effect of internal audit on the perfomance of public
TRANSCRIPT
EFFECT OF INTERNAL AUDIT ON THE PERFOMANCE OF
PUBLIC SECTOR IN ZANZIBAR
The Case of Presidential Office, Finance, Economy and
Development Planning
EFFECT OF INTERNAL AUDIT ON THE PERFOMANCE OF
PUBLIC SECTOR IN ZANZIBAR
The Case of Presidential Office, Finance, Economy and
Development Planning
By
Saleh Juma Rashid
A Dissertation Submitted to Mzumbe University, Dar es Salaam Campus
College in Partial Fulfilment of the Requirements for the Award of the Degree
of Master of Science in Accounting and Finance (MSc. A&F) of Mzumbe
University.
2013
i
CERTIFICATION
We, the undersigned, certify that we have read and hereby recommend for
acceptance by the Mzumbe University, a dissertation titled “Effects of Internal
Audit on the Performance of Public Sectors in Zanzibar: The case of Presidential
Office, Finance, Economy and Development Planning,” in partial fulfilment of the
requirements for award of the degree of Master of Accounting and Finance (MSc.
A&F) of Mzumbe University.
……………………………………..
Major Supervisor
………………………………….
Internal Examiner
………………………………
External Examiner
Accepted for the Board of …………………………………..
…………………………………………………………
CHAIRPERSON, FACULTY/DIRECTORATE BOARD
ii
DECLARATION
I, Saleh Juma Rashid, declare that this dissertation is my own original work and that
it has not been presented and will not be presented to any other university for a
similar or any other degree award.
Signature ___________________________
Date________________________________
iii
COPYRIGHT
©
This dissertation is a copyright material protected under the Berne Convention, the
Copyright Act 1999 and other international and national enactments, in that behalf,
on intellectual property. It may not be reproduced by any means in full or in part,
except for short extracts in fair dealings, for research or private study, critical
scholarly review or discourse with an acknowledgement, without the written
permission of Mzumbe University, on behalf of Saleh Juma Rashid.
iv
ACKNOWLEDGEMENT
The final product of this research would not have been successful without the
assistance of various individuals who participated in one way or another. However, it
is impossible to mention everybody by names. First of all, I would like to express
special thanks to the Almighty God who enabled me pursue my Studies at Mzumbe
University.
Secondly, I am highly indebted to the tireless efforts, constructive criticisms and
intellectual guidance of my research supervisor, Dr. K.P Feksi Mtey of Mzumbe
University for his continuous guidance, advice, and invaluable comments from the
proposal development up to the final production of this dissertation.
Thirdly, I extend my deeper thanks to my employer, President’s Office, Finance,
Economy and Development Planning (POFEDP) for granting me sponsorship and
study leave to attend the Post Graduate Studies.
Fourthly, special thanks are extended to Prof. Mohammed Ali Sheikh of the State
University of Zanzibar for his keen editorial work and advice that made it possible to
produce this dissertation
Lastly, I would like to extend my special thanks to the staff of the POFEDP who
participated in the study by giving various data/information used in the final output.
It is not possible to mention everybody here, but to all who contributed in one way or
the other, you are all in my special heart of hearts.
v
DEDICATION
This work is dedicated to my beloved wife; Mrs. Radhia Said Suleiman, my beloved
mother; Aisha Omar Hamad and the whole family of Juma Rashid Salum for their
moral support, patience and encouragement during the entire period of my study.
vi
LIST OF ACCRONOMY
ACCA - The Association of Chartered Certified Accountants
CAE - Chief Audit Executive
CIA - Certified of Internal Audition
CIA - Chief Internal Auditor
CPA - Certified of Public Accountants
IA - Internal Audit
IAF - Internal Audit Function
IAU - Internal Audit Unit
IIA - The Institute of Internal Auditor
IIAM - The Institute of Internal Auditors Malaysia
ISA - International Standard on Auditing
LGAs - Local Government Authority
MDAs - Ministry, Department and Agency
MICG - The Standards for the Professional Practice of Internal
POFEDP - Presidential Office, Finance, Economy and Development
Planning
PS - Public Sector
RGOZ - Revolutionary Government of Zanzibar
SPPIA - The Standards for the Professional Practice of Internal
SPSS - The Statistical Package for Social Science
vii
ABSTRACT
The research centred on the effect of internal audit on the performance of public
sector in Zanzibar using Presidential Office, Finance, Economy and Development
Planning (POFEDP). In carrying out the research, hypothesis was stipulated, which
basically questioned that there is positive linkage between roles of internal audit and
the performance in the public sector. To test this hypothesis, SPSS statistical tool
was employed. The research findings showed a positive relationship between the
roles of internal audit and public performance in the President’s Office, Finance,
Economy and Development Planning. It is recommended that the Revolution
Government of Zanzibar appoints an Internal Auditor General (IAG) to report
directly to the IAG rather than the Accounting Officer as of now. This will facilitate
independence and enhance value addition to the office of the Internal Auditors.
viii
TABLE OF CONTENTS
Pages
CERTIFICATION ...................................................................................................... i DECLARATION ........................................................................................................ ii COPYRIGHT ............................................................................................................ iii
ACKNOWLEDGEMENT ........................................................................................ iv DEDICATION ............................................................................................................ v
LIST OF ACCRONOMY ......................................................................................... vi
ABSTRACT .............................................................................................................. vii TABLE OF CONTENTS ........................................................................................ viii LIST OF TABLES .................................................................................................... xi LIST OF FIGURES ................................................................................................. xii
CHAPTER ONE ........................................................................................................ 1
PROBLEM SETTING ............................................................................................... 1 1.1 Introduction ................................................................................................ 1
1.2 Background Information ............................................................................ 1 1.3 Statement of the Problem ........................................................................... 6 1.4 Research Objectives .................................................................................. 6
1.4.1 General Objective....................................................................................... 6
1.4.2 Specific Objectives of the Study ................................................................ 7 1.5 Research Questions .................................................................................... 7 1.6 Significance of the Study ........................................................................... 7
1.7 Scope of the Study ..................................................................................... 7 1.8 Limitation of the Study .............................................................................. 8
1.9 Delimitations .............................................................................................. 8
CHAPTER TWO ....................................................................................................... 9 LITERATURE REVIEW .......................................................................................... 9
2.1 Introduction ................................................................................................ 9 2.2 Conceptual Definitions............................................................................... 9 2.3 Theoretical Literature Review.................................................................. 11
2.4 Overview of Internal Audit ...................................................................... 11 2.4.1 Relationship between IA and Performance .............................................. 12 2.4.2 Relationship between the Internal Auditor (IA) and the External Auditor
(EA) ...................................................................................................... 14
2.5 Agency Theory and the Role of Internal Audit ........................................ 19 2.5.1 Agency Theory ......................................................................................... 19 2.5.2 Auditors as Agents ................................................................................... 20 2.6 Empirical Studies ..................................................................................... 21 2.6.1 Internal Audit and Public Sectors’ Performance ...................................... 21
2.7 Knowledge Gap ........................................................................................ 28 2.8 Conceptual Framework and Research Model .......................................... 30 2.9 Research Hypothesis ................................................................................ 31
ix
CHAPTER THREE ................................................................................................. 32 RESEARCH METHODOLOGY ........................................................................... 32
3.1 Introduction .............................................................................................. 32 3.2 Research Design ....................................................................................... 32 3.3 Type of Study ........................................................................................... 32
3.4 Study Area ................................................................................................ 33 3.5 Study Population ..................................................................................... 34 3.6 Units of Analysis ...................................................................................... 34 3.7 Variables and their Measurements ........................................................... 34 3.8 Sample Size and Sample Techniques ....................................................... 36
3.9 Types and Sources of Data ....................................................................... 37 3.10 Data Collection Methods ........................................................................ 37
3.10.1 Questionnaire ........................................................................................... 37 3.10.2 Interview .................................................................................................. 38 3.11 Validity and Reliability Issues ................................................................. 38 3.12 Data Analysis Methods ............................................................................ 39
3.13 Ethical Consideration ............................................................................... 40
CHAPTER FOUR .................................................................................................... 41
PRESENTATION AND INTERPRETATION OF RESEARCH FINDINGS ... 41 4.1 Introduction .............................................................................................. 41
4.2 Demographic Characteristics of Respondents ......................................... 41
4.2.1 Gender status ............................................................................................ 41
4.2.2 Age status ................................................................................................. 42 4.2.3 Working experience of the staff ............................................................... 43
4.2.4 Working Positions of the Staff ................................................................. 43 4.3 Specific Objective One ............................................................................ 44 4.3.1 The existence of the Internal Audit Role ................................................. 45
4.3.2 Types of Internal Audit Roles .................................................................. 45 4.3.3 Compliance of Internal Audit Roles ........................................................ 47
4.3.4 Adequacy of Internal Audit Roles............................................................ 48 4.3.5 Perfomance of Internal Audit Roles ......................................................... 49 4.4 Specific Objective Two ............................................................................ 49
4.4.1 Existance of Internal Audit Process ......................................................... 50
4.4.2 Extent of Compliance of Internal Audit Process...................................... 51 4.4.3 Perfomance Status of Internal Audit Process ........................................... 52 4.5 Specific Objective Three .......................................................................... 52
4.5.1 Existance of Challenges ........................................................................... 53 4.5.2 Reasons of Internal Audit Challenges ...................................................... 53 4.6 Possible Solution to Improve Internal Audit Performance of Internal
Audit in the Public Sector ................................................................... 55
CHAPTER FIVE ...................................................................................................... 58 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS . 58
5.1 Introduction .............................................................................................. 58 5.2 Summary of findings ................................................................................ 58 5.3 Conclusion ............................................................................................... 59
x
5.4 Recommendations .................................................................................... 60 5.5 Areas for Further Research ...................................................................... 61
REFFERENCES ...................................................................................................... 62
APPENDICES .......................................................................................................... 69 Appendix 1: Covering letter .............................................................................. 69 Appendix 2: Questionnaire ............................................................................... 70 Appendix 3: Interview Guide ............................................................................ 73 Appendix 4: Organizational structure ............................................................... 76
xi
LIST OF TABLES
Pages
Table 3.1: Variables and Measurement ............................................................... 35
Table 3.2: Estimation and Respondents and Sample Size .................................. 36
Table 4.1: Gender ................................................................................................ 41
Table 4.2: Age Status .......................................................................................... 42
Table 4.3: Existence of Audit Roles.................................................................... 45
Table 4.4: Compliance of Internal Audit Roles .................................................. 48
Table 4.5: Adequacy of Internal Audit Roles ..................................................... 48
Table 4.6: Existence of Internal Audit Process ................................................... 50
Table 4.7: Existence of Challenges ..................................................................... 53
xii
LIST OF FIGURES
Pages
Figure 2.1: Agency theory .................................................................................... 20
Figure 2.2: Conceptual Framework ...................................................................... 31
Figure 4.1: Age status ........................................................................................... 42
Figure 4.2: Working Experiences of the Staffs .................................................... 43
Figure 4.3: Status of the Staffs ............................................................................. 44
Figure 4.4: Roles of Internal Audit ....................................................................... 46
Figure 4.5: Performance of Internal Audit Roles ................................................. 49
Figure 4.6: Extent of Compliance of Internal Audit Process ............................... 51
Figure 4.7: Performance Status of Internal Audit Process ................................... 52
Figure 4.8: Reasons of Internal Audit Challenge ................................................. 55
Figure 4.9: Possible Solution to Improve Internal Audit...................................... 57
1
CHAPTER ONE
PROBLEM SETTING
1.1 Introduction
The globalization of economy, technological advancements, and complexity of
business and allegations of fraudulent financial reporting have recently sharpened the
ever-increasing attention to internal controls and internal auditing (Karagiorgos et al.
2009). The study aimed at bringing professionalism and customer focus to the
management and delivery of government services. The Government’s top priority is
the improvement of public services (Fadzil, F. 2003). People’s expectations of
public funded services and products are rightly high and rising. A government has set
a clear strategy for improvement and targets against which to measure and reward
rising performance (Ljubisavljević, S and Jovanović, D. 2011). There are two main
benefits for an organization from having an internal audit department. The first arises
from the conventional audit of financial systems and controls and secondly all
operations/activities in the public sectors monitored efficiently and effectiveness
(Albrecht et al., 1988). Balanced performance measures should be in line with the
strategy of the organization and help in implementing the strategy (Kaplan & Norton,
2004).
