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Mekelle University College of Business and Economics Department of Management

A Thesis on Perception of Management and Internal Audit Staff on the Importance of Internal Audit Efffectiveness Measures in Bahir Dar and Mekelle Universities By Aderaw Gashayie Email: aderaw_g@yahoo.com Submitted in Partial Fulfillment of the Requirements for the Masters Degree of Business Administration/MBA in Finance

Principal advisor: Co-advisor:

Aregawi G/Michaeal (Asst.Prof.) Getnet Baye (Lecturer)

May, 2011 Mekelle, Ethiopia

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DECLARATION

This is to declar that this thesis on the title Perception of Management and Internal Audit Staff on the Importance of Internal Audit Effectiveness Measures in Bahir Dar and Mekelle Universities submitted in partial fulfillment of the requirements for the award of the Masters degree of Business Administration in Finance to the College of Business and Economics, Mekelle University, through the Department of Management, done by me,Mr. Aderaw Gashayie, Id.No. CBE/PRO43/02 is an authentic work carried out by me. The matter embodied in this project work has not been submitted earlier for award of any degree or diploma and all sources are acknowledged.

Name: Aderaw Gashayie

Signature

Place and date of submission: Mekelle University, May 2011

CERTEFICATION

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TABLE OF CONTENTS
Page Abstract vi List of tables ...............vii Acronyms .....viii Acknowledgements ...ix CHAPTER ONE: THE PROBLEM AND ITS APPROACH 1.1 Background of the study .1 1.2 Statement of the problem ....3 1.3 Objective of study.........4 1.4 Significance of the study..5 1.5 Delimitations of the study... 5 1.6 Limitation of the Study... 6 1.7 Research methodology.....6 1.7.1 Procedure..6 1.7.2 Population.....7 1.7.3 Census...7 1.7.4 Instrument design......7 1.7.5 Validity and Reliability of instruments.................7 1.7.6 Statistical analysis .8 1.8 Organization of the study ....9 1.9 Operational definitions ....9 CHAPTER TWO: REVIEW OF RELATED LITERATURE 2.1 Theoretical framework for the study ......11 2.1.1 Definition of IA11 2.1.2 Objectives of IA....12 2.1.3 Roles of internal auditor ........13 2.1.4 Types of internal audits services.....14 vii

2.1.5 The internal audit process .....15 2.1.6 Higher education auditing environment.....18 2.2 Empirical framework for the study 2.2.1 Prior research studies on audit effectiveness measures and its impact on internal audit effectiveness..20 2.2.2 Dimensions of internal audit efeectiveness measure.....27 2.3 Conceptual frameworks for internal audit effectiveness measures .33 CHAPTER 3: PRESENTATION AND ANALYSIS OF DATA

3.1 Summary statistics of the respondents....36 3.2 Hypothesis testing and data analysis.....37 3.2.1 Procedures for data analyses....37 3.2.2 Testing hypothesis one39 3.2.3 Testing hypothesis two.........41 3.2.4 Testing hypothesis three..43 3.2.5 Testing hypothesis four ..46 3.2.5 .1 Testing hypothesis four factor one .47 3.2.5 .2 Testing hypothesis four factor two. 50 3.2.5 .3 Testing hypothesis four factor three .. 52 3.2.5 .4 Testing hypothesis four factor four 55 3.2.5 .5 Testing hypothesis four factor five. 57 CHAPTER 4: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS 4.1 Summary ...61 4.2 Conclusion 63 4.3 Recommendations.64 BIBLIOGRAPHY...,......66 APPENDICES ..70

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ABSTRACT
The purpose of this study was to predict managements and audit staffs perceptions on the importance of selected factors utilized to evaluate internal audit effectiveness in Bahir Dar and Mekelle Universities. In this study, reasonable and meaningful findings and recommendations, auditees response and feedback, professionalism of the internal audit department, adherence to audit plan ,and absence of surprises were used as a criteria to predict managements and audit staffs perception (difference/similarity) on the importance of internal audit effectiveness measures. To this end, the study conducted in Bahir Dar and Mekelle Universities. By census methods, I obtained the data from 10 presidents, 43 directors and 8 intrnal auditors. Questionnaire was the instruments used for data collection. The data collected through the questionnaire were analyzed using precentage, z-test for proportion and one way ANOVA.Findings from the data analysis indicated that all the three groups were significantly different in perceptions on the importance of these five factors to use as criteria in evaluating internal audit effectiveness. The implication of this finding was that auditors evaluated on the wrong /erroneous criteria or on a different set of criteria than that of adopted by internal audit staffs. Following the findings and conclusions drawn, it is recommended that presidents, directors and audit staffs need awareness training in general on internal auditing and in particular, on importance of internal auditing effectiveness measures to narrow the perceptual difference on internal audit effectiveness measures and to increase internal audit effectiveness in the university environment. Further study on full scale of dimensions need to be conducted.

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LIST OF TABLES
No. Descripition Page No Fig 1 3.1 3.2 3.3 Summary of selected emperical studies Respondents profile The value for each item, and maximum and minimum value for one factor The maximum and minimum value for all factors and items included in each factor 3.4 Z-scores measuring audit staffs perception on importance of factors for evaluating internal audit effectiveness 3.5 Z-Scores measuring directors perceptions on importance of factors for evaluating internal audit effectiveness. 3.6 Z-Scores measuring presidents perceptions on importance of factors for evaluating auditing effectiveness 3.7 3.8 Summary of the first three hypotheses Meaningful and reasonable findings and recommendations as perceived by the three groups 3.9 3.10 3.11 3.12 3.13 3.14 Tukey HSD post hoc multiple comparison Adjusted Tukey HSD homogeneous subsets Auditee's response and feedback as perceived by the three groups Tukey HSD post hoc multiple comparison Adjusted Tukey HSD homogeneous subsets Professionalism of the internal audit department as perceived by the three groups 3.15 3.16 3.17 Tukey HSD post hoc multiple comparison Adjusted Tukey HSD homogeneous subsets Importance of adherence to audit plan as groups 3.18 3.19 3.20 3.21 3.22 3.23 Tukey HSD post hoc multiple comparison Adjusted Tukey HSD homogeneous subsets Absence of surprised as perceived by the three groups Tukey HSD post hoc multiple comparison Adjusted Tukey HSD homogeneous subsets Summary of hypothesis four for the five factors 56 56 57 58 58 59 perceived by the three 53 54 55 48 49 51 51 52 53 46 47 43 42 40 25 36 38 38

ACRONYMS
ACUA =Association of College and University auditors AICPA-American Institute of Certified Public Accountant ANOVA-ANalysis of Variance BDU-Bahir Dar University CIPFA-The Chartered Institute of Public Finance and Accountancy ECA=executive chief auditor IA-Internal Audit IC-Internal Control IIA-Institute of Internal Auditor MOE Minstry of Education MU-Mekelle University SAS1=score for audit staff one SD1=score for Director one SOX=Sarbanes-Oxley Act Sp1=score for president one SPPIA- Standard Professional Practice of Internal Auditing AS1=mean of audit staff one D1= mean of director one p1=mean of president one -Population parameter=mean (symbol) mD1=mean of mean for director one mP1=mean of mean for president one mSAS1=mean of mean for audit staff one

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ACKNOWLEDGEMENTS

I would like to express my heartfelt gratitude to my principal advisor, asst.prof. Aregawi G/Michael, whose deep concern, constructive comments and suggestions have contributed tremendously to the successful accomplishements of the study.

My appreciation also goes to my co-advisor, Getnet Baye (MBA) who gave me valueable comments and to others who have displayed kind of collaboration while conducting this study.

To my wife, W/ro Abebech Nigussie, I extend my love and gratitude for the many sacrifices she has made over the past two years. Her encouragement, understanding and support have been my most important source of inspiration for successful accomplishements of the MBA program.

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CHAPTER ONE
THE PROBLEM AND ITS APPROACH
This part describes background of the study, statement of the problem, hypotheses tested in the study, objective of study, significance of the study, delimitations of the study, limitation of the Study, research methodology, organization of the study and operational definitions.

1.1 Background of the study


Higher education institutions are fundamental for the creation of vital human resources, such as teachers, healthcare professionals, lawyers, engineers, managers, businesspersons, and researchers for socio-economic development of a nation (Teshome, 2003). However, higher education institutions worldwide facing new challenges and problems which require reforms in their management and governance styles. The major challenges and problems facing higher education institutions includes the rise of new stakeholders, internal factors, globalization and the rapid pace of knowledge creation and utilization which are among the recent developments. While higher education institutions have responded rather slowly in the past to changing circumstances, there is now an urgent need for them to adjust rapidly in order to fulfil their missions and the needs of stakeholders (Jowi, 2003). Similarly, higher education institutions in Ethiopia are facing these challenges and problems. Public higher education institutions can function effectively only when inherent risks/challenges that may prevent mission accomplishment have been properly identified, assessed and managed (Ministry of Education [MOE], 1997). Management is responsible for maintaining an adequate system of internal control system to manage risks that challenge higher education institutions. Internal audits are key components of the organization [university] control structure. Internal audit is the ultimate risk management tool for managers (Pickett, 2010).

Effective internal auditing has a significant role in the management of higher education institutions. Effective internal auditing has become progressively more varied in scope and objective to assist all levels of management in assuring internal and external constituencies that financial resources are being properly managed and accounted for and that the institution is complying with applicable policies and laws (Association of College and University Auditors [ACUA], 1992). Specifically, according to Pickett (2010) internal audit provides assurance, consulting and investigation services to management, the board and the audit committee in terms of reviewing the adequacy of systems of internal control to promote and facilitate the development of effective systems of risk management and internal control, which remain the responsibility of management. Thus, internal audit provide advice on addressing problems that remain the responsibility of management. Over the past years, the effectiveness of internal audit has become a subject of interest in the internal auditing literature(AICPA,1970; Bethea ,1992 ;Clark et al. ,1981 ;Dessalegn & Aderajew ,2007;Glazer & Jaenicke, 1980;Traver ,1991). According to Dittenhofer (2001) to assess internal audit effectiveness, considering four dimensions (identification of auditee goals and objectives, identification of measure, quantification of measure and actual measurement) are important but quantification of measures are difficult. One difficult literature issue that has emerged, relative to internal audit effectiveness, is to quantify proper and sound measures of the IA departments effectiveness measures. Similarly, Sarens (2009, pp.1-7) has raised the question when can we talk about an effective IA function measures quantification? in his editorial about future perspectives of IA research. Looking at the existing literatures, there is no unique answer to this question. Quntification of IA effectiveness measures are complicated since different authors have related IA effectiveness measures to different matters such as IA procedures, outputs and outcomes. However, as pointed out by preceding scholars, considering how stakeholders perceive internal auditing is an important factor in measuring internal audit effectiveness. For example, Barrett (1986, pp.30-35) notes, effectiveness can be described but it is difficult to quantify and therefore, effectiveness is determined by the perception of clients and auditees. According to Kondalkar (2007), people who are in different work settings have different objectives and uses different performance measurement standards as a result they have different perceptions on measurements. 2

In the higher education institutions environment, presidents and directors are two of the most important clients and auditees of the internal audit department that took different positions. While maintaining effectiveness, internal audit staff needs to meet or exceed the expectations of university management. In particular, in the ever-changing higher education institutions, internal audit staffs and managements need internal audit effectiveness measures to evaluate whether internal audit services is as expected or not. However, in the Ethiopian context, research on university managements and audit staffs perception on the important criteria used to judge internal auditing effectiveness in the university environment has been none existent. 1.2 Statement of the problem It has been observed that an expectations gap arises when audit customers (for example senior management) do not recognize the value of the internal audit (IA) function. In order to function effectively, internal auditors and the customers of audit services should possess a similar understanding of what makes internal auditing a value-adding activity. Failure to reach this understanding could result in the perception that internal audit simply is an obstacle to achieving organizational objectives. The difference in perceptions of different groups of managements and audit staffs towards to the importance of internal audit effectiveness affects internal audit effectiveness measures. This can result in underused audit services and ignored audit recommendations (Flesher & Zanzig, 2000). As highlighted by Dessalegn and Aderajew (2007), audit findings and recommendations would not serve much purpose unless management is committed to implement them. Implementation of audit recommendations is, therefore, highly relevant to audit effectiveness (Sawyer, 1996). The extent to which managers consider internal auditors work valuable and decide to exploit it influenced internal auditors on their achievement of corporate objectives (i.e. their effectiveness). In such view, the effectiveness of IA depends on the quality of effectiveness measure perceived by the auditees. Given the central role of auditees perceptions in relation to IA effectiveness measure, this study was to predict university managements (presidents and directors) and internal auditing staffs percepition on the importance of internal auditing effectiveness criteria in Bahir Dar and Mekelle universities.

More specifically, the study attempts to obtain reliable responses for the following research question: 1. Is there statistically significant difference between the scores of internal auditing staffs perception on the importance of five selected factors used to evaluate internal auditing effectiveness? 2. Is there statistically significant difference between the scores of directors perception on the importance of five selected factors used to evaluate internal auditing effectiveness? 3. Is there statistically significant difference between the scores of university presidents perception on the importance of selected five factors used to evaluate internal auditing effectiveness? 4. Is there statistically significant difference among mean scores of internal auditing staffs, directors and presidents perception on the importance of five selected factors used to evaluate internal auditing effectiveness?

1.3 The objective of the study


The general objective of this study was to predict managements (presidents and directors) and internal auditing staffs percepition on the importance of internal auditing effectiveness criteria in Bahir Dar and Mekelle universities. In order to meet the study objective, the following four null hypotheses were formulated and tested against the alternative hypothesis that says, Significance difference was observed in this investigation: 1. H1: There is no statistically significant difference between the scores of internal auditing staffs perception on the importance of five selected factors used to evaluate internal auditing effectiveness. 2. H2: There is no statistically significant difference between the scores of directors perception on the importance of five selected factors used to evaluate internal auditing effectiveness. 3. H3: There is no statistically significant difference between the scores of university presidentsperception on the importance of selected five factors used to evaluate internal auditing effectiveness.

4. H4: There is no statistically significant difference among mean scores of internal auditing staffs, directors and presidents perception on the importance of five selected factors used to evaluate internal auditing effectiveness. 1.4 Significance of the study This study is expected to give the following benefits: Helps predict universities internal audit staffs and managers view on internal audit effectiveness criterion. Internal auditing professionals and professional organizations for formulating training programs for internal auditors to improve the focus and delivery of their services to auditees and customers. University internal auditors use the results of this study to better coordinate and direct their work efforts and reports. Ministry of Education and Ministry of Finance and Economic Development may use the result to design appropriate internal audit effectiveness measures. Throwing light on what has been a gray area about internal audit effectiveness measures since little has been known about it. Encouraging others to undertake further study in internal audit effectiveness measures.

