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Theories and Issues in Accounting and Finance CourseworkDeterminants of Internal Audit Effectivenessin Italy, Israel, Saudi Arabia and Greece(2009-2015)4/51. INTRODUCTIONThe role of internal auditing in an organisation has become increasingly important, it actsas an internal control, involves in governance processes and risk-management. Thus, it is necessaryto improve the effectiveness of IA by identifying the factors that are associated with it and makingthe practical changes based on those factors. This paper aims to discuss and critically review fourpublished articles found on the Association of Business Schools (ABS) list focusing on the topic ofthe effectiveness of internal auditing, factors associated with it and the perceptions of the internalauditor and other parties towards it. The four published articles are as follows:1. Arena, M. and Azzone, G. (2009) Identifying organisational drivers of internal auditeffectiveness. International Journal of Auditing, 13, pp. 43-60.2. Cohen, A. and Sayag, G. (2010) The effectiveness of internal auditing: an empiricalexamination of its determinants in Israeli organisations, Australian Accounting Review, 20(3), pp. 296-307.3. Alzeban, A. and Gwilliam, D. (2014) Factors affecting the internal audit effectiveness: asurvey of the Saudi public sector, Journal of International Accounting, Auditing andTaxation, 23, pp. 74-86.4. Drogalas, G., Karagiorgos, T. and Arampatzis, K. (2015) Factors associated with internalaudit effectiveness: evidence from Greece, Journal of Accounting and Taxation, 7 (7), pp.113-122.Structure of literature review?7/102. ANSWERS TO QUESTIONSThis section covers critical discussions of nine issues on the selected four published articlesregarding the effectiveness of internal auditing.2.1 Why are the articles interesting or important?2The first article by Arena and Azzone (2009) provides an insight into how theeffectiveness of Internal Auditing (IA) should be improved by focusing on the“organisational drivers”. The authors claimed that the subject has not been widely exploredhence they attempted to answer this question by conducting their study focusing on Italy.In the second article by Cohen and Sayag (2010), Internal Audit Effectiveness(IAE) was measured by “developing and validating a scale”. They argued that only a fewauthors of earlier studies used valid scales to measure IAE as well as the factors thatdetermine it. Furthermore, they claimed that “the psychometric properties” of the scalesthat they developed could serve as the foundation for scales that could be “replicated” or“revised” in future research.The third article by Alzeban and Gwilliam (2014) provides an investigation offactors that may affect IAE in Saudi Arabian public sector organisations. The authorsclaimed that other previous studies in this area used perceptions of either external auditorsor chief audit executives (CAE) to evaluate IAE, without including the views of otherinterested parties. This research on the other hand, provides “a broadened approach” toperceptions of different parties as evaluators, e.g. managers of audited units.Lastly, the fourth article by Drogalas et al. (2015) identifies factors associated withIAE within the Greek business environment, which the authors claimed had never beenconducted before. This study offers practical concepts for regulators and internal auditorsspecifically in Greece, to improve IAE by focusing on the particular factors identified inthis study, such as quality, competence and independence of internal audit team.2.2 What are the research problems or questions and the corresponding hypotheses?Research question in the first article by Arena and Azzone (2009) is what are theorganisational drivers that are related to improving the value of IAE in Italy? The subquestions (SQ) and hypotheses (H) are explained below:SQ1 – How does the size of IA team influence IAE?H1 – The larger the IA team, the more effective IA is.SQ2 – How does the competency of an internal auditor influence IAE?H2 – The higher the competency of an internal auditor, the more effective IA is.SQ3 – In what way does the involvement of internal auditors in risk management influenceIAE?
The more the involvement of internal auditors in risk management, the moreeffective IA is.