1.2 Background Information
Auditing has a significant role in the ma management of most organizations. It has
become increasingly varied, both 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. Both public and private sectors use
resources to accomplish their daily activities (Cohen, A and Sayag, G. 2010).
Internal auditing (IA) serves as an important link in the business and financial
reporting processes of corporations and not-for-profit providers (Reynolds 2000).
Internal auditors monitor a company’s risk profile and identify areas for
improvement (Goodwin-Stewart and Kent 2006). Internal audit unit ensures all
public and private activities comply with the organizations’ objective.
2
During the past years, internal auditing underwent dramatic changes that expanded
its scope allowing for greater contributions to the organization. Diverse fields have
now seen the need to employ internal auditors (Popescu, S. and Omran, A. 2011).
As a profession Internal auditing now walks a tightrope between serving as a
management consultant and an independent professional. Different studies and
researches in different countries have emphasized compliance of internal audit in
terms of performance conditions (Fadzil, F. 2003). Performance in general can be
defined as a metric used to quantify the efficiency and or / or effectiveness of an
action (Neely et al, 2005). Systems for measuring performance differ greatly
between audit functions due to the great diversity of organizations (Rupsys et al.
2007). For the last 15-20 years, internal audit has become a true profession with
major potential to influence the management of public finances. Developed countries
have only recently made the transition to modern internal audit, making their
experiences relevant for other countries currently trying to achieve this conversion. It
also means that the concerns related to internal audit are shared globally (Kiabel, B.
2012).
One main concern is the degree of independence accorded to internal audit in
government structures and organization. In many cases, challenges for external audit
to become independent of the executive independence (structural and financial) for
internal audit have become the only sticking point. Internal audit must add value to
management, while at the same time not becoming its servant, but faithfully
reporting on the status to the board or other equivalent governing board
(Karagiorgos, T. Et al. 2010). However, developing or emerging economies,
particularly in Africa, are characterized by poverty and deprivations which could
be attributed to poor internal audit (IA) in both public and private sectors. Most of
the time, developing country establish internal audit unit (IAU) in order to meet
criteria to get projects from donors while the IAU is inactive leading to
misappropriation of public funds and hence increase in poverty level(Yismaw, A.
2010).
3
Zanzibar environment with respect to IA resembles other African countries.
However the Revolutionary Government of Zanzibar through the Public Finance Act
and Regulation of (2005), Reg.11 “requires Accounting Officers to “establish an
effective internal audit service unit throughout the ministry, department or agency”.
The Internal Auditor constantly provides information that makes management take
decisions to achieve the organizational goals (Ameir, A. 1995).
In the Zanzibari situation, Internal Auditor is expected to improve the performance of
the public sector in the following ways:-
(i). The Internal Auditor’s work includes assessing the tone and risk management
culture of the organization as well as evaluating and reporting on the
effectiveness and efficiency of the implementation of management policies.
(ii). Internal Auditors identify key activities and relevant risk factors and assess
their significance. Changing trends and business/economic conditions impact
the way the internal auditor assesses risk. The techniques of internal auditing
have changed from a reactive and control based form to a more proactive and
risk based approach. This enables the internal auditor to anticipate possible
future concerns and opportunities as well as identifying current issues.
(iii). Internal Auditors work closely with line managers to review operations then
report their findings. The internal auditor must be well versed in the strategic
objectives of the organization, so that they have a clear understanding of how
the operations of any given part of the organization fit into the bigger picture.
(iv). Compliance review ensures that the organization is adhering to rules,
regulations, and laws, codes of practice, guidelines and principles as they
apply individually and collectively to all parts of their organization(Cohen, A
and Sayag, G. 2010).
4
Organization’s management is responsible for establishing and maintaining effective
internal control systems such as structures, activities, processes, and systems which
help the management of the organization that effectively mitigate the risks to
organization’s achievement of objectives. Management is charged with this
responsibility on behalf of the organization’s stockholders and is held accountable
for this responsibility by an oversight body (e.g. board of directors, audit committee,
elected representatives). Internal audit is an important part of the corporate
governance structure within an organization (Van Peursem, 2005).
Corporate governance includes those oversight activities undertaken by the board of
directors and audit committee to ensure the integrity of the financial reporting
process (Public Oversight Board 1993). Three monitoring mechanisms have been
identified in the corporate governance literature. They are external auditing, internal
auditing, and directorships (Anderson et al. 1993, Blue Ribbon Committee 1999) as
well as the audit committee (Institute of Internal Auditors (IIA, 2003a).
Risk and complexity define the environment in which all Ministry, Department and
Agency (MDAs) and Local Government Authority (LGAs) operate, where by
changing stakeholders expectations, new technology, increased demand from public
for a better quality in the public goods service delivery, increased pressures from
donor community on financial accountability and process improvement and countless
other factors is compelling for Chief Internal Auditor (CIA) to drive an internal audit
plan that would facilitate change in management process in order to fulfil
stakeholders’ demands and enhance value to MDAs and LGAs (Kilenga, G. 2007).
Designing an audit plan needs understanding of the audit objectives and the
organization itself. Thus internal audit planning is very important so that audit risk
can be established to give the requirements and expectations of those who rely on the
organization services. In spite of the presence of internal audit planning in public
sectors, fraud, money laundering and risk greatly continue as the key challenges to
public sectors (Coram et al. 2008). Considering that IA is among the least
scientifically studied topics in management research, there is a wider knowledge gap
5
on the needs of understanding the effect of IA particularly the public sector in
Zanzibar. This study attempts to advance and stimulate more scientific interest in this
important profession. The findings of this exploratory study are vital in shedding
preliminary light on the effectiveness and functioning of IA in organizations. The
study will be a springboard from which to generate future research on IA, and will
suggest directions for such studies (Hindi, M. 2012).
Flesher (1996: 10) suggests that, although the modern work of the internal auditor
involves acting at times as a management consultant and auditing for efficiency and
effectiveness as much as for financial propriety, such activity has not always been
among the internal auditor’s duties. The profession of internal auditing has changed
considerably over the past half century. Before 1941, internal auditing was
essentially a clerical function with no organization and no particular standards of
conduct. The internal auditing function was essentially an arm of the accounting
function. Because much of the record-keeping at that time was performed manually,
auditors were needed to check the accounting work after it was completed in order to
locate errors in posting. Manual processing also made fraud easier. Combining the
need for uncovering errors and misappropriations resulted in the internal auditor
being little more than a verifier. Today, the internal auditor is accepted as an integral
part of the management team. A look at the evolution of internal auditing provides a
perspective on the function of internal auditing in today’s world; a function that
includes not only financial auditing, but also operational auditing.
Moreover, the emergence of the concept corporate governance and audit committee
brings change in the reporting relationship of internal auditors. In many countries
internal audit reports functionally to audit committee and plays a key role assisting
the board and/or its audit committee to discharge their governance responsibility.
Taking Zanzibar as a case in point, this research analyzed the reporting structure of
internal audit, and identified the correlation between the internal audit scope,
independence, good governance and audit committee, with recommendations made
for further processes.
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1.3 Statement of the Problem
Revolutionary Government of Zanzibar (RGOZ) has established internal audit unit in
each public sector. However, each passing year the performance of internal audit
unit reflected in the external audit report is becoming worse. Internal auditors in the
public sectors in Zanzibar normally report to the Principal Secretaries, a tendency
which declines the performance of internal audit function. Until now the RGOZ has
not yet appointed the Internal Auditor General to oversight the function of internal
audit unit whose performance is approximately 60%. IA have become the
important strategic tools in accomplishing the organizational goals. In fact, some
established firms with good internal audit unit (IAU) were able to survive and to
sustain growth. On top of that, firms having inappropriate strategic decision-
making and faulty practices such as selecting poor IAU were destined to
collapse.
An organization that has no good IA is like a ship sailing on the high sea
without a captain. Both human and material resources are bound to the wasted
despite their scarce nature. The Internal Audit function in the Zanzibar faces a
perception and, to some extent, a credibility problem as a value- adding unit of the
organization on it financial performance. The Internal Audit Agency (2006) believes
that the importance of Internal Audit is "shrouded in obscurity”. This unfortunate
background continues to play down the importance of Internal Audit as a key
function that can strengthen the oversight responsibility of the governing body. This
has been reflected in the management attitude towards the Internal Auditor. Internal
Auditors have been seen more as fault finders rather than solution providers and
partners in the Government’s strive for organizational excellence.
1.4 Research Objectives
1.4.1 General Objective
The overall objective of the study was to examine the effect of internal audit on the
performance of public sector in Zanzibar and come up with possible solutions for
future effective improvement of internal audit.
7
1.4.2 Specific Objectives of the Study
The research was guided by the following objectives
(i). To explore the role of internal auditing in achieving performance.
(ii). To assess the process of internal auditing at the Presidential Office, Finance,
Economy and Development Planning.
(iii). To determine the challenges affecting internal auditing at the President’s
Office, Finance, Economy and Development Planning.
1.5 Research Questions
(i). What is the role of internal auditing in achieving performance?
(ii). What are the processes of internal auditing at the President’s Office, Finance,
Economy and Development Planning?
(iii). What are the challenges affecting internal auditing at the Presidential Office,
Finance, Economy and Development Planning?
1.6 Significance of the Study
The research findings are expected to the following significances.
First and foremost, the findings will inspire potential researchers to conduct a
detailed and comprehensive study regarding the internal audit in Zanzibar
Government, or other areas of interests. Secondly, it will enable the governing body,
specifically the managements, the higher responsible body, and audit committee of
selected public enterprises, to be aware of the importance of internal auditing.
1.7 Scope of the Study
This research did not investigate all Zanzibar public offices, but focused on some
few selected Public offices in Zanzibar town. The study consists of a literature
review, combined with an empirical investigation of the current role of internal
auditors and the situation of internal audit functions. Principal Secretaries, directors,
heads of departments, sections and internal auditors participated in the investigation.
A qualitative approach was chosen, and the data analyzed and interpreted according
to their meanings.
8
1.8 Limitation of the Study
Apart from the limitations seen under delimitation of the study above, the researcher
faced problem of access to secure information from the respondents since most
employees at POFEDP were always busy during the data collection and final
research compilation periods. Delays in filling questionnaires was experienced, as
some respondents had accepted to do the work but later absconded. However, the
effects were partly solved by an effective communication between the researcher and
the respondents as well as the efforts taken by the researcher to make follow up.
In addition, time allocation to carry out this study was inadequate for a larger sample
to engage every aspect related to public sectors. As a strategy to overcome this
limitation, the study narrowed it down to 90 respondents and kept questions in
feasible limits. Furthermore respondents did not respond to the researcher’s interview
guided question that had asked the extent to which internal audit roles are complied.
The fact that many respondents gave a 100% internal audit role compilation, but
when asked to add more by indicating ‘how’, many chose the option “I do not know”
,meaning the researcher was limited in knowing how internal audit roles are
complied. Finally, some information could not be obtained forcing the researcher to
adopt multiple sources of data collection techniques in advance so as not to hinder
data analysis
1.9 Delimitations
This describes things which are within the capacity of the researcher. Under this
study the delimitation involves the methods of data collection, processes, analysis
and interpretation. The researcher used questionnaires and interviews as a method of
data collection, without using other tools.
Poor responses from participants forced the researcher to opt for a bigger sample
space so as to scrutinise and come up with reliable results. But in not, all public
service employees were sampled, and the findings are restricted to the sample (90)
used.
9
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter present various studies from different sources, on the effects and
internal audit in the public sector performance. This process helps identify and
involve the study with established theories and previously published researches. The
chapter covers theoretical literature review, empirical literature review, conceptual
framework and the hypotheses of the study. Many authors have addressed the
internal audit in relation to the performance of the public sectors. Both theoretical
and empirical literature was reviewed to gain more insight on the study of
the effects of IA on the public sectors performance.
2.2 Conceptual Definitions
Indicative of internal audit’s great importance is the significant amount of definitions
that are given by many researchers. In this concept, internal audit has developed
gradually on the basis of social and economic development and the inherent needs of
enterprise management (Wang, 1997). Furthermore, recent years have witnessed an
explosion in the academic literature of auditing history throughout the world.
