by the differences in the
population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous
subsets. The result indicated in table 3.13.
Table: 3.13 Adjusted Tukey HSD homogeneous subsets
job position in
the university N
Subset for alpha = 0.05
1
audit staffs 8 2.9988
Directors 41 3.0720
Presidents 9
3.6300
P-value
.949
Means for groups in homogeneous subsets are displayed.
Table3.13 shows an adjusted tukey that is approprate when population sizes for different groups are
not similar (n=9, n=41, n=8). There was not a statsitically significant difference (p=.949) between
audit staffs and directors because their means are both showen in subset 1. Therefore, the significant
difference between presidents, directors and audit staffs are caused by differences in the group size
but not on perception difference on the importance of auditee’s response and feedback to evalute
internal audit effectiveness. Based on the results the null hypothesis relative to this factor was not
rejected.
The auditee’s response and feedback of the internal auditing department factor used in this study
included elements such as the auditee’s acceptance of audit findings and implementation of
recommendations, the auditee’s assessment of internal audit services and the internal auditing
department gaining the cooperation of management.
The main reason that may explain three groups agreement in perceptions on the importance of
auditee’s response and feedback as a criterion for evaluating audit department effectiveness factor is
that both groups understand cooperations of management, management’s assessement of audit
services and proper implementation of audit findings are important for effective internal auditing
departments.
53
3.2.5 .3 Testing hypothesis four factor three Factor 3 of Professionalism of the internal audit department was analyzed using the ANOVA
process as well. This analysis revealed as in Table 3.14 a significant difference between the three
groups F (2, 55=13.475, p < .05) regarding the importance of Professionalism of the internal audit
department to judge internal audit effectivenes. Based on these results the Null hypothesis was
rejected. That is there is significant difference among three groups regarding this factor but the F-
test does not indicate where the difference exactly existed among three groups in their perceptions
on the importance of professionalism of the internal audit department to judge internal audit
effectivenes.
Table 14: professionalism of the internal audit department as perceived by the three groups
SOURCE Sum of Squares Df Mean Square F P-value
Between Groups 8.600 2 4.300 13.475 0.000
Within Groups 17.551 55 .319
Total 26.151 57
*significant at the 0.05 level
To locate where the difference existed Tukey HSD post hoc multiple comparison should be
conducted and the result showed that the siginificance difference existed between presidents and
internal audit staffs (p<.05), and directors and audit staffs (p<.05) as showen in table 3.15.
Table3.15: tukey HSD post hoc multiple comparison
(I) job position
in the
university
(J) job position
in the
university
Mean Difference
(I-J) Std. Error P-value
95% Confidence Interval
Lower Bound Upper Bound
Presidents Directors .06591 .20794 .946 -.4350 .5668
audit staffs -1.06056* .27449 .001 -1.7217 -.3994
Directors Presidents -.06591 .20794 .946 -.5668 .4350
audit staffs -1.12646* .21834 .000 -1.6524 -.6005
audit staffs Presidents 1.06056* .27449 .001 .3994 1.7217
Directors 1.12646* .21834 .000 .6005 1.6524
*. The mean difference is significant at the 0.05 level.
54
But as Morgan etail (2004) this significant difference may be caused by the differences in the
population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous
subsets. The result indicated in table 3.16.
Table 16: Adjusted Tukey HSD homogeneous subsets
Table 3.16 shows an adjusted tukey that is approprate when population sizes for different groups are
not similar (n=41, n=9, n=8). There was not a statsitically significant difference (p=.958) between
directors and presidents because their means are both showen in subset 1. In subset 2, the audit
staffs mean only are showen, indicating that it was significantly different from both directors and
presidents (P=1). By examining the two subsets boxes, we can see that the audit staffs (M=3.875)
are significantly different on perception on the importance of internal audit effectiveness from both
presidents (M=3.63) and directors (2.7485) because presidents’ and directors’ means appear in the
same subset (subset 1) whereas audit staffs apear in other subset (subset 2). Therefore, the
significant difference between presidents and audit staffs that supports the findings of Traver (1991),
and directors and audit staffs are atributed to differences in the perceptions on the importance of
professionalism of the internal audit department to use as criteria to evalute internal audit
effectiveness. Based on the results the null hypothesis relative to this factor was rejected. The
ANOVA process results relative to null hypothesis four also revealed a significant difference
between the three groups on their perceptions of the importance of the professionalism factor. It
was found that internal audit staffs perceived this factor as more important than do presidents and
directors. Based on the test results, the null hypothesis relative to this factor was rejected.