SQ4 – How does a close link between the IA team and the audit committee (AC) influenceIAE?H4 – The closer the link between IA team and AC, the more effective IA is.3Cohen and Sayag’s (2010) main focus is to answer a research question whichidentifies what the main factors are that affect internal audit effectiveness in Israeliorganisations. The sub questions and hypotheses are as follows:SQ1 – How does the type of sector organisation (private and public) affect IAE?H1 – IA is more effective in private organisations.SQ2 – How does the professional qualification of internal auditors affect IAE?
IA is more effective if the internal auditors have higher professional proficiency.
SQ3 – How does the quality of auditing work affect IAE?
The better the quality of auditing work, the more effective IA is.
SQ4 – How does organisational independence affect IAE?H4 – IA is more effective if the IA team have a greater organisational independency.SQ5 – How does the career path in organisation affect IAE?H5 – The more career opportunities for internal auditors, the more effective IA is.SQ6 – How does top management’s support affect IAE?H6 – IA is more effective if it is supported by top management.Focused on Saudi Arabia public sector, the second article identifies five researchquestions with the main question is: what are the factors that are associated with internalaudit effectiveness? The sub questions and hypotheses are as follows:SQ1 – Does the competency of internal auditor influence IAE?H1 – The higher the competency of internal auditor, the higher the perception of IAE.SQ2 – Does the size of audit department influence IAE?H2 – The larger the IA department, the higher the perception of IAE.SQ3 – Does the relationship between internal and external auditors influence internal auditeffectiveness?
The closer the relationship between internal and external auditors, the higher theperception of IAE.
SQ4 – Does the support from management influence IAE?H4 – The high perception of IAE is related to the great support from management.SQ5 – Does the independency of IA department influence IAE?H5 – The high perception of IAE is related to the independency of IA department.Drogalas et al. (2015) examined whether four factors, which are Internal AuditQuality, Competence of Internal Audit, Independence of Internal Audit and Support fromTop Management, are associated with IAE. Thus, they attempted to answer four subquestions and formed four hypotheses below:SQ1 – How is internal audit quality associated with IAE?4H1 – The quality of internal audit is positively associated with IAE.SQ2 – How is competence of internal auditors associated with IAE?H2 – The competency of internal auditors is positively associated with IAE.SQ3 – How is independence of internal audit associated with IAE?H3 – The independency of IA department is positively associated with IAE.SQ4 – How is senior management’s support associated with IAE?H4 – Support from senior management is positively associated with IAE.2.3 What theory or theoretical framework underpins the research?In the first article, Arena and Azzone (2009) obtains the organisational drivers ofIAE from relevant previous research which is the theoretical framework of their article. Itdefines the link between IAE and three main organisational drivers: resources andcompetencies of an IA team, processes and activities, and organisational role.The theoretical framework that support the second article is from an approach byRansan (1955) and Albrecht et al. (1988) who argued that IA effectiveness is based upon“subjective evaluations” and its achievement could only be assessed towards theexpectations of involved shareholders. Furthermore, they suggested that the approach needsvalid scales to measure the effectiveness of the internal audit.Alzeban and Gwilliam (2014) acquires the determinant factors that influence IAeffectiveness from an analysis of prior literatures concerning the function of internalauditing. The compliance with International Standards for the Professional Practice ofInternal Auditing Standards (ISPPIA), is also taken into consideration to measure IAE.The theory underpinning the fourth article is derived from the InternationalProfessional Practice Framework (IPPF), which acts as a framework created by IIA. Theauthors identified three variables (internal audit quality, competence and independence ofinternal audit) from the Attribute Standards of IPPF. The other two variables examined inthe article (top management’s support and internal audit effectiveness) were derived fromPerformance Standards of IPPF.2.4 What are the key motivating literatures on which the study depends?One of the key motivating literatures used in article one is by Mat Zain et al. (2006)which evaluates the contribution of internal auditors to the financial statement