According to the Institute of Internal Auditors, (IIA, 1991; Taylor and Glezen, 1991;
Konrath, 1996) internal auditing is “an independent appraisal function, established
within an organization to examine and evaluate its activities as a service to the
organization”. By measuring and evaluating the effectiveness of organizational
controls, internal auditing, itself, is an important managerial control
device(Carmichael et al., 1996), which is directly linked to the organizational
structure and the general rules of the business (Cai, 1997). According to COSO
Framework (1992) and The Turnbull Report (1999) defines internal audit as the
system of internal control comprising of those elements of an organization that
support people in the achievement of the organization's objectives.
10
Internal Audit is an independent appraisal activity established within a Ministry,
Department or Agency or other reporting unit which operates as a service to the
Head of the Unit involved, of which it controls activity functions by examining and
evaluating the adequacy and effectiveness of internal controls in the unit received
and for conducting operational/value for money audits throughout the unit in order to
ensure that proper systems of internal control and accounting systems exist
throughout the unit(Swinkels, W. 2012). According to Reynolds (2000), internal
auditing (IA) serves as an important link in the business and financial reporting
processes of corporations and not-for-profit providers. Cohen et al. (2002) prefers to
call it an integral part of the corporate governance mosaic in both the public and the
private sectors.
Internal Control means a set of systems operated by an organization to ensure that
financial and other records are reliable and complete, and they adhere to management
policies, orderly and efficient conduct of the business, and proper recording and
safeguarding of assets and resources. (Stewart, J. 2006). Finally, internal controls
help to ensure the compliance with applicable laws and regulations (Sarens and
Beelde, 2006).
An auditor is a professional who is responsible for evaluating some aspect of a
project, business, or individual. Internal auditors can add value to the entity by
providing assurance that its risk exposures are properly understood and managed
(Walkeret al., 2003; Leithhead, 1999). He or she is often employed in the task of
determining the level of efficiency present in the production process of a business,
the efficient use of labour and other resources associated with the business, and the
veracity of the financial records of the business. Along with evaluating a project or
aspect of a company, this person is often expected to make recommendations
regarding the correction of negative conditions that currently impact the
organization1.
1 http://www.wisegeek.org/what-is-an-auditor.htm#slideshow
11
2.3 Theoretical Literature Review
Theoretical literature review is a scientific term which can be defined as the
major concepts describing the particular topic being studied (Gabriel, 2012).
Theoretical literature review can also be understood as a collection of
interrelated ideas in terms of the various theories. The concepts and theories based
on this study comprise of internal audit particularly the performance of public sector.
2.4 Overview of Internal Audit
Internal audit is examination, monitoring and analysis of activities related to a
company's operation, including its business structure, employee behaviour and
information systems. An internal audit is designed to review what a company is
doing in order to identify potential threats to the organization's health and
profitability, and to make suggestions for mitigating the risk associated with those
threats in order to minimize costs (Miller,1999; Cosserat, 2000). Investopedia
explains 'Internal Audit' Regulations, such as the Sarbanes-Oxley Act of 2002, have
increased corporate requirements for performing internal audits. They are important
components of a company's risk management, as they help companies identify issues
before they become substantial problems. They also help identify risky behaviour by
individual employees and threats posed by outside parties, such as attempts to steal
intellectual property2. IA is a very important tool for monitoring public as well as
private interest in order for public and private resources to be utilized according to
the organization objectives and hence attain their vision (Kida, M. et al 2011).
Over the years, internal auditing has had different emphasis and roles. Previously, the
emphasis was more towards one-size-fits-all approach whereby audits were
scheduled on a cyclical, methodological basis, and auditors’ role was reported
against a checklist of existing company policies and procedures to ensure that the
internal controls of the company were functioning well. Ever since, the role of
internal auditor is only to reduce or to eliminate risk (Albrecht et al., 1988; Flesher,
2 http://www.investopedia.com/terms/i/internalaudit.asp#ixzz2LF7VpEnP
12
1996; Liu et al., 1997). This practice may have been appropriate in times of slower
development and not-so-rapid technological evolution but they would not be
applicable today since today’s businesses rely on sophisticated electronic technology
in every aspect of their operations and they also require timely information to make
decisions regarding global operations (Hayes, 1999).
2.4.1 Relationship between IA and Performance
Literature derived from (Kiabel ,2012) studies equated performance as a term that is
often discussed but rarely defined. In his (Kiabel, 2012) report, some writers see the
term as highly ambiguous capable of no simple definition (Emmanuel et al 1990;
Otley, l999). Earlier, Emmanuel et al (1990) had observed that the frequent use of the
term suggests that it may more often be used to avoid precise definition of what is
meant. According to Euske (1984), the most common definition of the term can be
“accomplishments of the organization”. Thus, an organization that is performing well
is one that is successfully achieving its goals and is effectively executing suitable
strategies. Some scholars (for example, Lal, 1980) have argued that the evaluation of
government investment should employ social/cost benefit analysis. In this
circumstance, the performance of GOCs would be measured in terms such as
employment which has been provided, assistance given in training manpower,
standards of living improved and other welfare matters. These, no doubt, are
important matters. But there is another side to this argument.
At the empirical level, a survey conducted by KPMG (1999) found that the internal
audit function in organizations where it exists contributes substantially to
performance improvement and assist in identifying profit evidence in corporate
disasters, particularly financial fraud consistently documents an association between
weak governance (e.g. less independent boards or the absence of an internal audit
function) and the incidence of problems (Beasley, 1996 and Abott et al 2000). Thus,
internal audit by acting as a watchdog could save the organization from malpractices
and irregularities thus enabling the organization to achieve its objectives of ensuring
high level of productivity and profit.
13
Greenlay and Foxall (1997) note that although studies have found an association
between accounting control systems and performance theory also predicts that these
associations will be influenced by external environmental influences.
It is widely believed that internal auditing, where it exists, contributes to improved
financial performance of the organization. According to Bejide (2006) “an effective
internal audit service can, in particular, help reduce overhead, identify ways to
improve efficiency and maximize exposure to possible losses from inadequately
safeguarded company assets all of which can have a significant effect on the bottom-
line”. Venables and Impey (1991) opined that internal audit is an “invaluable tool of
management for improving performance”. To Hermanson and Rittenberg (2003) the
existence of an effective internal audit function is associated with superior
organizational performance. Prasad and Rao (1989) expressed similar sentiments
when they observed that the internal auditor by acting as a watchdog saves the
organization from malpractices and irregularities thus enabling the organization to
achieve its objectives of ensuring high level of productivity and profit.
In the Zanzibar situation, internal auditors play a key role in monitoring a company’s
risk profile and identifying areas to improve risk management (Goodwin Stewart and
Kent 2006). The aim of internal auditing is to improve organizational efficiency and
effectiveness through constructive criticism. IA has four main components: (1)
verification of written records; (2) analysis of policy; (3) evaluation of the logic and
completeness of procedures, internal services and staffing to assure they are efficient
and appropriate for the organization’s policies; and (4) reporting recommendations
for improvements to management (Eden and Moriah 1996).
The subject is worthy of attention because internal auditors are important, even
crucial, in an economy that relies upon independently produced information (Van
Peursem 2005). Indeed, IA has become an indispensable management tool for
achieving effective control in both public and private organizations (Eden and
Moriah1996). Control mechanisms are those processes set up to monitor and to
direct, promote or restrain the various activities of an enterprise for the purpose of
14
seeing that enterprise objectives are met (Sawyer 1988; Coram, Ferguson and
Moroney 2008).
By detecting weaknesses in management operations, IA provides a basis for
correcting deficiencies before the deficiencies become uncontrollable or are exposed
in the external auditor’s report (Eden and Moriah 1996). As an example, Coram et al.
(2008) found in a sample of 324 Australian and New Zealand organizations that
those with an internal audit function are more likely to detect and self-report fraud
through misappropriation of assets than those who do not.
The current study looks at the effectiveness of IA, an important concept rarely
examined in the scientific literature. Of the few studies dealing with IA’s
effectiveness, most take as a starting point the perceptions of the external auditor and
whether the external auditor uses the internal auditor’s work (Eden and Moriah 1996;
Coram et al. 2008). Under the international standard on auditing (ISA) 610 requires
external auditor to use the work of internal auditor. The scope of this ISA is that:
(i). This International Standard on Auditing (ISA) deals with the external
auditor’s responsibilities relating to the work of internal auditors when the
external auditor has determined, in accordance with ISA 315, that the internal
audit function is likely to be relevant to the audit. (Ref: Para. A1–A2).
(ii). This ISA does not deal with instances when individual internal auditors
provide direct assistance to the external auditor in carrying out audit
procedures.
2.4.2 Relationship between the Internal Auditor (IA) and the External Auditor
(EA)
The coordination of internal audit activity with external audit activity is very
important from both points of view: from external audit’s point of view is important
because, in this way, external auditors have the possibility to raise the efficiency of
financial statements audit; the relevancy from internal audit’s point of view is
15
assured by the fact that this coordination assures for the internal audit a plus of
essential information in the assessment of risks control (Dobroţeanu, 2002).
The importance of the relationship from internal audit and external audit is reflected
also by International Standards of Audit (610 - „Considering the work of internal
audit”), which foresees, among others:
(i). The role of internal auditing is determined by management and its objectives
differ from those of the external auditor who is appointed to report
independently on the financial statements. The internal audit function’s
objectives vary according to management’s requirements. The external
auditor’s primary concern is whether the financial statements are free of
material misstatements;
(ii). The external auditor should obtain a sufficient understanding of internal audit
activities to identify and assess the risks of material misstatement of the
financial statements and to design and perform further audit procedures;
(iii). The external auditor should perform an assessment of the internal audit
function, when internal auditing is relevant to the external auditor’s risk
assessments;
(iv). Liaison with internal auditing is more effective when meetings are held at
appropriate intervals during the period. The external auditor would need to be
advised of and have access to relevant internal auditing reports and be kept
informed of any significant matter that comes to the internal auditor’s
attention which may affect the work of the external auditor. Similarly, the
external auditor would ordinarily inform the internal auditor of any
significant matters which may affect internal auditing;
Studies regarding the relationship between internal audit and external audit. The first
relevant study regarding the interaction between internal audit and external audit was
realized by Mautz R. (1984), and the results of this study showed that, from internal
16
audit’s point of view, the relationship with external audit is only ostensibly a very
good one. Because Mautz had not anticipated the existence of such negative
reactions from internal auditors, regarding their working with external auditors,
questions addressing causality were omitted from his survey.
Later, Peacock E. and Pelfrey S. (1989) realized a survey through they tried to assess
the current attitudes of internal auditors toward their working relationships with
external auditors, trying also to identify the reasons behind any negative attitudes
which were expressed. This survey was conducted of two groups: first group was
represented by internal audit directors, and the second group was formed by staff
auditors who work directly which external auditors. Both groups were asked to
evaluate the overall performance of their organization’s external auditor and their
perceived relationship with the external auditor. Next, we present the main results
obtained through this survey:
(i) 92% from internal audit directors appreciated that external auditors make full
use of the expertise of the internal audit staff;
(ii) 50% of internal audit directors perceived that relationship between internal
audit and external audit is an “excellent” one, while 31% appreciate this
relationship as “good”;
(iii) Staff auditors differed substantially in their perceptions of the external
auditors’ of the internal auditor’s expertise. Only 39% of staff auditors
considered that the external auditors fully utilized their expertise;
(iv) Starting from the statement of Morris N. (Morris N., 1981) that “the external
audit firm has the ear of the board of directors and, where one is established,
the audit committee. Internal auditors do not have the same relationship”,
Peacock E. and Pelfrey S. wanted to identify the relationship between internal
audit and audit committee. From this point of view, more that 80% of the
respondent directors of their study indicated that their companies have an
17
audit committee, and that the internal audit department has a defined
reporting relationship with that committee;
(v) The majority of the respondent directors reported that they were furnished
access to the letter of external audit either before or after presentation to the
board of directors. They are also asked to comment on its findings;
(vi) Another conclusion of this survey was that, generally, individual external
auditors do not recognize the contribution of individual internal audit staffs,
internal auditors considering that that they perform more than one third of the
external audit work;
(vii) General conclusion of this survey was that internal audit directors perceived a
good relationship between internal and external auditors, and this perception
could be the result of company policies which give internal auditing (1) a
direct reporting relationship to the audit committee of the board of directors,
and (2) the opportunity to respond to any criticism by the external auditors in
the management letters;
(viii) Internal auditing emphasizes operational auditing and may involve non-
financial data, whereas financial auditing is concerned primarily with
historical data, in order to be able to identify possible ways of improving
future business operations. Internal audit staffs consider their external audit
tasks to be less important that the work they perform as operational auditors.