1.5 Delimitations of the study Although other stakeholders (Ministry of Education and Board of Dierctors) have a role on internal audit effectiveness measures, this study delimited to presidents, directors, and internal auditing staffs of Bahir Dar and Mekelle universities. Based on availability of literature and its manageability, the measurement criterias delimited to the five dimensions (reasonable and meaningful findings and recommendations, auditees response and feedback, professionalism of the internal audit department, adherence to audit plan and absence of surprises). Taking the time and the finance required in carrying out the data collection process in to consideration, the study was delimited to Bahir Dar and Mekelle universities in Ethiopia. The

selection of the universities as a setting for the study was based on the researchers experience as a student in these two universities. Though there are many background variables that affect perceptions of individuals in organizations, this study was delimited to work setting /job setting/position. 1.6 Limitation of the study This study had the limitations in assuming the possible outcomes or findings in the very first place as there are no studies that look the audit staffs, directors and presidents perception on the importance of selected criteria used to evaluate internal auditing effectiveness within the Ethiopian context. Therefore, after all statistical analysis was undertaken, the conclusion for this study was given and infered only to the specified universities about other internal audit criterias. 1.7 Research methodology This part describes the methodology of inquiry used in this study. The basic research design used for this study was a non-experimental survey design. The data collections accomplished with questionnaire. 1.7.1 Procedure A complete list of managerial and audit staffs positions in Bahir Dar University and Mekelle University were compiled. The questionnaires were distributed in the third week of March 2011 and returned by the second week of April 2011. A repeatedly personal follow-up was made for those surveys not returned by the last day of appointement. Earl Babbie (1973) has indicated that a 70% return rate is considered very well for survey studies, 60% return is good but 50% return is worth analysis. The goal for this study was 70% or greater and actually 95% returned. All returned surveys were checked for errors, omissions and inconsistencies prior to entry into a computerized statistical program for analysis and one survey was not found worth analysis and rejected. The SPSS version16 was used for this study.

1.7.2 Population The population base for this research study was managements and audit staffs of Bahir Dar and Mekelle Universities. The population of interest was totally 61 of which 10 presidents, 43 directors and 8 internal audit staff of these institutions. 1.7.3 Census In this study, since the population was relatively small, the study used census survey methodology. A complete list of all presidents, directors and audit staffs obtained from each respective universities and the likelihood that the target population represented was 100%. 1.7.4 Instrument design According to Mullins (2004), effectiveness scale instrument was the only instrument used to collect data that reflected the perceptions of presidents, directors and internal audit staff concerning the importance of factors used to evaluate internal auditing effectiveness. The scale was designed based on the criteria used by Albrecht et al. (1988). The criterias were reasonable and meaningful findings and recommendations, auditees response and feedback, professionalism of the internal audit department, adherence to audit plan and absence of surprises. The five point likert scale was designed based upon the above criteria and separated into two sections as shown in appedix 2. Section I of the scale contained background information for the study. Section two of the scale contained a set of fifteen items about five selected factors used to evaluate audit effectiveness. 1.7.5 Validity and Reliability of instruments This instrument will be subjected to a small pilot test (n=5)before circulating the questionnaire widely, a small number of test responses were sought, in order to gauge the validity and realibility of the questions, the overall sense of the questions, and the time required to complete the questionnaire. Feedback from this was used to refine and update the questionnaire before printing. Important to any instrument of this nature was validity and reliability.

Validity Two types of validity were considered and addressed in this study. Face validity is to what degree the instrument looks like it measures what it is supposed to measure. This was one type of validity addressed in this study. More importantly, Content Validity addressed the degree to which an instrument actually measures what it purports to measure. This issue is important to survey research (Litwin, 1995). If an instrument does not measure what it was designed to, findings will be misleading and impossible to interpret accurately. To obtain acceptable content-validity, the researcher used a panel of five judges. Individuals serving as judges were knowledgeable of auditing practices, procedures and concerns but were not part of the research population. Each judge was asked to rate the items for relevance and appropriateness on a five-point scale. This process provided ratings for the fifteen items separately and the instrument as a whole. Judge were also asked to comment on the time taken to complete the scale, bad items, and to add items they strongly feel included on the instrument. This procedure was accepted by the reseacher and used many times over the years (Litwin, 1995). Reliability Consistency of measurement is a concern in all studies, particularly survey-research. Internal consistency was a major concern in this study. It was conducted a test of internal consistency/ reliability on this instrument. This was done in a pilot test (N=5). The split-half reliability correlation method was employed and it was found that the realibility of the instrument is 86% as shown in apendix1. Therefore, this was consistent with Nunnaly (1978) who rported there is not a generally agreed cut-off but usually 0.7 and above is acceptable. Once a coefficient was calculated for half of the instrument, the Spearman-Brown Correction Factor was used to determine reliability for the total instrument. Ferguson (1998) opined this to be an effective method to establish reliability of tests or surveys. 1.7.6 Statistical analysis Both inferential and descriptive analyses were used in this study. First, Hypotheses one, two and three were tested using the z-test for population proportions. The proportion of respondents addressing the importance of effective measures was tested to determine if it is significantly different from the population as a whole. To test hypothesis four, the single-factor analysis of Variance 8

(ANOVA) was used with the appropriate post-Hoc test. The procedures are often used in inferential research and are robust enough to deter type-one errors (Ferguson, 1998). The 95% confidence level is significant for this study. It should be noted that as with any research initiative, the study unable to control how data distributions looked once data is collected. It is hoped the data would be relatively normally distributed with equal variance. These are basic assumptions for parametric statistics. However, if descriptive analyses revealed large skewing of data, it should be necessary to revert to other procedures. If this became necessary, non-parametric tests would be employed. This method of analysis was recommended in situations such as this (Moore & McCabe, 1993). 1.8 Organization of the study This study was organized into four main chapters. Chapter one provides the problem and its approach. Chapter two deals with review of related literature. Chapter three provides the presentation and analysis of the data and finally the summary, conclusion, and recommendations of the study were presented in chapter four. 1.9 Operational definitions According to Leary (2001), operational definitions define concepts by specifying precisely how they are measured or manipulated in the context of a particular study. Operational definitions are essential for replication, as well as for non-ambiguous communication among scientists. Thus, in this research study, the following definitions were used: 1. Directors: Middle level managers which includes Business Manager /process owners/case teams/deans/directors/responsible for supervision of low-level managers and directly responsible and accountable to the vice president. 2. Higher education: education in the arts and sciences offered to undergraduates and graduate students who attend degree programmes through any of the delivery modes (Higher Education Proclamation No. 650/2009). 3.
Internal audit effectiveness:

the outcome/the impact that outputs have in meeting perceived

need or achievement of goals and objectives using the factor measures. Effectiveness is about the extent to which an entitys predetermined objectives have been achieved.

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Internal auditing: An independent appraisal of the diverse operations and controls within an organization to determine whether acceptable policies and procedures are followed, established standards are met, resources are used efficiently and economically, and the organizations objectives are being achieved (Sawyer, 1983).

5. Internal Control -- organization, policies, and procedures are tools to help program and financial managers achieve results and safeguard the integrity of their programs . 6. Measure - a parameter used to quantify the efficiency and/or effectiveness of past action. 7. Null hypothesis - A hypothesis about a population parameter. The purpose of hypothesis testing is to test the viability of the null hypothesis in the light of collected data. 8. Perception: The dynamic and complex way, in which individuals select information (stimuli) from the environment, interpret and translate it so that a meaning is assigned which will result in a pattern of behaviour or thought (Mullins, 2004). 9. Presidents: The Top-level managers responsible for managing the day-to-day operations of a university that includes President or Vice Presidents. The President is the chief executive officer of the institution. The president shall be appointed by the Minister of Education or by the head of the appropriate state organ from a short list of nominees provided by the Board.The president is usually appointed by the universitys Board of directors on a continuing, delegating basis (Higher Education Proclamation No. 650/2009).

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CHAPTER TWO
REVIEW OF RELATED LITERATURE
This chapter presents an overview of the literature that relates to the topic under investigation and consists three separate subsections. The first subsection describes theoretical framework of internal auditing (definition of IA, objectives IA, role of IA, internal auditing process, the types of internal audits in university environment and higher education internal audit environment). The second subsection deals with the emperical framework of the study, that is, prior research studies on audit effectiveness measures. The final subsection presents the research model for the study.

2.1 Theoretical framework for the study 2.1.1 Definition of IA Simmons (1999) assertted that internal audit professionals should look to the standards for the professional practice of internal auditing (SPPIA) for guidance on and understanding of the auditors role and the nature of internal auditing. According to Moeller (2004, P.165) in the 2001 international conference of the institute of internal auditors, the board of directors approved an updated definition of internal auditing as follows: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisations operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Internal audit is concerned with controls that ensure reliability and integrity of financial and operating information, effectiveness and efficiency of operations, safeguarding of assets and compliance with laws, regulations and contracts). There have been other attempts to define internal auditing. CIPFA (1997, P.81) described internal auditing as An independent and objective appraisal service within an organization: Internal audit is an assurance function that primarily provides an independent and objective opinion to the organization on the degree to which the internal control environment supports the achievement of the organizations objectives. In addition, internal audits findings and recommendations are beneficial to line management in the audited areas. Internal audit can also provide an independent and objective consultancy service specifically to help line management improve the organizations internal control environment. The service applies the professional skills of internal audit through a systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organizations objectives, and through recommendations for improvement. Such consultancy work can contribute to the opinion which internal audit provides on the internal control environment.

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United kigdom Government Internal Audit Manual (2006, P.131) defined internal auditing as An independent and objective appraisal service within an organization: Internal audit primarily provides an independent and objective opinion to the Accounting Officer on risk management, control and governance, by measuring and evaluating their effectiveness in achieving the organizations agreed objectives. In addition, internal audits findings and recommendations are beneficial to line management in the audited areas. Risk management, control and governance comprise the policies, procedures and operations established to ensure the achievement of objectives, the appropriate assessment of risk, the reliability of internal and external reporting and accountability processes, compliance with applicable laws and regulations, and compliance with the behavioural and ethical standards set for the organization.Internal audit also provides an independent and objective consultancy service specifically to help line management improve the organizations risk management, control and governance. The service applies the professional skills of internal audit through a systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organizations objectives, and through recommendations for improvement. Such consultancy work contributes to the opinion which internal audit provides on risk management, control and governance. There are many similarities in the above definitions of internal auditing. Most revolve around the view of internal audit as an independent service to the organization reviewing systems of internal control. These definitions signify that internal audit has undergone a paradigm shift from an emphasis on accountability about the past to improving future outcomes to help auditees operate more effectively and efficiently.

2.1.2 Objectives of IA In the revised statemaent of responsibilities of internal auditing issued by the institutet of internal auditors (1990, P.86) as part of standard fromework, the section on objectives states: The objective of internal auditing is to assisst all members of management in the effective discharge of their responsibilities by furnishing them with analysis, appraisal, recomandations and pertinent coments concerning the activities revised. The internal auditor is concerned with any phase of business activity where he can be of service to management .This involves going beyond accounting and financial records to obtain a full understanding of the operations under review. Concerning these objectives, Sawyer (1996) noted four benefits managers have gained from internal auditing assisstance. Those benefits were: 1. Providing managers with the bases for judgement and action; 2. helping managers by reporting weaknesses in control and performance and in recomanding improvements; 3. providing counsel to managers and board of directors on the solutons of business problems ;and 4. Supplying information that is timely, reliable and useful to all levels of management.

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Additionally, the statement set forth the types of services that should be performed and the kinds of activities carried on by the internal audit function in attaining the overall objectives: 1. Reviewing and appraising the soundness, adequacy and application of accounting, financiaal and other operating controls,and promoting effectiveness control at reasonable cost; 2. Ascertaining the extent of compliance with estabulished policies,plans,procuders,laws and regulations which could have a significant impact on operations and reports; 3. Reviewing the means of safguarding assets and as apprapriate veryfing the existance of such asets; 4. Appraising the economy and effeciency with which resources are employed; and 5. Reviewing operations or programes to estabulished objectives and goals and whether the operatins or programs are being carried out as planned. 2.1.3 Roles of internal auditor The IA role is unique because the IA is an agent that monitors the actions of another agent (management), both of whom are employed by the same principal (Adams, 1994). The author discussed the role of agency theory in explaining the role of internal auditing within different organizations. He proposed that agency theory can be used as a framework to explain several phenomena within the internal auditing profession. IA plays an important role in evaluating the effectiveness of control systems, and contributes to an ongoing effectiveness of the organization. Before the enactment of (SOX) 2002, internal audit services were focusing on detection not prevention. Flesher and Zanzig (2000) found evidence that some audit customers do not recognize the value of IA, and may even restrict the IA role to internal control evaluation over traditional areas such as accounting and finance. IA was moving from a confrontational approach to collaborating with management and moving from a control approach to a risk-based approach and they were focusing on consulting services (Roth, 2002). The Sarbanes-Oxley Act (SOX) of 2002 has increased not only the need for IA, but also their stature in the eyes of those who hire them as well as those who aspire to be them. The IA roles are increasing dramatically due to Sarbanes-Oxley compliance (Karl, 2003). IA today do not just focus on financial information as typically been a priority at many firms but nowadays, IA have a much broader responsibility. Management today are reliant upon IA not just to reduce the cost of external 13

auditing, but to provide assurance, confidence and trust that the internal controls (ICs) are operating effectively and that the business itself is efficient (Al-Twaijry et al., 2003). IA seem to serve best where they can skillfully walk the line between providing advice to management and, at the same time, provide assurance to others(Burns et al., 1994). Lara and Peter (2007) study on Maltese internal audit unit, identifies organizational and cultural barriers that are keeping the IA out of reach of its potential benefits. IA plays a crucial role in the spread of best practices through their own developed company wide network (risk and control communication). Management often benefits from IA as a benchmarking source for the effectiveness and efficiency of their risk assessment and internal control practices. Communication role contributes to the creation or further improvement of risk and control awareness. IA role in risk management from a comparison studies between the Belgian and US Company revealed that IA proactive involvement in the development and improvement of ICs are considered as an important aspect of their pioneering role. IA plays a valuable role because they actively enhance risk and control awareness on behalf of the management. Internal control is an integral part of IA responsibilities, because certain management levels do not realize that they are responsible for internal controls (Gerrit & Ignace, 2006). The divergence of interpretation of the audit role is explored in terms of the way we may in practice move away from the standard definition. Internal auditing is performed in a variety of ways, each with its own approach and style. Accordingly, it is important that a formal definition is devised and agreed since it will have a vital impact on the perceived role of the audit function. Management often asks auditors exactly what they are responsible for, and a variety of responses may be received. Some auditors feel that they should police the organization while others are convinced they must check the accuracy of accounting records. Still others feel obliged to search out poor value for money or new and improved ways of using resources. Much depends on the audit charter and management expectations. One must have a model developed by the profession, which represents the true scope of internal auditing. In this study, management is clearly responsible for controlling risks to ensure objectives are met, while the scope of audit work is based on reviewing risk management and controls.In general internal audit plays the following eight roles: control oversight role, decision support role, risk management support role, communication role, governance role, system involvement role, technical role and management intimidation role. 14