and its linkto the audit committee and IA characteristics. Another key motivating literature is byGoodwin-Stewart and Kent (2006) that examine IA utilisation by firms in Australia.The primary motivating literature used by Cohen and Sayag (2010) in their article,is from Eden and Moriah (1996) which studied the impact of IA on branch bankperformance in Israel. The secondary motivating literature is by Coram et al. (2008) whichexamined whether the IA function in organisations encourages the likelihood of fraud selfreporting.5Alzeban and Gwilliam (2014) use the article by Arena and Azzone (2009) andMihret and Yismaw (2007) as their key motivating literatures. Both of the articlesexamined the factors that influence IAE, where the former focuses on Italy and the latterfocuses on Ethiopia.The fourth article by Drogalas et al. (2015) depends on two motivating literatures.Similar to Alzeban and Gwilliam (2014) the first literature is an article by Arena andAzzone (2009) which is discussed in this paper, the second one is an article by Endaya andHanefah (2013) which discussed a viewpoint of developing the IAE conceptual theory.2.5 Which research methods have been chosen?The research method used in the first article is an ordinal logit regression model.The dependant variable is IA effectiveness and the independent variables are IA units’ size,IA proficiency, the participation of IA in risk management and the relationship between IAand the audit committee. The regression model used in the article is shown below:The authors in the second article used correlation analysis first to establish theinterrelationships between the variables and to test the possible multicollinearity. The nextstep was to test the hypotheses using regression analysis. The independent variables in thisresearch are sector (private and public), professional competency, IA quality, independenceof IA, career path and support from top management whilst the dependant variable is theeffectiveness of internal auditing. The regression model in this article has not beenprovided.In the third article, Ordinary Least Square (OLS) multiple regression is used toassess the level of independent variables that affect the dependent variable. The dependantvariable is IAE and the independent variables are level of competency, IA units’ size, linkbetween internal and external auditors, support from management and IA independency.The OLS model in this article is outlined below:The authors use factor analysis as the first step for all questions except thedemographic concern. To simplify the interpretation of the results, the authors use varimax%IMPi = b0i + b1lnNIASi + b2RATIOi + b3CERT_IIAi + b4CERT_CPAi + b5IIAi +b6lnRMi + b7CRSAi + b8FREQACi + b9FSCACi + b10lnSALEi + b11INDi +b12LISTi + eiIAE = b0 + biCOMP + b2SIZE + b3RELEX + b4MSUP + b5IND + ei6orthogonal rotation. Lastly, the authors use ordinary least squares (OLS) regression modelto examine dependent and independent variables. Similar to the three articles above, thedependant variable is IAE and the independent variables are quality of IA, competency,independence and management support. The OLS model used by the authors is shownbelow:2.6 How has the sample been selected?The article by Arena and Azzone (2009) collected questionnaires from both listedand unlisted organisations in Italy. The population represents the largest companies in Italyand the sample size was 364 organisations in various industries e.g. finance, manufacture,utilities, etc. However, in the end the total usable questionnaires were only 153 due to theinexistence of IA departments in some of the organisations, unanswered questionnaires andquestions. The sampling method was not mentioned in the article. Population size?In the second article, the author’s target population is managers and internalauditors who organise internal audits in Israeli organisations. The sample size was 292where each organisation was sent two questionnaires, for manager and internal auditor. Inthe end, the total responded organisations was only 108 organisations (75 in public sectorand 33 in private sector). The sampling method was not explained in the article. Populationsize?The population in the third article represented managers of audited departments andinternal auditors in 79 public sector organisations in Saudi Arabia that are audited by GAB(General Audit Bureau). The population size in the beginning was 223 managers and 396internal auditors. However, the authors received 203 answered questionnaires frommanagers and 239 answered questionnaires from internal auditors. There was no samplingsize sample size is given? and sampling method mentioned in the article.Similar to the three articles explained above, the fourth article by Drogalas et al.