Another study with a relevant contribution at the researching of the relationship
between internal and external audit was conducted by Reinstein A., Lander G.H. and
Gavin T.A. (1994). The starting point of this survey was assured by Statement on
Auditing Standards (SAS) 65 issued in April 1991 by The American Institute of
Certified Public Accountants (AICPA). SAS 65 “The Auditor’s Consideration of the
Internal Audit Function in an Audit of Financial Statements” whose main objective
was to clarify various aspects of the working relationship which should exist between
18
external and internal auditors. This standard issued by AICPA proposes to establish
new guidelines for external auditors, to help them to use the result of internal audit
activity more effectively and efficiently; to help external auditors to understand how
could they adapt their working procedures based on internal auditor’s work, and also
how to assess, evaluate and test the internal auditor’s competence, objectivity and
work. External auditors should: (1) understand the internal auditor’s role when
assessing their client’s control structure and (2) not accept the internal auditor’s work
as their own.
Peacock E. and Pelfrey S. (1989) categorised four groups of internal audit functions.
: (1) the chief internal auditor (IA); (2) the chief financial officer (CFO) (3) the chair
of the audit committee (AC) and (4) the external auditor (EA) in charge of the audit.
The survey concerned on three major points: the testing of general understanding of
financial statements audit realized by internal auditors; the testing of the assessment
realized by external audit regarding the internal audit’s competence; the testing of the
assessment of internal audit’s objectivity. General conclusion was that, in most
organizations, internal and external/auditors have developed a “teamwork” approach
to the audit for some time, and the provisions of SAS 65 appear to have had minimal
effect on these types of relationships. In situations where the internal audit staffs do
not maintain the required level of professionalism or the organization is changing
auditing firms, external auditors now have new guidance to help them use internal
auditors more effectively and efficiently. Given the recent increase in the stature of
the internal audit professional and the need for external auditors to control audit
costs, SAS 65 should serve both types of auditors well as they co-ordinate their
efforts.
According to ISA 610 describe the relationship between IAF and EA are as follow;
(i). The objectives of the internal audit function are determined by management
and, where applicable, those charged with governance. While the objectives
of the internal audit function and the extern al auditor are different, some of
the ways in which the internal audit function and the external auditor achieve
their respective objectives may be similar (Ref: Para. A3).
19
(ii). Irrespective of the degree of autonomy and objectivity of the internal audit
function, such function is not independent of the entity as is required of the
external auditor when expressing an opinion on financial statements. The
external auditor has sole responsibility for the audit opinion expressed, and
that responsibility is not reduced by the external auditor’s use of the work of
the internal auditors.
2.5 Agency Theory and the Role of Internal Audit
2.5.1 Agency Theory
An agency relationship is one in which “one or more persons (the principal[s])
engage another person (the agent) to perform some service on their behalf which
involves delegating some decision making authority to the agent”1 Perhaps the most
recognizable form of agency relationship is that of employer and employee. Other
examples include state (principal) and ambassador (agent); constituents (principal)
and elected representative (agent); organization (principal) and lobbyist (agent); or
shareholders (principal) and CEO.
Agency theory is the study of the agency relationship and the issues that arise from
this, particularly the dilemma that the principal and agent, while nominally working
toward the same goal, may not always share the same interests. The literature on
agency theory largely focuses on methods and systems—and their consequences—
that arise to try to align the interests of the principal and agent. While the
agent/principal dilemma in a corporate context had been pondered as early as the
18th century by Adam Smith —and many of its key concepts were developed in
literature on the firm, organizations, and on incentives and information—a separate
theory of agency did not emerge until the early 1970s when Stephen A. Ross and
Barry M. Mitnick, working independently, each presented a theory of agency
A simple agency model suggests that, as a result of information asymmetries and
self-interest, principals lack reasons to trust their agents and seek to resolve these
concerns by putting in place mechanisms to align the interests of agents with
principals and to reduce the scope for information asymmetries and opportunistic
20
behaviour(The Institute of Chartered Accountants [ICA], (2005). The figure below
shows the concept of agency theory by Toothill, (2012).
Figure 2.1: Agency theory
Source: Internal audit report from European Academic Conference (2012)
2.5.2 Auditors as Agents
If as simple agency theory implies, principals do not trust agents to provide them
with reliable and relevant information, then they will hire in external experts, who
are independent of these agents. This, however, introduces the concept of auditors as
agents of principals, which leads to new concerns about trust, threats to objectivity
and independence. Auditors act as agents to principals when performing an audit and
this relationship therefore brings with it similar concerns with regard to trust and
confidence as the director-shareholder relationship, prompting questions about who
is auditing the auditor (ICA, 2005). Agents (whether they are directors or auditors)
may be trustworthy without a need for further incentives to align interests or
monitoring mechanisms such as audit or increased regulation.
However, the simple agency model would suggest that agents are untrustworthy.
Like directors, auditors will have their own interests and motives to consider. For
21
example, auditors may be risk averse and being conscious of their potential liability,
introduce risk management processes that result in limitations in the scope of their
work and caveats in their reports which principals may find frustrating. Auditor
independence from the board of directors is of great importance to shareholders and
is seen as a key factor in helping to deliver audit quality (ICA, 2005).
An audit necessitates a close working relationship with the board of directors of a
company. The fostering of this close relationship has led (and continues to lead)
shareholders to question the perceived and actual independence of auditors and to
demand tougher controls and standards over independence to protect them. As far as
independence and objectivity are concerned, auditors need to be conscious of threats
to objectivity and apply suitable safeguards where necessary. Reputation is a key
factor in promoting trust and auditor independence is an important quality that
shareholders look for. Auditors have an important incentive to maintain
independence to protect their reputation and thereby help them to retain and win
audits (ICA, 2005).
2.6 Empirical Studies
Empirical literature reviews attempt to analyze, evaluate and synthesis the
topic concerned by looking at different research findings and working papers to see
what they say on the effects of internal audit on the performance of the public sector.
There are however, different numbers of studies on the effects of leadership styles in
relation to organizational performance.
2.6.1 Internal Audit and Public Sectors’ Performance
As it was found by The Institute of internal auditors (2009), continuing work should
be done to develop effective impact measures for internal audit function. As the
outsourcing internal audit work becomes increasingly common it is important to
develop metrics which provide a point of comparison between in-house audit
functions and third parties auditors and enhance the ability of internal auditors to
market their work to executive management. Even more important, however that
internal auditor should actively “Practice what they preach”. In the end, the proper
22
use of performance measures will lead to a more effective and efficient internal audit
function, but it will also insure that the profession remains committed to the core
principles of objectivity and accountability that are the greatest strengths of internal
auditing. Difficult in measuring impact- much of the work that internal auditors do
provides important assurance to management, governing board, and other
stakeholders. The impact of these activities is often very difficult to measure. For this
reason it is often difficult for internal audit shops to measure their own performance
beyond their compliance with the standard.
Stewart, J and Subramaniam, N (2009) pinpoints the internal auditor’s dual role as
a provider of both assurance services and consulting activities, the organizational
financial status, internal audit’s involvement in risk management, outsourcing of
internal audit activities and the use of internal audit as a training ground for
managers. In each case, recent studies discussed have added to the body of
knowledge relating to internal audit objectivity and highlighted opportunities for
future research. From this review, it is clearly evident that internal audit objectivity
is a rich and fruitful area of investigation where researchers can make valuable
contributions to the on- going development of the profession.
According to Swinkels, W. (2012), internal audit function has its roots in accounting
and financial audit units. It was initiated to verify and to prevent bookkeeping errors
and inaccuracies, as well as fraud and corruption. Internal audit activities were
positioned within the accounting function and there was a strong relation with the
external auditor. The main focus of internal audit functions was to audit the control
with respect to financial reporting. Furthermore, the need for an internal audit
function is related to the size of a firm. Since the 19th century firms became larger,
with widely dispersed geographical locations and limited managerial ability to
monitor all operations. Internal audit was initiated as a monitoring function, in
addition to management supervision and controlling functions.
According to Mawanda, S. (2008) concluded that the institution has an effective
internal control system as supported by the study findings of clear separation
23
of roles, supervision, training, and commitment of management. However, there
are challenges in the implementation of controls especially considering that the
audit function is not well extended to the upcountry centres which clearly has
affected their efficiency.
According to Holt, T. (2006) internal audit and corporate governance literatures
provides evidence that increased transparency about the internal audit function is
useful to investors when assessing a company’s financial reporting reliability. The
findings compliment studies linking weak corporate governance with poor financial
reporting quality (e.g., Dechow et al. 1996; Beasley et al. 1999; Beasley et al. 2000;
Klein 2002; Agrawal and Chadha 2005; Krishnan 2005; Srinivasan 2005; Wang
2006) by providing experimental evidence that investors value increased
transparency about a company’s corporate governance. These findings encourage
companies to voluntarily disclose information about the internal audit function in an
attempt to increase shareholder confidence.
For the internal audit functions to succeed, (Gansberghe, C, 2005) different countries
formulate time-lined action plans. The internal audit function does not significantly
influence financial performance and that political interference by way of
government’s appointment of board members does not significantly impact the
enterprises’ financial performance (Kiabel, B. (2012). Where the internal audit
function is de-emphasized, it cannot impact positively on financial performance.
Existing public departments can be strengthened by according them the necessary
professional independence and employing adequate number of experienced and
qualified staff.
A comprehensive measure of internal audit function (IAF) quality is significantly and
negatively associated with audit delay, suggesting that improvements in IAF quality
can reduce audit delays (Pizzini, M, 2010). Regarding individual aspects of quality,
audit delays are significantly decreasing in the level of IAF competence, objectivity,
fieldwork quality, and investment.
24
Unegbu, A. and Kida, M. (2011) there is an inevitable need for today’s auditors to
acquire the requisite technique and skills in computer operations and electronic data
processing because of the impact, which the advent of computer has made. It is
envisaged that some task such as salary preparation, pension accounts, automation of
vote book recording and many other could be tapped. In a system where manpower
or manual operation are in use as it is a known fact, auditors are expected to operate
at a tolerable level of performance for total system to run properly. Therefore
training personnel as well as other training infrastructure becomes an important
ingredient in the successful operation of control in such government parastatal.
Public sector organizations are carried out periodically in order to identify
weaknesses in executing responsibilities and make recommendations for
improvements weekly, bi-weekly or monthly basis (Łurlea, E. et al, 2010).
The national regulators’ attempts to give an international dimension to the internal
audit in the public sector have not exhaustively complied with the realities, but
have generated confusions and false interpretations concerning the role of the
internal audit(Łurlea, E. et al, 2010). These were considered the reasons for the
absence of comprehensive regulations regarding the internal audit into public
hospitals, as well as for the conditioning of the internal audit function by the number
of beds held by the hospitals (Mihret, D. (2007)
.
According to Office of auditor general of Canada (1992), Public and private sector
organizations differs in many aspects. The key thread running through the
organizations that internal audit is playing a critical, constructive and often pro-
active role in monitoring and reporting on the quality of controls in their
organizations which are changing shape through downsizing, delaying and
decentralization. Internal auditing is probably one of the most dynamic and yet
important subjects
According to (Karagiorgos, T. 2010), observed that Internal audit is currently at a
crucial stage in its development as there is a growing demand for audit services.
What has yet to be formed is a consensus among theory and practice. This research
25
did not have the intention of concluding the discussions over this matter; however, it
is expected to be one more element in the formation of opinions. Internal audit is a
great improvement in many management fields (Karagiorgos et. al, 2008). As the
saying goes, “the future is bright, but the road ahead is tortuous”’. Realization of the
major importance of internal audit in efficient management will set internal audit as a
priceless support in the business management effort.
