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MAKERERE UNIVERSITY
INSTITUTE OF ADULT AND CONTINUING EDUCATION
INTERNAL AUDITING AND TRANSPARENCY IN PUBLIC FINANCES
A CASE STUDY OF TORORO DISTRICT LOCAL GOVERNMENT
BY
ENYASU GODFREY
07/U/4818/EXT
SUPERVISOR:
MS. MBATUDDE SHEILA
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL
FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF A BACHELORS
DEGREE IN COMMERCE
JULY, 2011
DECLARATION
I Enyasu Godfrey declare that this research report is original and as a result of my own efforts, it
has never been presented by any student.
SIGNATURE: …………………………………………………………………….
ENYASU GODFREY
DATE: ……………………………………………………………………………
i
APPROVAL
This is to certify that this work has been submitted for approval.
SIGNATURE: …………………………………………………………………..
MS. MBATUDDE SHEILA (SUPERVISOR)
DATE: …………………………………………………………………………
ii
DEDICATION
I dedicate this work to my parents Enyasu Michael and Dometila Nyaruwa for the endless and
tireless support they have rendered me throughout my life.
iii
ACKNOWLEDGEMENT
This research has been made successful due to the efforts of a number of people. I therefore
would like to thank my Supervisor Madam Mbatudde Sheila for the tireless guidance she
rendered me.
I would like to thank my bosses who helped me a lot through my studies by giving me time to
study, the personnel at Tororo district local government for their participation by providing data
which made this research a success.
Special thanks also go to my course mates who helped me in compiling this research and during
the entire course notably Fortunate, Amon and Damba. I also want to thank Komuhangi Dorcus
for her the continued encouragement she has always offered me.
May the almighty lord bless you all abundantly.
iv
TABLE OF CONTENTS
DECLARATION..............................................................................................................................i
APPROVAL....................................................................................................................................ii
DEDICATION...............................................................................................................................iii
ACKNOWLEDGEMENT..............................................................................................................iv
TABLE OF CONTENTS................................................................................................................v
LIST OF ACRONYMS...................................................................................................................x
ABSTRACT...................................................................................................................................xi
CHAPTER ONE............................................................................................................................1
1.0 Introduction...........................................................................................................................1
1.1 Background of the study.......................................................................................................1
1.2 Problem statement................................................................................................................3
1.3 Purpose of the study..............................................................................................................4
1.4 Objectives of the study.........................................................................................................4
1.5 Research questions................................................................................................................4
1.6 Scope of the study.................................................................................................................4
1.7 Significance of the study......................................................................................................5
CHAPTER TWO...........................................................................................................................6
LITERATURE REVIEW.............................................................................................................6
2.0 Introduction...........................................................................................................................6
2.1 Internal auditing....................................................................................................................6
2.1.1 Internal controls................................................................................................................7
2.1.2 Audit risk...........................................................................................................................7
2.1.3 Audit evidence..................................................................................................................8
2.2 Principles governing internal auditing..................................................................................9
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2.2.1 Integrity.............................................................................................................................9
2.2.2 Objectivity.......................................................................................................................10
2.2.3 Competence and Due Care..............................................................................................11
2.2.4 Confidentiality................................................................................................................12
2.3 Internal audit process..........................................................................................................13
2.3.1 Planning..........................................................................................................................13
2.3.2 Fieldwork........................................................................................................................14
2.3.3 Reporting.........................................................................................................................15
2.3.4 Follow-Up.......................................................................................................................16
2.4 Transparency in public finances.........................................................................................17
2.4.1 Code of Good Practices and Fiscal Transparency..........................................................18
2.4.2 Factors that may lead to Lack of Transparency..............................................................19
2.4.2.1 Weak accountability system........................................................................................19
2.4.2.2 Inaccessibility to information......................................................................................20
2.4.2.3 Lack of capacity and monitoring.................................................................................20
2.4.2.4 Unclear rules, laws and processes...............................................................................21
2.5 The effect of internal auditing on transparency in public finances....................................22
2.5.1 Lack of funding...............................................................................................................23
2.5.2 Incompetent staff.............................................................................................................24
2.5.3 Errors in books of accounts.............................................................................................24
2.5.4 Conceptual restrictions....................................................................................................25
2.5.5 Delayed technique of internal auditing...........................................................................25
2.6 Conclusion..........................................................................................................................26
CHAPTER THREE.....................................................................................................................27
METHODOLOGY......................................................................................................................27
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3.0 Introduction.........................................................................................................................27
3.1 Research design..................................................................................................................27
3.2 Survey population...............................................................................................................27
3.3 Sampling design..................................................................................................................27
3.4 Sample size.........................................................................................................................28
3.5 Data sources........................................................................................................................28
3.6 Data collection tools...........................................................................................................29
3.7 Data collection procedures.................................................................................................29
3.8 Data management...............................................................................................................30
3.9 Data analysis.......................................................................................................................30
3.10 Limitations of the study......................................................................................................30
CHAPTER FOUR.......................................................................................................................31
PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS............31
4.1 Bio data...............................................................................................................................31
4.1.1 Gender of respondents....................................................................................................31
4.1.2 Age bracket of the respondents.......................................................................................31
4.1.3 Level of education of the respondents............................................................................32
4.1.4 Departments of the respondents......................................................................................33
4.1.5 Length of service.............................................................................................................33
4.2 Findings on principles of internal auditing.........................................................................34
4.2.1 Integrity...........................................................................................................................34
4.2.2 Objectivity.......................................................................................................................35
4.2.3 Competence and due care...............................................................................................36
4.2.4 Confidentiality................................................................................................................38
4.3 Findings on the process of internal auditing.......................................................................38
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4.3.1 Planning..........................................................................................................................39
4.3.2 Field work.......................................................................................................................40
4.3.3 Reporting.........................................................................................................................41
4.3.4 Follow up........................................................................................................................41
4.4 Findings on the transparency in public finances.................................................................42
4.4.1 Accountability system.....................................................................................................42
4.4.2 Accessibility to information............................................................................................43
4.4.3 Capacity and monitoring.................................................................................................45
4.4.4 Unclear rules, laws and processes...................................................................................45
4.5 Relationship between internal Auditing and transparency in public Finances...................46
CHAPTER FIVE.........................................................................................................................48
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS..................48
5.1 Introduction.........................................................................................................................48
5.2 Summary of the findings....................................................................................................48
5.2.1 Summary of findings on principles and process of internal auditing.............................48
5.2.2 Summary of findings on Transparency in public finances.............................................50
5.2.3 Summary of findings on Relationship between internal auditing and transparency in public Finances..............................................................................................................................51
5.3 Conclusions.........................................................................................................................51
5.4 Recommendations...............................................................................................................52
5.4 Areas suggested for further research..................................................................................52
REFRENCES.................................................................................................................................53
APPENDIX 1: QUESTIONNAIRE..............................................................................................57
APPENDIX 2: BUDGET ESTIMATES.......................................................................................60
APPENDIX 3: TIME SCHEDULE...............................................................................................61
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LIST OF TABLES
Table 1: Table of respondents......................................................................................................................28
Table 2: Findings on the gender of the respondents....................................................................................31
Table 3: Age distribution of respondents.....................................................................................................32
Table 4: Academic levels.............................................................................................................................32
Table 5: Department of respondents............................................................................................................33
Table 6: Length of service...........................................................................................................................34
Table 7: Findings on integrity......................................................................................................................35
Table 8: Findings on objectivity..................................................................................................................36
Table 9: Competence and due care..............................................................................................................37
Table 10: Findings on confidentiality..........................................................................................................38
Table 11: Findings on planning...................................................................................................................39
Table 12: Findings on field work.................................................................................................................40
Table 13: Findings on reporting...................................................................................................................41
Table 14: Findings on follow up..................................................................................................................42
Table 15: Findings on accountability systems.............................................................................................43
Table 16: Findings on Accessibility to information....................................................................................44
Table 17: Findings on capacity and monitoring..........................................................................................45
Table 18: Findings on unclear rules, laws and processes............................................................................46
Table 19: Correlations between internal audit and transparency.................................................................46
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LIST OF ACRONYMS
IIA………………………………...…Institute of Internal Auditors
IMF…………………………………..International Monetary Fund
MoFPED……………………………..Ministry of Finance, Planning and Economic Development
NAADS……………………………....National Agricultural Advisory Services
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ABSTRACT
The study was carried on internal auditing and transparency in public transparency in Tororo
district local government basing on the following objectives; to establish whether the principles
and process of internal auditing are followed in the public sector, to find out whether there is
transparency in public finances, to find out the extent to which internal auditing has influenced
transparency in public finances.
In carrying out the study, the researcher used both descriptive and correlatonal design research
designs to establish the relationship between internal auditing and transparency in public finance
in Tororo district local government. A total of 46 respondents were sampled using stratified
random sampling method. Questionnaires were used to gather views from the respondents. The
data was then analyzed using Statistical Packages for Social Sciences (SPSS).