(2015) also used questionnaires to collect data. The population was 240 companies that arelisted on the Athens Stock Exchange. Furthermore, companies that are suspended, deleted,or under surveillance and low dispersion, were not included. This leads to 140 companiesthat were sent questionnaires and it subsequently resulted in only 40 valid responsesreceived. The sample size sample size is given? and method are also not explained in thearticle.2.7 How have questions of validity been addressed for qualitative research?Arena and Azzone (2009) used sensitivity analysis to “verify the reliability of theregression model”. The sensitivity analysis was performed in five steps. Firstly, the highlycorrelated variables were removed one at a time before the regression was performed. Itaims to examine each variable’s influence towards the other variables in the model.IAE = a + b1QIA + b2CIAT + b3IIA + b4MS + ei7Secondly, the variables that are highly correlated to each other were combined using factoranalysis. Thirdly, the regression model was performed with an additional “early/laterespondent variable” to examine the bias in responses. Furthermore, the authors added“outsourcing” to test if it had influence between the IAE and the size of IA department.Lastly, the variable “AGE” was added to indicate the IA experience based on the age of theIA department.Cohen and Sayeg (2010) developed their own scale in order to measure IAE as thedependant variable. They adopted 84 IAE items by Ziegenfuss (2000) and interviewed 10top managers in Israeli public sector companies. The result led them to 37 items that thentested using exploratory factor analysis. Three factors were found to be appropriate tointerpret the variances and were tested using Cronbach’s Alpha to verify their reliability.The reliability of independent variables is also verified using Cronbach’s Alpha.The third article used Cronbach’s Alpha test to verify the reliability of theindependent variables e.g. competency, relationship between internal and external auditors,support from management and IA independence in measuring the dependent variable (theeffectiveness of internal auditing).To verify the reliability of the variables in the third article, the authors also usedCronbach’s Alpha. They suggested that the result of “0.70 or more is considered significantand highly reliable” (Drogalas et al. 2015, p.118).2.8 How have the results been analysed and what are the findings?In the first article, the authors analysed the variables using statistical analysis andregression analysis. The analyses show contrasting results for each of the variables. Thefirst hypothesis is supported by statistical analysis, which shows that IAE is positivelyrelated to the size of the IA department. However, the regression analysis did not fullysupport the hypotheses. The second hypothesis, which is a relation between IAE andinternal auditor’s competency, is partially supported by regression analysis. Hypothesisthree was also supported by statistical analysis which shows a positive relation betweenIAE and the involvement of IA in risk management, but the data analysis did not supportthis hypothesis. Lastly, the fourth hypothesis was supported by the statistical and dataanalysis, which shows that IAE is positively related to the relationship between the auditcommittee and internal auditors.Correlation analysis was performed in the second article to test the correlationsbetween the independent variables. The findings support hypotheses 1, 3, 4, and 6, andreject hypotheses 2 and 5. On the other hand, the findings from regression analysis showspartial support for hypothesis 1 which means that audit quality and contribution in theprivate sector is stronger than in public sector. The regression analysis also supportshypothesis 4 which shows that the greater independence in the IA department increases theIAE. Hypothesis 6 is strongly supported by the regression analysis which shows thatsupport from management is the most significant variable affecting IAE. Hypotheses 2, 3and 5 were rejected because the regression analysis did not support them.8The third article also performed the correlation analysis and the results showpositive and significant correlation between IAE and the five independent variables.Furthermore, the regression analysis also shows the results that support five hypotheses.The results show a positive and significant relation between competency and IAE, the sizeof the IA department and IAE, management support and IAE. These findings supporthypotheses 1, 2 and 4 with hypothesis 4 as the strongest supported hypothesis. In addition,hypotheses 3 and 5 are also supported by the regression analysis but “not at the same levelas for the other hypotheses” (Alzeban and Gwilliam 2014, p. 83).Drogalas et al. (2015) analysed the results using factor analysis and regressionanalysis. The results show significant