According to (Popescu, S. et al, 2011), the impact of risk is often high especially for
complex risks aimed at vulnerable areas of the entity. Risk assessment is essential
because it is central to the process of risk management responsibility of leadership,
management entity. This is called to interpret risks and take a position on this
is based on risk tolerance. By implementing a risk management system offers
several advantages such as ensuring the entity's objectives and implementation
of an effective and proactive control system. Auditors and managers are also
increasingly worried about the implications that it entails objective and subjective
factors on mission planning and assessment studies undertaken on risk.
Ljubisavljevic, S. et al. (2011) observed that from experience of developed countries,
IA makes a large contribution to the achievement of company goals and
implementation of strategies for their achievement. IA determines the reliabilities,
reality and integrity of financial and operational information that comes from
different organizational units, on which appropriate business decision from all levels
of management are based. Successful implementation of IA task means that it must
be autonomous i.e. company management should in no way influence its work,
information, conclusion and evaluations. In this way the internal audit report
becomes a means of communication between internal audit and management, and an
important guideline for the successful management of the company.
The study results also suggested by (Al-Twaijry, 2004 and Felix et al, 2001)
that an increase in the level of internal auditors‟ resources, such as human
capital i.e. proportion of the number internal auditors to the total number of
26
employees, will bring better internal audit effectiveness in the public sectors. The last
few decades have been characterized by unparalleled change (Karagiorgos, T. et al.
(1996). Nowadays, researchers pay more attention to risk management due to its
great importance for the world economy. Simultaneously, all auditing information is
established as an essential mean for the exact management of any business economic
resources. In today’s highly competitive business environment, internal audit plays a
catalytic role (Papastathis, 2003; Papadatou, 2005). As Power (2004) states: “internal
control is an unshakeable part of the moral economy of organizations”.
According to (Robson, L. et al, 2011) internal audit has experienced a very hard
period but made great progress. During the twenty-first century, internal audit will
see its great improvement in many business fields such as risk assessment. History
will witness that we will be able to grasp the current favourable opportunity,
overcome all difficulties and make new achievements in internal auditing. Internal
audit will surely have bright future prospects in business success and especially in
efficient risk management. According to Rittenberg, (2006) the growing importance
of internal auditing is business success.
Within this environment, significant amount of research has been conducted on the
effectiveness of internal audit. Karagiorgos, T. et al, (2009) concluded that all
auditing information is established as an essential mean for the exact management of
any business economic resources. In today’s highly competitive business
environment, internal audit plays a catalytic role (Papadatou, 2005). As Power (2004,
p. 20) states: “internal control is an unshakeable part of the moral economy of
organizations”. It is a fact that, internal audit has experienced a very hard period but
made great progress. During the twenty-first century, internal audit sees its great
improvement in many business fields such as risk assessment.
A research conducted by the Karagiorgos, T. et al. (2010) concluded that the area of
internal auditing is probably one of the most dynamic and yet important subjects to
come to our attention. Internal audit is currently at crucial stage in its development as
there is a growing demand for audit services. What has yet to be formed is a
27
consensus among theory and practice. Matarneh, G, (2011) recommended the
availability of the key factors to achieve the quality of the internal audit function.
Checking the quality of the internal audit function by the external parties possess the
expertise in this area, such as external auditors, to ensure the performance of internal
audit function in an acceptable level. Stewart, J. (2006) observed that firms in
Australia voluntarily choose to use internal audit.
Consistent with Carcello et al. (2005), a strong relationship between internal audit
and the size of the firm, suggest that smaller firms do not regard internal audit as cost
effective. It would appear from the various literatures now at, that there is
considerable scope for strengthening the relationship between internal audit, audit
committees and external auditors.
According to Albrecht et al. (1988), concluded that this research has used
institutional theory to examine the problems of developing internal auditing in the
Saudi Arabian corporate sector. Given that there has been virtually no prior academic
study of the nature and role of internal audit in Saudi Arabia this research has been
exploratory and wide ranging, identified the effectiveness of internal audit in terms
of an appropriate corporate environment, top management support, quality internal
audit staff and quality internal audit work. The results of this research demonstrate
that internal audit in the Saudi Arabian corporate sector is ineffective in all four
areas, and is not a value-adding function.
Bell et al (1997) also argued that by doing researches saying that an auditors using a
business risk approach needs to plan the audit so as to gain understanding of the
client’s operating environment. This in turn helps to carry out effective audit risk
work for the success of the organization. Other cases cited are of Enron and Global
Crossing, where the accounting misrepresentations and dealings of the top executives
cost stockholders tens of billions of dollars, and could have been avoided had the
internal auditors performed their traditional roles as “watchdogs” instead of
succumbing to pressure to de-emphasize audits of sensitive and high risk areas and
focus instead on advising management on ways to increase the bottom line.
28
In consistency to (Felix et al 2000), concluded that the auditors would have done a
much better job of finding the misstatements if they had planned their audit by first
understanding about the business, economic trends and risks of the transactions.
Other experimental researches generally indicate linkage between audit planning,
risk assessment and success of the organization. The research suggests that auditors
adjust their decisions/plans based on evidence concerning management integrity in
the organization.
The word of (Grüter, K, 2010). The results of the assessment give a positive view of
the relevance of world intellectual property organization (WIPO’s) internal audit
action. It certainly contributes to improved management of the Organization’s
financial and administrative activities, as well as its internal control system. Its
targeted actions encourage economic potential and the simplification of processes.
From this point of view, it satisfies the Standard on creating added value for the
Organization. However, when compared to professional internal audit standards, I
consider that the current situation at WIPO could be improved by better formalizing
audit documents (quality control of engagements, reasons for noting certain
elements, audit note summaries, for example) and by stepping up the quality control
of WIPO’s internal audit work (lack of a quality assurance and improvement
program).
2.7 Knowledge Gap
Several previous studies have been done in an attempt to determine the correlation
between internal audit and Government offices. One such study surveyed the
assessment of internal-audit function effectiveness in government offices (Hindi,
2012). Their findings suggest that the internal audit office of the organization studied
needs to enhance the technical expertise of the internal audit staff and minimize staff
turnover so as to foster audit effectiveness. Another recent source of information on
the internal-audit function effectiveness in government offices was done by Karoa
(2012). This study examined the effect of internal audit on the performance of public
29
sector in Zanzibar by considering specifically financial and non financial
performance within the public sector.
According to Myers (2005), concluded that audit independence is fundamental to the
profession credibility. The audit independence can be viewed from two angles:
(i) Actual independence is the achievement of actual freedom from bias,
personal interest, prior commitment to an interest, or susceptibility to undue
influence or pressure; and
(ii) Perceived independence is the belief of financial report users that actual
independence has been achieved.
According to Unegbu, A. 2010, concluded that the internal auditors should ensure
that reviews of various departmental functions, auditors required to have enough
skills in computer operations and electronic data processing because of the impact,
which the advent of computer has made in our lives. It is envisaged that some task
such as salary preparation, pension accounts, automation of vote book recording and
many other could be tapped. In a system where manpower or manual operation are in
use as it is a known fact, auditors are expected to operate at a tolerable level of
performance for total system to run properly. Therefore training personnel as well as
other training infrastructure becomes an important ingredient in the successful
operation of control in such government parastatals, public sector organizations are
carried out periodically in order to identify weaknesses in executing responsibilities.
As it was found by (Ebimobowei, A et al. (2011), concluded that audit expectation
gap and the performance of internal auditors in the prevention of irregularities and
fraud. The literature shows that audit expectation gap exists in every society. The
results of the empirical analysis show that relationship exists between audit
expectation gap and performance of internal auditors in the prevention of financial
misappropriation in the public sector and the existence of significant expectation gap
between internal auditors and users of accounting information. Therefore, since the
concept of audit expectation gap conflicts with the role theory, it is better to
reformulate standards to eliminate this concept. Internal auditors need to unlearn it
30
by means of interactive learning and social capital formation because this concept
gives internal auditors a moral and psychological freedom not to accept
responsibility of fraud prevention and detection.
According to Kornish, at al. (2000), concluded that a survey commissioned by the
ISB indicated that respondents believed that the evolution of audit firms into
consulting fields was logical and provision of most consulting services was not likely
to create real problem of independence. It is believed that auditor’s responsibility and
independence are crucial issues underlying the independent auditing function and has
significant implications on the development of auditing standards and practices. In
this regard, a survey was taken up by Lin (2004) in China with respect to audit
objectives, auditor's obligation to detect and reporting frauds and third party liability
of auditors.
2.8 Conceptual Framework and Research Model
In our literature we have learnt several factors which are important for the internal
audit unit to have so that it can add value to the Organization and improve its
services to the people.
31
Figure 2.2: Conceptual Framework
2.9 Research Hypothesis
(i). Ho: There is positive linkage between roles of internal audit and the
performance in the public sector.
(ii). H1: There is negative linkage between roles of internal audit and the
performance in the public sector.
Independent
variables
(Qualities of
internal audit)
• Internal audit role
• Internal audit
process
• Internal audit
challenges
Dependent
variables
(Public sector
performance)
(Performance of
PS)
32
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This Chapter focuses on the methods that were used to collect and analyze
data. It dwells on the research design, the population studied, the sample
selection procedures and sampling techniques used. Other issues addressed are
data collection methods, methods of verifying reliability and validity of data,
matters regarding ethics and the limitations of the methodology. Conclusions are
drawn at the end of the chapter.
3.2 Research Design
According to (Kothari, 2004) research design is arrangement of condition for
collecting and analyzing data in a manner that aim to combine relevance to the
research purpose with the economy in procedure. The study has involved the effect
of internal audit in the performance of public sector. Consequently, the research has
been designed to its key players like top management, and other employees such as
auditors, accountants and system internal auditors in order to achieve the objectives
set out by the researcher.
3.3 Type of Study
The study used a case study design given time factor and financial position was not
sufficient to cater for other research designs. According to (Alvarez et al 1990) a case
study design is considered suitable for a research study involving fewer sample
space. And if sample size falls to a range of 2 -100 (Hamel et al, 1993; Yin 1984,
1993, 1994) case study designs is used and for this study the sample size fell in the
named limit. For these reasons case study was used in order to enable the researcher
to collect reliable and relevant data in the targeted organization. This design is very
flexible and allows the researcher to change the research procedures along the way as
a result of the interaction with the respondents. And this design is also a good tool for
learning about a specific phenomenon being analyzed (Yin, 1994).
33
3.4 Study Area
This study was conducted at President’s Office, Finance, Economy and Development
Planning in Zanzibar (POFEDP). The POFEDP is a Public Service Organization
located at Vuga, Zanzibar Island. It has 13 departments, with 8 departments located
in the headquarters’ buildings. All the activities of POFEDP are always approved by
Principal Secretary and the remaining departments which are semi-autonomous are
allocated in different places in Zanzibar Town. These departments are Zanzibar
Revenue Board, Zanzibar Insurance Corporation, Zanzibar Social Security Fund,
Zanzibar Institute of Finance and Administration, People Bank of Zanzibar, Tanzania
Revenue Authority – Zanzibar Branch, The Chief Government Statistician Office,
Zanzibar Road Fund Board and Zanzibar Investment Promotion Authority (ZIPA).
ZIPA is not included in the Organization Chart attached because at a time the chart
was drawn, it was not under the POFEDP. Currently, it is incorporated account of
the recent Government Restructuring processes. Therefore, the updated structure is in
process.
This Office has the following roles (MTEF 2010/11 – 2014);
(i). Preparing government development plans, budgets and coordinate their
implementation in various sectors and agencies.
(ii). Managing and monitoring economic growth and inflation trends, through
preparing national plans e.g. MKUZA II, Growth Strategy etc.
(iii). Managing Public Finances ( Revenue and Expenditure) and Public assets
(iv). Mobilizing and management of government resources (Internal and External)
(v). Custodian of Public funds and assets (registering and disposal) of the assets
of national enterprises, as share of public investment to total investments,
(vi). Coordinate, observe and implement cross – cutting issues (Gender,
HIV/AIDS, population, environment etc.)
However, the researcher was conducted only at the departments approved by the
Principal Secretary at Vuga Street, nearer Zanzibar White House. This is because all
34
internal auditors are centralized in this office making it easier for accessibility
purposes and information gathering.