Findings revealed that there is a weak positive relationship between internal auditing and
transparency in public finances at Pearson correlation coefficient r = 0.342 (*). The significance
of the correlation is 0.05. This implies that a big change in the way of handling internal auditing
would bring about a small change of transparency in public finances by 11% in Tororo district
local government. It was therefore concluded that despite being weak, there is a relationship
between internal auditing and transparency.
It is recommended that internal auditors be given regular training to ensure that they keep up to
date with changes in auditing standards so as to enhance the effectiveness of the internal audit
function. And avenues for questioning those in charge should be increased since these will act as
checks which allow people in charge to be brought to account, thus improving transparency in
public finances.
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CHAPTER ONE
1.0 Introduction.
This chapter covers the background, statement of the problem, purpose of the study, objectives
of the study, research questions, scope of the study, and significance of the study.
1.1 Background of the study.
Internal audit is a continuous and systematic process of examination and reporting the operations
and records of concern by its employees selected specifically for this purpose. Such audit is an
independent appraisal activity within an organization for review of the operations and for
measuring and evaluating the effectiveness of other controls (D.P. Jain, 1999).
Internal audit is a key pillar of good governance. It is concerned with the adequacy of risk
management and internal control systems, efficiency and effectiveness of operations, asset
safeguarding and regulatory compliance. It provides an organisation’s audit committee and
executive management with an independent view on whether the organisation has an appropriate
risk and internal control environment and acts as a catalyst for a strong risk and compliance
culture within an organization (Pickett, 2006). According to Frigo and Mark (2002), in early
auditing (voucher audit), internal auditing was supposed to prove a true and fair view of the
company’s financial affairs by reviewing all transactions, and comparing them with financial
statements. This was possible since companies’ transactions were few. However, this later
developed into modern audits (system based audits). Under this, internal auditing relies on the
presence and strength of internal control systems to apply tests on a sample of entries drawn
from a population of entries and the results of the sample are taken to represent those of the
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organization. Increasingly, internal auditors are called upon to act as internal control, risk and
corporate governance consultants within the organization
Internal Auditing is concerned with all aspects of the organization both financial and non
financial. It also involves detection and prevention of fraud in any form, hence transparency in
finances. Some organizations however still fail to do Internal Auditing for various reasons for
example; lack of resources to support internal audits, lack of manpower with the skill to handle
internal audits, lack of accurate statistics, and the top management in some cases does not
prioritize internal auditing.
Transparency means that institutions, processes, and decisions are made accessible to the public
at large or to representatives of the public, so that processes and decisions can be monitored,
reviewed, commented upon and influenced by the stakeholders. It is important to create
transparency at the beginning. This means full public access to information. This will also bring
about awareness (Sandra Zwart, 2003).
To achieve transparency, managers and accountants are under obligation to show evidence of
good financial management in an organization and this is achieved through production of
accountability of money received and spent. This takes the form of production of documents as
evidence of money received and well spent; these include receipts( showing evidence of money
received), Invoices (demand payments of goods and services provided on credit),
Vouchers(show details and support payments).
However, transparency in public finances is increasingly declining. This is shown by the
frequent media reports and publications on corruption and embezzlement of funds. For example;
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In Wakiso eleven Wakiso district health staff were charged with misappropriating over
300million shillings meant for health services (Ssempogo, 2011).
The common practices that lead to lack of transparency range from misappropriation of assets,
bribery, bid rigging, improper disclosure, improper expense reimbursement to false
representation of financial reports
Therefore as an instrument to monitor, control and evaluate performance, internal controls play a
major role in fostering, ensuring and promoting standardized, uniformity and consistency in the
implementation of government financial policies and programs for improved service delivery. In
order for transparency to be achieved in an organisation, fraud and corruption must be curbed by
putting in place controls. This will ensure that processes are adhered to by providing
accountability and openness in the way organisation’s matters are carried out.
If policies are adhered to and finances properly accounted for then an organization is likely to
achieve its objectives.
1.2 Problem statement.
Indications in Uganda today have shown that the problem of lack of transparency is on the rise.
This can be seen by the corruption that seems to be getting out of hand. Reference is made to the
local dailies which have always reported on corruption for example the 80 Billion shillings
NAADS money swindled, Parliament questioning a minister over ghost pensioners, the 900
million shillings stolen from the National Forest Authority’s boss’s bedroom (Kabanda, 2009).
This clearly shows a problem of mismanagement and misappropriation of funds in both central
and local governments in Uganda. The researcher conducted the study based on the above
information to establish whether the lack of transparency in the public finances could have been
as a result of ineffective internal auditing.
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1.3 Purpose of the study.
The researcher was driven to find out whether internal auditing can lead to transparency in public
finances vis-à-vis other factors.
1.4 Objectives of the study.
To establish whether the principles and process of internal auditing are followed in the
public sector.
To find out whether there is transparency in public finances.
To find out the extent to which internal auditing has influenced transparency in public
finances.
1.5 Research questions.
Are the principles and process of internal auditing, followed in the public sector?
Is there transparency in public finances?
To what extent has internal auditing influenced transparency in public finances?
1.6 Scope of the study.
Conceptual scope
Focus was on the impact of internal auditing on transparency in public finances.
Geographical scope
The study was undertaken in Tororo district local government.
4
Time scope
The study involved the review of financial and non – financial transactions of Tororo district
local government for the period 2000 – 2010.
1.7 Significance of the study.
The study can be of significance in the following ways as shown below;
The government, the study can enhance improvement in internal auditing techniques
hence minimizing misuse of public finances, thus availing the government with enough
funds to run its activities such as construction of schools, and hospitals.
The public, since the improved internal audit techniques can minimize misuse of public
finances, they can then be put to their appropriate use such as disaster management,
health care management, which will be beneficial to the public.
Other researchers, the study can inspire other researchers to research more on the topic to
discover other aspects that may not have been discovered with the help of the already
existing research.
The management of government organizations, since it provides information regarding
different aspects of internal auditing. This will enable them improve on the effectiveness
of internal auditors by engaging them in seminars, workshops and training to improve
their skills and effectiveness.
5
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction.
This chapter presents the literature review of different scholars and authors in relation to internal
auditing and transparency in public finances.
2.1 Internal auditing.
Internal auditing is an appraisal or monitoring activity established by management and directors
for the review of the accounting and internal control systems as a service to the entity. It
functions by, amongst other things, examining, evaluating and reporting to management and
directors on the adequacy and effectiveness of components of the accounting and internal control
systems (Phil Griffiths, 2004).
According to D.P Jain, (1999), such audit is an independent appraisal activity within an
organization for review of the operations and for measuring and evaluating the effectiveness of
other controls. The scope and objectives may be stated as below;
To study and evaluate the adequacy and effectiveness of accounting, financial and
operating controls.
To ascertain the degree of compliance with pre determined policies, plans and
procedures.
To ascertain the extent to which business assets are accounted for and safeguarded from
losses.
6
To ascertain the authority of accounting and other data complied within the organization.
To evaluate the quality of performance in carrying out assigned responsibilities.
To furnish the members of management with objective analysis, comments and
recommendation as regards the activities of the business so as to help them in efficient
and effective discharge of their responsibilities.
2.1.1 Internal controls.
Internal controls are a system consisting of specific policies and procedures designed to provide
management with reasonable assurance that the goals and objectives it believes important to the
entity will be met (Kathleen T. McNeely, 2009). Internal auditing relies on the existence and
strength of internal control systems to apply tests on a sample of entries drawn from a population
of entries and the results of the sample taken to represent those of the entire organization (Paul
Sobel, 2004).
In a broader sense, internal controls extend beyond the mere allocation of clerical duties to
include the quality of management supervision itself (Emile Woolf, 1997).
2.1.2 Audit risk.
According to Sobel (2004), audit risk refers to the possibility that auditors may unknowingly fail
to appropriately modify their opinion of financial statements that are materially misstated. In
other words it is risk that the auditors will issue an unqualified opinion on financial statements
that contain a material departure from generally accepted accounting principles. Audit risks can
be reduced by gathering more evidence. Therefore the more competent evidence that is gathered,
the less audit risk assumed (Shore and Wright, 2000).
7
For each financial statement account, audit risk consists of the possibility that;
i. A material misstatement in an assertion about the account has occurred, and
ii. The auditors do not detect the misstatement. The first risk, the risk of occurrence of
material misstatement may be separated into inherent risk and control risk. The risk that
auditors will not detect the misstatement is called detection risk.
2.1.3 Audit evidence.
Evidential matter is any information that corroborates or refutes an assertion. Audit evidence is
therefore that information that is obtained by the auditor in arriving at the conclusion on which
he bases his opinion (Whittington and Pany, 2004).
Internal auditors are often required to express an opinion on the adequacy and effectiveness of
internal control. For this they must gather evidence to support their opinion. They can do this in
various ways and follow the audit program. A good audit program will indicate what tests need
to be carried out, by who, how this will be done, when and how long they will take. As a
planning tool, it will guide auditors on the sufficiency of evidence to be gathered (Robert R.