job position in the university N
Subset for alpha = 0.05
1 2
Directors 41 2.7485
Presidents 9 2.8144
audit staffs 8 3.8750
P-value .958 1.000
Means for groups in homogeneous subsets are displayed.
55
The professionalism of the internal auditing department factor used in this study included elements
such as the internal auditor's participation in professional organizations and continuing education
programs as well as the practice of professional ethics.
There are reasons that may explain this significant difference in perceptions between directors and
presidents with that of internal audit staffs. The main reason is that professionalism of the internal
auditing department to many internal audit staffs in higher education is promoted through , a code
of ethics, a statement of responsibilities, standards for the professional practice of internal auditing,
certification of internal auditors and a continuing education program.
Internal audit staffs consider these separate guides to be the criteria that internal auditing
practitioners should look to for definitions and interpretations of professionalism, professional
proficiency and professional judgments. The Code of Ethics for internal auditors is set forth in
Section 240 of the Standards. Its basic purpose is to establish professional standards of conduct.
Continuing education is another element that is important to professionalism in the internal auditing
department. For example, technological changes in the higher education environment have made it
clear that internal auditors must learn to keep abreast of new knowledge. This recognition is also
reflected in the Standards, which emphasizes the internal auditor's need to maintain technical
competence as well as certification through continuing education. Failure to keep current with
changes will adversely affect the usefulness of internal auditors (Lembke, et aI., 1974).
3.2.5 .4 Testing hypothesis four factor four Factor four was "Adherence to audit plan." The ANOVA analysis F (2, 55=8.374, p< .05) revealed
that no significant difference exist between the three groups concerning Factor 4 as showen in table
3.17. Based on the analysis the null hypothesis was rejected. That is there is significant difference
between groups but the “F” ratio could not indicate where the difference lies.
Table3.17: importance of adherence to audit plan as perceived by the three groups
SOURCE Sum of
Squares Df
Mean
Square F P-Value
Between Groups 7.274 2 3.637 8.374* 0.001
56
Within Groups 23.887 55 434
Total 31.160 57
* significant at the 0.05 level.
To find where the difference existed Tukey HSD post hoc multiple comparison should be
conducted and the result showed that the siginificance difference existed between presidents and
directors (p<.05), and directors and audit staffs (p<.05) as showen in table3.18.
Table 3.18: Tukey HSD post hoc multiple comparison
(I) job position
in the
university
(J) job position
in the
university
Mean Difference
(I-J) Std. Error P-value
95% Confidence Interval
Lower Bound Upper Bound
Presidents Directors .86236* .24259 .002 .2780 1.4467
audit staffs .19833 .32022 .810 -.5730 .9697
Directors Presidents -.86236* .24259 .002 -1.4467 -.2780
audit staffs -.66402* .25472 .031 -1.2776 -.0505
audit staffs Presidents -.19833 .32022 .810 -.9697 .5730
directors .66402* .25472 .031 .0505 1.2776
*. The mean difference is significant at the 0.05 level.
But as Morgan et al (2004) this significant difference may be caused by the differences in the
population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous
subsets. The result indicated in table 3.19.
Table 3.19: Adjusted Tukey HSD homogeneous subsets
job position in the university N
Subset for alpha = 0.05
1 2
Directors 41 3.2110
audit staffs 8
3.8750
Presidents 9
4.0733
P-value 1.000 .751
Means for groups in homogeneous subsets are displayed.
