The Importance Of Internal Control For Small Business

Submitted to the Lebanese International University - Yemen

MAIS - School of Business – MBA In Accounting Information Systems

Done By Student :

Yasser Abdulmajeed AL-Khuledy – ID - 62010136

In Fulfillment of the Requirements for

COURSE ( BACC610 - Advanced Auditing )

By Supervised

Dr. Ebrahim Ahmed Al-Sakaf

Campus, Yemen

SPRING SEMESTER – 2020 / 2021

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 Acknowledgment

I would like to extend my plenty thanks and appreciation to His Excellency Dr.

competent, Professor Ebrahim Ahmed Al-Sakaf for his great efforts in publishing the

beneficial familiarity to the young and adult persons. Thanks to God first and then

thanks to Dr. Ebrahim Ahmed Al-Sakaf what I would get to this rank of science that I

have reached. The sincere thanks to this great important who has given most of his life

and made all his time and dedicated all his effort and energy to build a splendors

generation educated, intellectual and conscious.

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 Abstract

Internal control plays an essential role in ensuring the creditability of information,

Effectiveness, and efficiency of operations and compliance with laws and regulations. This

study aims to study the aspects related to the importance of internal control systems for small

businesses in terms of their nature, reasons for their importance, forms of their practice, and

their effects in general.

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 Table Of Contents
................................................................................................................................................................ 2
Acknowledgment ................................................................................................................................... 2
Abstract.................................................................................................................................................. 3
1.0 Introduction ..................................................................................................................................... 6
1.1 Study Problem ................................................................................................................................. 8
1.2 Study Objectives.............................................................................................................................. 8
1.3 Study Methodology ......................................................................................................................... 9
2.0 About Internal Control................................................................................................................... 9
2.1 Internal control components .......................................................................................................... 9
2.1.0 Control environment ................................................................................................................... 9
2.1.1 Risk assessment .......................................................................................................................... 10
2.1.2 Information and communication .............................................................................................. 10
2.1.3 Control activities ........................................................................................................................ 10
2.1.4 Monitoring .................................................................................................................................. 11
3.0 The Importance of Internal Control in SMEs : Fraud Prevention & Detection ..................... 11
4.0 Role of internal controls in business resilience and growth of small businesses ..................... 12
5.0 The Impact of Internal Audit Quality on Financial Performance of Yemeni Commercial
Banks: An Empirical Investigation ................................................................................................... 13
6.0 EFFECT OF INTERNAL CONTROL SYSTEMS ON FINANCIAL PERFORMANCE OF
SMALL AND MEDIUM SCALE BUSINESS ENTERPRISES ..................................................... 14
6.1 The Effect of the Internal Audit and Firm Performance .......................................................... 14
6.2 The Effect of the Organization’s Internal Control System on Organizational Effectiveness 15
7.0 Internal Control and SMEs’ Sustainable Growth : The Moderating Role of Multiple Large
Shareholders ........................................................................................................................................ 16
8.0 CHALLENGES FACED THE INTERNAL AUDIT PROFESSION IN YEMEN : ............... 17
8.1 Independency and Proficiency Challenges Faced Internal Auditors : (Murad Thomran, 2020)
.............................................................................................................................................................. 17
8.2 External Challenges Faced Internal Audit Profession : (Murad Thomran, 2020) ................... 18
9.0 Summary Of Articles .................................................................................................................... 19
9.1 Article Number One ..................................................................................................................... 19
9.2 Article Number Two ..................................................................................................................... 20
9.3 Article Number Three .................................................................................................................. 21
9.4 Article Number Four .................................................................................................................... 22
9.5 Article Number Five ..................................................................................................................... 23
9.6 Article Number Six ....................................................................................................................... 24
9.7 Article Number Seven................................................................................................................... 26

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9.8 Article Number Eight ................................................................................................................... 27
9.9 Article Number Nine..................................................................................................................... 28
9.10 Article Number Ten .................................................................................................................... 29
10.0 Conclusion ................................................................................................................................... 30
11.0 Recommendations ....................................................................................................................... 30
References ............................................................................................................................................ 31

Table Of Figures

Figure 1-1 Internal Controls original source (Amy Buben, 2017) ................................................... 13

