Determinants Affecting Internal Audit Effectiveness

Authors

DOI:

https://doi.org/10.5195/emaj.2020.208

Keywords:

Risk-based planning and guidelines, Big Data and Analytics, Internal Audit and Audit Committee Meetings, India

Abstract

This study tries to identify the determinants that affect the effectiveness of internal auditing for listed firms in India. A sample of 300 listed companies was drawn. Questionnaires were mailed to the head of audit department, internal audit managers, internal auditor and head of accounts of each company. The overall response rate was 28.3%. The results were derived by applying multiple regression method and the three determinants turned out to be significant. The three determinants are risk-based planning, usage of Big Data and Analytics, and frequency of meetings of internal auditor (IA) with audit committee (AC) respectively. The model explains 42.8% of variations in the dependent variable (IA effectiveness). The study indeed encourages internal auditors to develop their core skills and competencies in the area of risk assessment and Big Data and Analytics for delivering better services to the auditees, the board of directors and the AC members. The implications of these findings may be of importance to internal audit professionals, accounting professional bodies and the regulators. Direction for future research is also provided.

References

Alles, M., & Gray, G. (2018). The pros and cons of using big data in auditing: a synthesis of the literature and a research agenda. Rutgers. pp. 1-37.

Allegrini, M., D’Onza, G., Paape, L., Melville, R., & Sarens, G., (2006). The European literature review on internal auditing. Managerial Auditing Journal, 21(8),pp. 845-853.

Alshbiel, S. O. (2017). Internal Auditing Effectiveness Success Model: A Study on Jordanian Industrial Firms. In Proceedings of the Second American Academic Research Conference on Global Business, Economics, 26, Finance and Social Sciences. pp. 978–101.

Arena, M., & Azzone, G. (2007). Internal audit departments: Adoption and characteristics in Italian companies, International Journal of Auditing, 11(2), pp. 91-114.

Arena, M., & Azzone, G. (2009). Identifying organizational drivers of internal audit effectiveness. International Journal of Auditing, 13, pp. 43–60.

Asare, T., (2009). Internal auditing in public sector: Promoting good governance and performance improvement. International Journal on Governmental Financial Management, 3(1), pp. 15-27.

Badara, M. S., & Saidin, S. Z. (2013). The journey so far on internal audit effectiveness: A calling for expansion. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(3), pp. 340– 351.

Bednarek, P. (2018). Factors affecting the internal audit effectiveness: A survey of the Polish private and public sectors. In Efficiency in Business and Economics, pp. 1–16.

Bender, R. (2006). What is an effective audit and how can you tell? Accessed 3 August 2020. https://dspace.lib.cranfield.ac.uk/handle/1826/5672

Bierwirth, M. (2019). Improving the internal audit function through enhanced data Analytics. September 13, Accessed on 28 July 2020. https://www.surgentcpe.com/blog/improving-internal-audit-function-through-enhanced-data-analytics.

Bishop, W.G., Hermanson, D.R., Lapides, P.D., & Rittenberg, L.E. (2000). The year of the audit committee, Internal Auditor, 57, pp. 46-51.

Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data Analytics in financial statement audits. Accounting Horizon, 29(2), pp. 423–429.

Castanheira, N., Rodrigues, L.L., & Craig, R., (2010), Factors associated with the adoption of risk-based internal auditing, Managerial Auditing Journal, 25 (1), pp. 79–98.

Cioban (Lucan), A.N., Hlaciuca, E., & Zaiceanua, A.M. (2015). The impact and results of the internal audit activity exercised in the public sector in Romania. Procedia Economics and Finance, 32, pp. 394 – 399.

Cohen, A., & Sayag, G. (2010). The effectiveness of internal auditing: an empirical examination of its determinants in Israeli organizations. Australian Accounting Review, 20(3), pp. 296-307.

Dellai, H., Ali, M., & Omri, B., (2016). Factors affecting the internal audit effectiveness in Tunisian organizations. Research Journal of Finance and Accounting, 7(16), pp.2222–2847.

Dejnaronk J., McClelland., R.J., & Mujtaba, B.G., (2015). Factors influencing the effectiveness of the internal audit function in Thailand, Conference: Business and Social Sciences Research Conference: Research for Development, Bangkok Thailand. Accessed 2 August 2020. https://www.researchgate.net/publication/286013042_Factors_Influencing_the_Effectiveness_of_the_Internal_Audit_Function_in_Thailand.