3.5 Study Population
The definition of population in this study was based on two parts: top management
and employees particularly accounting and auditing departments of POFEDP. A
population is defined as a group of individuals who cannot be statistically
distinguished (Lawson, 2012). A population is any complete group with at least one
characteristic in common. 3Populations are not just people, but may consist of, but
are not limited to, people, animals, businesses, buildings, motor vehicles, arms,
objects or events.
3.6 Units of Analysis
In the top management unit the study considered principal secretaries, deputy
principal secretary, directors and audit committee. For the case of subordinates the
analysis was concentrated on two departments of the Ministry including
accounting, auditing and system internal audit departments for all auditors and
accountants. These two sections formed the unit of study.
3.7 Variables and their Measurements
In the researcher’s study as mentioned in the previous chapters, there were dependent
and independent variables. Dependent variables concerned with performance of the
public sectors including revenue collection, efficiency of public expenditure,
recruitment procedure, and effectiveness of public goals, but independent variables
involved basis of valuation, level of education and status of internal audit. These
variables were measured in precision and exactness to prove their effects on the
subject matter of the study. Table 3.1 below shows a systematic forms of key
variables and their operational definitions was used in this study.
3 http://www.abs.gov.au/websitedbs/a3121120.
35
Table 3.1: Variables and Measurement
Variables Operation definitions Measurement
Basis of valuation Whether Whether basis of valuation exists.
To what extent the basis of valuation is
adequate.
Internal audit framework Whether Is there internal audit framework that
guides your audit work?
To what extent internal audit framework
add value in your organization.
Level of education Academic certificates How many of you having academic
certificates.
Whether the certificates obtained from
recognized institutions.
Status of internal audit Whether Where do internal auditors report?
What are the implications of internal of
IA report?
Revenue collection Performance
Measures
To check whether the revenue collection
is according to the budget.
Attainability of public
sectors’ goals
Performance
Measures
To check weather annual public goals
are achieved or not.
To what extent do public satisfy from
public services.
Efficiency of expenditures Performance
measures
To check weather expenditure are
according to the budget provided.
Recruitment procedures Whether Whether employment procedures are
followed completely.
To check whether employment
opportunity are unbiased.
Internal audit effectiveness Performance
Measures
Extent to which IA perform their work.
To check whether their services add
value to the organization.
36
3.8 Sample Size and Sample Techniques
A sample is a set of observations drawn from a population by a defined procedure. It
may be drawn without replacement, in which case it is a subset of a population; or
with replacement, in which case it is a multi subset. Typically, the population is very
large, making a census or a complete enumeration of all the values in the population
impractical or impossible. The sample represents a subset of manageable size.4
Probability sampling is a sampling technique wherein the samples are gathered in a
process that gives all the individuals in the population equal chances of being
selected.5
This study was used Probability sampling through simple random sampling in
selecting key informants whose information was relevant to the study. This is
because the study concentrated only on the staff of POFEDP within RGOZ. The
total sample size was 100 in different categories of respondents in the entire
ministry as shown in table 3.2. The logic behind selecting such sample size is that the
sample size should be optimum. According to Kothari (2004), an optimum sample is
the one, which fulfils the requirements of efficiency, representation, reliability and
flexibility. And Rescoe (1975) cites in Sakaran (2000), sample sizes larger than 30
and less than 500 as appropriate for most researches.
Table 3.2: Estimation and Respondents and Sample Size
Respondents Sample size Number of respondents Percentage
Principal secretary 1 1 1.11%
Deputy Principal secretary 2 2 2.22%
Directors 8 5 5.56%
Accountants 20 18 20.00%
Auditors 48 46 51.11%
Audit committee 10 8 8.89%
System internal auditor 11 10 11.11%
Total 100 90 100%
Source: Created by author, 2013.
4 http://en.wikipedia.org/wiki/Sample_%28statistics%29 5 http://explorable.com/probability-sampling
37
3.9 Types and Sources of Data
The study used both primary and secondary data sources of information.
Primary data was collected from the field to represent as wider population in
the study area. This was achieved through interview and questionnaires. Secondary
data are those data for which have already been collected by someone else, either
published or unpublished data6. Secondary data used in this research is based on
what has been done or known in relation to POFEDP. Information from
secondary sources helped to create a state of knowledge on the subject and
enable to determine the missing information about the subject.
3.10 Data Collection Methods
3.10.1 Questionnaire
The research used both kinds of questionnaire as a major research instrument. Both
open ended and close-ended questionnaire was used to generate information. The
closed ended questionnaire was prepared in the form of multiple choices, whereby
respondents were asked to put a tick against the correct answer. With open ended
question respondents were requested to read and provide appropriate answers to the
questions in the questionnaire or write the correct answer.
The Questionnaires were based on internal audit manual, international professional
practice framework and audit report from the respective ministry. In this, the
researcher asked various questions in sequential order and the respondents were
given a chance to present their views freely. Structured and unstructured interviews
were conducted to sample internal auditors and other ministry officials. Data analysis
of responses shows the relationship between the internal audit and the auditors’ role
on good governance. The respondents were to choose from “strongly agree” to
“strongly disagree” and the collected information was compared with audit standards
6 http://en.wikipedia.org/wiki/Secondary_data
38
3.10.2 Interview
The interview method of collecting data involved presentation of oral – verbal
stimuli and reply in terms of oral – verbal responses. This method can be used
through personal interviews and, if possible, through telephone interviews (Kothari,
2004). For the purpose of this study both personal and telephone interviews were
used. This method enabled the researcher to have deep information on all the
POFEDP issues.
3.11 Validity and Reliability Issues
When evaluating or formulating a specific instrument, reliability and validity are two
of the most important aspects to be considered (Booth, 1995). Reliability and
validity are the statistical criteria used to assess whether the research provides a
good measure (Whitelaw, 2001). Reliability refers to the dependability of a
measurement instrument, that is, the extent to which the instrument yields the
same results on repeated trials (Babbie and Mouton, 2001). Reliability is
concerned with the consistency of the particular instrument, while validity is
concerned with systematic or consistent error. There are three fundamental methods
that are accepted for assessing the reliability of a measurement scale: test-retest,
internal consistency and alternative forms (Booth, 1995). The primary goal of
validity and reliability is to minimize the risk of having errors and avoid biasness in a
study. To ensure the reliability and validity of this research the researcher cautiously
interpreted all the gathered information throughout the entire research. Data was
collected from respective catering institutions, carefully compared and evaluated to
obtain the highest possible level of reliability and validity. For reliability, Cronbach's
alpha measure was applied.
Cronbach's alpha is a measure of internal consistency, that is, how closely related to
a set of items are as a group. A "high" value of alpha is often used (along with
substantive arguments and possibly other statistical measures) as evidence that the
items measure an underlying (or latent) construct. However, a high alpha does not
imply that the measure is undimensional. If, in addition to measuring internal
consistency, evidence is provided that the scale in question is undimensional,
39
additional analyses can be performed. Exploratory factor analysis is one method of
checking dimensionality. Technically speaking, Cronbach's alpha is not a statistical
test - it is a coefficient of reliability (or consistency).
Cronbach's alpha can be written as a function of the number of test items and the
average inter-correlation among the items. Below, for conceptual purposes, we show
the formula for the standardized Cronbach's alpha:
Here N is equal to the number of items, c-bar is the average inter-item covariance
among the items and v-bar equals the average variance.
Reliability Statistics
Cronbach's Alpha N of Items
.839 14
The alpha coefficient for the fourteen items is .839, suggesting that the items have
relative high internal consistency. The reliability coefficient of .839, is considered
acceptable" as shown in the table above. The result is supported by (Gliem & Gliem,
2003), where Cronbach’s alpha level closer to 1 indicates higher internal consistency
of the items measured by the survey questions and the alpha level equal to or greater
than .8 is an indicator of reasonable internal consistency. Therefore, the
questionnaire provided reliable measurement of the constructs. To ensure that the
data is reliable and bares validity thorough investigation was conducted and
comprehension of the appropriate literature, articles, and websites that give insights
to that aspect of the study was also performed.
3.12 Data Analysis Methods
Data analysis is the process of sorting the data so as to establish statistical patterns
and identification of relationships. Mostly descriptive statistics analysis was used to
40
analyze data obtained from respondents through questionnaires. These included
percentages, and frequencies, and cross-tabulations. Frequencies and cross-tables
were the major types of the descriptive statistics analysis of the study. The Statistical
Package for Social Sciences (SPSS) version16.0 and Microsoft Excel computer
software were used to enter the data collected from respondents.
3.13 Ethical Consideration
Permission to conduct the study was taken from Principal Secretary, POFEDP. On
top of that, ethical issues was considered through the special form provided to
the potential respondents seeking their consent to participate in the research study.
Moreover, confidentiality and principles of anonymity was assured to the
respondents. A part from that, professional behavior and discipline in
conducting the research was taken to create ease and cooperation.
41
CHAPTER FOUR
PRESENTATION AND INTERPRETATION OF RESEARCH FINDINGS
4.1 Introduction
This chapter presents the key findings of the study. The information is presented in
figures and tables, and is analyzed as per the presentation shown below.
4.2 Demographic Characteristics of Respondents
4.2.1 Gender status
Table 4.1: Gender
Variables Frequency Per cent Valid Per cent- Cumulative Per cent
Valid Male 50.00 55.56% 55.56%
55.56%
Female 40.00 44.44% 44.44% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data, (2013)
Table 4.1 above indicates that the respondents’ gender distribution. 55.56% of the
respondents were male, 44.44% females. This shows that major roles in the internal
audit for the public sector are played by male. However, females are also playing a
role in the finance/audit department of POFEDP.
42
4.2.2 Age status
Table 4.2: Age Status
Variables (Age). Frequency Per cent Valid Per cent- Cumulative Per
cent Valid 20-29 50.00 55.56% 55.56%
55.56%
30-39 33.00 36.67% 36.67% 92.23%
40-49 5.00 5.56% 5.56% 97.79%
50 and above 2.00 2.22% 2.21% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data (2013)
Figure 4.1: Age Status
Source: Primary data collected through questionnaire, (2013)
Table 4.2 and the figure 4.1 show that most of the respondents are youth aged 20-29
years 50(55.56%) and 30-39years 33(36.67%). On the other hand fewer respondents
of 7.77% are aged 40 and above. This shows that the youngest group (both women
and men) serves in the finance/audit department of POFEDP. This indicates that
most of the employees in the auditing and account departments are youth between
the ages” 20-39”.
43
4.2.3 Working experience of the staff
Figure 4.2: Working Experiences of the Staffs
Source: Primary data (2013)
Figure 4.2 indicates that most respondents have 1-5 years (53.78%), followed by 6-
10 years (36.55%) working experiences. Working experience of more than 10 years
is 9.67% of the sample. On the other hand, the results show that most respondents in
the finance and auditing department of POFEDP have experience of 1-10 years
(90.33%) while those having experience of more than 10 years are fewer (9.67%),
despite the audit’s importance to the POFEDP in increasing the effectiveness of the
organisation.
4.2.4 Working Positions of the Staff
In responding to the questionnaire, different groups of the staff indicated their
working positions/posts. This triggered the need of measuring the performance of
the organisation since their working positions play a vital role in the implementation
of the organization objectives. The results are shown in figure 4.3 below.
44
Figure 4.3: Status of the Staffs
Source: Primary data (2013)
Figure 4.3 illustrates that (51.11%) of the respondents are internal auditors who are
directly involved in auditing functions while accountants who form the business units
or auditors and the systems auditors who are mainly involved in auditing the system
represent 20% and 11.11% respectively of the respondents. Audit committee to
which internal auditors report functionally represents 8.89% of the respondents and
plays a vital role in administering the auditing function in POFEDP, including
establishing link between internal audit and external audit (Controller and Auditor
General). The directors who administer all POFEDP activities, and principal
secretary and deputy principal secretary who authorise all the organization’s
expenditures represents 5.56%, 1.11% and 2.22% respectively.
4.3 Specific Objective One
The main objective was to assess the role of the internal auditing in achieving
performance at the President’s Office, Finance, Economy and Development
Planning. It comprised of the following different variables:-
45
4.3.1 The existence of the Internal Audit Role
The analysis shows the existence of internal audit roles in POFEDP, and how the
roles lead to an improvement in the performance and attainment of the objectives of
the organization.