Moeller, 2004).
Audit evidence can be gathered by observation, inspection, interviews or questioning, analytical
reviews, computation and recomputations, confirmation and comparisons (Pickett, 2004).
According to Institute of Internal Auditors - Practice Advisory 2310-1, the auditor should obtain,
relevant, reliable, sufficient and useful evidence to enable him draw reasonable conclusions there
from.
8
2.2 Principles governing internal auditing.
It is imperative that the internal audit staff observe the following fundamental principles:
2.2.1 Integrity.
An auditor should be straightforward and honest in performing professional services. Auditors
have a duty to adhere to the highest standards of behavior (for example honesty and candidness)
in the course of their work and in their relationships with the staff of audited entities. In order to
sustain public confidence, the conduct of auditors should be above suspicion and reproach
(Power, 1997).
Integrity can be measured in terms of what is right and just. Integrity requires auditors to observe
both the form and the spirit of auditing and ethical standards.
Integrity also requires auditors to observe the principles of independence and objectivity,
maintain irreproachable standards of professional conduct, make decisions with the public
interest in mind, and apply absolute honesty in carrying out their work and in handling the
resources of the audit (Aidan Dunlea and Naill Maclochlainn, 1998).
The integrity of internal auditors thus establishes trust and thus provides the basis for reliance on
their judgment (Chartered Institute of Internal Auditors).
Rules of Conduct.
According to the Chartered institute of internal auditors, Internal auditors:
Shall perform their work with honesty, diligence and responsibility.
Shall observe the law and make disclosures expected by the law and the profession.
Shall not knowingly be a party to any illegal activity, or engage in acts that are
discreditable to the profession of internal auditing or to the organisation.
Shall respect and contribute to the legitimate and ethical objectives of the organisation.
9
2.2.2 Objectivity.
There is a need for objectivity and impartiality in all work conducted by auditors, particularly in
their reports, which should be accurate and objective. Conclusions in opinions and reports
should, therefore, be based exclusively on evidence obtained and assembled in accordance with
audit guidelines, audit charter, and auditing Standards (Anders Jansson, 2009). Audit work
should be based on evidences and should be done impartially (D.P. Jain, 1999)
Arens, Elder & Beasley, (2003), say auditors should make use of information brought forward by
the audited entity and other parties. This information is to be taken into account in the opinions
expressed by the auditors in an impartial way. The auditor should also gather information about
the views of the audited entity and other parties. However, the auditors' own conclusions should
not be affected by such views.
According to the Chartered institute of internal auditors, internal auditors exhibit the highest
level of professional objectivity in gathering, evaluating, and communicating information about
the activity or process being examined. Internal auditors make a balanced assessment of all the
relevant circumstances and are not unduly influenced by their own interests or by others in
forming judgements.
Rules of Conduct
According to the IIA, Internal auditors:
Shall not participate in any activity or relationship that may impair or be presumed to
impair their unbiased assessment. This participation includes those activities or
relationships that may be in conflict with the interests of the organisation.
10
Shall not accept anything that may impair or be presumed to impair their professional
judgement.
Shall disclose all material facts known to them that, if not disclosed, may distort the
reporting of activities under review.
2.2.3 Competence and Due Care.According to the code of ethics for government of Uganda
internal auditors issued by MoFPED, (2009) an Internal Auditor should perform professional
services with due care, competence and diligence and has a continuing duty to maintain
professional knowledge and skill at a level required to ensure that a client or employer receives
the advantage of competent professional service based on up-to-date developments in practice,
legislation and techniques.
Internal auditors must not undertake work they are not competent to perform. Internal auditors
should know and follow applicable auditing, accounting, and financial management standards,
policies, procedures and practices (Quarles, R. 1994). Likewise, they must also possess a good
understanding of the constitutional, legal and institutional principles and standards governing the
operations of the auditee (MoFPED, 2009).
Internal auditors should apply the knowledge, skills and experience needed in the performance of
internal auditing services (IIA).
Rules of Conduct
According to the Chartered institute of internal auditors, Internal auditors:
Shall engage only in those services for which they have the necessary knowledge, skills
and experience.
11
Shall perform internal auditing services in accordance with the International Standards
for the Professional Practice of Internal Auditing.
Shall continually improve their proficiency and the effectiveness and quality of their
services.
2.2.4 Confidentiality.
An auditor should respect the confidentiality of information acquired during the course of
performing professional services and should not use or disclose any such information without
proper and specific authority or unless there is a legal or professional right or duty to disclose
(Power, 1997). Internal auditors should not disclose information received in the performance of
their duties to third parties, either orally or in writing, except for the purposes of meeting the
internal audit's statutory or other identified responsibilities as part of the internal audit's normal
procedures or in accordance with relevant laws (MoFPED, 2009).
Internal auditors should also not use information received in the performance of their duties as a
means of securing personal benefit for themselves or for others. Neither should they divulge
information that would provide unfair or unreasonable advantage to other individuals or
organisations, nor should they use such information as a means for harming others (MoFPED,
2009).
According to IIA, Principle Internal auditors respect the value and ownership of information they
receive and do not disclose information without appropriate authority unless there is a legal or
professional obligation to do so.
12
Rules of Conduct
According to the Chartered institute of internal auditors, Internal auditors:
Shall be prudent in the use and protection of information acquired in the course of their
duties.
Shall not use information for any personal gain or in any manner that would be contrary
to the law or detrimental to the legitimate and ethical objectives of the organisation.
2.3 Internal audit process
Every successful audit is based on sound planning and an atmosphere of constructive
involvement and communication between the client and the Internal Auditor. The objective is to
involve client management throughout each stage of the audit. Management’s participation
results in both a better understanding of unit operations and a more effective implementation of
recommendations (POB, 2000). The majority of internal audits performed go through four major
phases: Planning, Field Work, Report Writing, and Follow-up. These phases are discussed in the
following paragraphs:-
2.3.1 Planning
According to Jefferson Wells (2004), audit work should be planned, controlled and recorded in
order to determine priorities, establish and achieve objectives, and ensure the effective and
efficient use of audit resources. The main purposes of audit planning are:-
a) To determine priorities and to establish the most cost-effective means of
achieving audit objectives.
b) To assist in the direction and control of audit work.
13
c) To help ensure that attention is devoted to critical aspects of audit work.
d) To help ensure that work is completed in accordance with pre-determined
targets.
The process of planning and audit would include activities ranging from making arrangements
for securing the data to reviewed, to designing procedures, to be followed in examining
them. There should be a written plan containing exact details with regard to the conduct of a
particular audit (D.P. Jain, 1999). Work plans should be prepared for each audit assignment as it
is arranged covering; Objective and scope of the audit, time budget and staff allocation, and
methods, procedures and reporting arrangements, including supervision and allocation of
responsibilities (Shore & Wright, 2000).
All internal audit plans should be sufficiently flexible to respond to changing priorities (D.P.
Jain, 1999)
2.3.2 Fieldwork.
During the fieldwork phase, auditors gather sufficient, relevant and reliable evidence of actual
performance and compare this against expected performance. The intent of internal auditing is to
identify gaps between actual and expected performance. While all differences are noted, only
significant ones are identified in the reporting phase (Pickett, 2004). For example if the expected
performance is that sensitive documents are kept in a locked safe and the actual performance,
based upon fieldwork, shows that sensitive documents are kept in an unlocked desk drawer, the
auditor would note this difference.
Pei and Davis, (1989) stated that in determining the significance of the difference between actual
and expected performance, the internal auditor will consider a number of factors. In drawing a
14
conclusion, the internal auditor will rely upon their independence from the process being audited,
their objectivity as a person disinterested in the outcome of the audit and on their professional
judgment gained through training and experience. Auditors may conduct interviews, surveys, run
focus groups, review documentation, analyze reports, prepare calculations, consult experts and
employ any number of other techniques that help them to obtain sufficient, relevant and reliable
information process (John Dunn, 1996).
The conclusions reached by Corporate Internal Audit Services are their professional opinions,
based on the evidence collected and the analysis performed, as to how closely actual
performance compares to expected performance. (Pickett, 2004).
2.3.3 Reporting.
Audit reports provide a formal means of communicating to management the results arising from
audits undertaken. Such reports should include audit findings, recommendations and conclusions
relating to the adequacy of and compliance with the system of internal control and the efficiency,
effectiveness and economy of operations in the area covered by the audit. From the point of view
of completeness, management response to the audit findings should preferably also be included
in the report (Emile Woolf, 1997).
Phil Griffith, (2004) mentions that reporting arrangement, including the format and distribution
of internal audit reports, should be agreed with management. The head of internal audit should
ensure that reports are sent to managers who have a direct responsibility for the unit or function
being audited and who have the authority to take action on the internal audit recommendations.
15
Internal audit reports are confidential documents and their distribution should be restricted to
those managers who need to know and other appropriate persons on a need to be informed basis.