57
Table 3.19 shows an adjusted tukey that is appropriate when population sizes for different groups
are not similar (n=41, n=8, n=9). There was not a statsitically significant difference (p=.751)
between audit staffs and presidents because their means are both showen in subset 2. In subset 1,
the directors’mean only are showen, indicating that it was significantly different from others (P=1).
By examining the two subsets boxes, we can see that the directors (M=3.2110) is different from
both presidents (M=4.0733) and audit staffs (3.8750) because presidents’ and audit staffs’ means
appear in the same subset (subset 2) whereas directors appear in other subset (subset 1). Therefore,
the significant difference between directors and audit staffs, and directors and presidents are
attributed to differences in the perceptions on the importance of adherence to audit plan to use as
criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this
factor was rejected.
The Adherence to audit plan of the internal auditing department factor used in this study included
elements such as ensuring that riskier areas receive higher audit priority in the audit plan, completion
of the annual audit plan by internal auditing and the development of a long-range plan by internal
auditing to cover all significant areas.
The main reason that may explain this significant difference in perceptions between internal audit
staffs and presidents with that of directors is that directors are not frequantly in contact with internal
auditors since internal auditors who conduct traditional audits do not consider directors as clients.
Again not cosidering directors as clients resulted in developing plans that are incompatible with
company objectives, not providing for the measurement of the performance needed to carry out
plans.
3.2.5 .5Testing hypothesis four factor five
Factor 5 measures the importance of "Absence of surprises" in evaluating internal auditing
effectiveness. Table 3.20 ANOVA analysis F (2, 55=11.945, P < .05) revealed significant difference
exist between the three groups regarding this factor. The null hypothesis could be rejected.
Table 3.20: absence of surprised as perceived by the three groups
SOURCE Sum of Squares Df Mean Square F P-value
Between Groups 6.972 2 3.486 11.945 0.000
Within Groups 16.052 55 .292
58
SOURCE Sum of Squares Df Mean Square F P-value
Between Groups 6.972 2 3.486 11.945 0.000
Within Groups 16.052 55 .292
Total 23.025 57
* significant at the 0.05 level.
To identify where the difference existed, Tukey HSD post hoc multiple comparison should be
conducted and the result showed that the siginificance difference existed between presidents and
directors (p<.05), and presidents and audit staffs (p<.05) as showen in table 3.21. Table 3.21: Tukey HSD post hoc multiple comparison
(I) job position
in the
university
(J) job position
in the
university
Mean Difference
(I-J) Std. Error P-value
95% Confidence Interval
Lower Bound Upper Bound
Presidents Directors .95927* .19886 .000 .4803 1.4383
audit staffs .94875* .26251 .002 .3164 1.5811
Directors Presidents -.95927* .19886 .000 -1.4383 -.4803
audit staffs -.01052 .20881 .999 -.5135 .4924
audit staffs Presidents -.94875* .26251 .002 -1.5811 -.3164
Directors .01052 .20881 .999 -.4924 .5135
*. The mean difference is significant at the 0.05 level.
As Morgan etail (2004) this significant difference may be due to by the differences in the population
size (N1=41, N2=8, N3=9 and tested by adjusted Tukey HSD homogeneous subsets to assure that
the significant difference is occurred only by absence of surprises. The result indicated in table 3.22.
Table 3.22: Adjusted Tukey HSD homogeneous subsets
Means for groups in homogeneous subsets are displayed.
job position in the university N
Subset for alpha = 0.05(p)
1 2
Directors 41 2.7807
audit staffs 8 2.7912
Presidents 9
3.7400
P-value
.999 1.000
59
Table 3.22 shows an adjusted tukey that is approprate when population sizes for different groups are
not similar (n=41, n=8, n=9). There was not a statsitically significant difference (p=.999) between
audit staffs and directors because their means are both shown in subset 1. In subset 2, the
presidents’ mean only are showen, indicating that it was significantly different from others (P=1).