and positive correlation between each independentvariable and dependant variable. The regression analysis also supports the four hypotheses,suggesting strong support to hypothesis 1 (the quality of internal audit is positivelyconnected to IAE), hypothesis 3 (independence of IA is positively associated with IAE) andhypothesis 4 (support from management is positively related to IAE). Hypothesis 2 on theother hand, is supported by the regression analysis but at a lower level in comparison to theother hypotheses.2.9 What are the conclusions and recommendations, are they consistent with the findings?Arena and Azzone (2009) conclude the research with three main points. First, theysuggest that the effectiveness of internal auditing is affected by whether or not the IAdepartment have sufficient resources. Hence, this point should be considered by companieswhen making future decisions regarding IA budgeting and staffing. Second, a close linkbetween internal auditors and the audit committee is also positively associated with IAE.They suggest that the involvement of the audit committee in IA’s activities leads to anincrease in commitment of the organisation to its auditing process. Moreover, they alsosuggest that IA has the opportunity to become involved in the risk management processwhich may increase the value of the work in this area. Third, the authors highlight theproperly-designed IA competencies. They suggest that personal certification mainly focuseson “traditional skills” and does not necessarily provide improvements on “newcompetencies”. Furthermore, they recommend for future studies to further delve into thetopic using intensive research methods, to have a clear framework in order to obtain a betterunderstanding of IA’s role in risk management activities, and to analyse the specificinternal auditor’s competencies that are “theoretically required”.Cohen and Sayag (2010) conclude that support from top management is the mostimportant determinant of IAE regardless of the sectors where organisations are rooted in(private or public). They also suggest that the top management’s support may be derived byother factors of IAE e.g. employing competent internal auditors, providing a career path ofinternal auditors and providing independence of the IA department. Moreover, theyrecommend for future research to further develop this possibility and to also consider othersignificant determinants (e.g. organisational independence and the quality of audit work).Similar to the second article, Azeban and Gwilliam (2014) also conclude thatsupport from top management is the key factor of IAE particularly in Saudi Arabian publicsector organisations. They suggest that the cultural and institutional factors may have aneffect on IAE in Saudi Arabia (for instance, religion, social attitudes and history), hence9they suggest that there is an opportunity to explore these aspects for future research inconnection with IAE. They also recommend for future research, to investigate thedeterminants of IAE in both developed and developing countries.Finally, the fourth article concludes that the independence of IA is the mostsignificant factor that influences IAE. Moreover, the authors suggest that managementsupport, internal audit quality and the competency of internal auditors are also positivelyand significantly influencing the IAE, however, at a lower level than independence of IA.Lastly, they recommend for further study to undertake perceptions of other parties (e.g.external auditors) and to collect data with other alternative methods (e.g. interviews).37/403. SUMMARYThe four articles that were reviewed in this paper show the importance of organisationaldrivers in improving internal audit effectiveness. The findings among the articles are similar toeach other, which suggest that support from top management, independence of IA department, andprofessional proficiency of internal auditors are the important determinants of IAE. However, thereare also discrepancies in the countries where the studies were conducted, population and samplesize in each article.Moreover, the four articles show similarity regarding the source of theoretical perspectives.None of the articles confirm the particular theory of internal audit effectiveness. The authorsderived the theoretical framework from previous literatures, where some of them combined it withthe guidance known as ISPPIA published by IIA. This led to a similar but not identical perspectiveof determining independent variables in the four articles.The research method is also similar in those four articles, all the authors conducted survey(questionnaires) to collect data and use regression analysis to test the hypotheses. However, theauthors in the first article also used statistical analysis and comparing it with regression analysis.This caused