According to Arens, Elder & Beasley, (2003), the auditor should produce clear, constructive and
concise written reports based on sufficient, relevant and reliable evidence which should:-
State the scope, purpose, extent and conclusions of the internal audit assignment.
Make recommendations which are appropriate and relevant, and which flow from the
conclusions; and
Acknowledge the action taken, or proposed by management.
The internal auditor should meet with management to discuss the audit findings at the
completion of field work for each internal audit assignment and the formal written report should
be presented to management as soon as possible thereafter. Before issuing the final report, the
internal auditor should discuss the contents with the appropriate levels of management, and may
submit a draft report to them, for confirmation of factual accuracy. If the internal auditor and
management disagree about the relevance of the factual content of the draft audit report, the
internal auditor should consider whether reference should be made to this in the final report
(John Dunn, 1996).
2.3.4 Follow-Up.
The Institute of Internal Auditors defines a follow-up as a process by which the internal auditors
determine the adequacy, effectiveness and timeliness of actions taken by management on
reported audit findings.
16
According to Jefferson Wells (2004), after a reasonable period of time, the audit client is
contacted to request a status report on the corrective action taken to date. The auditors evaluate
the effectiveness of the corrective action taken and advise the client on alternatives that they can
employ to achieve the desired improvements. Hermanson and Rittenberg ,(2003)stressed out that
in larger, more complex audit situations follow up may be repeated several times as additional
changes are initiated. Additional on-site visits and reviews may be performed to ensure adequate
implementation of recommendations.
As required by the IIA's Standards for the Professional Practice of Internal Auditing
(Performance Standard #2500), internal auditors should establish a follow-up process to ensure
that management actions have been effectively implemented or that senior management has
accepted the risk of not taking action (Pickett, 2004). The end result should be a brief summary
of the status of every action plan agreed upon. The final summary is reviewed with the person
responsible for clearing the audit report before the follow-up report is issued.
2.4 Transparency in public finances.
Transparency means that institutions, processes, and decisions are made accessible to the public
at large or to representatives of the public, so that processes and decisions can be monitored,
reviewed, commented upon and influenced by the stakeholders. It is important to create
transparency at the beginning. This means full public access to information. This will also bring
about awareness (Sandra Zwart, 2003).
In recent years, the term "financial transparency" has generally been applied to developing and
emerging countries' monetary and fiscal policies (Beattie, 2000) and efforts by the IMF and
17
other international financial institutions to encourage clear financial reporting internationally
(Hanson, 2003).To achieve transparency emphasis should first be placed on openness and
availability of information, then on standardization and comparability (Blanchet, 2002).
2.4.1 Code of Good Practices and Fiscal Transparency.
According to Michael Schaeffer (2002), in the context of the architecture of the international
financial system, the IMF in 1998 developed a Code of Good Practices on Fiscal Transparency
aimed at increasing transparency in fiscal policy.
The IMF code contains a number of principles that could be followed by countries to increase
fiscal transparency. In effect, the application of these principles would make fiscal policy more
transparent and enhance public sector governance. Among the principles are the following:
1. The government sector should be clearly distinguished from the rest of the economy,
and policy and management roles within government should be well defined.
2. There should be a clear legal and administrative framework for fiscal management.
3. The public should be provided with full information on the past, current, and
projected activity of government.
4. A public commitment should be made regarding the timely publication of fiscal
information.
5. Budget documentation should specify fiscal policy objectives, the macroeconomic
framework, the policy basis for the budget, and identifiable major fiscal risks.
6. Budget data should be classified and presented in a way that facilitates policy analysis
and promotes accountability.
18
7. Procedures for the execution and monitoring of approved expenditures should be
clearly specified.
8. The integrity of fiscal information should be subject to public and independent
scrutiny.
2.4.2 Factors that may lead to Lack of Transparency.
It is evident that Transparency is still lacking in the management of public finances for example,
A Government of Uganda payroll cleaning exercise in August 2005 revealed major leakages in
the payroll system, including the existence of many ghost workers. The integrity of the payroll is
significantly undermined by inconsistencies between personnel records and the personnel
database (Auditor general’s report, 2008). Special audit reports on the payrolls of the Ministry of
Works and Police in 2006/07 revealed loopholes in data integrity. There is no regular
reconciliation of teacher records (kept by local governments) or civil servants’ records (kept by
Ministry Department and Agencies) with personnel records (kept by Ministry of Public Service)
and the payroll. The Lack of transparency may be caused by the following factors.
2.4.2.1 Weak accountability system.
One of the factors that have lead to lack of transparency in the public finances is; Weak
Accounting System. According to Uganda Debt Network there is still a matter of a weak
accounting system. A weak accounting system has often been used as an excuse for not being
able to account for public funds. Very often taxes deducted from payments to contractors of
government jobs are never remitted to the Uganda Revenue Authority.
19
Lack of transparency creates opportunities for public officials to abuse their office for private
gain. This closely relates to accountability, and weak accountability mechanisms tend to
facilitate corruption. Where there is a lack of transparency and accountability corruption will
flourish. Once corrupt bureaucrats realize that they can take advantage of regulations, they will
produce more regulations and run the risk of becoming less transparent (Tanzi, Vito , 1998).
2.4.2.2 Inaccessibility to information.
Transparency describes when there is free access by citizens to public information. When the
rules, procedures, and objectives of the government are not available to the public, there is not
budgetary and administrative oversight to balance the power of government officials,
transparency is lacking and corruption can be bred. Without oversight and transparency of
budget and rules, national resources may be plundered and power may be abused in favor of the
corrupt official only (Kaufmann and Bellver, 2005).
Further, when there are not public sector mechanisms that channel social preferences and
specific complaints of the population to the agencies involved in those complaints, people of
power will not serve their purpose of representing the populace, but have free reign to do as they
please in the public sector (Olken, 2004).
2.4.2.3 Lack of capacity and monitoring.
According to Sandra Zwart (2003), cases of non transparency in local governments can be
brought back to procurement, financial management and human capacity. Non transparency can
thrive in local governments especially in relation to procurement and distribution of funds, due to
lack of capacity and monitoring. Especially the Chief Administrative Officer plays a big role
20
with regard to corruption issues. In theory every anti-corruption institution that is present at the
central level, is present at the local level. The reason why it is stated “in theory” is because most
of the institutions at a local level have even less capacity and infrastructure than at the central
level. The issues that need to be targeted within local government are, amongst others, public
awareness raising in relation to transfer of recourses to the districts, capacity building with
regard to several management committees and local government officials, and the system of
appointing members to the Local Government Tender Board needs to be changed.
2.4.2.4 Unclear rules, laws and processes.
According to Michael Schaeffer, (2002), in many countries, the lack of transparency in rules,
laws, and process creates abundant areas for corruption. Rules dealing with government
procurement process, financial management and accounting are often confusing. Even if an
individual exercises some initiative and tries to understand the rules, the documents specifying
these rules may not be publicly available. Furthermore, many organizational rules may be
changed without public announcements to that effect.
In many instances, regulations and laws are written so that only trained lawyers can understand
their true impact. Many laws are often conceptually opaque, thus leaving grounds for different
interpretation. In many developing countries, the processes are not as efficient. This may lead to
additional corruption with respect to trying to obtain an effective interpretation of the regulation
or law (Stratherna, 2008).
21
According to Mauro, 1997 one of the ways to reduce the corruption inherent in opaque
regulations and laws is to establish more efficient regulation processes. The establishment of
independent regulatory agencies, both at the national and local government level can be effective
in promoting efficiency and limiting opportunities for corruption. These regulatory institutions
however, must operate with transparency (hold public meetings), simplicity (rules-based
principles), and accountability (election of regulators or term based regulators).
2.5 The effect of internal auditing on transparency in public finances.
Internal auditors have a responsibility to plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
Reasonable assurance is achieved when audit risk, the risk that the auditor may unknowingly
appropriately modify the opinion of financial statements that are materially misstated is reduced
to an appropriately low level by an auditing activity which identifies the various cases of the
misstatements such as errors, fraud ,excreta (Dunlea and Maclochlainn, 1998), thus enhancing
transparency in public finances.
Internal auditing involves appraising the economy effectiveness and efficiency of the use of the
resources are purchased in their best use. This eliminates fraud, enhancing transparency in public
finances
Internal auditing undertakes the review of the reliability and integrity of financial and operating
information. This ensures that all this information is accurate without any element of bias and
fraud (Dunlea and Maclochlainn, 1998), thus promoting transparency in public finances, since all
information regarding expenditure and income are accurately reported.
22
According to Robert R. Moeller (2004), minority stake holders with no executive contact with
the company are particularly vulnerable to the consequences of the directors’ fiduciary duties
such as related party transactions from which the directors derive a personal benefit. Such
stakeholders are bound to rely heavily on internal auditors to bring such matters to their attention
so that appropriate action can be taken, thus enhancing transparency in public finances.