2.1.4 Types of internal audit services The types of internal audits in university conduct of their institutions organizations, functions, programs, activities and funds have been identified by individuals and professional associations who have focused their research on internal auditing. ACUA (1992) identified five general classifications of audit services: 1. Financial auditing: The review and testing of reliability and integrity of financial information and the systems, which deliver this information. Internal audit staff support of external auditors is generally grouped in this classification. 2. Operational auditing: The review of the economy, efficiency, and effectiveness of administrative operations. 3. Compliance auditing: The review and testing of the organizations compliance with statutory, regulatory, and internal policy requirements. 4. Information technology auditing: The review and testing of computer systems which process financial and non-financial information to assure the integrity of that information. 5. Investigative (Fraud) Auditing: The review of activities targeting irregularities, their magnitude and rate of occurrence. 2.1.5 The internal audit process The internal auditing process generally followed by most internal auditors consists of four elements: Planning, Fieldwork, Reporting, and Follow-up. The first fieldwork standard for conducting internal audits is that the audit work be adequately planned. In planning, internal auditors should define the audits objectives and the scope and methodology to achieve those objectives. Reider (1994, p.21) stated, The purpose of the planning phase is to determine whether a situation needs improvement. Whether it is significant, and what should be done about it. In addition, McDaniel (2000) listed ten activities, which comprise the planning phase of the audit: 1. Reviewing the risk assessment results and comments. 2. Reviewing audit objectives and prior audits 3. Obtaining and reviewing relevant information including the mission statement and goals and objectives of the auditable entity. 15

4. Performing an analytical review 5. Meeting with the audited/client 6. Interviewing key management and staff members 7. Identifying and following the key processes instrumental in the accomplishment of the entities goals and objectives 8. Identifying potential risks associated with key processes 9. Evaluating potential risks without controls considered in place 10. Designing the audit program to address high-risk areas identified. Further, in this planning phase internal auditors should look for the kinds of management controls that will help reduce or mitigate risks. Improprieties stemming form inadequate controls in high risks areas can be catagorized under the four generally accepted elements of management: Planning, Organizing, Directing, Controlling. Sawyer (1983) identified violations of four generally accepted elements of management as: 1. Improper planning results in not setting or updating goals or standards, not prescribing a system of review and approval, developing plans that are incompatible with company objectives, not providing for the measurement of the performance needed to carry out plans. 2. Improper organizing results in failing to establish unity of objectives within organizational units of the enterprise, failing to provide equality of authority and responsibility, failing to establish clear lines of responsibility which extend from the top of the organization to the lowest level of supervision, failure to delegate authority so as to permit decisions to be made at the lowest practicable level of management. 3. Improper directing results in not training or instructing subordinates, not providing for coordination of plans, objectives, policies and procedures of the unit with those of the company and interfacing units, not making sure that people read and understand instructions. 4. Improper Controlling results in not providing schedules and budgets for each job, not fixing responsibility for work performed, not providing for feedback on the quality and acceptable of the work performed, not comparing results with expectations and investigating variances. Following the planning phase of the audit, the necessary fieldwork is performed to accomplish the audit objective. Fieldwork is performed to accomplish the audit objective. Fieldwork primarily 16

carries out the basic instructions in the audit program. Essentially, it is directed toward measurement and evaluation. Measurement cannot be objective unless standards of measurement have been established and units of measurement have been identified. Without standards, audit results are subjective opinions instead of objective conclusions (Sawyer, 1983). Generally accepted auditing standard provide four basic forms of fieldwork: Observation, Inquiry, Inspection, andConfirmation. The data gathered thought these procedures must be evaluated and interpreted. The results of audit fieldwork provide the support upon which internal auditors base their opinions as to the unit being audited. After completion of fieldwork, a final report is issued. Elements that are generally included in comprehensive internal audit reports include the following: Introduction, Background, Summary, Scope and opinion, Findings and recommendations, and Exhibits (ACUA, 1992). Also according to McDaniel (2000), the final audit report issued should address: High risks not appropriately addressed/mitigated to allow for the successful accomplishment of key goals and objectives of the entity reviewed. Strategies, solutions and alternative systems/procedures necessary to permit the accomplishment of the predetermined goals and objectives. Agreed upon timetable for implementing necessary changes identified. Reports are the auditors opportunity to get managements undivided attention and to show how auditors can help them. Standards for the Professional practice of Internal Auditing and generally accepted Government Auditing Standards require internal auditors to follow up on known material findings and recommendations from previous audits. They should do this to determine whether the auditee/client has taken timely and appropriate corrective actions. Audit fieldwork activities include examination of documents, interviews with applicable personnel and observations of the auditees operations. The data gathered through these procedures must be evaluated and interpreted. Reider (1994, p.21) stated, The purpose of the planning phase is to determine whether a situation needs improvement, whether it is significant, and what should be done about it.

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The audit report represents or symbolizes the internal auditing department and constitutes the output of the college or university internal audit staff. The purpose of the report is to bring the results of the audit, including findings and recommendations, to the attention of those having an interest in or responsibility for the findings (Reider, 1994). Audit reports need to be supported by sufficient documentation to ensure the credibility of reported results. Follow-up audit work is needed to determine if corrective action has been taken and if recommendations have produced the intended results. This information is of particular interest to management and board members. Audit follow-up is also useful in targeting future audit work. 2.1.6 Higher education auditing environment As the 20th Century closes, the higher education environment is faced with numerous challenges of change that university internal auditors need to be aware, in order to be effective, some of the higher education literature has focused on these challenges. Elliott (1994) addressed the challenges facing urban universities in the delivery of higher education to the New Majority made up of women, minorities, displaced workers, senior citizens and career professionals. Horne (1995) noted that criticism has increased from politicians, government officials and others about the time faculty spends in the classroom the value of research, and the quality and preparedness of students. Mercer (1993) described the growing concern among legislators, parents, and students about the amount of tuition that higher education is charging and how this concern is causing compus leaders to seek new ways of keeping costs in line to reduce the need for tuition increases, and/or to find other sources for finding. Petrson et al. (1997, P.xix) in planning and Management for a Changing Environment A Handbook on Redesigning Postsecondary Education stated: In this new context, higher education instructions need critically examine their programs and processes, adapting where possible and reorganizing and restructuring where necessary. Most critical to the long-term effectiveness of higher education is thoughtful attention to the design of institutional processes for planning, management, and governance. The ability of colleges and universities to adapt successfully to the challenges they face depends a great deal on an institutions collective ability to learn successfully implement appropriate change, and continuously improve the core technologies of the organization.

18

Further, relative to the environmental challenges facing higher education Rowley et al. (1997, P.7) stated: the move of the country since the 1980s toward more conservative politics, whether temporary or not, is signaling a diminution of the days of government largesse, especially in national funding of research, stat- supported growth and the subsidy of tuition under the umbrella of accountability and efficiency. Governments are increasingly interested in cutting perceived waste and in balancing budgets. These challenges of change will directly affect the work of internal auditors. Management is responsible for maintaining an adequate system of internal control to manage risks to the organization. Internal audit will provide assurance services to management, the board and the audit committee in terms of reviewing the adequacy of these systems of internal control. Internal audit will also provide a consulting role in helping promote and facilitate the development of effective systems of risk management and internal control. In addition, and subject to the availability of resources, audit will seek to respond to managements requests for investigations into matters of fraud, probity and compliance. Internal audit will provide advice on addressing these problems, which remain the responsibility of management. Furthermore, internal audit shall have no responsibilities over the operations that it audits over and above the furnishing of recommendations to management. The results of consulting and ad hoc projects requested by management will be used to inform internal audits position on assurances where appropriate (Pickett 2010). Johnsons (1992) study on internal auditing in higher education contained a reference to a publication by the public accounting firm listed key audit areas of the Twenty-First century university as:financial auditing,operational auditing,compliance auditing,information technology auditing,investigative (Fraud) Auditing. Because of the changes taking place in the higher education environment, Bruegman (1995) has advocated that higher education change to the corporate model as an administrative /participatve organizational model based on the following reasons: 1. The present organization of higher education institutions is too complex and unmanageable, 2. Higher educations rigid decentralized culture has created a fragmented, specialized administrative structure. 3. Colleges and universities are drowning in policies, procedures and paper because there are so many layers of supervision. This stifles entrepreneurship. 19

4. Higher educations core mission teaching is being diluted. 5. Todays organizations have produced no leaders.

2.2 Empirical framework for the study 2.2.1 Prior research studies on internal audit effectiveness measures and its impact on internal audit effectiveness.
The subject of auditing effectiveness and factors used to evaluate auditing effectiveness has been discussed in the internal auditing literature. In the mid-1970s the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 9 titled the Effect of an Internal Audit Function on the Scope of the Independent Auditors Examination. The purpose of this publication was to provide guidance to external auditors who relied on the work of internal auditors in the performance of an institutions annual audit. The statement made it a requirement that external audit function evaluates internal audit in terms of three criteria: (1) objectivity, (2) Competence, and (3) performance. Clark et al. (1981) conducted a study of internal auditor objectivity. Participants in the study included 25 partners and managers of international public accounting firm who were asked to indicate their perceptions of the importance of five criteria: 1. Internal audit department independence: 2. The level to which the internal audit staff reported; 3. The internal audit departments ability to investigate any area within the organization; 4. Top management support of internal audit; and 5. Adequacy of the scope of audits Although the consensus of ranking was in the order of the five criteria listed above, the study provided evidence that more specific evaluative criteria may be needed to assure consistent assessment of internal audit staff objectivity. In a 1990 exposure draft issued jointly by the AICPA and Canadian Institute of Chartered Accountants of the external auditors consideration of the internal audit function in a financial statement audit, the following factors were recommendation for consideration when evaluating the quality and effectiveness of the internal auditors work: 20

1. The scope of work is appropriate to meet audit objectives, 2. Audit programs are adequate, 3. Working papers adequately document the work performed, 4. Conclusions are appropriate; and 5. Reports be consistent with the result of work performed (AICPA. 1990). Glazer and Jaenicke (1980) constructed a framework approach to evaluating the internal audit function based on criteria set forth in the Standards for the Professional practice of Internal Auditing. The evaluation was a compliance review against the criteria defined in the Standards. The five major performance measures specified were: (1) independence (2) Professional proficiency, (3) Scope of audit work, (4) management of the internal auditing department and (5) performance of audit work (Institute of Internal Auditors, 1978). Salmon and Chadler (1981) considered the compliance to standards approach to evaluating an internal audit function to be an incomplete analysis of effectiveness. They suggested that a review of the audit function take into consideration such elements as: 1. Environmental characteristics 2. Infrastructure 3. Audit process 4. Audit management and 5. A review of the audit function Farbo (1985) investigated the effectiveness of the internal audit function within universities by comparing and contrasting the importance of selected internal audit attributes as perceived by the internal audit director, his/her immediate superior and the institutions external or independent auditors at both public and private institutions. The study was conducted through use of a survey questionnaire. The concept of effectiveness evaluated was modeled as a function of internal audit attributes: (1) audit objectivity, (2) auditor competence, and (3) auditor performance or productivity. The sample consisted of individuals associated with the internal audit department of western region members of the Association of College and University Auditors. The survey was sent to the internal audit director his/her immediate superior and the institution/s external auditor. Statistical analysis included Kendalls 21

Coefficient of Concordance with 0.05 level of significance, 2-tailed test of significance and Spearmans Rank Correlation Coefficient with0.05 level of significance, a two-tailed test of significance. A split plot analysis of variance was computed for each of the five major performance areas defined as elements of auditor performance. Findings indicated significant agreement among perceptions of audit objectivity and auditor competence attributes, as identified by the audit director, immediate supervisor and external auditor. The statistical strength of agreement, ranged considerably. In addition, findings revealed a significant difference between perceptions of the audit performance attribute relative to audit professional proficiency for audit directors and their supervisors in 25 public institutions. Comparisons of the mean responses for the three other major performance factors (independence, due professional care, quality assurance and improvement program) did not identify significant differences.
Albrecht et al. (1988) examined the attributes of Americas most effective internal audit departments.

