Independence and Performance of Internal Audit in Public Sector Organizations
Chapter One
Research Objectives
- To examine the relationship between internal audit and the management in all council operation
- To assess the effectiveness of internal audit controls both existing and proposed functions
- To examine challenges faced by Ifo municipality in upholding the independence of internal audit and accountability including management’s behavior.
- To determine types of internal audit and their subsequent efficient methods at the council
- To investigate how the size and resourcing of internal audits affect objectivity and efficiency
- To recommend strategies for establishing an effective and independent internal audit
CHAPTER TWO
LITERATURE REVIEW
This rational of this chapter was to delineate key elements that have greater influence in achieving internal audit’s independence. Due to the contemporary economic crisis in progress, there is too much pressure which has led to the evolution of internal audit .This section has gradually unfolded different forms of internal audit in both the elected and the appointed officials this refers to the internal audit department as according to the Managerial Auditing Journal (2013) and internal Audit committee according to section 97 of the Urban Councils Act (29:15).In this light, there is use of secondary data sources to support the importance of internal audit’s independence. The chapter also dealt with defining the major role of internal auditors in a public sector and there are seven key elements that anchor internal audit and have been discussed in detail inside the chapter. Furthermore, this section has managed also to disclose forms of internal audit. The second part of this chapter has addressed and examined comparatively empirical evidence from different public sector internal control systems in countries such as Ghana and South Africa representing developing countries and also United States of America and Belgium representing two developed countries. Lastly, benefits and returns of the independence of internal audit such as, transparency, accountability, risk management and effectiveness were articulated and discussed accordingly.
Definition of literature review
According to McKinney (2008) literature review gives a short and concise interpretation and summary of information that acts as a critique to the existing literature so that, contemporary data of literature review is recognized. Moreover, literature review is an aspect of academic recording; analyzing, reporting and writing as such it must have an introduction, body and conclusion.
Literature review can be defined as an assessment of the dated circulated information matching specifically with a unique area of study. Literature review is the research and examination of existing published information. Therefore, it should not be just regarded as the combination of mutual sources but important data to specific study area. According to Boote and Beile (2005) the literature review should outline major concepts of the research as an evaluated report of studies found in the literature related to a selected research area. The review should describe, summarize, evaluate and clarify the literature. It should give a theoretical basis for research and help’s to determine the nature of one’s research. Literature review goes beyond the search for information however; it includes identification of relationships between literature and the field of research. This should bring justification and provision of research this view concurs with Reid et al (2006).
What is internal auditing?
According to the Institute of Internal Audit IIA (2006) definition of internal auditing is now familiar and well accepted: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”
According to the Internal Audit Annual Report of Anchorage Municipality (2013) internal audit is a term used to describe procedures performed by an internal auditor in examining financial records, reviewing compliance with laws and regulations, assuring the efficiency and economy of operations, and evaluating the effectiveness in achieving program results. The audit process includes an evaluation of internal controls, examination of financial and other data review. Moreover according to the Zimbabwe Internal Audit Charter (2012) internal audit is a control measure which ensures that other internal controls are in place through examining and evaluating adequacy and effectiveness and efficiency of internal controls. It has an appraisal and consultative role within the authority to independently examine and evaluate the activities as a service to the entity and management. The department is functionally responsible to the stakeholders and administratively to the Chief Executive Officer (CEO). Apart from this, internal audit is examining all financial and non financial transactions of an organization by an internal person or body in order to measure achievement, efficiency and compliance, Blue Ribbon Committee (1999). To add, according to Zhou and Zinyama (2012) audits are procedures in which independent third parties systematically examine the evidence of adherence of some practices to set norms and standards of business auditing is known also as the accumulation and evaluation of evidence about information and established criteria.
CHAPTER THREE
RESEARCH METHODOLOGY
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Introduction
In the previous chapter, the literature reviewed factors and elements that affect independence of internal auditors in municipalities. This chapter extracted direction from the previous chapters as the foundation of research. The main focus of this chapter was to scrutinize the methodology to be used for this study. The research methodology refers to the research decision taken within the framework of specific determinants unique to the research study. Research methodology directed the geographical location where the study was taking off the ground. The instruments that were used have been discussed in detail including methods to uphold and maintain validity, accuracy and reliability of the instruments. It was the prior concern of the third chapter to demonstrate how this research has been executed.