Internal auditing involves the segregation of duties. This ensures that organizational activities are
performed by various individuals and not one person to prevent fraud and minimize the risk of
intentional manipulation of records as well as promote the element of inter checking since
activities are handled from one person to another (Phil Griffith, 2004), thereby promoting
transparency in public finances.
Internal auditing also involves management control which includes reviews of management
accounts, comparison of actual performance with budgets and any other special review of
Procedures performed by management there by leading to transparency in public finances.
As seen above Internal auditing can be used to curb the problem of lack of transparency however
it does have some limitations that may present a hindrances to internal auditing in curbing
transparency in public finances.
2.5.1 Lack of funding.
One potential obstacle to internal audit quality is a relative lack of funding (Jefferson Wells
2004). As internal audit departments are usually cost centers, internal audit departments must
perform their duties within a prespecified budget. Budgetary constraints represent three
potentials threats to internal audit quality. First, budget shortfalls can result in reduced testing of
23
controls, reduced geographic audit coverage (Public Oversight Board 2000). Second, the failure
to ensure the requisite budgetary resources may reduce the attractiveness of internal audit as a
career within the company, leading to turnover of highly-skilled and competent individuals
(Hermanson 2002). Third, budget constraints may prevent internal auditors from receiving the
necessary training to remain current with new echnological, accounting and auditing issues
(Jefferson Wells 2004). The lack of training may lead to under qualified personnel performing
tests of controls. These, may hinder the achievement of transparency. It is no wonder, the IIA has
repeatedly recommended that the audit committee review internal audit’s budget to ensure
adequate internal audit scope, maintain the career attractiveness of internal audit and provide the
necessary training to develop in-house talent (IIA 2003).
2.5.2 Incompetent staff.
According to Power (1994), staff may be incompetent. The purpose of internal audit fails to help
the management. There may be lack of experience and training on the part of internal audit staff.
The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to
examine the record. The shortage of staff is hurdle to get the benefits of internal audit.
2.5.3 Errors in books of accounts.
According to Srinivasan (2004), it will be wastage of time and money to conduct internal audit if
there may be errors in the books of accounts. It depends upon the expertise of internal audit staff.
If audit staff is competent there is less chance of errors. In case of poor audit staff there is no
guarantee that audited accounts are free from errors. Besides the books of account, an auditor has
24
to depend on various personnel of the enterprise to seek additional information, classification and
explanation this information may not be reliable if the personnel providing it have themselves
been party to the manipulation of books of account (D.P. Jain, 1999).
Auditing can fail to disclose the correct information of what's happening. Background entries
may not be totally clear to audit staff and management may be vague on their clarifications.
Whether or not these things happen, an auditor still has to give his report (Gray, 2004).
2.5.4 Conceptual restrictions.
Auditing is conceptually confined to the techniques of checking vouchering, verification, totaling
etc. In modern business there are several vital aspects such as finances, management efficiency
and effectiveness, business ethics etc which are not covered by auditing (D.P. Jain, 1999). Hence
internal auditing may not play much in the restraining lack of transparency.
2.5.5 Delayed technique of internal auditing.
D.P Jain (1999), further mentions that auditing is a delayed technique the work of auditing
begins when the work of accountancy ends. The auditor may not be able to discover the
systematic manipulation in the books of accounts at the preparatory stage. This limits internal
auditors since the untransparent practices at the preparatory stage may not be discovered.
25
2.6 Conclusion.
A well configured internal audit function can play a vital role in the governance and
accountability process of public sector institutions through their assessments on the
effectiveness of key organisational controls, governance and risk management processes.
Governing bodies and senior management in the public sector need the services of
internal audit to be effective and efficient. At the same time the legitimacy of internal
audit activity and its mission should be understood and supported by senior management
of government entities to enhance its effectiveness in promoting good public sector
governance, control and risk management systems thus transparency.
Modern internal audit practice has transformed into a professional discipline of its own
and as a partner to governance bodies with strategic focus of contributing towards the
improvement of organisational governance and risk management strategies. Internal audit
has now found itself in the corporate spotlight and it is no longer seen as a less important.
26
CHAPTER THREE
METHODOLOGY
3.0 Introduction.
This chapter describes the methods and procedures the researcher used in the process of data
collection. It also shows the nature and pattern the researcher followed in collecting and
analyzing data.
3.1 Research design.
The research used a correlational design utilizing a case study strategy. The purpose of this
design was to correlate the independent variable that is internal auditing to dependent variables
(transparency in public finances). The researcher also used quantitative survey designs. This
helped the researcher to generate information and allowed the researcher to carry out analysis of
the various respondents’ opinions. The data that was collected was analyzed using descriptive
analysis.
3.2 Survey population.
The researcher collected data from the Tororo district local government departments namely:-
procurement department, accounting and finance department, internal auditing department and
senior management.
3.3 Sampling design.
The population sampled was heterogeneous in nature, definite and comprised of district
accountants, internal auditors, procurement officers and local government management.
27
Stratified random sampling method was also used since it was easier to develop the stratas
basing on the different departments that is to say the accounts department and internal auditing
department, Procurement department among and top management.
The respondents were then randomly selected from each stratum. That is, procurement
department, internal auditing department, accounting department, senior management.
3.4 Sample size
A representative sample of 46 respondents got from different departments of Tororo District
Local Government was used to provide information.
Table 1: Table of respondents.
Category of respondents Population Respondents
procurement department 11 11
Internal Audit department 16 16
Accounting and finance 16 16
Senior Management 3 3
Total 46 46
3.5 Data sources
The data was collected from two sources (Primary and secondary).
Primary data was collected from the accountants, internal auditors and senior management of
Tororo district local government using questionnaires.
28
Secondary data was sourced mainly from the Ministry of finance and Ministry of local
government. Other information was collected from the library (Makerere University), audit
reports, relevant journals, receipt and financial statements from the district local government
offices and from the internet.
3.6 Data collection tools.
The major tools used included;
Questionnaire
Self-administered Likert scale questionnaires (which examine how strongly respondents agree or
disagree with a statement) were given to respondents to fill and show their amount of agreement
and disagreement on the questions put forward. The researcher also used the cronbach coefficient
alpha to estimate the reliability of the questionnaire and the pretest design to find out the survey
question's validity by determining how well it measures the concept(s) it is intended to measure.
Observation.
Observation method was also used to be able to get accurate phenomenon as they occur. The
observation was done directly. This helped the researcher get reliable and accurate information
and make clarifications on the spot
3.7 Data collection procedures.
The researcher obtained a letter of recommendation from the Research Coordinator for
presentation to the chief administrative officer Tororo District Local Government, so as to be
allowed collect data from the selected respondents. After acquiring permission, questionnaires
were distributed to the respondents to fill.
29
3.8 Data management.
The data collected was checked and edited for completeness and accuracy. The data was then
coded, translating responses into numerical form.
3.9 Data analysis
The data was analyzed and presented in a descriptive manner, using of tables and means
determined. Data was also put together with the help of Statistical Package for the Social
Sciences.
3.10 Limitations of the study.
The following limitations were faced during the research.
Lack of enough time. Since the research was done concurrently with semester work, there
was limited time to conduct the research.
Financial constraints. The scholastic materials and equipment required for the research
were many and therefore costly.
Tedious, the research involved getting data from various offices and libraries and thus
tedious
There was difficulty in obtaining data especially in the field since most of the personnel
in Tororo district local government offices were busy and difficult to access.
30
CHAPTER FOUR
PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS
4.1 Bio data.
Findings on the bio information of respondents were considered and are shown below:
4.1.1 Gender of respondents.
Findings on the gender of respondents are shown in the table below:
Table 2: Findings on the gender of the respondents.
Frequency Percent Valid Percent Cumulative Percent
Valid Male 29 63.0 63.0 63.0
Female 17 37.0 37.0 100.0
Total 46 100.0 100.0
Source: Primary data
From the above table, 63.0% of the respondents were male while 37.0% of the respondents were
females. This shows that more males took part in the study as compared to the females.
4.1.2 Age bracket of the respondents.
The study captured the different age brackets of respondents in order to establish the most
prevalent group, the respondents were asked to state their age. The distribution was as in the
table below:
31
Table 3: Age distribution of respondents.
Frequency Percent Valid Percent Cumulative Percent
Valid 21-30 Years 22 47.8 47.8 47.8
31-40 Years 17 37.0 37.0 84.8
41-50 Years 6 13.0 13.0 97.8
51-55 Years 1 2.2 2.2 100.0
Total 46 100.0 100.0
Source: Primary data
From Table 3, above findings indicated that 47.8% of respondents were aged between 20 to30
years, 37.0% were between 31 to 40 years of age and 13.0% were aged between 41 to 50 years
while 2.2% were between 51and 55 years of age. This shows that the respondents were mature
enough to answer the questions in the questionnaires.
4.1.3 Level of education of the respondents.
The study also captured data on the level of education of respondents and is shown in the table
below:
Table 4: Academic levels.