To select the sample, the researchers requested the Board of Directors and members of the Research Committee of the Institute of Internal Auditors to identify the most effective and respected internal audit departments known to them. This process resulted in thirteen companies participating in the study. Interviews, using a structured interview guide, were conducted with the chief executive officer, chief fiscal officer and operating management of each company. The findings from the study was the identification of fifteen factors used as criteria to judge the effectiveness of internal auditing departments. They further classify these factors into three distinct kinds of criteria as follows: 1. Feedback effectiveness or effectiveness as perceived by others and best exemplified by the factors by auditees response and feedback as an effectiveness measure. 2. Qualitative or indirect and judgmental measures of effectiveness. The factors ranked as most important of this kind were reasonable and meaningful findings and recommendations, professionalism of the Internal Audit Department, and Absence of surprises. 3. Quantitative or direct and objective measures of which the factor adherence to audit plan ranked as the most important of this kind of criteria. The researchers compared the responses of top management representative and found the there was agreement on the overall order of perceived importance of these factors. 22

Traver (1991) studied differences in perceptions of audit directors and their immediate supervisors of the importance of factors, which have an impact on audit effectiveness. The sample consisted of 326 audit directors who were members of the Association of College and University Auditors. Two hundred thirty-five responded. In addition, the 235 immediate supervisors of those auditor directors who responded were included in the study. Subjects were asked to complete a researcher created questionnaires of twenty-four questions utilizing six factors: professionalism, objectivity, scope, independence, performance, and audit management. The statistical test used to compare mean responses of the audit directors and their immediate supervisors was the t-test. Findings showed significant difference on perceptions of importance between audit directors and their immediate supervisors for all factors. The study concluded that further work is indicated to unify the view of perceived importance between audit directors and their immediate supervisors. Azad (1992) examined the perceptions of college and university auditors concerning the importance of selected factors for the successful performance of operational auditing. The factors studied were categorized in eigth attribute group: Independence, audit plan, audit program, audit supervision, continuing education, training, audit report and audit follow-up. A survey questionnaire of twenty-nine factors categorized in the eight-attribute groups associated with operational auditing in university was used to gather the data. The survey questionnaires were mailed to 328 members of the Association of College and University Auditors. Two hundred and seven responded. Mean ratings and standard deviations for the importance of each factor were calculated. Results indicated that all factors perceived by internal auditors as most important for the successful performance of operational auditing relative to each attribute category were: 1. Reporting to the audit committee 2. Establishing the audit objectives 3. Establishing steps for evidence accumulation 4. Reviewing audit reports

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5. Attending professional conferences and seminars for continuing professional educational purposes 6. Training in operational auditing 7. Communicating material facts accurately and unequivocally and 8. Responding by the auditee in writing to the audit report in a timely manner Bethea (1992) examined the perceptions of chief internal auditors of the importance of audit funding levels and 12 selected audits and training attributes with regard to the roles and responsibilities of internal auditing in higher education. The selected audit and training attributes included organization reporting status, scopeofwork, staffcertification, independence, objectivity, continuing education, training, audit planning, audit programs, audit supervision, professional organization and academic culture. The sample consisted of 363 chief internal auditors within the Association of college and University Auditors. Both public and private institutions located in several regions throughout the United States and a few institutions outside the United State were included in the study. The test used to evaluate the 10 null hypotheses was the split-plot analysis of variance. The test was a two-tailed test at a .05 level of significance. The findings indicated private institution audit funding levels are higher than public institutions, thus indicating a stronger commitment to the audit functions. There were significant differences among chief internal auditors of the perceived importance of 10 of the 13 selected audit attributes. The attributes showing no significant differences were Audit planning, audit supervision and professional organization. In addition, public institutions were found to offer more training than private institutions. Dessalegn and Aderajew (2007) investigated to identify factors that affect the effectiveness of internal audit services. The factors were internal audit quality, management support, organizational setting, audit attributes. The study was conducted by case -study method by distributing questionares to audit personnels and identified the following major findings: 24

Internal audit quality and management support strongly affect internal audit effectiveness.

Organizational setting and audit attributes do not have strong impact on audit effectiveness.

Ahmad et al (2009) identified five key factors that contribute to the effectiveness of internal audit functions. According to their importance the factors are internal audit quality, support of top management, adequate resources, cooperation from auditor and interaction with audit committee. A survey questionnaire for 200 internal audit staff in symposium was distributed and 99 were collected. The prior research studies on internal audit effectiveness measures and its effectiveness is summarized in figure 1. Figure 1: summary of selected empirical studies.
Author and date,Research (R) Standard(S), suggestion

impact on internal audit

N0

.
1

Factors
1. objectivity, 2. Competence, and 3. Performance. 1. Internal audit department independence: 2. The level to which the internal audit staff reported; 3. The internal audit departments ability to investigate any area within the organization; 4. Top management support of internal audit; and 5. Adequacy of the scope of audits 1. The scope of work is appropriate to meet audit objectives, 2. Audit programs are adequate, 3. Working papers adequately document the work performed, 4. Conclusions are appropriate; and 5. Reports be consistent with the result of work performed 1. Independence 2. Professional proficiency, 3. Scope of audit work, 4. management of the internal auditing deparment and 5. performance of audit work 1. Environmental characteristics 2. Infrastructure

AICPA(1970s) ,S

target group/countr y USA

Findings on perceptions Difference(D)/ Similar(S) on importance factors All are equally important

Clark et al (1981), R

Partner vs Managers. USA

Importance decrease As we go down.

AICPA and CICA (1990), S

USA and Canada

All are equally important.

Glazer and Jaenicke(198 0),suggestio n

USA

All are equally important.

Salmon Chadler

and

USA

All are equally important

25

(1981), suggestion

3. Audit process 4. Audit management and 5. A review of the audit function 1. 2. 3. Audit objectivity, Auditor competence, and Auditor performance productivity. Internal External Audits CEO. USA Top managements USA

(addetional Consideration For No 4). S except audit professional proficiency.

Farbo (1985)

or

Albecht et al (1988), R

Traver (1991),R

1. Reasonable and meaningful findings and recommendations 2. Auditees response and feedback 3. Professionalism of the internal audit department 4. Adherence to audit plan 5. Absence of surprises 1. Professionalism 2. Objectivity 3. Scope 4. Independence, 5. Performance, and 6. Audit management 1. 2. 3. 4. 5. 6. 7. 8. Independence, Audit plan Audit program Audit supervision Continuing education Training Audit report and Audit follow-up.

S on all factors.

Internal audit heads And CEO. USA

D on all factors.

Azad (1992),R

Internal auditors. USA

All are equally important.

10

Bethea(1992) ,R

1. Organization reporting status 2. Scope of work 3. Staff 4. Certification 5. Independence 6. Objectivity 7. Continuing education 8. Training 9. Audit planning 10. Audit programs 11. Audit supervision 12. Professional organization and 13. Academic culture 1. 2. 3. 4. Internal audit quality management support organizational setting ,and audit attributes

Chief internal auditors of private and public institutions . USA

D except audit planning, audit supervision and professionalism .

11

Dessalehn and Aderajew (2007),R

Internal audit personnel Ethiopia

Ahmad et al (2009),R 12

1. 2. 3. 4. 5.

internal audit quality, support of top management, adequate resources, cooperation from auditor ,and interaction with audit committee

Internal audit staff. Malaysia

The first two has strong impact but the last two do not have strong impact on Internal audit effectiveness. Importance decrease As we go down.

26

From the above empirical studies, the researcher concludes a promising research area on audit staffs, directors and presidents perception on the importance of internal audit effectiveness measures/criteria used to jugde internal audit effectiveness. These scholars were not using effectiveness/outcome criteria (only they used process/outcome criteria) to evaluate internal audit effeciveness and at same time, they did not consider stakeholders /managements and internal audit staffs simultaneously as study group.

2.2.2 Dimensions of internal audit efeectiveness measures


In recent years, researchers and practitioners have widely discussed the need for internal auditors of adding more value to their companies operations, and contributing to the achievement of corporate objectives. Rickard (1993, pp.21-23) stated that, I think it is quite clear that the performance indicators [measures] for internal audit that have been developed over the years fall into the category of administrative performance. They are workload oriented, introspective, and provide only a snapshot of how efficiently the resources of internal audit are used. They provide no information about the impact of internal audit work on the operation of the organization. Some eleven years later Blackburn (2004, P.22) provides a similar argument stating that, However, the trouble with these targets [efficiency and effectiveness measures] is that the operational goals chosen may not reflect the overall purpose of internal audit. That is:to provide assurance to the management, the audit committee and the board on the system of internal control and risk management; and to assist management to improve its operations, risk management and internal control.So if we rephrase "was the internal audit function effective?" as "to what extent did the internal audit function provide us with assurance? What evidence do we have of improvements in operations, risk management and internal control? We are closer to what we would like to know but the answers may not be as readily quantifiable. This seems to indicate that in the period from the early nineteen nineties up to the present day little progress has been made in moving internal audit performance measurement forward beyond the traditional measures which based mainly on budget and a simple time recording system. (Blackburn, 2004). This new perspective has focused increasing attention on issues such as performance evaluation and effectiveness of internal auditing (Dittenhofer, 2001). Several parties advocated the need to assess internal auditing (IA) effectiveness, though, at present; there is not a shared framework of reference to this scope (for instance Desalegn & Aderajew, 2007; Dittenhofer, 2001; Sawyer, 1995; Barrett, 1986). Recently, Sarens (2009, pp.1-7) have raised the question when can we talk about an effective IA function? in his editorial about future perspectives of IA research. Looking at the existing 27

literatures, there is no unique answer to this question. Different authors have related IA effectiveness to different issues, focusing on IA processes, outputs and outcomes. Certain authors related IA effectiveness measures with the quality of IA procedures, such as the level of compliance with IIA standards or the ability to plan, execute and communicate audit findings (for instance Fadzil et al., 2005; Spraakman, 1997). However, this approach suffers from a major limitation as it is based on the hypothesis that IA activity is effective if IA procedures are carried out properly, without considering the needs of the main stakeholders in each individual audit (Lampe & Sutton, 1994). This is in contrast with the current trend that stresses the relevance of value-added activities and indicates stakeholders satisfaction as one of the critical performance categories for IA activities (see, for instance, the Practice Advisory 1311-2). A second stream of research relates IA effectiveness to the output of IA activities (Frigo, 2002), looking for instance at the ability of IA to respond to auditees needs (see, for instance, Frigo, 2002; Ziegenfuss, 2000; Barrett, 1986). In this context, a recent work by Ziegenfuss (2000) has highlighted that the survey results of auditee satisfaction and the percent of recommendations that are implemented are the performance measures considered by the CAE to be most suitable to evaluate IA effectiveness. Finally, a few authors went further, relating IA effectiveness measures to the outcome of the audit activities (i.e. the impact of a certain output of the audit process). According to Boland and Fowler (2000, pp.417-44) define what is meant by an outcome, and go on to explain why measuring outcomes is inherently difficult, Hence it is necessary to define an additional term, namely "outcome", defined here as the impact that outputs have in meeting [this] perceived need. This is generally thought of in qualitative terms that imply that outcomes are difficult, in themselves, to measure. Furthermore, the process is also frequently complicated by the length of time it takes for such impacts to be identified. Finally the impact of outcomes arising from the actions of other agencies, working in related policy areas, adds further complexity. Dittenhofer (2001, pp.443-50.24) states that the measurement of internal audit effectiveness must consider aspects that relate closely to the intended outcome of the audit process. He argues that, when evaluating the effectiveness of the internal auditing operation, a positive response would be given when the internal auditor: (1) audits the achievement of the auditees objectives and finds no

28

problems, and no problems surface following the audit; or (2) audits and finds problems; and recommends solutions to the problems; and the solutions resolve the problems. The logical extension of this statement being that internal audit effectiveness, or outcomes can be measured by: 1. recording control failures, or surprises 2. Implementation of Recommendations 3. the amount of cost savings generated as a result of internal audit work 4. Measurement Targetry and Dysfunctional Behaviour 5. stakeholders and their needs and expectations 6. Role of Internal Audit. 1. Recording control failures, or surprises that occur after the audit, because either they were not identified in the first place, or the recommended solution failed to prevent the problem. Whilst this is intuitively attractive, Boland and Fowler's identification of the problems in measuring outcomes are particularly relevant. Firstly it may be difficult to attribute events to specific individual control failures, or surprises may be qualitative and therefore difficult in themselves to define. Secondly how long after the audit review or implementation of actions is it appropriate to take such measures? Thirdly how is it possible to isolate the internal audit contribution (and so measure its performance) when failures may occur due to the actions or inactions of staff or management, or be caused by changing environmental conditions not present at the time the review was undertaken? Rickard (1993, P.21) argues that to be useful, internal audit activities should aim to improve performance [of the organization] by;improving management's understanding of the function, program or product which is the subject of the inquiry; developing the knowledge, skill and appreciation of controls to be used; assisting management in the development of options for addressing problem areas and the implementation of recommendations, and so on. This description draws on the work of Sawyer in his model of Process Consultancy. This stresses the helping relationship between consultant (auditor) and client (manager) whereby the role of the consultant is to, Create a relationship with the client that permits the client to perceive and understand and to act upon the process events that occur in the client's internal and external environment in order to improve the situation as defined by the client (Sawyer, 1983, pp.41-44). The measurement of the outcome of such a role that can be attributed to the consultant is however inherently difficult.This inherent difficulty is reflected in the lack of evidence from the literature of outcome measures actually used, even if some are discussed. However, one measure that is used almost as a substitute or proxy for outcome is the implementation of recommendations made.

29

2. Implementation of recommendations Implementation of recommendations is a frequently quoted performance measure for internal audit, but is at the same time frequently criticised as a measure. Blackburn (2004, P.35) argues that such a measure is an indicator of an effective internal audit function. This measures both the responsiveness of management and the skill of internal audit in agreeing improvements that management is prepared to action. Two objections are commonly raised to this measure.These are: 1. The potential for dysfunctional behaviour: If internal auditors know that they are measured against this, they may join management to avoid agreeing actions if they are difficult to implement, or will accept that actions have been implemented without obtaining sufficient positive evidence to support this. 2. The lack of direct contro1: Management implementation rates are likely to be outside the control of internal audit. Chambers (2003, P.19) repeates the views of Boland and Fletcher, ...time delay is likely to be too great to make it a useful measure of internal audit performance. So it might be more practical to measure in accordance with the listing of performance measures but stopping short of trying to evaluate whether or not an implemented audit recommendation was successfu1. In Salierno (2000) a number of the critic surveyed are critical of the measure for a range of reasons; it could prove misleading; the qualitative differences among recommendations are not accounted for using this measure; this often proves difficult to measure and is subject to factors beyond the control of the internal audit function; responsibility for the implementation of recommendations does not rest with internal audit and so it should not be used as a measure of internal audit's performance. 3. Cost savings Another potential outcome measure, the amount of cost savings generated because of internal audit work, is another seemingly controversial area for measurement, with a range of arguments for and against its use. Seaman (1995) make similar arguments for using a financial value upon the work undertaken by internal audit as a performance measure within the context of a value added approach. This view is supported in a more recent survey conducted by Cashen and Aldhizer III (2002) who identify that the third most prevalent measure used by internal audit departments who demonstrate a high value added service emphasis is future savings generated by audit recommendations. Tilley (1999) in his 30

survey of Australian entities also identifies savings arising from recommendations as one of the most frequently cited measures. However, this may overstate the popularity or relevance of this as a measure, as Seaman (1995) cites that, "If the audit comment refers to an operational matter that involves efficiency or effectiveness it can admittedly be more difficult to show the value." Taking this in the context of the modern role to be performed by internal audit covering all aspect of the business it makes the application of this measure more trivial. This is perhaps reflected in the Tilley study which whilst identifying cost savings as among the most popular measures, it was still only cited by 15% of the respondents. In the Cashell and Aldhizer study 58% of respondents cited this measure. Chambers (2003, P.39) argues that, Measuring cost savings is only a partial measure as the time delays and uncertainty as to what might otherwise have happened make such measures unreliable. It will however never be possible to account for the total value of the audit function to the business as a whole in terms of cost savings. The impact on costs of many accepted and implemented audit recommendations is indeterminable as we can often never know what would have happened if management had not so acted. Ewert (1997, pp.54-57) goes further and suggests that the internal audit budget is analogous to an insurance premium, This is not to suggest that the audit department's budget should be cost justified by a quantified list of economic benefits. Approving the internal audit budget and plan is simply a risk management decision. An informed discussion of costs, services, and coverage, normally with the audit committee, would satisfy the cost/benefit criteria. 4. Measurement targetry and dysfunctional behaviour The use of measures to create performance targets and the potential for this to introduce dysfunctional behaviour within an audit environment is reviewed by Otley and Pierce (1996) in the context of time budget pressures. Whilst having an external audit focus this study highlights a number key points that need to be considered generally and in an internal audit context. The study provides strong evidence that the perceived attainability of budgets is linked closely to the incidence of dysfunctional behavior. The dysfunctional behaviors studied were those that lead to either a reduction in the quality of the work undertaken, or the under reporting of time. It is argued that to attain maximum motivational benefits from budgetary targets they should be set at tight yet attainable levels. However this level is likely to vary between individuals and so adverse as well as favourable variances will occur - both outcome potentially encouraging dysfunctional behaviour. 31

