IMPACT OF INDEPENDENCE ON THE EFFECTIVENESS OF SERVICES RENDERED BY INTERNAL AUDITORS
(A STUDY OF ESUT).
ABSTRACT
The aim of this study is to evaluate the impact of independence on the effectiveness of services rendered by internal auditors in with special reference to Enugu state University of science and Technology. To enable the researcher carry out extensive study the subject matter this work was divided into five parts. The first chapter is the introductory part of the research work, which includes background of the study, statement of problems, research question etc extensive literatures was reviewed this means other recognized authors view or ideas on the subject matter. Data for this research work was sourced through primary and secondary sources of data collection. The presentation and analysis of data were dealt with in this research work.Simple random and stratified sampling is to be used to draw the sample size of the study. Hypotheses was formulated and tested. Questionnaires and oral interview have to be used as the main instrument of data collection. Based on the findings, conclusion was drawn and recommendations was also made in the last part of the work.
TABLE OF CONTENTS
Title page. . . . . . . . . . i
Certification page . . . . . . . . ii
Approval page. . . . . . . . . iii
Dedication . . . . . . . . . iv
Acknowledgement . . . . . . . . v
Abstract. . . . . . . . . . vii
Table of contents . . . . . . . . viii
CHAPTER ONE
Introduction
1.1 Background of the Study. . . . . . 1
1.2 Statement of Problem . . . . . . 5
1.3 Objective of the Study . . . . . . 9
1.4 Research Question . . . . . . . 10
1.5 Research Hypothesis . . . . . . 10
1.6 Significance of the Study . . . . . . 12
1.7 Limitation of the Study . . . . . . 13
1.8 Definition of Terms . . . . . . . 14
Reference. . . . . . . . 16
CHAPTER TWO
Review of Literature
2.1 The Meaning of Internal Auditing . . . 17
2.2 Peculiarities of Internal Audit in Public Sector . 18
2.3 Function of Internal Audit Unit of ESUT. . 19
2.4 Critical Challenges Facing Internal Auditors . 21
2.5 Qualities or Attributes of an Internal Auditor. 24
2.6 Areas where the internal auditors could be
assistance to the external auditors. . . 25
2.7 Areas where the duties of internal auditors
overlap with that of external auditors . . 26
2.8 Factors to be considered before an external
auditor could rely on the work of an internal auditor 27
2.9 To What Extent is the Internal Audit Unit
Independent of the Management . . . 30
2.10To what extent has computerization, and
e-payment system affected the work of the
internal auditors in ESUT . . . . . 31
2.11Legal and Ethical provisions that protect the
independence of the internal auditors . . 34
References . . . . . . . 38
CHAPTER THREE
Research Design and Methodology
3.1 Research Design . . . . . . 40
3.2 Description of Respondents . . . . 41
3.3 Source of Data . . . . . . . 41
3.4 Population and Determination of Sample Size . 42
3.5 Methods of Investigation . . . . . 44
References . . . . . . . 46
CHAPTER FOUR
Presentation, Analysis and Interpretation of Data
4.1 Data Presentation and Analysis . . . 47
4.2 Testing of Hypothesis . . . . . 61
CHAPTER FIVE
Summary, Conclusion and Recommendations
5.1 Summary of Findings . . . . . . 73
5.2 Conclusion. . . . . . . . 74
5.3 Recommendations . . . . . . 76
Bibliography . . . . . . . . 78
Appendix I . . . . . . . . 81
Appendix II . . . . . . . . 82
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Auditor independence and objectivity are the cornerstones of the profession. The assurance services provided by auditors derive their value and credibility from the fundamental assumptions of independence of mind and independence in appearance. Prior research on auditor independence and objectivity has been undertaken predominantly in the context of external audit. However, in more recent years, there has been heightened interest in issues associated with the independence and objectivity of internal audit. The motivation for research growth in the area is related to the evolving and expanding role of internal audit as a key corporate governance mechanism as well as an internal consultancy service. In this regard, internal auditors are in a unique situation as providers of both assurance services within the organization and consultancy services to managers. Not surprisingly, this dual role has generated significant debate as it has the potential to place the internal auditor in a situation of conflict. Furthermore, as employees of the organization, the ability of internal auditors to exercise true objectivity has also been questioned (Paape, 2007).
In recognition of the potential for conflict, the Institute of Internal Auditors (IIA) has issued a number of professional standards and guidelines with respect to independence and objectivity. In fact, in 2001 the IIA published “Independence and Objectivity: A Framework for Internal Auditors” (IIA, 2001) as a guide for managing threats to objectivity. The framework identifies seven key threats: self-review, social pressure, economic interest, personal relationship, familiarity, cultural and cognitive biases. It also identifies a variety of safeguards against these threats.