Frequency Percent Valid Percent Cumulative Percent
ValidA level 1 2.2 2.2 2.2
Diploma 9 19.6 19.6 21.7
Bachelor's degree 29 63.0 63.0 84.8
Masters 7 15.2 15.2 100.0
Total 46 100.0 100.0
Source: Primary data
32
From table 4, 2.2% of the respondents are holders of A’ level of education, 19.6% Diploma
holders, 63.0% Bachelor’s degree holders, 15.2% Masters degree holders. This implies that the
data is sufficient since the respondents are knowlledgable.
4.1.4 Departments of the respondents.
The study also obtained departments under which respondents worked and the results are as in
the table below:
Table 5: Department of respondents.
Frequency Percent Valid Percent Cumulative Percent
Valid Procurement 11 23.9 23.9 23.9
Internal audit 16 34.8 34.8 58.7
Accounting and finance 16 34.8 34.8 93.5
Top Management 3 6.5 6.5 100.0
Total 46 100.0 100.0
Source: Primary data
From table 5, findings indicated that 23.9% of the respondents were employed in the
procurement department, 34.8% were employed in the department of internal Audit, 34.8% were
employed in Accounting and finance and 6.5% were in top management. This implies that
respondents who were involved in study were well vast with the topic under study.
4.1.5 Length of service.
Respondents were asked to state period for which they had worked and the results were as in the
table below:
33
Table 6: Length of service.
Frequency Percent Valid Percent Cumulative Percent
ValidBelow 1 year 1 2.2 2.2 2.2
1-2 Years 11 23.9 23.9 26.1
3-4 Years 18 39.1 39.1 65.2
Above 5 years 16 34.8 34.8 100.0
Total 46 100.0 100.0
Source: Primary data
Results of table 6, indicated that 2.2% of the respondents had been in service for a period less
than one year, 23.9 for a period between 1 to 2 years, 39.1 for a period between 3 to 4 years and
34.8% for a period above 5 years. This implies that respondents were knowledgeable enough and
had enough experience.
4.2 Findings on principles of internal auditing.
Findings on principles of internal auditing were considered and the information below was
obtained:
4.2.1 Integrity.
Knowledge of the respondents about integrity was obtained and the results were as in the table
below:
34
Table 7: Findings on integrity.
N Minimum Maximum Mean Std. Deviation
Internal Auditors are honest,
diligent and responsible46 2.00 5.00 4.1087 .8493
Internal Auditors observe the law 46 2.00 5.00 4.2391 .7940
Internal Auditors respect and
contribute to the legitimate and
ethical objectives
46 2.00 5.00 4.1522 .8156
Internal Auditors don’t involve
themselves in illegal activities or
acts that are descendible to their
profession or organization
46 1.00 5.00 3.7174 1.1287
Valid N 46
Source: Primary data
Table 7, results showed that, integrity required internal Auditors to observe the law
(Mean=4.2391), to respect and contribute to the legitimate and ethical objectives
(Mean=4.1522), to be honest, diligent and responsible (Mean=4.1087) and Auditors to avoid
involving themselves in illegal activities or acts that are descendible to their profession or
organization (Mean=3.7174).
4.2.2 Objectivity.
Knowledge of the respondents about Objectivity of was obtained, as the results in the table
below indicate.
35
Table 8: Findings on objectivity.
N Minimum Maximum Mean Std. Deviation
Internal auditors are unbiased. 46 1.00 5.00 3.5652 1.0884
Internal auditors don’t accept
gifts.46 1.00 5.00 3.3043 1.0928
Internal auditors disclose all
material facts known to them for
purposes of reporting activities
under review.
46 1.00 5.00 3.8043 1.0671
Internal auditors don’t have
conflict of interests.46 2.00 5.00 3.6957 .9158
Valid N 46
Source: primary data
Table 8, results showed that, internal auditors were objective, since they could disclose all
material facts known to them for purposes of reporting activities under review (Mean=3.8043),
had no conflict of interest (Mean=3.6957), were unbiased (Mean=3.5652) and they could not
accept gifts (Mean=3.3043).
4.2.3 Competence and due care
Knowledge of the respondents about competence and due care was obtained as tabulated below:
36
Table 9: Competence and due care
N Minimum Maximum Mean Std. Deviation
Internal auditors understand the
legal and institutional
principals and standards
governing the operations of the
organization.
46 3.00 5.00 4.2174 .5930
Internal auditors have
necessary knowledge, skills
and experience to conduct
audits.
46 3.00 5.00 4.3913 .5366
Internal auditors are given
necessary training to maintain
expertise needed to conduct
their assignments.
46 1.00 5.00 2.4348 1.3107
Internal standards for
professional practice or internal
auditing are followed during
audits.
46 2.00 5.00 4.0870 .7550
Valid N 46
Source: primary data
Table 9, results showed that, internal Audit achieves competence and due care through, having
necessary knowledge, skills and experience to conduct audits (Mean=4.3913), understanding the
legal and institutional principals and standards governing the operations of the organization
(Mean=4.2174), internal standards for professional practice or following internal auditing during
audits (Mean=4.0870) and internal auditors being given necessary training to maintain expertise
needed to conduct their assignments (Mean=2.4348).
37
4.2.4 Confidentiality.
Knowledge of the respondents on Confidentiality was obtained as tabulated below:
Table 10: Findings on confidentiality.
N Minimum Maximum Mean Std. Deviation
Information acquired in the course of
auditing is protected.46 1.00 5.00 4.0870 .7839
Internal auditors do not use
information acquired in the course of
their work for personal use.
46 1.00 5.00 3.9783 .9065
Information received by internal
auditors is only disclosed if the law
requires.
46 1.00 5.00 3.9130 1.0072
Valid N 46
Source: primary data
Table 10, results showed that, the internal Audit achieves Confidentiality through, ensuring that
information acquired in the course of the audit is protected (Mean=4.0870), ensuring that internal
auditors do not use information acquired in the course of their work for personal use
(Mean=3.9783) and also making sure that information received by internal auditors is only
disclosed if the law requires (Mean=3.9130).
4.3 Findings on the process of internal auditing.
Findings on the Process of internal auditing were considered and the information below was
obtained:
38
4.3.1 Planning.
Knowledge of the respondents about planning the audit was obtained and the results are as in the
table below:
Table 11: Findings on planning.
N Minimum Maximum Mean Std. Deviation
Your internal audit department has a
mission statement46 2.00 5.00 4.3478 .7369
Your internal audit department has a
formal strategy(e.g audit charter,
terms of reference)
46 3.00 5.00 4.1739 .6075
The internal audit department has
formally recognized objectives.46 2.00 5.00 4.0435 .7588
These objectives are reviewed
frequently46 2.00 5.00 3.8261 .9500
Budgets are prepared for purposes of
carrying out audits.46 1.00 5.00 3.7826 1.1138
Valid N 46
Source: primary data
Table 11, results showed that, planning the internal Audit is achieved by ensuring that, the
internal audit department has a mission statement (Mean=4.3478), the internal audit department
has a formal strategy (e.g audit charter, terms of reference) (Mean=4.1739), the internal audit
department has formally recognized objectives (Mean=4.0435), objectives are reviewed
frequently (Mean=3.8261) and budgets are prepared for purposes of carrying out audits
(Mean=3.7826).
39
4.3.2 Field work.
Knowledge of the respondents about field work was obtained and the results were as in the table
below:
Table 12: Findings on field work.
N Minimum Maximum Mean Std. Deviation
Internal auditors use evidence of
actual performance to compare with
expected performance.
46 2.00 5.00 4.1304 .8329
Internal auditors summarize the
evidence indicating the fraud and
corruption.
46 3.00 5.00 4.1739 .5698
Internal auditors identify the possible
scenarios of fraud and corruption46 3.00 5.00 4.1522 .6313
Internal auditors identify the possible
extent of the fraud and corruption.46 2.00 5.00 4.2391 .6389
Internal auditors determine whether
compliance with the policies and
procedures is adequate.
46 2.00 5.00 4.1739 .6431
Valid N 46
Source: primary data
According to Table 12, results on field work showed that, internal auditors identify the possible
extent of the fraud and corruption (Mean=4.2391), internal auditors summarize the evidence
indicating the fraud and corruption (Mean=4.1739), internal auditors determine whether
compliance with the policies and procedures is adequate (Mean=4.1739), internal auditors
identify the possible scenarios of fraud and corruption (Mean=4.1522) and evidence of actual
performance is compare with expected performance (Mean=4.1304).
40
4.3.3 Reporting.
Knowledge of the respondents about reporting of Audit findings was obtained, as the results in
the table below indicate:
Table 13: Findings on reporting.
N Minimum Maximum Mean Std. Deviation
Results of auditing are presented to
audit committees.46 2.00 5.00 4.2609 .7434
Copies of the audit report are availed
to stake holders.46 1.00 5.00 4.1304 .8058
Auditors discuss the audit findings to
management and obtain corrective
action.