This means that there is an inherent conflict between the planning / motivational functions of budgets and the control function. The relevance to this study however is in highlighting two factors. Firstly is the design of the measures themselves in recognising the potential for such behaviour to be present. Secondly is in the design of the overall framework that should provide checks and balances to ensure possible dysfunctions are minimised, or counter balanced by other measures. 5. Customers / Stakeholders The literature is relatively consistent in defining the range of customers and stakeholders of internal audit. However there is some diversity of view as to who the key stakeholder is. Cosmas (1996) provides the most comprehensive list that is representative of that suggested in many articles. This is: The Board / Audit Committee Executive Management Operating Management External Audit Control Agencies The analysis recognises that this list may vary depending upon the size and context of individual organisations; and that each stakeholder will have different needs and expectations. Others extend the list to include suppliers, partners, and the community / society. From a marketing perspective this is important as it enables market segmentation and so products and services can be designed and delivered in a tailored fashion. Interestingly however, Ewert (1997,pp54-57) argues that, "catering for too many customers may be the root of some of the conflicts in perception, needs and expectations that still plague the internal audit profession." His view is that internal audit should recognise only one customer, and that is the organisation as a whole so that internal audit activity is directed at serving the good of the organisation as whole rather than individual parts of it. It is clear that in designing performance measures it is important to determine who the target of the measure is and what response to the measure is required, and this means that in designing a measure and a framework a clear understanding of stakeholders and their needs and expectations is required. 6. Role of internal audit The final variable to consider for outcome is the role adopted by internal audit within the organization, and to some extent the role adopted by the organization itself. Daft (1997) identifies two management paradigms. The first is the traditional paradigm, which is characterized by control, efficiency, rules and bottom line profit. The second is the modem paradigm that is characterised by empowerment, creativity, teamwork, collaboration, and top line effectiveness. 32

The impact of this distinction is perhaps best illustrated by the articles on the impact of Total Quality Management (TQM) on internal audit by Hawkes and Adams (1994). This article illustrate that if the organisation itself adopts a TQM philosophy - the most visible expression of Daft's modem management paradigm - then the role internal audit plays, hence the measures of performance required, will change. Hawkes and Adams (1994) illustrate a range of scenarios for internal audit ranging from the traditionalist model of independent systems efficiency focus, through independent supportive reviewer, participative and supportive adviser, to participative catalyst for change. Clearly the stance or role adopted by the internal audit unit will affect upon the measures of performance to be chosen. Applegate et al (1997,pp62-67) illustrate one "quality attributes" model as an alternative to more traditional performance measures that may be appropriate in organisations that follow this philosophy. However not all organisations do, and so it is important to consider the role played by internal audit in choosing an appropriate framework, and measures. From the above statements it is clear that outcomes address a wide range of aspects, i.e. all the elements on which audit activities have an impact. These include both efficiency and effectiveness of the audited processes, and corporate performances. At a process level, for example, the impact of IA activities has been related to cost savings generated by the implementation of suggested recommendations (Cashell and Aldhizer III, 2002). At a corporate level, outcome can address the IA contribution to corporate performance, such as profit, growth, or share price; or its role in the avoidance of corporate failures by ensuring sound corporate governance.

2.3 Research model for internal audit effectiveness measures


The theoretical and empirical literatures have recorded systematic variations on managements and audit staffs perception on the importance of internal audit effectiveness criteria to evaluate internal audit effectiveness. To test this variation, the following conceptual model was developed by the study.

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Figure 2: Perception of management and internal audit staff on measurement criteria

To test this conceptual model, the fifteen important internal audit effectiveness criterias that was used by Albrecht et al. (1988) was used. The reason why this criteria was selected is that first it is comprehensive as compared to others. For instance, this criterion contains both qualitative and quantitative dimensions. Second while most studies conducted by scholars evaluate internal audit performance by using process and output indicaters (for instance, following audit standards), only albrechet et al. (1988) tried to evaluate internal audit performance by using outcome/effectiveness measures. However, albrecht et al. (1998) studies considered only from the percpectives of stakeholders especially managements. Thus, the model indicated above was developed by the researcher to fill this gap. The different group of management and audit staffs perception on the importance of internal audit effectiveness measure affects internal audit effectiveness as showen in the model. Albrecht et al. (1988) used fifteen factors which catagarized in to five major factors each contains again three criterias. The criterias are: 34

1. The usefulness of audit information provided by internal auditing. 2. Internal auditings recognition of the institutions significant problems. 3. Internal auditings ability to provide independent reviews. 4. The auditees acceptance of audit findings and implementation of recommendations. 5. The auditees assessment of internal audit services. 6. The internal auditing department gaining the cooperation of management. 7. The participation of internal auditors in professional organizations. 8. The participation of internal auditors in continuing education programs. 9. The practice of professional ethics by internal auditors. 10. Internal auditing ensuring that riskier areas receive higher audit priority in the audit plan. 11. Completion of the annual audit plan by internal auditing. 12. The development of a long-range plan by internal auditing to cover all significant areas. 13. The need for internal auditing to alert management to potential problems befor they occur. 14. Internal auditings early warning of problems in operations and control. 15. Internal auditingss ability to establish appropriate audit priority based upon a formalized risk assessment by internal auditing. The fifteen items were designed to provide three-item groupings of the five factors used to judge internal audit effectiveness. The fifteen items were randemly distributed on the questionairre to increase realability of the response and the five factors serving as the bases for the items in this scale are: 1. 2. 3. 4. 5. Reasonable and meaningful findings and recommendations 1,6,11 Auditees response and feedback 5,10,15 Professionalism of the internal audit department 2,7,12 Adherence to audit plan 4,9,14 Absence of surprises 3,8,13

The item statements are grouped by their relationship to one another based on Albrecht et al (1988).

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CHAPTER 3
PRESENTATION AND ANALYSIS OF DATA
Introduction Under this chapter, results of data analysis based on the questionnaires survey were presented. The first subsection presents summary statistics of respondents who participated in the study. Subsection two involved testing of four hypotheses mentioned in section 1.3 by using z-test for proportion and one way ANOVA. 3.1 Summary Statistics of the Respondents In this study, the targeted respondents were presidents, directors and audit staffs of Bahir Dar and Mekelle Universities. They were chosen since they occupy the position in their respective universities. Total answered questionnaires received were 59 out of 61(96.72%) of respondents. Although, the total number of questionnaires received were 59, only 58 observations were used which represent a net response rate of 95%. Respondents were eager to participate with 15% of respondents being presidents, 71% directors and 14 % of internal auditing staffs from the total census. Table 3.1: Profile of the respondents Gender % Male Female Age % 3 17 31 21 28 Education level Bachelor(N=8) Masters(N=23) PHD(N=27) % 14 40 46 Work experience <1 years(N=1) 1-5 years(N=7) 6-10 years(N=17) % 2 12 29

100 21-25(N=2) 0 26-30(N=10) 31-35(N=18) 36-40(N=12) >40(N=16)

11-15 years(N=19) 33 16-20 years(N=8) > 20 years(N=6) 14 10

Table 3.1 shows the profile of the respondents. The overall distribution of males in the census was 100 percent, with 100% of males within the universities in top positions. In this analysis, respondents age ranged from 21 41 and above. The age of the respondents were grouped into five categories. In reference to respondents working experience indicates that the duration of work experience ranging from less than 1 year to more than 20 years. The highest duration of work experience are between 11 to 15 years (33%) followed by 6 to 10 years are (29%). Apparently the 36

least year of work experience among the respondents is less than 1 year (2%). On the other hand, education level of the respondents revealed that higher percentage level of respondents education is PHD, which accumulates 46% and 40%, has master degree qualification. The least percentage (14%) of respondents has academic qualification of Bachelor Degree level.

3.2 Hypothesis testing and data analysis


The hypothesis testing was done based on the four (4) hypotheses that were determined in Chapter 1 of this research. The hypothesis was developed based on the research model that shown in part 2.3. Two test has been used namely z-test and one-way analysis of variance. The z- test is being carried out to determine the significant difference between the scores of university presidents, directors and audit staffs of the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire. One-way analysis of variance was carried out to explore statistically significant difference among mean scores of presidents, directors and internal auditing staffs on the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire. However, before the testing hypothesis four, data was tested for data compatibility for the ANOVA assumptions. The results of normality and homoginity of data distribution was displayed in appendix 1.

3.2.1 Procedures for data analyses


Firstly, to address hypotheses one, two and three, scores were converted to two categories for the five factors/criteria used to evaluated internal audit effectiveness based on measurement scale provided on questionnaire in part two. Each item contributed to a total score for each of the respondents. The total score obtained indicated to what degree these selected factors were important as a whole. The highest score a respondent could have was 15 and the lowest score was three. Therefore, the median, would be nine [(3+15)/2] indicating average importance. Table 3.2 and 3.3 shows the value for each item, and maximum and minimum value for one factor and the maximum and minimum value for all factors and items included in each factor.

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Table3.2: the value for each item, and maximum and minimum value for one factor No The value for one item 1 2 3 4 5 Greate importance=5 Above average=4 Average importance=3 Below average importance=2 No importance=1 No. of items for one factor 3 3 3 3 3 15 12 9 6 3 Scale

Table3.3: The maximum and minimum value for all factors and items included in each factor Factor Code
1 2 3 recommendations Auditees response and feedback Professionalism of the internal audit department 4 5 Adherence to audit plan Absence of surprises

Factors
Reasonable and meaningful findings and

Items in the questionaire 1,6,11 5, 10, 15 2,7,12 4,9,14 3,8,13 Max 15 15 15 15 15 Min 3 3 3 3 3

The scale provides a total score concerning the importance of internal auditing factors used for measuring internal audit effectiveness based on the 5 selected responses. Each response is an increment, which adds to respondent's total score. Having many measurements to provide an overall measurement for a dimension (importance of factors) is statistically more desirable than one measurement. It increases reliability of the Scale (Borg & Gall. 1989). More specifically respondents with average scores more than nine (median) were considered above average importance; those below the median were considered below average importance. The scores for the groups (presidents, directors and audit staffs) were converted in this fashion and tested independently (each group separately) using the z distributions to ascertain if the population proportions can be expected to exist in the three populations are significant. Confident intervals were also computed at the 95% level.

38

Secondly, to test hypothesis four, mean scores of presidents, directors, and internal auditing staffs were calculated and input into a single-factor analysis of variance (ANOVA) model to ascertain if there was a significant difference between the mean scores. All items and factors come from Section two of the questionnaire. Each factor was measured by three items, totaling fifteen items for that section. Respondent mean scores for each factor were calculated by adding the items (for each separate factor) and providing a total score. This resulted in five total scores for each respondent. Mean scores for the three groups were derived from these total factor scores.

3.2.2 Testing hypothesis one


Hypotheses one stated that there was no statistically significant difference between the scores of audit staffs of the perceived importance of the selected five factors used to evaluate internal auditing effectiveness as measured by the questionnaire. The analysis of the five factors individually indicated that audit staffs proportionally perceived the individual factors above average importance to use for evaluating internal audit effectiveness. When the z-test of population proportions was used to test siginificance difference between the scores of audit staffs on these factors, only two factors (reasonable and meaningful findings and recommendations, and professionalism of the internal audit department, and the factors as a whole) found to be significant, that is, audit staffs did not agree on the benefit to use these factor as acriteria to evaluate internal audit effectiveness. Audit staffs had insignificant difference on the remaining three factors (auditee's response and feedback, adherence to audit plan, and absence of surprises), that is they agreed on the benefit of these factors to use as criteria for evaluating internal audit effectiveness. The analysis of factors as a whole indicated that the statistics results of factors as whole exceed the critical value (z = 1.96) needed to reject the null hypotheses.There was significant difference in perception between audit staffs, that is, there was no agreement on the benefits of these two factors to use as criteria for evaluating internal audit effectiveness. Table 3.4 shows the results of the analysis.

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Table3.4: Z-scores measuring audit staffs perceptions on importance of factors for fvaluating auditing effectiveness
Factors 1 2 3 4 5 Whole .26(N=9) %below .17(N=1) .33(N=2) .14(N=1) .37(N=3) .29(N=2) %above .83(N=5) .67(N=4) .86(N=6) .63(N=5) .71(N=5) 1.96 .74(N=25) 1.96 Z critical 1.96 1.96 1.96 1.96 Z observed 2.68 1.06 3.06 0.77 1.42 3.37 0.00076 Two tailed probability 0.00740 0.28920 0.00222 0.44120 0.15560

86% of audit staffs respondents rated the factor of professionalism of the internal audit department as the first above average important factor used for evaluating internal auditing effectiveness. Conversely, 14% of the audit staffs viewed the factor of professionalism of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. This negative view of the professionalism factor by audit stafs may be explained by those audit staffs lack of understanding of the relationship of professionalism to the overall performance of the internal auditing program. 83% of audit staffs respondents rated the factor of reasonable and meaningful findings and recommendations as the second above average important factors used for evaluating auditing effectiveness. On the other hand, 17% of the audit staffs viewed the factor of reasonable and meaningful findings and recommendations of the internal auditing department as a criterion of below average importance for judging internal auditing effectiveness. 71% of audit staffs respondents rated the factors of absence of surprises as the third above average important factors used for evaluating auditing effectiveness. A reason which may explain why audit staffs rated the factors of absence of surprises to be the third above average important factor is that audit staffs understand the benefit of risk management. Audit staffs alert presidents to potential problems before the occurance of problems.In contrast 29% of the audit staffs viewed the factors of absence of surprises of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. This is because internal auditers play a watchdog role and as the result this is not useful to measure internal audit effectiveness.