By examining the two subsets boxes, we can see that the presidents (M=3.7400) is different from
both directors (M=2.7807) and audit staffs (2.7912) because directors’ and audit staffs’ means appear
in the same subset (subset 1) whereas presidents apear in other subset (subset 2). Therefore, the
significant difference between directors and presidents, and audit staffs and presidents are atributed
to differences in the perceptions on the importance Absence of surprises to use as criteria to evalute
internal audit effectiveness. Based on the results the null hypothesis relative to this factor was
rejected.
The absence of surprises of the internal auditing department factor used in this study included
elements such as the need for internal auditing to alert management to potential problems befor they
occur, internal auditing’s early warning of problems in operations and control, and internal
auditings’s ability to establish appropriate audit priority based upon a formalized risk assessment by
internal auditing.
The main reasons that may explain this significant difference is that presidents are well aware about
the importance risk management while others are not. That is alerting management to potential
problems, early warning of problems befor occurance and prioritizing risk audit area by making risk
assessement is considered as task of internal auditors by presidents. Incontrast, directors and audit
staffs do not consider this as task of internal auditors.
The different group’s perceptions on different factors were summarized in table 23.
Table 3.23: Summary of hypothesis four for the five factors
Factors Difference on the importance of internal audit effectiveness criteria among three groups
F-test Post-hoc tukey test Adjusted HSD tukey
IAS and D IAS and P D and P IAS and D IAS and P D and P
60
1 D N D D N D N
2 D N N D N N N
3 D D D N D D N
4 D D N D D N D
5 D N D D N D D
D=significant difference IA=internal audit staffs P=presidents N=no significant difference D=directors
CHAPTER 4
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
The purpose of this research was to examine managements’ and audit staffs’ perception on the
importance of five selected factors used to evaluate internal auditing effectiveness in Bahir Dar and
Mekelle Universities.
The target populations were 10 presidents, 43 directors and 8 internal audit staffs of Mekelle and
Bair Dar universities. The list was obtained from each univerisity and the individuals who occupy the
positions of presidancy, dean, directorships and internal audit was considered as targets of the study.
61
The data were gathered through the internal audit effectiveness scale distributed to presidents,
directors and internal audit staffs of these universities and the returned survey scales provided the
data used in the research analysis and it was analysed by z-test and one way ANOVA. The analysis of the data provided the basis for rejecting or not rejecting the hypotheses statements.
The researcher provided explanation and rationale for the differences and similarities in the data
analysis and presentation section of the study. In this section the reasearcher tried to summarize,
conclude and recommend based on the data.
Z-test statistical procedures for independent samples were performed to analyze null hypotheses
one, two and three. One-way analysis of Variance and the tukey post-hoc test were applied to test
null hypothesis four.
In this study, the following null hypotheses were tested:
H1: There is no statistically significant difference between the scores of internal auditing
staffs of the perceived importance of five selected factors used to evaluate internal
auditing effectiveness as measured by the questionnaire.
H2: There is no statistically significant difference between the scores of directors on the
perceived importance of five selected factors used to evaluate internal auditing
effectiveness as measured by the questionnaire.
H3: There is no statistically significant difference between the scores of university presidents
on the perceived importance of selected five factors used to evaluate internal auditing
effectiveness as measured by the questionnaire.
H4: There is no statistically significant difference among mean scores of presidents, directors
and internal auditing staffs on the perceived importance of five selected factors used to
evaluate internal auditing effectiveness as measured by the questionnaire.
4.1 Summary
From statistical analysis coducted in chapter three, the researcher obtained the following major
findings and summarized in the order of hypotheses as follows.
Hypotheses one: The z- test was carried out to determine the significant difference between the
scores of university audit staffs of the perceived importance of five selected factors used to evaluate
62
internal auditing effectiveness as measured by the questionnaire and found that the above average
and below average category of audit staffs significantly differ on the importance of two criteria
(Professionalism of the internal audit department, and Reasonable and meaningful findings and
recommendations) to use as criteria to evaluate internal audi effectiveness. In the opinion of a
majority of the audit staffs, the five selected factors used for evaluating auditing effectiveness were
of above average importance overall. The percentage of scores for audit staffs falling in the above
average importance dimension with regard to the selected factors used to evaluate auditing
effectiveness were significantly larger than the percentage of scores following the below average
importance category. Within Audit staffs scored the most significant difference was observed on the
factor of professionalism of the internal audit department of the five selected factors for evaluating
internal audit effectiveness.