Table 4.3: Existence of Audit Roles
Variables Frequency Per cent Valid Per cent- Cumulative Per cent
Valid Yes 90.00 100.00% 100.00%
100.00%
No 0.00 0.00% 0.00% 0.00%
Total 90.00 100.00% 100.00% 100.00%
Source: Primary data (2013)
Table 4.3 indicates that all respondents (100%) agreed on the existence of internal
audit roles in the POFEDP. Unegbu, A. (2011), highlighted that the roles played by
internal audit are tools that lead to effective work performance. Without internal
audit roles, internal auditors are like a ship sailing without a captain (Unegbu, A.
2011). The result of this study is also supported by (Gurbanov, G. 2011) who
demonstrated that internal audit roles must exist in any public organization as a tool
used by internal auditors to conduct their duties. The results suggest that the
existence of internal audit is very important to the public organization in order to
achieve its objectives effectively and efficiently.
4.3.2 Types of Internal Audit Roles
Respondents were asked to indicate the types of the roles of internal audit in their
department, as captured in figure 4.4.
46
Figure 4.4: Roles of Internal Audit
Source: Primary data collected through questionnaire, (2013)
Figure 4.4 above illustrates that 97.78% of the respondents mentioned the types of
internal audit roles in the public sector. Respondents mentioned four key areas as the
primary roles of internal audit. Inter-a-lia, internal audit:
(i). Evaluates and provides reasonable assurance that risk management, control
and governance system.
(ii). Maintains open communication with the management and the audit
committee.
(iii). Engages in continuous education and staff development.
(iv). Provides support to the organization anti-fraud progmams.
In that case 52.97% identified these four key areas as internal audit roles. However
only 2.22% said none of the above are audit roles. The finding is supported by the
Kida, M. (2011), who mentioned the internal audit roles and duties.
47
(i). Internal audit through internal auditor owe a responsibility to the
management and the board, providing them with information about the
adequacy and effectiveness of the sector’s system of internal control and the
quality of performance.
(ii). The internal auditor ensures adherence to all financial, personnel, lending,
data processing, the other administrative policy and procedure as well as the
economy, efficiency and effectiveness with which resources are used.
(iii). Internal audit serves as a major management control tool to provide an
assurance to management that the financial information furnished to
management to aid decision making is reliable, accurate and based on
reliable records and where necessary, draw the attention of the management
to deficiencies in the organization or system of internal control. Where
required, also, highlight areas of management practices calling for corrective
actions.
The above results are also supported by (Gurbanov, G. 2011) thence, internal audit
roles must be clear in any public organization and known by internal auditors in
conducting their duties. The findings suggest that there are different internal audit
roles in the POFEDP and internal auditors perform them in undertaking their
responsibilities.
4.3.3 Compliance of Internal Audit Roles
The internal audit roles are adequately complied with to ensure that internal audit
objectives are achieved in line with the organizational objectives. This indicates that
compliance of internal audit roles is tied to better performance of the public sector.
(Birskyte, J. 2011) suggested that with the growing size and complexity of public
sector in the recent years, the importance of the internal audit has correspondingly
increased so that it is today a major factor in establishing the quality of the
public sector internal control and its development has made a considerable
contribution to the improvement of the public sector management.
48
Table 4.4 below shows that 100% of the respondents agreed on the compliance of
internal audit roles. This result indicates that internal auditors perform their roles as
laid down and assist in the improvement of organisational performance in the public
sector.
Table 4.4: Compliance of Internal Audit Roles
Variables Frequency Per cent Valid Per cent- Cumulative Per cent
Valid Yes 90.00 100.00% 100.00%
100.00%
No 0.00 0.00% 0.00% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data (2013)
4.3.4 Adequacy of Internal Audit Roles
Table 4.5: Adequacy of Internal Audit Roles
Variables Frequency Per cent Valid Per
cent-
Cumulative Per cent
Valid Yes 90.00 100.00% 100.00%
100.00%
No 0.00 0.00% 0.00% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data (2013)
Table 4.4 above indicates that 100% of the respondents feel that internal audit roles
are adequate. The results is supported by McDonnell, P. et al (1998) who highlighted
that, in order for internal audit department to perform their duties effectively internal
audit roles must be adequate so as not to be ineffective. This result shows that
internal audit roles in the public sector as per the study are adequate in performing
internal audit work.
49
4.3.5 Perfomance of Internal Audit Roles
Perfomance of internal audit roles is a vital roles that guide internal auditors used to
perfom their duties. Figure 4.5 indicates that 100% of the respondents idicated the
existence of audit roles perfomance. Respondents identified four key areas of which
45.45% of respondents said that perfomance of internal audit roles were verry good,
18.18% of respondents said perfomance of internal audit roles were
exellent/moderate, while a fewer percentage of 9.09% of respondents said
perfomance of internal audit roles were poor. This results show that the general
performance of internal audit roles were good at POFEDP as indicated in figure 4.5
shown below.
Figure 4.5: Performance of Internal Audit Roles
Source: Primary data (2013)
4.4 Specific Objective Two
To assess the process of internal auditing at the President’s Office, Finance,
Economy and Development Planning, data was analysed based on following
variables:-
50
4.4.1 Existence of Internal Audit Process
The existance of internal audit process is a vital role in any public sector. This helps
auditors to perform their duties with exellence in order to achieve organization
goals. This indicates better performance of the public sector whenever they are
implemented accordingly. This is confirmed by (Persellin, J. 2011) who argued that
internal audit process is generally a ten-step procedure outlined as notification,
planning, opening meeting, fieldwork, communication, report drafting, management
response, closing meeting, report distribution and follow-up. Research results
suggest that internal audit process exist in the POFEDP, an important aspect to
follow in internal audit job performance. Table 4.5 below indicates that 90
(100.00%) of the respondents suggested that there is the existance of internal audit
process.
Table 4.6: Existence of Internal Audit Process
Variables Frequency Per cent Valid percent Cumulative Per cent
Valid Yes 90.00 100.00% 100.00%
100.00%
No 0.00 0.00% 0.00% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data (2013)
51
4.4.2 Extent of Compliance of Internal Audit Process
Figure 4.6: Extent of Compliance of Internal Audit Process
Source: Primary data (2013)
Figure 4.6 above indicates that 72.72%, 9.09%, and 9.09% of the respondents
sugested that internal audit process were verry good, exellent and moderate
respectivelly. However, 9.09% of the respondents sugested that internal audit
process were poor. Only a small percentage of 9.09% sagested that there is poor
performance of internal audit complience. This group is however minor and it does
not affect much because the big number of respondents(90.91%), agreed that
complience of internal audit process were either verry good, excellent or moderate.
This results further show that internal audit process must be complied with wholy
and exclussevely in conducting audit work, as this helps internal auditors to perform
their duties efficiently and effectiveness.
52
4.4.3 Performance Status of Internal Audit Process
Figure 4.7: Performance Status of Internal Audit Process
Source: Primary data collected through questionnaire, (2013)
Figure 4.7 indicates that 45.45% of the respondents agreed that internal audit
perfomance status are very good. This is inspite of the fact that 27.27% and 9.09%
who said that internal audit performance status were excellent and moderate
respectivelly. However 18.18% suggested that internal audit status in the MOFEDP
were really poor, and did affect nothing because a greater number of respondents
indicated that 81.18% internal audit perfomance status were either excellent, very
good or moderate. This results shows that internal audit status is good as seen from
the organization structure of POFEDP and other public sectors(appendix 4).
4.5 Specific Objective Three
To determine the challenges affecting internal auditing at the President’s Office,
Finance, Economy and Development Planning. This objective was made up of the
following variables:-
53
4.5.1 Existance of Challenges
Table 4.7: Existence of Challenges
Variables Frequency Per cent Valid percent Cumulative Per cent
Valid Yes 90.00 100.00% 100.00%
100.00%
No 0.00 0.00% 0.00% 100.00%
Total 90.00 100.00% 100.00%
Source: Primary data collected through questionnaire, (2013)
Table 4.7 above indicates the existance of challenges. 90 (100.00%) agreed that
there are challenges facing internal auditing at the POFEDP. Normally internal audit
challenges hinder effectiveness of internal audit perfomance in the public sector.
This result of our study is in line with Mafiana, E. (2013) findings. Using data from
Nigeria he demonstrated that in the aftermath of the global economic downturn,
corporate leaders were increasingly faced with the challenges of pushing their
companies beyond their current limits whilst implementing best practices. This
indicates that challenges facing internal audit in the MOFEDP has existed for some
time.
4.5.2 Reasons of Internal Audit Challenges
Figure 4.8 below indicates that 100.00% of respondence agreed that there were
challenges in the MOFEDP. Respondents identified three key areas as primary
challenges facing MOFEDP.
(i). Independent, pre-audit and lack of participant of inetrnal auditor in the
management.
(ii). Indipendent, low salary and pre-audit.
54
(iii). Indipendent, reporting status that is internal auditor in Zanzibar generally
report to the principal secretary and their employment status are too
subjective.
73.11% identified the three areas as key challenges facing internal audit in the
MOFEDP. This result is supported by Mafiana, E. (2013) using data from Nigeria
Banking industry, who demonstrated that in the aftermath of the global economic
downturn, corporate leaders were increasingly faced with the challenges of pushing
their companies beyond their current limits whilst implementing best practices. The
results of this study provides unique evidence that a great deal of this significant and
positive relationship between internal control effectiveness and financial
performance can be harnessed for the sustainability of business organizations.
55
Figure 4.8: Reasons of Internal Audit Challenge
Source: Primary data (2013)
4.6 Possible Solution to Improve Internal Audit Performance of Internal
Audit in the Public Sector
Appointment of Internal Auditor General
The President of Revolutionary Government of Zanzibar should appoint Internal
Auditor General. This means that internal auditor will report direct to the Internal
Auditor General. If the appointment of Internal Auditor General happens as
suggested, the independence of internal audit will be improved. The results found in
this study showed that 25.45% of the respondents said that internal auditor general
must be appointed as it will lead to good performance in the public sector.
Until recently internal auditor in the public sector in Zanzibar were doing pre-audit
duties, contrary to the codes of ethics of professional accountants/auditors
specifically independence. Adisai, M. (2012) demonstrated that self review threat
may occur if non-audit service/pre-audit is performed by the auditor, since it will be
difficult to criticise him/her self. Thus instead of pre-audit to be conducted by the
56
internal auditor it should be conducted by other examiners. The results found in this
study shows that 18.18% of the respondents concurred that pre-audit should be
avoided.
Employees are the most important resource in an organization. Therefore,
organizations need to pay their staffs (internal auditor) reasonable remuneration to
enhance public sectors performance. Generally internal auditors in the public sectors
in Zanzibar are paid a net of salary of Tsh 270,000/=, Tsh 315,000/=, 325,000/= and
400,000/= for advance diploma, degree, post graduate and master respectively.
However Chief internal auditors are paid net amount of 1,400,000/=. Figure 4.9
below shows that 20.00% said that to improve the public sector’s performance,
remuneration of internal auditor must be increased.
Establishment of a Training Policy
Internal auditors in POFEDP and other public sectors in Zanzibar should be given
schedule of training policy regarding their profession such as to attend professional
trainings conducted by the National Board of Accountants and Auditors (NBAA),
Institute of internal Audit (IIA) etc. This will help internal auditors to be aware of
any changes regarding financial issues. Figure 4.9 below shows that 9.09% of
respondents said that POFEDP should establish a training policy. Field results
established that most internal auditors and accountants in the POFEDP are not
Certified Public Accountants (CPA). Thus they are not professionals, meaning
POFEDP accounts department are run by unqualified employees. Internal auditors
and accountants must do professional examinations in order to become competent in
financial matters to bring about intelligent changes. Figure 4.9 below shows that
9.09% of respondents have been sponsored by POFEDP to attend review classes and
later examinations in fields such as CPA, ACCA, CIA and the like.
From the POFEDP organization structure after the principal secretary is the internal
auditor. This means that internal auditor is the most important in seniority to advise
the Accounting Officer on all activities to be implemented according in the
organization policy. However, accounting officers in the POFEDP and other staffs in
57
the public sectors perceive that internal auditors are like the police to look at what
accounting officers are doing, then to report to the concerned authority. Thus
management in general have to participate in the training conducted by NBAA and
IIA to understand their status in the public sector.