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67% of audit staffs respondents rated the factors of auditee's response and feedback as the fourth above average important factors used for evaluating auditing effectiveness. On the contrary 33% of the audit staffs viewed the factors of auditee's response and feedback of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. 63% of audit staffs respondents rated the factor of adherence to audit plan as the fifth above average important factor used for evaluating auditing effectiveness. Alternatively, 37% of the presidents viewed the factor of adherence to audit plan of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. The explanation for factors auditee's response and feedback, and adherence to audit plan for being below average may be that presidents may not consider feedback information from audited units and others' views about auditing to be important in their evaluations of internal auditing effectiveness Lastly, 74% of audit staffs respondents rated the all factors of measuring internal audit effectiveness as the above average important factor used for evaluating auditing effectiveness. Alternatively, 26% of the presidents viewed all factors of measuring internal audit effectiveness of the internal auditing department as a criterion of below average importance for judging internal auditing effectiveness. As the result of this hypothesis one is rejected, that is, audit staffs are not agree on the benefit of these factors to evaluate internal audit effectiveness.

3.2.3 Testing hypothesis two


Hypotheses two states that there is no statistically significant difference between the scores of directors of the perceived importance of the selected five factors used to evaluate internal auditing effectiveness as measured by the questionnaire. The analysis for the five factors indicated that directors proportionally perceived the individual factors and the factors as a whole to be of above average importance. Z-test for proportion showed that directors have significant difference on all factors to use as criteria to judge internal audit effectiveness. Individual factors and factors as whole exceed the critical value (z = 1.96) needed to reject the null hypotheses. It is concluded that directors do not agree on the importance of these factors for evaluating internal audit effectiveness; the null hypothesis was rejected. Table3.5 shows the results of the analysis.

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Table 3.5: Z-scores measuring directors' perceptions of the importance of factors for evaluating auditing effectiveness
Factors 1 2 .13(N=5) 3 .19(N=6) 4 .14(N=5) 5 .23(N=7) Whole .15(N=26) %below .09(N=3) %above Z critical .91(N=32) 1.96 .87(N=34) 1.96 .81(N=26) 1.96 .86(N=32) 1.96 .77(N=24) 1.96 .85(N=148) 1.96 Z observed 4.44 3.34 0.00084000 2.4 0.01640000 3.20 0.00138000 1.97 0.04880000 14.08 0.00000200 Two tailed probability 0.00001812

Of the five factors, reasonable and meaningful findings and recommendations was rated by 91% of the directors as being the first above average important factor for judging internal audit effectiveness. Reasonable and meaningful findings and recommendations are the essence of the quality of the work produced by internal auditors and may explain why directors perceived this factor to be first in importance for evaluating auditing effectiveness. This factor also carries the implication of value-added to the entity. Alternatively, 9% of the directors viewed the factor of reasonable and meaningful findings and recommendations of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. The Auditee's response and feedback were rated by 87% of directors respondents to be the second above average important factors for evaluating internal audit effectiveness. A reason that may explain why directors rated the factors of auditees response and feedback to be the second above average important factor for judging internal audit effectiveness is that directors provide valuable comment as input for quality internal auditing. In contrast, 13% of directors viewed the factors of auditee's response and feedback of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. Also worth mentioning is that 86% of directors participants viewed the factor of adherence to audit plan as being third above average important factor for evaluating internal auditing effectiveness. An explanation for directors rating the factor adherence to the audit plan as the third above average 42

important factor for judging effectiveness may be that they are clients to the internal audit function and as a result tended to give more attention to planning aspects of the internal audit department. Otherwise, 14% of the directors viewed the factor of adherence to audit plan of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. 81% of directors participants viewed the factor of professionalism of the internal audit department as being fourth above average important factor for evaluating internal auditing effectiveness. The directors closeness to the audit department, as a client, may also explain their selection of the professionalism of the internal audit department as the fourth important criteria for judging effectiveness of internal auditing. Directors may have perceived that auditors must be professionals. Conversely, 19% of the directors viewed the factor of professionalism of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. 77% of directors participants viewed the factor of absence of surprises of the internal audit department as being fifth above average important factor for evaluating internal auditing effectiveness. Directors expect auditors to alert them to potential problems before the occurance of problems. In contrast, 23% of directors viewed the factors of absence of surprises of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. Finally, 85% of directors respondants perceived factors as a whole to be of above average important criteria for evaluating internal auditing effectiveness. Alternatively, 15% of directors viewed all factors of measuring internal audit effectiveness of the internal auditing department as a criterion for judging internal auditing effectiveness is below average importance.

3.2.4 Testing hypothesis three


Hypotheses three states that there is no statistically significant difference between the scores of university presidents of the perceived importance of the selected five factors used to evaluate internal auditing effectiveness. Table 3.6 highlights the z-test results. Table 3.6: z-scores measuring presidents' perceptions on the importance of factors for evaluating internal auditing effectiveness
Factors 1 %below .11(N=1) %above .89(N=8) Z critical Z observed 3.71 Two tailed probability 0.00020000

43

2 .12(N=1) 3 .29(N=2) 4 .14(N=1) 5 .12(N=1) Whole .15(N=6)

1.96 .88(N=7) 1.96 .71(N=5) 1.96 .86(N=6) 1.96 .88(N=7) 1.96 .85(N=33) 1.96

3.4 0.00068000 1.42 0.15560000 3.06 0.00222000 3.4 0.00068000 6.4 0.000002oo

The data displayed indicated that though more favorable toward some than others, presidents perceive the five factors to be generally of above average importance to be used as a criteria for evaluating internal audt effectiveness. To see the magnitude of importance of these factors as criteria, Z test for proportion is used and the results showed that presidents have significant difference, which contradict the findings of Albrecht et al (1988), on the importance of four factors (reasonable and meaningful findings and recommendations, auditees response and feedback, adherence to audit plan and absence of surprises) to use as a criterion for measuring internal audit effectiveness. Presidents have insignificant differece, which supports the findings of Albecht et al (1988), on the importance of professionalism of the internal audit department for evaluating internal audit effectiveness. Based on the results obtained, the null hypothesis was rejected; and it is concluded that there is a significant difference between presidents. While presidents respondents perceived all five factors to be of above average importance, 89% of them rated the factor of reasonable and meaningful findings and recommendations as the first above average important factors used for evaluating auditing effectiveness. On the other hand, 11% of the presidents viewed the factor of reasonable and meaningful findings and recommendations of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. 88% of presidents respondents rated the factors of auditee's response and feedback, and Absence of surprises as the second above average important factors used for evaluating auditing effectiveness. A reason that may explain why presidents rated the factors of absence of surprises and auditees response and feedback to be the second most important factor is that the top administration does not want surprises and their saying as input for quality internal auditing is very important 44

respectively. Presidents expect auditors to alert them to potential problems before the occurance of problems.In contrast 11% of the presidents viewed the factors of auditee's response and feedback, and absence of surprises of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. In the case of auditee's response and feedback factor, it appears that these presidents may not consider feedback information from audited units and others' views about auditing to be important in their evaluations of internal auditing effectiveness 86% of presidents respondents rated the factor of adherence to audit plan as the third above average important factor used for evaluating auditing effectiveness. Alternatively, 14% of the presidents viewed the factor of adherence to audit plan of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. The explanation for this factor for being below average may be that presidents may not consider feedback information from audited units and others' views about auditing to be important in their evaluations of internal auditing effectiveness 71% of presidents respondents rated the factor of professionalism of the internal audit department as the fourth above average important factor used for evaluating auditing effectiveness. Conversely, 29% of the presidents viewed the factor of professionalism of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. This negative view of the professionalism factor by presidents may be explained by those presidentss lack of understanding of the connection or relationship of professionalism to the overall performance of the internal auditing program. Specifically, for example, they may not understand the connection between an auditor's code of ethics and the integrity of the internal auditing department. Presidents need to understand that internal auditors view themselves as professionals. Lastly, 85% of presidents respondents rated the all factors of measuring internal audit effectiveness as the above average important factor used for evaluating auditing effectiveness. Alternatively, 15% of the presidents viewed all factors of measuring internal audit effectiveness of the internal auditing department as a criterion of below average importance for judging auditing effectiveness. The first three hypothese tested above were summarized in table 3.7.

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Ranks on importance of factors in judging internal audit effectiveness by using z scors(sig at p( .05)=1.96) Audit staffs Factors 1 2 3 4 5 Whole Z-scores 2.6 1.06 3.06 0.77 1.42 3.37 Sig Sig Rank 2 Directors Z-scores 4.44 3.34 2.40 3.20 1.97 14.08 Sig Sig Sig Sig Sig Sig Sig rank 1 2 4 3 5 Z-scores 3.71 3.40 1.42 3.06 3.40 6.40 Presidents sig sig sig insig sig sig sig 1 2 5 4 2 Rank

Insg 4 Sig 1

Insg 5 Insg 3 Sig

Table3.7: summary of the first three hypotheses. Sig=Significant Insg=insgnificant

3.2.5 Testing hypothesis four


Hypotheses four states that there is no statistically significant difference between the mean scores of presidents, directors and internal auditing staffs of the perceived importance of the five selected factors used to evaluate internal auditing effectiveness. First let us see data copatability and then I test the hypothesis.

Datas compatibility for one way ANOVA


The ANOVA models was used to address the (H4) by investigating the significant differences among presidents, directors and internal audit staffs on the importance of internal audit effectiveness measures to assess internal audit effectiveness measures. Field (2005) suggested that, four (4) basic assumptions should be assessed before running the analysis of variance. The assumptions are as follows. 46

1. Normally distributed data: The prerequisite to use anova is the fullfilment of normality assumption. According to Andy (2005) this assumption is tested by looking the frequency distribution in histogram and calculating the z-scores of skewness and kurtosis at significant level .01(p=2.58) if populatin is less than 200. According to him an absolute value greater than 2.58 is significant at 2.58, that is, a data greater than this value is not assumed normally distributed. Accordingly the data was tested and found normally distributed. See the detail in apendex 1. 2. Homogeneity of variance: according to Morgan (2004) to run ANOVA it should be tested for homogeneity of variances to assure that variances are same throughout the data. Given the Levenes test has a probability greater than 0.05 reasonable and meaningful findings and recommendations, auditee's response and feedback, professionalism of the internal audit department, adherence to audit plan ,and absence of surprises , it is assumed that the population variances are relatively equal. For detail see apendex 1 3. Interval data: Field (2005) suggested that the data should be measured at least at the interval level to run in ANOVA. This means that the distances between points of a scale should be equal at all parts along the scale. According to him, five point lekert scales assumed interval scale. 4. Independence: this assumption is that data from different participants are independent, which means that the behaviour of one participant does not influence the behaviour of another. In this study the behaviour of presedents, directors and audit staffs are not influnced each other.

3.2.5.1 Testing hypothesis four factor one


When the single factor analysis of variance was employed to determine if a significant difference existed between presidents, directors and internal auditing staffs regarding factor one(Importance of Meaningful and Reasonable Findings and Recommendations) as table 3.8 shows F(2,55)=4.819,P <.05)it was found that a significant difference is existed. Table3.8: meaningful and reasonable findings and recommendations as perceived by the three groups SOURCE
Between Groups Within Groups Total Sum of Squares 1.644 9.382 11.026 Df 2 55 57 Mean Square .822 .171 F 4.819

P-value
.012

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Sufficient evidence was found to reject the null hypothes. Presidents, directors and internal auditing staffs
(I) job position in the university Presidents Mean (J) job position in Difference the university (I-J) Directors audit staffs Directors Presidents audit staffs audit staffs Presidents Directors .41415* .57375* -.41415* .15960 -.57375* -.15960 95% Confidence Interval Std. Error .15203 .20069 .15203 .15963 .20069 .15963 P-Value .023 .016 .023 .580 .016 .580 Lower Bound .0479 .0903 -.7804 -.2249 -1.0572 -.5441 Upper Bound .7804 1.0572 -.0479 .5441 -.0903 .2249

have signific ant differe nce on the import ance of meanin gful and

reasonable findings and recommendations to use as criteria to evalute internal audit effectiveness. The F ratio only tells us the presence of significant difference among three groups but it does not indicate where the differnce exactly was? To address this, Tukey HSD post hoc comparison was performed. Table3.9: Tukey HSD post hoc multiple comparison

*significant at the 0.05 level.

As Tukey HSD post hoc multiple comparisons on table 3.9 evidenced that the siginificance difference on the importance of meaningful and reasonable findings and recommendations to use as 48

criteria to evalute internal audit effectiveness found between presedents and directors(p<.05), and presedents and audit staffs(p<.05)not between directors and audit staffs(p>.05). But as Morgan etail (2004) this significant difference may be created by the differences in the population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous subsets. The result was indicated in table3. 10. Table3.10: Adjusted Tukey HSD homogeneous subsets
Subset for alpha = 0.05 job position in the university audit staffs Directors Presidents P-value
Means for groups in homogeneous subsets are displayed.

N 8 41 9

1 3.1663 3.3259

3.3259 3.7400

.626

.050

Table 3.10 shows an adjusted tukey that is approprate when population sizes for different groups are not similar (n=9, n=41, n=8). There is not a statistically significant difference (.626) between audit staffs and directors because their means are both showen in subset 1. In subset 2 the directors and presidents means are showen indicating that they are not significantly different (P=.05). By examining the two subsets boxes, we can see that the audit staffs (M=3.1663) is different from presidents (M=3.74) because these two means do not appear in the same subset. Therefore, the significant difference between presidents and directors are atributable to population size difference whereas the significant difference between presidents and audit staffs are atributed to differences in the perceptions on the importance of meaningful and reasonable findings and recommendations to use as criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this factor was rejected. The three elements included in the factor of "reasonable and meaningful findings and recommendations were: (I) the usefulness of audit information provided by internal auditing; (2) internal auditing's recognition of the institutions significant problems; and (3) Internal auditing's ability to provide independent reviews. This third element infers the internal auditor's freedom to report all findings. 49

There are several reasons that might explain this significant difference. To begin with, internal auditors attached more importance to "reasonable and meaningful findings and recommendation" as a criterion for evaluating audit department effectiveness because this factor provides evidence that internal auditors are following internal auditing standards. Internal auditors are authorized to make evaluations of their institution's activities. According to the Standards for the Professional Practice of Internal Auditing, one purpose of these evaluations is to furnish managers with recommendations for improvements. Meeting standards are very important to internal auditors. Another rationale that might explain audit staffs attachment of more importance to this factor is that through reporting meaningful findings and recommendations, audit staffs are provided with an opportunity to get management's undivided attention. Reporting significant audit results and recommendations gives audit staffs an avenue for presenting and selling their products to the president and other top management team members. To audit staffs way of thinking, the reasonable and meaningful findings and recommendations contained in the audit report are symbols of their contributions that resulted in changes that made their institution better overall. Further, internal audit staffs might have perceived more importance to the ability to provide independent reviews than directors. Again, in order to comply with the Standards, audit staffs believe that their departments should be independent, objective and able to render impartial and unbiased judgments in connection with audit work. An explanation for presidents perceiving the factor of reasonable and meaningful findings and recommendation as being of more importance than directors may be, because presidents generally favor receiving only executive summaries of reports or reports of the most significant audits. Because of this it is questionable whether directors are in a position to evaluate accurately the quality of audit findings and recommendations.