To date, there have only been a limited number of prior reviews of the internal audit literature. Bailey, Gramling and Ramamoorti (2003) edited a monograph published by the IIA Research Foundation on research opportunities in internal auditing. There were two key objectives of this monograph. It was intended, first, to inspire academic research on topics of relevance to internal auditing and, second, to bridge the gap between academics and practitioners. As such, it is a blend of theory and practice, designed to familiarize academic researchers with internal audit practice (Editorial Preface, xi – xii). Each chapter of the monograph raises a series of research questions related to a specific topic in internal auditing and we refer to these where relevant.
Gramling, Maletta, Schneider and Church (2004) examined the literature and future research opportunities relating to the role of the internal audit function in corporate governance. These authors focused on the relationship between internal audit and the other cornerstones of governance (i.e. external auditors, the audit committee and management). They also evaluated the literature on internal audit quality (including objectivity and independence). However, much of the research cited relates to external auditors’ evaluations of internal audit quality and on external auditors’ reliance on the work of internal audit. The authors provide an excellent synthesis of the literature in this area, largely from a North American perspective. Hence, in this paper, we concentrate on research relating directly to internal auditors and the internal audit function, particularly focusing on studies from other parts of the world.
In 2006, the IIA commissioned the 2006 Global Common Body of Knowledge study, engaging researchers from around the world “to better understand the expanding scope of internal audit practice” (Cooper, Leung and Wong, 2006). An initial phase of this study has resulted in three related literature reviews. Cooper et al. (2006) examined the internal auditing literature in the Asia Pacific region, Hass, Abdolmohammadi and Burnaby (2006) studied the literature from the Americas, while Allegrini, D’Onza, Paape, Melville and Sarens (2006) performed a similar review of the European literature. The purpose of these reviews was to document changes in internal audit as a result of shifts in global business practices. Where relevant, we draw on aspects of these studies that relate to internal audit objectivity.
1.2 Statement of Problem
An internal auditor occupies a unique position within an organization. The auditor is employed by the organization but is also expected to review the conduct of operations. This has a potential to create significant tension since the internal auditor's “independence” from management is necessary for the auditor to objectively assess management’s actions. Internal auditing’s in-depth knowledge and understanding of operational conditions of the audited entity can add significant value to the organization. However, it may be hindered in upholding the public trust if measures to protect its independence are not developed, implemented, and maintained. These measures include provisions to ensure that the internal audit activity is empowered to report significant issues to those charged with governance; is supported by management formally and in practice; and is provided with sufficient resources to effectively perform its duties. Internal auditing is performed in diverse environments and within organizations that vary in purpose, size, and structure. In addition, the laws and regulations within various countries differ from one another. Particularly, public sector auditors operate in organizational structures that are as complex and varied as the many forms of government that exist throughout the world today.
The International Standards of Supreme Audit Institutions (ISSAI) and the Institute of Internal Auditors’ (the IIA’s) International Standards for the Professional Practice of Internal Auditing (Standards), present general terms to allow adoption in different national contexts with the understanding that implementation will be governed by the environment in which the internal audit activity carries out their responsibilities and in accordance with the applicable laws and regulations. The IIA’s Standards are universal and are intended to apply to all members of the internal audit profession.
Internal auditing has become a factor of the new accountability and control era. The manner in which public sector entities maintain internal control and how they are held accountable has evolved to require more transparency and more accountability from these organizations that spend investor or taxpayer funds. This trend has significantly impacted how management implements, monitors, and reports on internal control.
Although internal auditors can be a valuable advisory resource on internal control, the internal auditor should not be a substitute for a strong internal control system. A system of internal control is the primary response to risks.
The role of internal auditing has evolved from an administrative procedure with a focus on compliance, to an important element of good governance. In many cases the existence of internal auditing is mandatory.
In describing public sector auditing, the Lima Declaration calls for internal audit services to be functionally and organizationally independent as far as possible within their respective constitutional frameworks (ISSAI 1/section 3, par. 2).
The IIA’s Standards and Code of Ethics recognize the importance of internal auditors maintaining their independence and objectivity when performing their work, irrespective of whether the internal auditors are engaged in public or private sector audits. In addition, the IIA Standards advocate a strong system of internal control that is monitored by a well-resourced internal audit activity as a fundamental feature of good governance. In the public sector, a strong system of governance is essential in ensuring adequate service delivery to the public at large.
The appearance or perception of a lack of independence and objectivity could be as damaging as the actual condition. If internal auditors are involved in developing the internal control systems, it may become difficult to maintain the appearance of independence when auditing these systems.
1.3 Objective of the Study
The purpose of this study is to examine the impact of independence on the services rendered by internal auditors with particular reference to Enugu State University of Science and Technology (ESUT). Some other objectives of this study are:
1. To examine the extent of independence in the role of internal auditor in ESUT.
2. To evaluate the various activities of internal auditor in the university.
3. To check if internal auditor performs its duties and obligations without any influence by the school management.
4. To evaluate how the services rendered by the internal auditor contribute to the developmental process of the new face of ESUT.
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