Deloitte. (2018). The innovation imperative: Forging Internal Audit's path to greater impact and influence. Accessed 3 August 2020. https://www2.deloitte.com/us/en/pages/audit/articles/global-chief-audit-executive-survey.html#:~:text=Deloitte's%20global%20survey%20report%2C%20The,influence%20within%20their%20broader%20organization.

Erasmus, L., & Coetzee, P., (2018). Drivers of stakeholders’ view of internal effectiveness, Managerial Auditing Journal, 33(1), pp.90-114.

Ernst & Young (2015) Big data and analytics in the audit process: mitigating risk and unlocking value. Accessed 1 August 2020. https://www.ey.com/Publication/%20vwLUAssets/ey-big-data-and-analytics-in-the-audit-process/$FILE/ey-big-data-and-analytics-in-the-audit-process.pdf

Griffiths, D. (2006). Risk-based internal auditing: An introduction. Accessed 3 August 2020. https://www.internalaudit.biz/files/introduction/rbiaintroduction.pdf

Hermanson, D.R., & Rittenberg, L.E. (2003). Internal audit and organizational governance, Institute of Internal Auditors Research Foundation.

IIA. (2004). About internal auditing, The Institute of Internal Auditors. Accessed 3 August 2020. https://global.theiia.org/about/aboutinternalauditing/Pages/About-Internal-Auditing.aspx.

IIA., (2010). Measuring internal audit effectiveness and efficiency. IPPF Practical Guide. Institute of Internal Auditors (IIA) Report.

IIA., (2012). International standards for the professional practice of internal auditing (standards), The Institute of Internal Auditors. Accessed 3 August 2020. https://na.theiia.org/standards-guidance/Public%20Documents/IPPF%202013%20English.pdf

IIA., (2019) Data analytic: Is it time to take the first step? Accessed 30 July 2020. https://www.iia.org.uk/media/1689102/0906-iia-data-analytics-5-4-17-v4.pdf

Joshi, P.L., & Marthandan, G. (2019). Continuous internal auditing: Can Big Data Analytics help? International Journal of Accounting Auditing and Performance Evaluation, 16(1), pp. 25-42.

Kaya, I., Akbulut, D.H., & Ozoner, K. (2018). Big data analytics in internal audit, Press Academia Procedia (PAP),7, pp. 260-262.

Lenz, R.. (2013), Insights into the effectiveness of internal audit: a multi-method and multiperspective study, Dissertation at the Université catholique de Louvain - Louvain School of Management Research Institute. Accessed 5 August 2020. https://fdocuments.in/document/2013-01-doctoral-thesis-rainer-lenz.html.

Lenz, R., Sarrens, G., & Jeppesen, K.K., (2018) In search of a measure of effectiveness for internal audit functions: An institutional perspective, EDPACS the EDP audit, control and security newsletter 58(2), pp. 1-36.

Murphy, M. L.,& Tysiac, K., (2015). Data analytics helps auditors gain deep insight, Journal of Accountancy. Accessed 3 August 2020. https://www.journalofaccountancy.com/issues/2015/apr/data-analytics-for-auditors.html

Pelletier, J., (2008). Adding risk back into the audit process, Internal Auditor, 65(4), pp. 73 - 76.

Protiviti., (2015). Changing trends in internal audit and advanced analytics. Accessed 3 August 2020. https://www.protiviti.com/sites/default/files/united_states/internal-audit-data-analytics-whitepaper-protiviti.pdf

PwC. (2010). A future rich in opportunity internal audit must seize opportunities to enhance its relevancy. Pricewaterhousecoopers. Accessed 3 August 2020.

https://www.pwc.com/mu/en/services/pwc_2010_global_internal_audit_survey.pdf

Raghunandan, K.R., Rama, D.V. & Scarbrough, D.P., (1998), Accounting and auditing knowledge level of Canadian audit committees: Some empirical evidence , Journal of International Accounting, Auditing and Taxation, 7 (2), pp. 181-194.

Sandwith, L., (2017). Big data & internal audit: What FDs need to know. Accessed 3 August 2020. https://www.financialdirector.co.uk/2017/05/30/big-data-and-internal-audit-what-fds-need-to know/#:~:text=Internal%20audit%20can%20use%20Big,based%20on%20better%2Dinformed%20insight.

Sarens, G., Abdolmohammadi, M., & Lenz, R., (2012) Factors associated with the internal audit function's role in corporate governance, Journal of Applied Accounting Research 13(2), pp, 191-204..