Hypotheses two: The z- test was conducted to determine the significant difference between the
scores of university directors of the perceived importance of five selected factors used to evaluate
internal auditing effectiveness as measured by the questionnaire and found that the above average
and below average category of directors significantly differ on the importance of five factors/criteria
to use as criteria to evaluate internal audi effectiveness. In the opinion of a majority of the directors,
the five selected factors used for evaluating auditing effectiveness were of above average importance
overall. The percentage of scores for directors falling in the above average importance dimension
with regard to the selected factors used to evaluate auditing effectiveness were significantly larger
than the percentage of scores following the below average importance category. Within directors
scored the most significant difference is observed on the factor of reasonable and meaningful
findings and recommendations of the five selected factors for evaluating internal audit effectiveness.
Hypotheses three: The z- test was performed to determine the significant difference between the
scores of university presidents of the perceived importance of five selected factors used to evaluate
internal auditing effectiveness as measured by the questionnaire and found that all presidents
believed that all factors have above average importance to use as criteria for evaluating internal audit
effectiveness. Presidents had significant difference which contradict the findings of Albecht et al
(1988) on the importance of four factors (reasonable and meaningful findings and
63
recommendations, auditee’s response and feedback, adherence to audit plan and absence of
surprises) to use as a criterion for measuring internal audit effectiveness. Presidents had insignificant
differece that supports the findings of Albecht et al (1988) on the importance of professionalism of
the internal auditing departments.
In the opinion of a majority of the presidents, the five selected factors used for evaluating overall
auditing effectiveness were of above average importance. The percentage of scores for presidents
falling in the above average importance dimension relative to the five selected factors used to
evaluate auditing effectiveness were significantly large than the percentage of scores falling into the
below average importance category. Within presidents scored the most significant difference was
observed on the factor of reasonable and meaningful findings and recommendations of the five
selected factors for evaluating internal audit effectiveness.
Hypotheses four: A single factor analysis of variance (ANOVA) statistical procedure with Tukey
HSD post-hoc analysis was employed to test this hypothesis relative to each factor. There was a
significant difference in the response scores of presidents, directors and internal auditing directors
relative to the importance of the five selected factors used to evaluate auditing effectiveness. The
results for each factor were:
1. Audit staffs Perceptions/opinions was significantly different from presidents on the
importance of reasonable and meaningful findings and recommendations to use as criteria to
evaluate internal audit effectiveness. While presidents perceived reasonable and meaningful
findings and recommendations as significantly more important, audit staffs perceived as less
important criteria to evaluate internal audit effectiveness.
2. All groups had similar perceptions on the importance of auditee’s response and feedback as
criteria for evaluating internal audit effectiveness.
3. Audit staffs Perceptions/opinions were significantly different from both presidents and
directors on the importance of professionalism of the internal audit department to use as
criteria to evaluate internal audit effectiveness. While audit staffs perceived professionalism
of the internal audit department as significantly more important criteria, presidents and
directors perceived as less important criteria to evaluate internal audit effectiveness. The
64
significant difference between presidents and audit staffs supports the findings of Traver
(1991).
4. Directors Perceptions/opinions were significantly different from both presidents and Audit
staffs on the importance of adherence to audit plan to use as criteria to evaluate internal
audit effectiveness. While directors perceived adherence to audit plan as significantly more
important criteria, presidents and audit staffs perceived as less important criteria to evaluate
internal audit effectiveness.
5. Presidents’ Perceptions/opinions’ were significantly different from both directors and Audit
staffs on the importance of absence of surprises to use as criteria to evaluate internal audit
effectiveness. Absence of surprises was perceived by presidents’as significantly, as more
important criteria but directors and audit staffs perceived it as less important criteria to
evaluate internal audit effectiveness.