3.2.5 .2 Testing hypothesis four factor two


The one way ANOVA was coducted to explore if there is no significant difference between presidents, directors and internal audit staffs in their perceptions on the importance of auditees response and feedback to judge internal audit effectiveness. As table3.11 result shows F (2, 55) 50

=3.832, P<.05), it was found that presidents, directors and internal audit staffs differ significantly in their perceptions on the importance of auditees response and feedback to judge internal audit effectiveness .The analysis were sufficient to reject the null hypothesis four regarding factor two. Table 3.11: auditee's response and feedback as perceived by the three groups SOURCE P-value Sum of Squares Df Mean Square F
Between Groups Within Groups Total

2.506 17.985 20.491

2 55 57

1.253 .327

3.832

.028

* significant at the 0.05 level.

As table 3.11 shows mean squares (1.253) for between groups and the mean squares (.327) for within groups and F(2,55=3.832,p<.05) indicat only the presence of significance difference among three groups in their perceptions on the importance of auditees response and feedback to judge internal audit effectivenes but does not indicate where the difference exactly existed. To locate where the difference existed Tukey HSD post hoc multiple comparison should be conducted. As Tukey HSD post hoc multiple comparisons on table 12 evidenced that the siginificance difference on the importance of auditees response and feedback to use as criteria to evalute internal audit effectiveness found between presedents and directors(p<.05) not between presedents and audit staffs(p>.05),and directors and audit staffs(p>.05). Table 3.12: tukey HSD post hoc multiple comparison
(I) job position (J) job position in the university Presidents in the university Directors audit staffs Directors Presidents audit staffs audit staffs Presidents Directors Mean Difference (I-J) .55805 Std. Error P-value .028 .068 .028 .941 .068 .941 Lower Bound .0510 -.0381 -1.0651 -.4592 -1.3006 -.6056 Upper Bound 1.0651 1.3006 -.0510 .6056 .0381 .4592 95% Confidence Interval

.21050 .27786 .21050 .22102 .27786 .22102

.63125 -.55805

.07320 -.63125 -.07320

*. The mean difference is significant at the 0.05 level.

51

But as Morgan et al (2004) this significant difference may be created by the differences in the population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous subsets. The result indicated in table 3.13. Table: 3.13 Adjusted Tukey HSD homogeneous subsets
job position in the university audit staffs Directors Presidents P-value
Means for groups in homogeneous subsets are displayed.

Subset for alpha = 0.05 N 8 41 9 1 2.9988 3.0720 3.6300 .949

Table3.13 shows an adjusted tukey that is approprate when population sizes for different groups are not similar (n=9, n=41, n=8). There was not a statsitically significant difference (p=.949) between audit staffs and directors because their means are both showen in subset 1. Therefore, the significant difference between presidents, directors and audit staffs are caused by differences in the group size but not on perception difference on the importance of auditees response and feedback to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this factor was not rejected. The auditees response and feedback of the internal auditing department factor used in this study included elements such as the auditees acceptance of audit findings and implementation of recommendations, the auditees assessment of internal audit services and the internal auditing department gaining the cooperation of management. The main reason that may explain three groups agreement in perceptions on the importance of auditees response and feedback as a criterion for evaluating audit department effectiveness factor is that both groups understand cooperations of management, managements assessement of audit services and proper implementation of audit findings are important for effective internal auditing departments.

52

3.2.5 .3 Testing hypothesis four factor three


Factor 3 of Professionalism of the internal audit department was analyzed using the ANOVA process as well. This analysis revealed as in Table 3.14 a significant difference between the three groups F (2, 55=13.475, p < .05) regarding the importance of Professionalism of the internal audit department to judge internal audit effectivenes. Based on these results the Null hypothesis was rejected. That is there is significant difference among three groups regarding this factor but the Ftest does not indicate where the difference exactly existed among three groups in their perceptions on the importance of professionalism of the internal audit department to judge internal audit effectivenes. Table 14: professionalism of the internal audit department as perceived by the three groups SOURCE
Between Groups Within Groups Total Sum of Squares Df Mean Square F

P-value 0.000

8.600 17.551 26.151 at the 0.05 level

2 55 57

4.300 .319

13.475

*significant

To locate where the difference existed Tukey HSD post hoc multiple comparison should be conducted and the result showed that the siginificance difference existed between presidents and internal audit staffs (p<.05), and directors and audit staffs (p<.05) as showen in table 3.15. Table3.15: tukey HSD post hoc multiple comparison
(I) job position (J) job position in the university Presidents in the university Directors audit staffs Directors Presidents audit staffs audit staffs Presidents Directors Mean Difference (I-J) .06591 -1.06056 Std. Error .20794 .27449 .20794 .21834 .27449 .21834 P-value .946 .001 .946 .000 .001 .000 Lower Bound -.4350 -1.7217 -.5668 -1.6524 .3994 .6005 Upper Bound .5668 -.3994 .4350 -.6005 1.7217 1.6524 95% Confidence Interval

-.06591 -1.12646 1.06056 1.12646

* * *

*. The mean difference is significant at the 0.05 level.

53

But as Morgan etail (2004) this significant difference may be caused by the differences in the population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous subsets. The result indicated in table 3.16. Table 16: Adjusted Tukey HSD homogeneous subsets Subset for alpha = 0.05 job position in the university Directors Presidents audit staffs
P-value
Means for groups in homogeneous subsets are displayed.

N 41 9 8

1 2.7485 2.8144

3.8750 .958 1.000

Table 3.16 shows an adjusted tukey that is approprate when population sizes for different groups are not similar (n=41, n=9, n=8). There was not a statsitically significant difference (p=.958) between directors and presidents because their means are both showen in subset 1. In subset 2, the audit staffs mean only are showen, indicating that it was significantly different from both directors and presidents (P=1). By examining the two subsets boxes, we can see that the audit staffs (M=3.875) are significantly different on perception on the importance of internal audit effectiveness from both presidents (M=3.63) and directors (2.7485) because presidents and directors means appear in the same subset (subset 1) whereas audit staffs apear in other subset (subset 2). Therefore, the significant difference between presidents and audit staffs that supports the findings of Traver (1991), and directors and audit staffs are atributed to differences in the perceptions on the importance of professionalism of the internal audit department to use as criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this factor was rejected. The ANOVA process results relative to null hypothesis four also revealed a significant difference between the three groups on their perceptions of the importance of the professionalism factor. It was found that internal audit staffs perceived this factor as more important than do presidents and directors. Based on the test results, the null hypothesis relative to this factor was rejected.

54

The professionalism of the internal auditing department factor used in this study included elements such as the internal auditor's participation in professional organizations and continuing education programs as well as the practice of professional ethics. There are reasons that may explain this significant difference in perceptions between directors and presidents with that of internal audit staffs. The main reason is that professionalism of the internal auditing department to many internal audit staffs in higher education is promoted through , a code of ethics, a statement of responsibilities, standards for the professional practice of internal auditing, certification of internal auditors and a continuing education program. Internal audit staffs consider these separate guides to be the criteria that internal auditing practitioners should look to for definitions and interpretations of professionalism, professional proficiency and professional judgments. The Code of Ethics for internal auditors is set forth in Section 240 of the Standards. Its basic purpose is to establish professional standards of conduct. Continuing education is another element that is important to professionalism in the internal auditing department. For example, technological changes in the higher education environment have made it clear that internal auditors must learn to keep abreast of new knowledge. This recognition is also reflected in the Standards, which emphasizes the internal auditor's need to maintain technical competence as well as certification through continuing education. Failure to keep current with changes will adversely affect the usefulness of internal auditors (Lembke, et aI., 1974).

3.2.5 .4 Testing hypothesis four factor four


Factor four was "Adherence to audit plan." The ANOVA analysis F (2, 55=8.374, p< .05) revealed that no significant difference exist between the three groups concerning Factor 4 as showen in table 3.17. Based on the analysis the null hypothesis was rejected. That is there is significant difference between groups but the F ratio could not indicate where the difference lies. Table3.17: importance of adherence to audit plan as perceived by the three groups
SOURCE Between Groups Sum of Squares 7.274 Mean Square 3.637

Df 2

F 8.374*

P-Value 0.001

55

Within Groups Total


* significant at the 0.05 level.

23.887 31.160

55 57

434

To find where the difference existed Tukey HSD post hoc multiple comparison should be conducted and the result showed that the siginificance difference existed between presidents and directors (p<.05), and directors and audit staffs (p<.05) as showen in table3.18. Table 3.18: Tukey HSD post hoc multiple comparison
(I) job position (J) job position in the university Presidents in the university Directors audit staffs Directors Presidents audit staffs audit staffs Presidents directors Mean Difference (I-J) .86236 Std. Error P-value .002 .810 .002 .031 .810 .031 Lower Bound .2780 -.5730 -1.4467 -1.2776 -.9697 .0505 Upper Bound 1.4467 .9697 -.2780 -.0505 .5730 1.2776 95% Confidence Interval

.24259 .32022 .24259 .25472 .32022 .25472

.19833 -.86236 -.66402

* *

-.19833 .66402

*. The mean difference is significant at the 0.05 level.

But as Morgan et al (2004) this significant difference may be caused by the differences in the population size (N1=9, N2=41, N3=8). This again tested by adjusted Tukey HSD homogeneous subsets. The result indicated in table 3.19. Table 3.19: Adjusted Tukey HSD homogeneous subsets Subset for alpha = 0.05 job position in the university
Directors audit staffs Presidents P-value Means for groups in homogeneous subsets are displayed.

N
41 8 9

1
3.2110

3.8750 4.0733 1.000 .751

56

Table 3.19 shows an adjusted tukey that is appropriate when population sizes for different groups are not similar (n=41, n=8, n=9). There was not a statsitically significant difference (p=.751) between audit staffs and presidents because their means are both showen in subset 2. In subset 1, the directorsmean only are showen, indicating that it was significantly different from others (P=1). By examining the two subsets boxes, we can see that the directors (M=3.2110) is different from both presidents (M=4.0733) and audit staffs (3.8750) because presidents and audit staffs means appear in the same subset (subset 2) whereas directors appear in other subset (subset 1). Therefore, the significant difference between directors and audit staffs, and directors and presidents are attributed to differences in the perceptions on the importance of adherence to audit plan to use as criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this factor was rejected. The Adherence to audit plan of the internal auditing department factor used in this study included elements such as ensuring that riskier areas receive higher audit priority in the audit plan, completion of the annual audit plan by internal auditing and the development of a long-range plan by internal auditing to cover all significant areas. The main reason that may explain this significant difference in perceptions between internal audit staffs and presidents with that of directors is that directors are not frequantly in contact with internal auditors since internal auditors who conduct traditional audits do not consider directors as clients. Again not cosidering directors as clients resulted in developing plans that are incompatible with company objectives, not providing for the measurement of the performance needed to carry out plans.

3.2.5 .5Testing hypothesis four factor five


Factor 5 measures the importance of "Absence of surprises" in evaluating internal auditing effectiveness. Table 3.20 ANOVA analysis F (2, 55=11.945, P < .05) revealed significant difference exist between the three groups regarding this factor. The null hypothesis could be rejected. Table 3.20: absence of surprised as perceived by the three groups SOURCE Sum of Squares Df Mean Square F
Between Groups Within Groups

P-value

6.972 16.052

2 55

3.486 .292

11.945

0.000

57

SOURCE
Between Groups Within Groups Total

Sum of Squares

Df

Mean Square

P-value

6.972 16.052 23.025

2 55 57

3.486 .292

11.945

0.000

* significant at the 0.05 level. To identify where the difference existed, Tukey HSD post hoc multiple comparison should be conducted and the result showed that the siginificance difference existed between presidents and directors (p<.05), and presidents and audit staffs (p<.05) as showen in table 3.21. Table 3.21: Tukey HSD post hoc multiple comparison
(I) job position (J) job position in the university Presidents in the university Directors audit staffs Directors Presidents audit staffs audit staffs Presidents Directors Mean Difference (I-J) .95927 .94875 -.95927 Std. Error P-value .000 .002 .000 .999 .002 .999 Lower Bound .4803 .3164 -1.4383 -.5135 -1.5811 -.4924 Upper Bound 1.4383 1.5811 -.4803 .4924 -.3164 .5135 95% Confidence Interval

* * *

.19886 .26251 .19886 .20881 .26251 .20881

-.01052 -.94875

.01052

*. The mean difference is significant at the 0.05 level.

As Morgan etail (2004) this significant difference may be due to by the differences in the population size (N1=41, N2=8, N3=9 and tested by adjusted Tukey HSD homogeneous subsets to assure that the significant difference is occurred only by absence of surprises. The result indicated in table 3.22. Table 3.22: Adjusted Tukey HSD homogeneous subsets Subset for alpha = 0.05(p) job position in the university
Directors audit staffs Presidents P-value Means for groups in homogeneous subsets are displayed.