Shu, F., Li, Q., Wang, Q., & Zhang, H. (2010). Measurement and analysis of process audit: A case study. In International Conference on Software Process, 6195, pp. 285–296.

Soh, D.S.B. and Martinov-Bennie, N. (2011), The internal audit function: Perceptions of internal audit roles, effectiveness, and evaluation, Managerial Auditing Journal, 26 (7), pp. 605-622.

Soh, D.S.B., & Martinov-Bennie, N., (2015). Internal auditors’ perceptions of their role in environmental, Social and governance assurance and consulting, Managerial Auditing Journal 30(1), pp. 80-111.

Spira, L.F. (1998) An Evolutionary Perspective on Audit Committee Effectiveness, Corporate Governance: An International Review, 6, pp. 29-38.

Tang, F., Norman, C.S., & Vendrzyk, V.P., (2017). Exploring perceptions of data analytics in the internal audit function, Behaviour & Information Technology, 36 (11), pp. 1125-1136.

Yee, C.S.L., Sujan, A., James, K., & Leung, J.K.S. (2008). Perceptions of Singaporean internal audit customers regarding the role and effectiveness of internal audit, Asian Journal of Business and Accounting, 1(2), pp. 147-174.

Yoon, K., Hoogduin, L.A., & Zhang, Li. (2015). Big Data as complementary audit evidence, Accounting Horizons, 29(2), pp. 431-438.

Zacchea, N. M., (2003). Risk-based audit target selection can increase the probability of conducting value-added audits. The Journal of Government Financial Management, 52, (1), pp.22-28.

Zainal Abidin, N.H., (2017), Factors influencing the implementation of risk-based auditing, Asian Review of Accounting, 25 (3), pp. 361-375.

Zhang, J., Yang, X., & Appelbaum, D. (2015). Towards effective Big Data analysis in continuous auditing, Accounting Horizon, 29(2), pp.469–476.

Downloads

Published

2021-04-27

Issue

Vol. 10 No. 2 (2020)

Section

Articles

License

Authors who publish with this journal agree to the following terms:

  1. The Author retains copyright in the Work, where the term “Work” shall include all digital objects that may result in subsequent electronic publication or distribution.
  2. Upon acceptance of the Work, the author shall grant to the Publisher the right of first publication of the Work.
  3. The Author shall grant to the Publisher and its agents the nonexclusive perpetual right and license to publish, archive, and make accessible the Work in whole or in part in all forms of media now or hereafter known under a Creative Commons Attribution 4.0 International License or its equivalent, which, for the avoidance of doubt, allows others to copy, distribute, and transmit the Work under the following conditions:
    1. Attribution—other users must attribute the Work in the manner specified by the author as indicated on the journal Web site;
    with the understanding that the above condition can be waived with permission from the Author and that where the Work or any of its elements is in the public domain under applicable law, that status is in no way affected by the license.
  4. The Author is able to enter into separate, additional contractual arrangements for the nonexclusive distribution of the journal's published version of the Work (e.g., post it to an institutional repository or publish it in a book), as long as there is provided in the document an acknowledgement of its initial publication in this journal.
  5. Authors are permitted and encouraged to post online a prepublication manuscript (but not the Publisher’s final formatted PDF version of the Work) in institutional repositories or on their Websites prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work. Any such posting made before acceptance and publication of the Work shall be updated upon publication to include a reference to the Publisher-assigned DOI (Digital Object Identifier) and a link to the online abstract for the final published Work in the Journal.
  6. Upon Publisher’s request, the Author agrees to furnish promptly to Publisher, at the Author’s own expense, written evidence of the permissions, licenses, and consents for use of third-party material included within the Work, except as determined by Publisher to be covered by the principles of Fair Use.
  7. The Author represents and warrants that:
    1. the Work is the Author’s original work;
    2. the Author has not transferred, and will not transfer, exclusive rights in the Work to any third party;
    3. the Work is not pending review or under consideration by another publisher;
    4. the Work has not previously been published;
    5. the Work contains no misrepresentation or infringement of the Work or property of other authors or third parties; and
    6. the Work contains no libel, invasion of privacy, or other unlawful matter.
  8. The Author agrees to indemnify and hold Publisher harmless from Author’s breach of the representations and warranties contained in Paragraph 6 above, as well as any claim or proceeding relating to Publisher’s use and publication of any content contained in the Work, including third-party content.

Revised 7/16/2018. Revision Description: Removed outdated link.