4.2 Conclusion Based on the findings obtained from this research endeavor, the following conclusions were drawn:
� Audit staffs themselves do not agree on the importance of professionalism of the internal audit
department, and reasonable and meaningful findings and recommendations for evaluating
internal audit effectiveness.
� Directors themselves do not agree on the importance of all five factors (reasonable and
meaningful findings and recommendations, auditee's response and feedback, professionalism of
the internal audit department, adherence to audit plan and absence of surprises) for evaluating
internal audit effectiveness.
� Presidents themselves do not agree on the importance of four factors (reasonable and
meaningful findings and recommendations, auditee's response and feedback, adherence to audit
plan and absence of surprises) for evaluating internal audit effectiveness.
� There is theoretical knowledge gap between audit staffs and presidents. Especially audit staffs do
not understand the importance of reasonable and meaningful findings and recommendations for
measuring internal audit effectiveness.
65
� All three groups have similar perception on the importance of auditee's response and feedback
to use as creteria for evaluating internal audit effectiveness.
� Presidents and directors do not understand the benefits of professionalism of the internal audit
department for assessing internal audit effectiveness.
� Directors do not understand the benefits of adherence to audit plan for assessing internal audit
effectiveness.
� Directors and audit staffs do not understand the benefits of absence of surprises for assessing
internal audit effectiveness.
4.3 Recommendations
Based on the findings and conclusions drawn, the following recommendations are forwarded in
order to increase the benefit of internal audit effectiveness criteria for the two uniersities.
This study revealed that three groups do not view the importance of all factors at the same level of
significance as criteria for evaluating internal auditing effectiveness. Although the differences in
perception on these factors may in part be attributable to the other background factors like age, sex,
educational level and experience, it represents an area that internal audit staffs and managements
need to pay attention. These significant differences have two implications.
The first implication is that the evaluation system of internal audit function based on the wrong or
erroneous criteria. The second implication is that without consensus of factor importance between
these three groups, the audit function may be evaluated on a different set of criteria than that of
adopted by internal audit staffs’ to perform their audit roles. To assist in overcoming this difference
in perceptions, it is recommended that Internal auditors
� Understand the profession well and then create internal audit awareness program
for their directors and presidents about the current theory and practice of internal
auditing.
� Need to conduct awareness training to communicate to directors and presidents that
internal auditors subscribe to and follow a substantial body of professionalism
guidance in the performance of their duties.
66
� Improve presentation skills to better communicate the audit results and respond to
critical questions about the results.
� Align the internal auditing program with the university's mission and make sure
presidents and directors understand this. Such action would serve as an indication
that the internal audit function is linked to the business of the university and that
their work will reflect that perspective.
� Cultivate closer working relationships and personal contacts with their presidents as
a means of closing this difference.
Finally, the researcher having identified the need, recommends further research on the :
� The benefits of five internal auditing measures as perceived by all stakeholders
(Ministry of Education and Board of directors) in public and/or private colleges and
universities.
� The benefits of internal auditing criteria as perceived by presidents, directors and
audit staffs in public and/or private colleges and universities by considering different
personal background variables (age, sex, education).
� The benefits of full scope/more dimensions of internal auditing criteria as perceived
by presidents, directors and audit staffs in public and/or private colleges and
universities.
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APPENDICES 1
Homoginity and Normality of data distribution
Test of Homogeneity of Variances
Levene Statistic df1 df2 Sig.