46 3.00 5.00 4.0435 .5947
Valid N 46
Source: primary data
Table 13 results showed that, internal Audit reporting is achieved by presenting the results of the
Audit to the audit committees (Mean=4.2609), availing copies of the audit report to stake holders
(Mean=4.1304) and Auditors discussing the audit findings to management and obtaining
corrective action (Mean=4.0435).
4.3.4 Follow up
Knowledge of the respondents about follow up of Audit findings was obtained, as tabulated
below:
41
Table 14: Findings on follow up
N Minimum Maximum Mean Std. Deviation
Audit recommendations are
categorized according to significance.46 3.00 5.00 4.1087 .6404
Audit recommendations are targeted
with dates for completion.46 2.00 5.00 4.1304 .7183
Audit recommendations are assigned
to individuals with responsibilities.46 2.00 5.00 4.1522 .7592
Implementation status of audit
recommendations is checked.46 2.00 5.00 4.0435 .6978
Implementation status of audit
recommendations is reported.46 1.00 5.00 4.0000 .8433
Valid N 46
Source: primary data
According to Table 14, results on follow up showed that, Audit recommendations are assigned to
individuals with responsibilities (Mean=4.1522), Audit recommendations are targeted with dates
for completion (Mean=4.1304), Audit recommendations are categorized according to
significance (Mean=4.1087), implementation status of audit recommendations is checked
(Mean=4.0435) and implementation status of audit recommendations is reported (Mean=4.0000).
4.4 Findings on the transparency in public finances.
Findings on the transparency obtained are as shown below.
4.4.1 Accountability system.
Knowledge of the respondents about accountability system was obtained and the results were as
in the table below:
42
Table 15: Findings on accountability systems.
N Minimum Maximum Mean Std. Deviation
International standards of accounting
are used in your organization.46 2.00 5.00 4.4783 .6579
Assets in the organization are safe
guarded well46 2.00 5.00 4.3043 .7563
Accounting and record keeping are
properly done and kept in good
custody.
46 2.00 5.00 4.3696 .8527
Budgets/ financial plans do exist. 46 3.00 5.00 4.4783 .5865
A bank account has been opened to
record all incomes and expenditures
of all monies received.
46 3.00 5.00 4.3913 .6138
Valid N 46
Source: primary data
Table 15 results showed that, accountability system involved ensuring that Budgets/ financial
plans do exist (Mean=4.4783), ensuring that international standards of accounting are used in the
organization (Mean=4.4783), ensuring that a bank account to be opened to record all incomes
and expenditures of all monies received (Mean=4.3913), Accounting and record keeping are
properly done and kept in good custody (Mean=4.3696),and ensuring that Assets in the
organization are safe guarded well (Mean=4.3043).
4.4.2 Accessibility to information.
Knowledge of the respondents about Accessibility to information was obtained and the results
were as in the table below:
43
Table 16: Findings on Accessibility to information.
N Minimum Maximum Mean Std. Deviation
The organization publishes annual
reports containing its account for the
year.
46 2.00 5.00 4.0870 .8648
Copies of the report are available to
stakeholders.46 2.00 5.00 4.1739 .7395
The rules and processes used in your
organization are accessible by stake
holders.
46 2.00 5.00 4.1739 .7088
There are opportunities to question
those in charge about their plans and
decisions.
46 1.00 5.00 4.1522 .8424
Information (fiscal) is easily
accessible for scrutiny by stake
holders.
46 2.00 5.00 3.9348 .8001
Valid N 46
Source: Primary data
Table 16 results showed that, accessibility to information involved, accessibility to rules and
processes used in the organization by stake holders (Mean=4.1739), availing of copies of the
reports to stakeholders (Mean=4.1739), existence of opportunities to question those in charge
about their plans and decisions (Mean=4.1522), the organization publishing annual reports
containing its account for the year (Mean=4.087) and easy accessibility to information (fiscal)
for scrutiny by stake holders (Mean=3.9348).
44
4.4.3 Capacity and monitoring.
Knowledge of the respondents about Capacity and monitoring was obtained and the results were
as in the table below:
Table 17: Findings on capacity and monitoring.
N Minimum Maximum Mean Std. Deviation
Your organization has adequate
infrastructure to monitor its
activities.
46 2.00 5.00 3.8696 .9570
Monitoring of activities is done
frequently.46 2.00 5.00 3.8478 .8684
Management of corruption and
fraud done at the central level.46 1.00 5.00 3.5870 1.0236
Management of corruption and
fraud is decentralized.46 2.00 5.00 3.6304 1.0616
Valid N 46
Source: Primary data
Table 17 results showed that, there was adequate infrastructure to monitor activities
(Mean=3.8696), frequent monitoring of activities was done (Mean=3.8478), decentralizing
management of corruption and fraud (Mean=3.6304) and management of corruption and fraud
by doing it at the central level (Mean=3.5870).
4.4.4 Unclear rules, laws and processes.
Knowledge of the respondents about unclear rules, laws and processes was obtained and the
results were as in the table below:
45
Table 19: Correlations between internal audit and transparency.
1.000 .342*. .020
46 46.342 * 1.000.020 .
46 46
Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N
INTERNAL AUDITING
TRANSPARENCY
INTERNALAUDITING
TRANSPARENCY
Correlation is significant at the 0.05 level (2-tailed).*.
Table 18: Findings on unclear rules, laws and processes.
N Minimum Maximum Mean Std. Deviation
Rules governing Procurement
processes, financial management
accountability do exist.
46 3.00 5.00 4.2174 .6964
These rules are easily understandable
by stake holders.46 2.00 5.00 4.1304 .7777
The organization complies with legal
requirement in the course of its work.46 3.00 5.00 4.3478 .5664
Valid N 46
Source: Primary data
Table 18 results showed that, the organization complies with legal requirement in the course of
its work (Mean=4.3478), rules governing Procurement processes, financial management
accountability existed (Mean=4.2174), and rules, were easily understandable by stake holders
(Mean=4.1304).
4.5 Relationship between internal Auditing and transparency in public Finances.
46
From table 19 above, findings revealed that there is a weak positive relationship between internal
auditing and transparency in public finances at Pearson correlation coefficient r = 0.342 (*).The
significance of the correlation is 0.05. This implies that a big change in the way of handling
internal auditing would bring about a small change of transparency in public finances by 11%.
47
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction.
This Chapter gives precise summary of the major findings of the study, draws appropriate
conclusions as well as recommendations. The purpose of the study is to establish the relationship
between internal Audit and Transparency in public finance.
5.2 Summary of the findings.
5.2.1 Summary of findings on principles and process of internal auditing.
The findings showed that the principles governing internal auditing were found to be followed,
that is integrity, objectivity, confidentiality and competence. Integrity was attained through
observation of the law, respecting and contributing to the legitimate and ethical objectives, being
honest, diligent and responsible; auditors also avoided involving themselves in illegal activities
or acts that are descendible to their profession or organization which are in line with Power,
(1997 and Aidan Dunlea & Naill Maclochlainn, (1998).
Internal auditors were found to be objective, they disclose all material facts known to them for
purposes of reporting activities under review, have no conflict of interest, are unbiased and do
not accept gifts these are in conformity to D.P. Jain (1997).
Finding also showed that internal auditors are competent and perform their duty with due care
through, having necessary knowledge, skills and experience to conduct audits, understanding the
legal and institutional principals and standards governing the operations of the organization,
having internal standards for professional practice or following internal auditing during audits
48
which is in agreement with Quarles,(1994).However, internal auditors are not being given
necessary training to maintain expertise needed to conduct their assignments which is in
disagreement with D.P. Jain(1997).
Internal audits are also carried out with Confidentiality through, ensuring that information
acquired in the course of the audit is protected, ensuring that internal auditors do not use
information acquired in the course of their work for personal use, making sure that information
received by internal auditors is only disclosed if the law requires. These are in line with the
principles of internal auditing which are put down by Power, (1997)
Findings indicate that internal audits are planned which is achieved by ensuring that, the internal
audit department has a mission statement, has a formal strategy (for example audit charter, terms
of reference), internal audit department has formally recognized objectives, objectives are
reviewed frequently and budgets are prepared for purposes of carrying out audits.This is in
relation to Shore & Wright, (2000). Results on field work showed that, internal auditors identify
the possible extent of the fraud and corruption, internal auditors summarize the evidence
indicating the fraud and corruption, internal auditors determine whether compliance with the
policies and procedures is adequate, internal auditors identify the possible scenarios of fraud and
corruption, evidence of actual performance is compare with expected performance which
conform to the process of internal auditing as per Picket, 2004 and John Dunn, 1996, the findings
also showed that audit reports are achieved by presenting the results of the audit to the audit
committees, availing copies of the audit report to stake holders, and audit findings discussed the
audit with management to obtaining corrective action. This is in agreement with Pei and Davis,
(1989). Results on follow up showed that, audit recommendations are assigned to individuals
with responsibilities, are targeted with dates for completion, and are categorized according to
49
significance, implementation status of audit recommendations is checked and implementation
status of audit recommendations is reported which are in line with reporting as a procccess of
internal auditing according to Emile Woolf, (1997).