N
41 8 9

1
2.7807 2.7912

3.7400 .999 1.000

58

Table 3.22 shows an adjusted tukey that is approprate when population sizes for different groups are not similar (n=41, n=8, n=9). There was not a statsitically significant difference (p=.999) between audit staffs and directors because their means are both shown in subset 1. In subset 2, the presidents mean only are showen, indicating that it was significantly different from others (P=1). By examining the two subsets boxes, we can see that the presidents (M=3.7400) is different from both directors (M=2.7807) and audit staffs (2.7912) because directors and audit staffs means appear in the same subset (subset 1) whereas presidents apear in other subset (subset 2). Therefore, the significant difference between directors and presidents, and audit staffs and presidents are atributed to differences in the perceptions on the importance Absence of surprises to use as criteria to evalute internal audit effectiveness. Based on the results the null hypothesis relative to this factor was rejected. The absence of surprises of the internal auditing department factor used in this study included elements such as the need for internal auditing to alert management to potential problems befor they occur, internal auditings early warning of problems in operations and control, and internal auditingss ability to establish appropriate audit priority based upon a formalized risk assessment by internal auditing. The main reasons that may explain this significant difference is that presidents are well aware about the importance risk management while others are not. That is alerting management to potential problems, early warning of problems befor occurance and prioritizing risk audit area by making risk assessement is considered as task of internal auditors by presidents. Incontrast, directors and audit staffs do not consider this as task of internal auditors. The different groups perceptions on different factors were summarized in table 23. Table 3.23: Summary of hypothesis four for the five factors Factors Difference on the importance of internal audit effectiveness criteria among three groups F-test Post-hoc tukey test IAS and D IAS and P D and P Adjusted HSD tukey IAS and D IAS and P D and P

59

1 2 3 4 5

D D D D D

N N D D N

D N D N D

D D N D D

N N D D N

D N D N D

N N N D D

D=significant difference IA=internal audit staffs P=presidents N=no significant difference D=directors

CHAPTER 4
SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
The purpose of this research was to examine managements and audit staffs perception on the importance of five selected factors used to evaluate internal auditing effectiveness in Bahir Dar and Mekelle Universities. The target populations were 10 presidents, 43 directors and 8 internal audit staffs of Mekelle and Bair Dar universities. The list was obtained from each univerisity and the individuals who occupy the positions of presidancy, dean, directorships and internal audit was considered as targets of the study.

60

The data were gathered through the internal audit effectiveness scale distributed to presidents, directors and internal audit staffs of these universities and the returned survey scales provided the data used in the research analysis and it was analysed by z-test and one way ANOVA. The analysis of the data provided the basis for rejecting or not rejecting the hypotheses statements. The researcher provided explanation and rationale for the differences and similarities in the data analysis and presentation section of the study. In this section the reasearcher tried to summarize, conclude and recommend based on the data. Z-test statistical procedures for independent samples were performed to analyze null hypotheses one, two and three. One-way analysis of Variance and the tukey post-hoc test were applied to test null hypothesis four. In this study, the following null hypotheses were tested: H1: There is no statistically significant difference between the scores of internal auditing staffs of the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire. H2: There is no statistically significant difference between the scores of directors on the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire. H3: There is no statistically significant difference between the scores of university presidents on the perceived importance of selected five factors used to evaluate internal auditing effectiveness as measured by the questionnaire. H4: There is no statistically significant difference among mean scores of presidents, directors and internal auditing staffs on the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire.

4.1 Summary
From statistical analysis coducted in chapter three, the researcher obtained the following major findings and summarized in the order of hypotheses as follows. Hypotheses one: The z- test was carried out to determine the significant difference between the scores of university audit staffs of the perceived importance of five selected factors used to evaluate 61

internal auditing effectiveness as measured by the questionnaire and found that the above average and below average category of audit staffs significantly differ on the importance of two criteria (Professionalism of the internal audit department, and Reasonable and meaningful findings and recommendations) to use as criteria to evaluate internal audi effectiveness. In the opinion of a majority of the audit staffs, the five selected factors used for evaluating auditing effectiveness were of above average importance overall. The percentage of scores for audit staffs falling in the above average importance dimension with regard to the selected factors used to evaluate auditing effectiveness were significantly larger than the percentage of scores following the below average importance category. Within Audit staffs scored the most significant difference was observed on the factor of professionalism of the internal audit department of the five selected factors for evaluating internal audit effectiveness. Hypotheses two: The z- test was conducted to determine the significant difference between the scores of university directors of the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire and found that the above average and below average category of directors significantly differ on the importance of five factors/criteria to use as criteria to evaluate internal audi effectiveness. In the opinion of a majority of the directors, the five selected factors used for evaluating auditing effectiveness were of above average importance overall. The percentage of scores for directors falling in the above average importance dimension with regard to the selected factors used to evaluate auditing effectiveness were significantly larger than the percentage of scores following the below average importance category. Within directors scored the most significant difference is observed on the factor of reasonable and meaningful findings and recommendations of the five selected factors for evaluating internal audit effectiveness. Hypotheses three: The z- test was performed to determine the significant difference between the scores of university presidents of the perceived importance of five selected factors used to evaluate internal auditing effectiveness as measured by the questionnaire and found that all presidents believed that all factors have above average importance to use as criteria for evaluating internal audit effectiveness. Presidents had significant difference which contradict the findings of Albecht et al (1988) on the importance of four factors (reasonable and meaningful findings and 62

recommendations, auditees response and feedback, adherence to audit plan and absence of surprises) to use as a criterion for measuring internal audit effectiveness. Presidents had insignificant differece that supports the findings of Albecht et al (1988) on the importance of professionalism of the internal auditing departments. In the opinion of a majority of the presidents, the five selected factors used for evaluating overall auditing effectiveness were of above average importance. The percentage of scores for presidents falling in the above average importance dimension relative to the five selected factors used to evaluate auditing effectiveness were significantly large than the percentage of scores falling into the below average importance category. Within presidents scored the most significant difference was observed on the factor of reasonable and meaningful findings and recommendations of the five selected factors for evaluating internal audit effectiveness. Hypotheses four: A single factor analysis of variance (ANOVA) statistical procedure with
HSD

Tukey

post-hoc analysis was employed to test this hypothesis relative to each factor. There was a

significant difference in the response scores of presidents, directors and internal auditing directors relative to the importance of the five selected factors used to evaluate auditing effectiveness. The results for each factor were: 1. Audit staffs Perceptions/opinions was significantly different from presidents on the importance of reasonable and meaningful findings and recommendations to use as criteria to evaluate internal audit effectiveness. While presidents perceived reasonable and meaningful findings and recommendations as significantly more important, audit staffs perceived as less important criteria to evaluate internal audit effectiveness. 2. All groups had similar perceptions on the importance of auditees response and feedback as criteria for evaluating internal audit effectiveness. 3. Audit staffs Perceptions/opinions were significantly different from both presidents and directors on the importance of professionalism of the internal audit department to use as criteria to evaluate internal audit effectiveness. While audit staffs perceived professionalism of the internal audit department as significantly more important criteria, presidents and directors perceived as less important criteria to evaluate internal audit effectiveness. The 63

significant difference between presidents and audit staffs supports the findings of Traver (1991). 4. Directors Perceptions/opinions were significantly different from both presidents and Audit staffs on the importance of adherence to audit plan to use as criteria to evaluate internal audit effectiveness. While directors perceived adherence to audit plan as significantly more important criteria, presidents and audit staffs perceived as less important criteria to evaluate internal audit effectiveness.

5. Presidents Perceptions/opinions were significantly different from both directors and Audit staffs on the importance of absence of surprises to use as criteria to evaluate internal audit effectiveness. Absence of surprises was perceived by presidentsas significantly, as more important criteria but directors and audit staffs perceived it as less important criteria to evaluate internal audit effectiveness.

4.2 Conclusion
Based on the findings obtained from this research endeavor, the following conclusions were drawn: Audit staffs themselves do not agree on the importance of professionalism of the internal audit department, and reasonable and meaningful findings and recommendations for evaluating internal audit effectiveness. Directors themselves do not agree on the importance of all five factors (reasonable and meaningful findings and recommendations, auditee's response and feedback, professionalism of the internal audit department, adherence to audit plan and absence of surprises) for evaluating internal audit effectiveness.

Presidents themselves do not agree on the importance of four factors (reasonable and meaningful findings and recommendations, auditee's response and feedback, adherence to audit plan and absence of surprises) for evaluating internal audit effectiveness. There is theoretical knowledge gap between audit staffs and presidents. Especially audit staffs do not understand the importance of reasonable and meaningful findings and recommendations for measuring internal audit effectiveness.

64

All three groups have similar perception on the importance of auditee's response and feedback to use as creteria for evaluating internal audit effectiveness. Presidents and directors do not understand the benefits of professionalism of the internal audit department for assessing internal audit effectiveness. Directors do not understand the benefits of adherence to audit plan for assessing internal audit effectiveness. Directors and audit staffs do not understand the benefits of absence of surprises for assessing internal audit effectiveness.

4.3 Recommendations
Based on the findings and conclusions drawn, the following recommendations are forwarded in order to increase the benefit of internal audit effectiveness criteria for the two uniersities. This study revealed that three groups do not view the importance of all factors at the same level of significance as criteria for evaluating internal auditing effectiveness. Although the differences in perception on these factors may in part be attributable to the other background factors like age, sex, educational level and experience, it represents an area that internal audit staffs and managements need to pay attention. These significant differences have two implications. The first implication is that the evaluation system of internal audit function based on the wrong or erroneous criteria. The second implication is that without consensus of factor importance between these three groups, the audit function may be evaluated on a different set of criteria than that of adopted by internal audit staffs to perform their audit roles. To assist in overcoming this difference in perceptions, it is recommended that Internal auditors Understand the profession well and then create internal audit awareness program for their directors and presidents about the current theory and practice of internal auditing. Need to conduct awareness training to communicate to directors and presidents that internal auditors subscribe to and follow a substantial body of professionalism guidance in the performance of their duties. 65

Improve presentation skills to better communicate the audit results and respond to critical questions about the results. Align the internal auditing program with the university's mission and make sure presidents and directors understand this. Such action would serve as an indication that the internal audit function is linked to the business of the university and that their work will reflect that perspective. Cultivate closer working relationships and personal contacts with their presidents as a means of closing this difference. Finally, the researcher having identified the need, recommends further research on the : The benefits of five internal auditing measures as perceived by all stakeholders (Ministry of Education and Board of directors) in public and/or private colleges and universities. The benefits of internal auditing criteria as perceived by presidents, directors and audit staffs in public and/or private colleges and universities by considering different personal background variables (age, sex, education). The benefits of full scope/more dimensions of internal auditing criteria as perceived by presidents, directors and audit staffs in public and/or private colleges and universities.

BIBLIOGRAPHY
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APPENDICES 1 Homoginity and Normality of data distribution


Test of Homogeneity of Variances Levene Statistic reasonable and meaningful finding 1.506 and recom auditees respons and feedback professinalism of the internal audit 1.053 dept adherence to audit plan absence of surprises 1.335 .502 2 2 55 55 .271 .608 2 55 .356 1.418 2 55 .251 2 55 .231 df1 df2 Sig.

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Normality distributionStatistics reasonable and meaningful finding and recom N Valid Missing Mean Skewness Std. Error of Skewness P Kurtosis Std. Error of Kurtosis P 58 0 3.3681 .233 .314 .74 -.435 .618 .72 auditees respons and feedback 58 0 3.1484 -.370 .314 1.17 -.495 .618 .8 professinalism of the internal audit dept 58 0 2.9141 -.146 .314 .46 .398 .618 .64 adherence to audit plan 58 0 3.4364 -.706 .314 2.24 .364 .618 .59 absence of surprises 58 0 2.9310 -.135 .314 .42 .359 .618 .58

Reliability Statistics

Cronbach's Alpha .701

N of Items 5

Reliability Statistics Cronbach's Alpha Part 1 Value N of Items Part 2 Value N of Items Total N of Items Correlation Between Forms Spearman-Brown Coefficient Equal Length Unequal Length .152 3a .659 2
b

5 .761 .864 .868

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Guttman Split-Half Coefficient a. The items are: reasonable and meaningful finding and recom, auditees respons and feedback, professinalism of the internal audit dept.

.861

b. The items are: professinalism of the internal audit dept, adherence to audit plan, absence of surprises.

APPENDICES 2 Mekelle University College of business and economics Department of management Questionnaire to be filled by University managements and audit staffs Purpose: the purpose of this questionnaire is to collect data for a study on the title Internal Audit Effectiveness measures in two selected Higher Education Institutions. Your institution is selected for the study. This study is for academic purpose i.e. a work and Dissertation project Submitted in Partial Fulfillment of the Requirements for the Master of Arts degree In Business 72

Administration program/MBA. Your cooperation to provide genuine and relevant information is highly important and appreciated for the success of the study. I would like to assure you that your response would be kept confidential. Hence, please feel free to give answer for all the questions frankly and accurately. It is not necessary to write your name on the questionnaire. It takes no longer than 10 minutes to answer the questions. I thank you for your precious time that you spend for answering the questions. General Instruction: questions are subdivided into two parts. Read instructions for each part and answer accordingly. Section I: Background information
The following questions have been included to determine selected demographic factors of your institution. Please answer by filling the blank by checking (x) as appropriate or use the space provided for open-ended questions. 1. Name of the campus: _____________________________________________. 1. Male 2. Female 2. Age ________________________________________. 3. Gender: 4. Work experience____________________________. 5. Educational level BA/BSC Masters /second-degree PhD

Section II: effectiveness criteria

Based on your opinion, indicate the importance you place on each factor when evaluating internal audit effectiveness at your institution. Please circle the appropriate number with 1 indicating this factor has no importance to 5 indicating this factor is of great importance.
How important is each of the following factors to you in evaluating internal audit department effectiveness at your institution? Factors Great Above Average Below No importa Average Importa Averag Impo nce Importa nce e rtanc nce e

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1 2 3

The usefulness of audit information provided by internal auditing. The participation of internal auditor's in professional organizations.

5 5 5

4 4 4

3 3 3

2 2 2

1 1 1

The need for internal auditing to alert management to potential problems before they occur.
Internal auditing ensuring that riskier areas receive higher audit priority in the audit plan. The auditees acceptance of audit findings and implementation of recommendations'

4 5

5 5

4 4

3 3

2 2

1 1

6 7 8 9 10 11 12 13 14 15
','

Internal auditing's recognition of the institution's significant problems. The participation of internal auditors in continuing education programs. Internal auditing's early warning of problems in operations and control. Completion of the annual audit plan by internal auditing. The auditees assessment of internal audit services. Internal auditing's ability to provide independent reviews. The practice of professional ethics by internal auditors. Internal auditing's, ability to establish appropriate audit priority The development of a long-range plan by internal auditing to cover all significant areas.
The internal auditing department gaining the cooperation of management.

5 5 5 5 5 5 5 5 5 5

4 4 4 4 4 4 4 4 4 4

3 3 3 3 3 3 3 3 3 3

2 2 2 2 2 2 2 2 2 2

1 1 1 1 1 1 1 1 1 1

16: What do you recommend for internal audit effectiveness measure in your university? Please, suggest your idea on the blank space provided below. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 74

______________________________________________________________________________ _______________________ .

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