the contrasting results and therefore partially supported their hypotheses. On the otherhand, the following articles did not compare the statistical analysis, which may be due tominimising the contrasting results.Furthermore, the findings of the four articles show similar trends. Though, there aredifferences among the articles in determining the most important factor of IAE. For instance,Cohen and Sayag (2010) found that support from top management is the most important factor thataffects the IAE, which is supported by later research by Alzeban and Gwilliam (2014). On theother hand, Drogalas et al. (2015) found that independence of internal audit is the most importantfactor affecting IAE. In addition, the first article does not show the most important factor thataffects IAE, which may be as a result of the contrasting findings.7/10104. CONCLUSIONBased on the articles that were reviewed above, three further scopes of future researchregarding the determinants of IAE can be researched. Firstly, exploring other countries’determinants of IAE focus on the developing countries in Asia, where the economics and politicsare different from European and Middle-Eastern countries. Secondly, instead of targetingpopulation on the different business industries or organisations, future research can focus the studyon one particular business industry, such as the banking or manufacturing industry. Lastly, thesurvey method can also be done using a structured interview in order to receive in depthinformation from the sample. In addition, future research can also focus on the top manager,external auditor or shareholder perceptions in order to investigate different views from otherparties. Any suggestions using quantitative analysis?7/10BIBLIOGRAPHYAlbrecht, W.S., Howe, K. R., Schueler, D.R. and Stocks, K.D. (1988) Evaluating the effectivenessof internal audit departments, Institute of Internal Auditors, Altamonte Springs, FL.Alzeban, A. and Gwilliam, D. (2014) Factors affecting the internal audit effectiveness: a survey ofthe Saudi public sector, Journal of International Accounting, Auditing and Taxation, 23, pp. 74-86.[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 11 October 2018].Arena, M. and Azzone, G. (2009) Identifying organisational drivers of internal audit effectiveness,International Journal of Auditing, 13, pp. 43-60. [Online]. Available from: EBSCOhost.https://eds.a.ebscohost.com [Accessed 22 October 2018].Cohen, A. and Sayag, G. (2010) The effectiveness of internal auditing: an empirical examination ofits determinants in Israeli organisations, Australian Accounting Review, 20 (3), pp. 296-307.[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 14 October 2018].Coram, P., Ferguson, C. and Moroney, R. (2008) Internal audit, alternative internal audit structuresand the level of misappropriation of assets fraud, Accounting and Finance, 48, pp. 543-559.[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 1 November 2018].Drogalas, G., Karagiorgos, T. and Arampatzis, K. (2015) Factors associated with internal auditeffectiveness: evidence from Greece, Journal of Accounting and Taxation, 7 (7), pp. 113-122.[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 6 October 2018].11Eden, D. and Moriah, L. (1996) Impact of internal auditing on branch bank performance: a fieldexperiment, Organisational Behaviour and Human Decision Performance, 68, pp. 262-271.[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 1 November 2018].Endaya, A.K. and Hanefah, M.M (2013) Internal audit effectiveness: an approach proposition todevelop the theoretical framework, Research Journal of Finance and Accounting, 4 (10), pp. 92-102. [Online]. Available from: IISTE www.iiste.org [Accessed 22 October 2018].Goodwin-Stewart, J. and Kent, P. (2006) The use of internal audit by Australian companies,Managerial Auditing Journal, 21 (1), pp. 81-101. [Online]. Available from: Emerald Insight.www.emeraldinsight.com [Accessed 1 November 2018].Mat Zain, M., Subramanian, N. and Stewart, J. (2006) ‘Internal auditors’ assessment of theircontribution to financial statement audits: the relation with audit committee and internal auditfunction characteristics, International Journal of Auditing, 10 (1), pp. 1-18. [Online]. Availablefrom: EBSCOhost. https://eds.a.ebscohost.com [Accessed 1 November 2018].Mihret, D. and Yismaw, A. (2007) Internal audit effectiveness: an Ethiopian public sector casestudy, Managerial Auditing Journal, 22 (5), pp. 470-484. [Online]. Available from: EmeraldInsight. www.emeraldinsight.com [Accessed 1 November 2018].Ransan, T.H. (1955) Effectiveness of internal auditing, a paper presented at the 14th AnnualConference of the IFA.Ziegenfuss, D.E. (2000) Measuring Performance, The Internal Auditor, 57 (1), pp. 36-40.5/5
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