reasonable and meaningful finding
and recom 1.506 2 55 .231
auditees respons and feedback 1.418 2 55 .251
professinalism of the internal audit
dept 1.053 2 55 .356
adherence to audit plan 1.335 2 55 .271
absence of surprises .502 2 55 .608
71
Normality distributionStatistics
reasonable and
meaningful finding
and recom
auditees respons
and feedback
professinalism
of the internal
audit dept
adherence to audit
plan
absence of
surprises
N Valid 58 58 58 58 58
Missing 0 0 0 0 0
Mean 3.3681 3.1484 2.9141 3.4364 2.9310
Skewness .233 -.370 -.146 -.706 -.135
Std. Error of Skewness .314 .314 .314 .314 .314
P
Kurtosis
.74
-.435
1.17
-.495
.46
.398
2.24
.364
.42
.359
Std. Error of Kurtosis
P
.618
.72
.618
.8
.618
.64
.618
.59
.618
.58
Reliability Statistics
Cronbach's Alpha N of Items
.701 5
Reliability Statistics
Cronbach's Alpha Part 1 Value .152
N of Items 3a
Part 2 Value .659
N of Items 2b
Total N of Items 5
Correlation Between Forms .761
Spearman-Brown Coefficient Equal Length .864
Unequal Length .868
72
Guttman Split-Half Coefficient .861
a. The items are: reasonable and meaningful finding and recom, auditees respons and feedback,
professinalism of the internal audit dept.
b. The items are: professinalism of the internal audit dept, adherence to audit plan, absence of surprises.
APPENDICES 2
Mekelle University
College of business and economics
Department of management
Questionnaire to be filled by University managements and audit staffs
Purpose: the purpose of this questionnaire is to collect data for a study on the title “Internal Audit
Effectiveness measures in two selected Higher Education Institutions. Your institution is
selected for the study. This study is for academic purpose i.e. a work and Dissertation project
Submitted in Partial Fulfillment of the Requirements for the Master of Arts degree In Business
73
Administration program/MBA. Your cooperation to provide genuine and relevant information is
highly important and appreciated for the success of the study. I would like to assure you that your
response would be kept confidential. Hence, please feel free to give answer for all the questions
frankly and accurately. It is not necessary to write your name on the questionnaire. It takes no longer
than 10 minutes to answer the questions. I thank you for your precious time that you spend for
answering the questions.
General Instruction: questions are subdivided into two parts. Read instructions for each part and
answer accordingly.
Section I: Background information The following questions have been included to determine selected demographic factors of your institution. Please answer by filling the blank by checking (x) as appropriate or use the space provided for open-ended
questions.
1. Name of the campus: _____________________________________________.
2. Age ________________________________________.
3. Gender: 1. Male 2. Female
4. Work experience____________________________.
5. Educational level
BA/BSC Masters /second-degree PhD
Section II: effectiveness criteria Based on your opinion, indicate the importance you place on each factor when evaluating internal
audit effectiveness at your institution. Please circle the appropriate number with 1 indicating this
factor has no importance to 5 indicating this factor is of great importance.
How important is each of the following factors to you in evaluating internal audit department effectiveness at
your institution?
Factors Great importance
Above Average Importance
Average Importance
Below Average
No Importance
74
1 The usefulness of audit information provided by internal auditing.
5 4 3 2 1
2 The participation of internal auditor's in professional organizations.
5 4 3 2 1
3 The need for internal auditing to alert management to potential problems before they occur.
5 4 3 2 1
4 Internal auditing ensuring that riskier areas receive higher audit priority in the audit plan.
5 4 3 2 1
5 The auditees acceptance of audit findings and implementation of recommendations'
5 4 3 2 1
6 Internal auditing's recognition of the institution's significant problems.
5 4 3 2 1
7 The participation of internal auditors in continuing education programs.
5 4 3 2 1
8 Internal auditing's early warning of problems in operations and control.
5 4 3 2 1
9 Completion of the annual audit plan by internal auditing.
5 4 3 2 1
10 The auditee’s assessment of internal audit services.
5 4 3 2 1
11 Internal auditing's ability to provide independent reviews.
5 4 3 2 1
12 The practice of professional ethics by internal auditors.
5 4 3 2 1
13 Internal auditing's, ability to establish appropriate audit priority
5 4 3 2 1
14 The development of a long-range plan by internal auditing to cover all significant areas.
5 4 3 2 1
15 The internal auditing department gaining the cooperation of management.
5 4 3 2 1
','
16: What do you recommend for internal audit effectiveness measure in your university? Please,
suggest your idea on the blank space provided below.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
75
______________________________________________________________________________
_______________________ .