5.2.2 Summary of findings on Transparency in public finances.
Findings from the study on transparency showed that accountability system was done through
drawing of Budgets/ financial plans do exist, ensuring that international standards of accounting
are used in Tororo district local government, ensuring that a bank account is opened to record all
incomes and expenditures of all monies received accounting and record keeping are properly
done and kept in good custody, and ensuring that Assets in the organization are safe guarded
well which is in line to Tanzi, Vito, 1998 as regards achievement of transparency.
Findings on accessibility to information showed, accessibility to rules and processes used in the
organization by stake holders, availing of copies of the reports to stakeholders, existence of
opportunities to question those in charge about their plans and decisions, the organization
publishing annual reports containing its account for the year and easy accessibility to information
(fiscal) for scrutiny by stake holders which are in conformity to Olken, (2004) for transparency
to be achieved.
Findings on capacity and monitoring showed Tororo district local government having adequate
infrastructure to monitor activities, monitoring of activities frequent, decentralizing and
centralization of management of corruption and fraud. Tororo district local government complies
with legal requirement in the course of its work, rules governing Procurement processes,
50
financial management accountability exists, and rules, are easily understandable by stake
holders.
5.2.3 Summary of findings on Relationship between internal auditing and transparency
in public Finances.
From the study, internal auditing positively influences transparency in public finances. It was
found that internal auditing has improved transparency in public finances through the following
of the process and principles of auditing, proper funding of the internal audit department,
employment of competent internal auditors, which have led to the provision of checks, balance
and aiding the detection of errors and fraud which is in agreement with Dunlea and
Maclochlainn, (1998) thus improving use of public funds and enhancing accountability and
transparency in public finances.
5.3 Conclusions.
Results showed that the principles of internal auditing that is; integrity, objectivity, competence
and due care, confidentiality and the process of internal auditing that is; planning, field work,
reporting and follow up are being followed when handling internal audits in public finances.
Results also showed that with the adoption of accountability systems like international standards
of accounting, increasing of accessibility to information, capacity and monitoring, increase and
streamlining of unclear rules, laws and processes transparency in public finances has been
achieved. This is attributed to the proper internal auditing practices being followed.
After review of the findings, it was concluded that internal auditing is related to transparency in
public finances. The findings revealed internal auditing having a small positive relationship of
51
11% with transparency thus making internal auditing not 100% effective, in effecting
transparency in public finances.
However, it is very important for public organizations to carry out internal auditing to be in
position to assess the effectiveness of internal controls and other aspects in achieving
organizational goals.
5.4 Recommendations.
There should be regular training of internal auditors to ensure that they keep up to date
with changes in auditing standards so as to enhance the effectiveness of the internal audit
function in achieving transparency in public finances.
Avenues for questioning those in charge should be increased since these will act as
checks which allow people in charge to be brought to account, thus improving
transparency in public finances.
5.4 Areas suggested for further research.
The following areas of study are recommended.
Internal controls and effective cash flow management.
Transparency in public finances and public sector performance.
52
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Hanson, Margaret. (2003, January-March). The global promotion of transparency in emerging
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Hermanson, D.R( 2002), The growing stature of internal auditing. Altamonte Springs, FL
Hermanson, D.R. and L. Rittenberg (2003), Internal audit and organizational governance.
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John Dunn (1996), Auditing theory and practice, 2nd edition.
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Michael Schaeffer (2002), Corruption and public finance, sectorial perspectives on corruption.
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Ministry of finance, planning and economic development (2009), Code of ethics for government
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54
Obed Kabanda, (2009, November 16).Corruption in Uganda-where are we headed?: New
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56
APPENDIX 1: QUESTIONNAIRE
Dear respondent,
I am a student of Makerere University carrying out a research study on “internal auditing and
Transparency in public finances”. The questions below are intended to facilitate the study. The
information requested for below, is purely for academic purposes and if provided will be treated
with strict confidentiality. Please kindly answer all parts of the questionnaire as honestly as
possible. Your positive response will be highly appreciated.
Instructions:
- Please tick in the most appropriate box.
- In Section B and C please indicate your degree of agreement or disagreement with the
statement using the rating below.
5=SA (Strongly agree), 4=A (Agree), 3=NS (Not sure), 2=D (Disagree), 1=SD (Strongly
disagree)
SECTION A: - Biography
1. Sex: Male Female
2. Age: Below 20 21-30 31-40
41-50 51-55 Above 55
3. Academic level: O’Level Bachelor’s degree
A’ Level Masters
Diploma Others (Specify) …....………
4. Which of the following departments are you currently working in?
Procurement Accounting and finance
Internal audit Top management
5. Length of service:
Below 1year 1-2years 3-4 years above 5 years
57
SECTION: B – The principles and process of internal auditing.
No Question SA A NS D SDPrinciples of internal auditingIntegrity- During the course of their work, auditors;6 Are honest, diligent and responsible.7 Observe the law.8 Respect and contribute to the legitimate and ethical objectives of the
organization.9 Do not involve themselves in illegal activities or acts that are descendible to the
profession of internal auditing or organsition.Objectivity- During the course of doing their work internal auditors;10 Are unbiased.11 Do not accept gifts.12 Disclose all material facts known to them for purposes of reporting activities
under review.13 Do not have conflict of interest.Competence and due care.14 Internal auditors understand the legal and institutional principles and standards
governing the operations of the organization.15 Internal auditors have the necessary knowledge, skills and experience to
conduct audits.16 Internal auditors are given the necessary training to maintain expertise needed
to conduct their assignments.17 International standards for professional practice or internal auditing are
followed during audits.Confidentiality.18 Information acquired in the course of auditing is protected.19 Internal auditors do not use the information acquired in the course of their work
for personal use.20 Information received by internal auditors is only disclosed if the law requires.Process of internal auditing.Planning.21 The internal audit department has a mission statement.22 Your internal audit department has a formal strategy (for example audit charter,
terms of reference).23 The internal audit department has formally recorgnised objectives.24 These objectives are reviewed frequently.25 Budgets are prepared for purposes of carrying out audits.Field work- During field work auditors;26 Use evidence of actual performance to compare with expected performance in
the course of carrying out the audits.27 Summerise the evidence indicating the fraud and corruption.28 Identify the possible scenario of fraud and corruption.29 Identify the possible extent of the fraud and corruption.
58
30 Determine whether compliance with policies and procedures is adequate.Reporting.31 Results of auditing are presented to audit committee.32 Copies of the audit report are availed to stakeholders.33 Auditors discuss the audit findings to management and obtain corrective action.Follow up- Audit recommendations are;34 Categorised according to significance.35 Targeted with dates for completion.36 Assigned to individuals with responsibilities.37 Implementation status of audit recommendations is checked.38 Implementation status of audit recommendations is reported.
SECTION C: - Transparency.
No.
Question. SA A NS D SD
Accountability system.39 International standards of accounting are used in your organization.40 Assets in the organisation are safeguarded well.41 Accounting and record keeping are properly done and kept in good custody.42 Budget/ financial plans do exist.43 A bank account has been opened to record all income and expenses of all
monies received.Accessibility to information.44 The organistion publishes annual reports containing its account for the year.45 Copies of the report are available to the stake holders.46 The rules and processes used in your organisation are accessible by stake
holders.47 There are opportunities to question those in charge about their plans and
decisions.48 Information (fiscal) is easily accessible for scrutiny by stake holders.Capacity and monitoring.49 The department in your organisation have adequate infrastructure.50 Monitoring of activities is done frequently.51 Management of corruption and fraud done at the central level.52 Management of corruption and fraud is decentralised.Unclear rules, laws and processes.53 Rules governing procurement processes, financial management accountability
do exist.54 These rules are easily understandable by the stake holders.55 The organisation complies with legal requirements in the course of its work.
Thanks for your time.
59
APPENDIX 2: BUDGET ESTIMATES
Budget estimates.
Item Quantity Unit cost (Ushs) Amount (Ushs)
Stationery 2 reams 9000 18000
Flash 1 30000 30000
Transport To and from
Tororo(5 times)
15000 per Journey 75000
Typing 70 page 500shs per page 35000
Photocopying 500 pages 50shs per pages 25000
Data analysis 46 questionnaires 1000shs per questionnaire
46000
Printing 210 page 100shs per pages 21000
Binding 3 copies 6000shs per book 18000
Miscellaneous 18000
Total 286000
60
APPENDIX 3: TIME SCHEDULE
Time schedule.
No. Month Year Activity
1 Feb 2011 Proposal writing
2 March 2011 Approval of the proposal
3 April 2011 Data collection
4 May 2011 Data analysis interpretation
5 June 2011 Discussion of findings recommendations and
conclusions, print first draft
6 July 2011 Printing final copy and presentation
61