Furthermore, this chapter articulated the appropriateness of instruments in order to extract useful information about the problem that was under study. Research methodology is not an end on its own but a means to an end which means that it is a systematic problem solving approach. In short, this chapter did not look at the methodologies only but in fact how logical were they in extracting reliable information. In addition, the section enveloped research design and methodologies including sampling, population under study, establishing rigour before, during and after data collection, ethical aptitudes and execution of data reporting and data analysis.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Introduction
This chapter is a summary of all the data composed and extracted using research instruments such as questionnaires and interviews guides to assess the independence of internal audit at Ifo municipality. Data extracted from different sort and grouping of respondents is documented in different tables and percentage rate shall be used to articulate total responses per each class and sort. This data shall be analysed and interpreted. The percentage system shall be applied providing a standard measure for effective analysis and interpretation. The summary also shows average responses for the entire research. It is from the presentation, analysis and interpretation of the responses that conclusions and proposals will be made. The chapter will unfold data presentation that the researcher has assembled on the data collection phase. Data presentation techniques such as graphs, pie charts, tables and bar charts shall be exercised in detail in order to get a vivid conclusion.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Introduction
This chapter is going to explicitly summarize research as the final phase or chapter of the study. The main rational of this research project was to investigate the independence of internal audit in public sector organisation particularly Ifo municipality. Therefore, this episode shall provide a conclusion of the entire study. There shall be also a detailed presentation of conclusion extracted from the research findings and recommendations shall be given and inserted.
Summary
The major goal of this research was to instigate independence of internal audit in public sector organizations. Independence of internal audit in public sector organisations is a platform of effective and accountable mechanisms that ensure transparency and enhance good corporate governance. The first chapter unfolded the background of Ifo municipality as the case study sample for public sector organization in the assessment of independence of internal audit. The researcher wanted to examine independence of both the audit committee and the internal audit including the systems of internal audit, reporting structures and internal auditors in particular. Taking note of how the internal audit exercises and executes its functions, duties and responsibility was also the key priority of this research project.
In chapter 1 the objectives of the research were to examine the relationship between internal audit and the management in all council operations, to assess effectiveness of internal audit controls both existing and proposed functions, to examine challenges faced by Ifo municipality in upholding independence of internal audit and accountability including management’s behaviour, to determine types of internal audit and their subsequent efficient methods at the council, to investigate how size and resourcing of internal audit affect objectivity and efficiency and to recommend strategies of establishing an effective and independent internal audit. In chapter 2, the literature reviewed that in order to enhance independence of internal audit in local authorities; there should be a politically established audit committee as provided for by the legislation of many local governments. To add, the magnitude of the internal audit has to be proportional to the size of the organization as a whole. Apart from this, there are key elements that are crucial in the enhancement of objectivity and autonomy of internal audit. These are a formal mandate, unrestricted access, organizational independence, sufficient funding, competent leadership and competent staff, professional audit standards and finally stakeholder support. In this light, internal audit scrutinizes whether all forms of internal audit are being complied to. It has been highlighted that independence of internal audit in most cases exists in developed countries such as the United States of America, Belgium and in second world countries such as South Africa.