Figure 4.9: Possible Solution to Improve Internal Audit
Source: Primary data collected through questionnaire, (2013)
58
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
This chapter presents the summary of findings, conclusions and recommendation
based on the study, “The effects of Internal Audit on the Performance of Public
Sector in Zanzibar”. It was conducted based on internal audit in Zanzibar. The public
sector of Zanzibar is not the biggest employer of Internal Auditors and involves
several organizations including Ministries, Departments and Agencies (MDAs). The
public sector also includes Municipal and District Assemblies MMDAs).
Specifically the study was conducted in the President’s Office, Finance, Economy
and Development planning.
The study was based on researching the linkage between the roles of internal audit
and performance in the public sector, the process of internal auditing, the challenges
facing internal auditing, and possible solutions to improve the performance of
internal audit in the public sector. Using a mainly descriptive cross-sectional,
primary data was collected from the POFEDP (public sector) in Zanzibar using
questionnaire and interviews. Documentary reviews were used to support primary
data obtained. It involved a sample size of 100 of respondents; however the number
finally came down to 90, after screening. Data was analysed using descriptive
statistics method through Statistical Package for Social Science (SPSS) application,
version 16.
5.2 Summary of findings
Findings show the existence of internal audit roles in POFEDP. These roles lead to
an improvement in the performance and attainment of the objectives of the
organization. These roles are also tools that lead to effective work performance.
Additional findings indicate that compliance of internal audit roles is tied to better
performance in the public sector. This result indicates that internal auditors perform
their roles as laid down and assist in the improvement of organisational.
59
Research results suggest that internal audit process exist in the POFEDP, an
important aspect to follow in internal audit job performance. This results further
show that internal audit process must be complied with wholy and exclussevely in
conducting audit work, as this helps internal auditors to perform their duties
efficiently and effectiveness, with a majority confirming internal audit perfomance
status were either excellent, very good or moderate
There are challenges facing internal auditing at the POFEDP. Normally internal
audit challenges hinder effectiveness of internal audit perfomance in the public
sector. three areas as key challenges facing internal audit in the MOFEDP:
Independent, pre-audit and lack of participant of inetrnal auditor in the management,
Indipendent, low salary and pre-audit, Indipendent, reporting status that is internal
auditor in Zanzibar generally report to the principal secretary and their employment
status are too subjective.
Possible solution to improve internal audit performance of internal audit in the public
sector includes appointment of Internal Auditor General, Establishment of a training
policy, avoiding of pre-audit, increase of remuneration and finally internal auditors
should have professional education such as CPA, ACCA, CIA and the like.
The findings revealed that the linkage between roles of internal audit and the
performance in the public sector under existence of internal audit roles, to mention
roles of internal audit, compliance of internal audit roles adequacy of internal audit
roles and performance of internal audit roles.
5.3 Conclusion
The purpose of the research is to examine the effect of internal audit on the
performance of public sector in Zanzibar. The analysis showed a significant
relationship between roles of internal audit and performance of public sectors. The
role of internal audit contains five dimensions, among these, compliance of internal
audit roles causes significantly in achieving performance of public sector through the
existence of internal audit roles, to mention roles of internal audit, compliance of
60
internal audit roles, and adequacy of internal audit roles and performance of internal
audit roles. The study also discovered that to assess the process of internal auditing it
is very important for POFEDP to improve public performance through the existence
of internal audit process and performance status of internal audit process.
It was also revealed that internal audit in the POFEDP faced challenges on
conducting internal auditing through reporting status that lead independence of
internal audit, pre-audit, lack of participant of interrnal auditor in the management,
low salary. The study also suggested possible solutions to improve the perfomance of
internal audit in the public sector by improving internal audit indipendence.
5.4 Recommendations
The president of Zanzibar has to appoint a competent and independent Internal
Auditor General with full autonomy and enough resources to enable internal auditors
to perform their daily activities efficiently and effectiveness. Apart from that internal
auditors have to report directly to the Internal Auditor General as this will strengthen
the independence of internal audit department and hence internal auditors will
improve the value of POFEDP in Zanzibar.
Internal audit serves as a major management control tool to provide an
assurance to management that the financial information furnished to
management to aid decision making is reliable, accurate and based on reliable
records. Where necessary, draw the attention of management to deficiencies in the
organization or system of internal control and highlight areas of management
practices requiring corrective actions.
POFEDP has to establish training policy regarding internal auditors as well as
accountants in order to be aware to any changes relating to auditing and financial
matters because financial regulations are dynamic. Thus to be conversant with this
therefore internal auditors and accountants have to attend seminars regarding
financial matters.
61
Management should establish the benchmarks that can help them measure the
performance of internal auditors so as know exactly whether internal auditors add
value to the organization. If internal auditors meet the benchmark, then the
performance of public sectors will be increased.
Management of POFEDP should encourage and support internal auditors to
participate in short term trainings such as seminars and workshops conducted by
NBAA, IIA conducting in-house trainings or hiring expert from out to facilitate some
issue such as risk assessment.
Management should establish a system of quality control designed to provide
reasonable assurance to the POFEDP’s internal audit office and its personnel to
comply with the regulatory and legal requirements, code of ethics and standards on
auditing.
5.5 Areas for Further Research
The researcher focused specifically on the Effectiveness of Internal Audit as
Instrument of Improving Public Sector Management. There is general awareness all
over the world for the need to pay greater attention to the improvement of public
sector management. The reason is obvious, government constitutes the largest
single business entity and her pattern of expenditure through its various
parastatals, agencies and commissions stimulate lot of economic activities.
Potential researchers should look at these areas of expenditures, and how internal
audit fair in the private sector since the majority of employers now are private
entities.
62
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APPENDICES
Appendix 1: Covering letter
Mzumbe University
Dar-es-Salaam
Tanzania
Dear Sir/Madam,
I am a Master’s degree student of the above named university involved in a research
work on the effects of internal audit on the performance of the public sector in
Zanzibar. The questionnaire is strictly to provide vital information regarding this
research work. I assure full confidentiality of all information given.
Yours Sincerely,
Saleh J. Rashid.
70
Appendix 2: Questionnaire
Audit committee, Heads, assistants and staff of accounting and internal audit
departments
PART I: GENERAL BACKGROUND INFORMATION
The questions asked in this section will be used for classification purposes only. The
information gathered will not be used in any other way and will be kept strictly
confidential. Please Tick [√] the most appropriate alternative/s
1. What is your gender?
(i). Female ( )
(ii). Male ( )
2. What is your current position?
(i). Audit Committee ( )
(ii). Chief Internal Auditor ( )
(iii). Internal Auditor ( )
(iv). Accountant ( )
3. What is your experience in this organization?
(i). 1 - 5 years ( )
(ii). 6 - 10 years ( )
(iii). More than 10 years ( )
4. Does your internal audit office have mission statement?
(i). Yes ( )
(ii). No ( )
(iii). I don’t know ( )
71
5. Are there any challenges facing internal auditing in your Organization?
(i). Yes ( )
(iv). No ( )
(ii). I don’t know ( )
If yes give reasons
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
6. If yes, is it approved by the management?
(i). Yes ( )
(ii). No ( )
(iii). I don’t know ( )
7. Does your internal audit office have formally recognized objectives?
(i). Yes ( )
(ii). No ( )
(iii). I don’t know ( )
8. How frequently are these objectives reviewed for change?
(i). Never ( )
(ii). Annually ( )
Other (please specify) ___________________________________________
9. Does internal audit prepare annual plans for their audits?
(i). Yes ( )
(ii). No. ( )
(iii). I don’t know ( )
72
10. If yes, which of the below format is followed?
(i) Risk-based planning ( )
(ii) System-based planning ( )
(iii) Mixed planning ( )
(iv) I don’t know ( )
11. Does the internal audit carry out its functions in compliance with the public
financial regulations?
(i) Yes ( )
(ii) No ( )
(iii) I don’t know ( )
12. Do you measure the internal audit performance in your key activity areas?
(i) Yes ( )
(ii) No ( )
73
Appendix 3: Interview Guide
Principal Secretaries and Directors of MDAs
1. Does internal audit add value in your organization?
(i) Yes ( )
(ii) No ( )
If yes, specify…………………………………………………………………
2. Do you value the internal audit performance?
(i) Yes ( )
(ii) No ( )
3. What is basis of valuing the internal audit performance?
…………………………………………………………………………………
4. What is the level of education of internal auditors in your organization?
…………………………………………………………………………………
5. Do internal audit roles exist in your organization?
(i) Yes ( )
(ii) No ( )
If yes please specify
(i) Evaluates and provides reasonable assurance that risk managent,
control and governance systems.
(ii) Maintains open communication with managent and the audit
committee.
(iii) Engages in continuous education and stuff development.
(iv) Provides support to the organization anti-fraud programs.
(v) All of the above
(vi) None of the above
74
6. Do internal auditors follow completely the roles of internal audit?
(i) Yes ( )
(ii) No ( )
7. Does internal audit roles adequate in achieving performance?
(i) Yes ( )
(ii) No ( )
8. To what extent do internal audit roles achieve its performance?
(i) Excellent ( )
(ii) Very good ( )
(iii) Moderate ( )
(iv) Poor ( )
9. Does internal audit process exist in your organization?
(i) Yes ( )
(ii) No ( )
10. To what extent is internal audit process followed?
(i) Excellent ( )
(ii) Very good ( )
(iii) Moderate ( )
(iv) Poor ( )
11. What is the performance status of internal audit in your organization?
(i) Excellent ( )
(ii) Very good ( )
(iii) Moderate ( )
(iv) Poor ( )
75
12. What are the possible solutions to improve the performance of internal audit?
(i) To avoid pre-audit ( )
(ii) The appointment of Internal Auditor General ( )
(iii) To improve the qualification of internal auditors ( )
(iv) To increase auditors’ remuneration ( )
(v) All of the above ( )
(vi) None of the above ( )
76
Appendix 4: Organizational structure
REVOLUTIONARY GOVERNMENT OF ZANZIBAR
ZANZIBAR INSURANCE
COOPORATION ZANZIBAR SOCIAL SECURITY
FUND
OFICE OF CHIEF
GOVERNMENT
STATISTICIAN
DEPARTMENT FOR ECONOMIC
MANAGEMENT
DEPARTMENT FOR HUMAN
RESOURCES DEVELOPMENT &
PLANNING
CO-REFORMS UNIT DEPARTMENT FOR EXTERNAL
FINANCE
DEPARTMENT FOR NATIONAL
PLANNING, SECTORAL
DEVELOPMENT AND POVERTY
REDUCTION
DEPARTMENT FOR STOCK VER. &
PUBLIC INVESTMENT
DEPARTMENT FOR POLICY,
PLANNING & RESEARCH
DEPARTMENT FOR
ADMINISTRATION & PERSONNEL
COMMISSIONER
DIRECTOR
DIRECTOR
COMMISSIONER
COMMISSIONER COMMISSIONER
COMMISSIONER
SMZ - COORDINATION OFFICE
DSM
PEMBA OFFICE OFFICER IN CHARGE
COORDINATOR
DIRECTOR
ZANZIBAR REVENUE BOARD COMMISSIONER
TANZANIA REVENUE
UTORITY DEPUTY COMMISSIONER
MANAGING DIRECTOR
MANAGING DIRECTOR
PEOPLES BANK OF ZANZIBAR MANAGING DIRECTOR
ZANZIBAR ROAD FUNDS EXECUTIVE DIRECTOR
ZANZIBAR INSTITUTE OF
FINANCIAL ADMINISTRATION
DIRECTOR
CHIEF GOVERNMENT
STATISTI
ORGANIZATION STRUCTURE FOR PRESIDENT’S OFFICE FINANCE, ECONOMY AND DEVELOPMENT
DEPARTMENT FOR BUDGET COMMISSIONER
ASST. ACC GENERAL
ZANZIBAR INVESTMENT
PROMOTION AUTHORITY
EXECUTIVE DIRECTOR
PUBLIC RELATIONS OFFICE INTERNAL AUDIT OFFICE PROCUREMENT
LEGAL SERVICES
ACCOUNTS
MINISTER
EXECUTIVE SECRETARY,
(PLANNING COMMISSION)
DEPUTY PRINCIPAL SECRETARY
(FINANCE)
OFFICE OF ACCOUNTANT GENERAL
PRINCIPAL SECRETARY