Both qualitative and quantitative research designs were employed. The target population was 467, 50 people was the sample frame and only 45 responded. Probability and non probability sampling were both used in this research. Probability sampling was used through simple random sampling and stratified random sampling. Contrary to this, non probability sampling was used through purposive sampling to select top management and employees from the internal audit department. Primary and secondary data was used to strengthen sources mainly from interviews which were done to councillors and it also partially reinforced data extracted from questionnaires. On the other hand, in presenting data, graphs, tables and pie charts were used to protract information in a more meaningful way and vivid analysis has been done. From the findings, it has been found that 23% of general employees have Ordinary level certificates and only 18% have attained Advanced level certificates, 25% of workers committee members have Ordinary level certificates, 63% of councillors have Zimbabwe Junior certificates (ZJC) and finally 71 % of the management have academic degrees and good academic qualifications. Respondents cited that main challenges at Ifo municipality that undermine internal audit’s independence are political interference, lack of resources, familiarity and improper relationships and conflict between management and employees plus negative management influence. In this context, the researcher identified a number of imperfections and faults that have a greater effect on independence of internal audit. For instance, internal audit employees and internal auditors have improper relationships with the management and other employees of the council, internal audit is not done consistently and frequently and also financial audit is the only method that internal audit examines compliance at most. Hence, other forms such as performance audit, advisory and investigative service are not effectively assessed by the internal audit. Furthermore, internal auditors report their findings to their own bosses that are town clerk or chamber secretary. In addition internal audit plays a consultative role which is argued to be a non audit role and which undermines internal audit at large.
Conclusions
- There are various factors which affect independence of internal audit such as flexibilityrotation of internal auditors of the organization, size of the internal audit, availability of an effective audit committee. Competence of internal audit leadership and staff is very essential to promote internal audit’s autonomy hence, if these factors directed and organized properly and effectively provided for by local authorities, independence of internal audit will be
- Internal audit is not merely the cross examination of books of accounts but it involvesaspects such as unrestricted access, organizational independence, competent leadership and competent staff or workforce, adherence to professional audit standards and congregate stakeholder support. This shows that in a public sector forum the principal agent theory is very useful whereby, stakeholders as principals should give a strong support to the internal audit of a local authority for it to be independent and Citizens are the main shareholder of local authority’s funds hence, it should be transparent how and what their funds are being spent for.
- Public sector organizations should have an independent internal audit structure since itprovides benefits such as accountability, transparency, effective risk management and in totality organizational This would increase confidence in investors, financial reliability and quality audit becomes the driving force of all internal operations of the organization. Independence of internal audit maximizes the net revenue or profit moreover; competitive revenue is influential and enhances effective service delivery.
- Poor legislation is an impediment to independence of internal audit in public sector Furthermore, political interference, management influence and conflict between management and employees, size of internal audit, familiarity and improper relationships and lack of resources are complex shortcomings which are detrimental to the efficiency, effectiveness and objectivity of internal audit. Effective legislation results in good corporate governance and prohibits internal audit to conduct non audit services.
Recommendations
- Internal audit department should be established outside of the organization as a self sustaining body with its separate operational systems to achieve independence and to avoid bias and improper
- There should be effective provision of legislation especially amendment of the Urban councils Act (29:15) and internal audit in public sector should be constitutionalized to enhance its autonomy and making sure that all internal controls are uniform and adhered
- Internal audit leadership should be given salaries which are similar to the management of local authorities so that they execute their duty with competence and they should not be remunerated within the organization because this increases bias due to intimidation from However their salaries should come from the ministry or local government board.
- Internal audit employees should be rotated to avoid familiarity and Chief internal auditors should be given legislative mandate and grades that are equal to the management so that their powers are not overridden by management’s influence and
- Reports of internal audit should be disclosed to any interested stakeholder to ensure transparency and internal audits should be done frequently usually on monthly basis. When there is a suspected scenario, internal audit should investigate without any
- Management should not have a negative influence towards internal audit but they should cooperate responding accordingly to the recommendations given by internal auditors.
- Internal audit team should not report its findings to the town clerk but to a separate entity such as the Anti Corruption Commission of Zimbabwe.
- Internal audit workforce especially councilors should be taken for human development and ongoing formation courses so that there is coherence and consistent use of manual and computerized auditing and accounting concepts. Councillors to be fitted in the audit committee should be given the platform for capacity building towards internal audit.
- Internal audit should be given unrestricted access to all aspects of
- Stakeholders must support operations of internal audit through accessing audit reports on monthly basis and make
- Central government should build political will and commitment among politicians to ensure that they promote independence of internal audit at Ifo
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