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1.0 Introduction

The sizes of commercial and industrial businesses are vary between large, medium, and

small, Where small commercial and industrial businesses are considered as an important

sectors, which are not less important than large and medium businesses. And that because it's

one of the basic pillars of the economies for countries, Whether they are major industrial

countries or developing countries. Where all economists agree on the importance of the

economic role that small commercial and industrial businesses are doing in achieving

economic and social development by providing job opportunities, diversifying the

commercial and industrial structure, promoting exports, and their contribution to attracting

local savings and value added, As it's of the most effective means that is bringing economic

recovery, Due to its ease in adaptation, flexibility, and ability to compete and invade foreign

markets. In order for small businesses to be able to full do their role in the economy of any

country, It must operate within an environment that guarantees to it continuity and guarantees

to it all the factors of stability and success and enables it to face the threats of the ocean and

withstand in the face of globalization, and foreign competition and achieve distinction and

protect their assets.

Monitoring is considered as a permanent and continuous function that should be performed in

all areas of humanity activity in terms of considering its as a system for monitoring

performance and ensuring the achievement of the established goals. During recent times and

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with the development of the size of economic projects, The attention on internal control has

been increased, & its concept has been developed and its importance has been increased,

Where it is considered as one of the main pillars of the success and sustainability of the

business. And that conjunction with the development of business volume, & the complexity

of its activities, & the development of management science and the information revolution.

Where the concept of internal control has been moved from a concept related to financial

activity to more general and comprehensive concept that deals with all aspects of

administrative, financial, legal, & technical activity, As its function has evolved from

preventive protection of funds, prevention of errors and abuses, and data validation to the

function of increasing the productivity of the company.

In addition, the continuity of internal control enables to provide the data and information

that the administration needs periodically. In order to help it to evaluate its activities and

compare them with the results of its work in different time periods, And to take the necessary

measures to address any violations or shortcomings.

The internal control systems is contributing to increases efficiency, protecting assets,

ensuring the correctness and accuracy of the financial situation, and adherence to applicable

laws. And like all systems, the internal control system needs to be evaluated and ensure the

proper functioning of the procedures and follow-up and scrutiny of the processes. These

requires of the presence of a special and independent benefit, which is usually needed to look,

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examining and investigate all the management and information systems within the review and

the auditing, which takes care of the evaluation and the institution.

1.1 Study Problem

In light of the above, it is possible to highlight the problem that this study dealt with, Which

is determined in the statement of the impact represented by the importance of internal control

systems for small businesses. Also the effectiveness of internal control in the absence of

internal auditing, in addition, the most prominent obstacles, challenges, difficulties and

problems are facing internal audit bodies and limit the effectiveness of its importance and

critical role in the internal audit process generally.

1.2 Study Objectives

This study aims to study the aspects related to the importance of internal control systems for

small businesses in terms of their nature, reasons and its importance, and forms of their

practice, and their effects in general. As the study aims to highlight on the most important

components and requirements for internal control systems to play an effective role in

protecting funds, preventing errors, abuses, and identifying the availability of those

components and requirements for internal control systems.

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1.3 Study Methodology

The method of this study is qualitative. Where the sampling of this study consist of 39

observation. The data of this study was collected & gathered from 10 articles.

2.0 About Internal Control

According to (COSO 2013), internal control is understood as a process, effected by an

entity’s board of directors, management, and other personnel, designed to provide reasonable

assurance regarding the achievement of objectives relating to operations, reporting, and

compliance. Internal control includes five components, which are control environment, risk

assessment, information and communication, control activities and monitoring.

2.1 Internal control components

2.1.0 Control environment

Control environment comprises the ethical values, organizational structure, assignment of

responsibility and authority, personnel policies and procedures, as well as the attitudes and

awareness of the management regarding the importance of internal control to the entity’s

operation. Control environment has a directly impact on the mindset of each member within

the organization and the strength of the whole internal control system (COSO 2013).

A good control environment may support a good internal control system, which helps to

reduce the opportunity of misappropriation.

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2.1.1 Risk assessment

Risk assessment is the process of identifying and addressing the risks, which might affect the

achievement of the organization’s objectives. After risks have been identified and assessed,

appropriate actions are made to respond to the assessed risks.

The process of analyzing and assessing risk is a dynamic process. Management needs to

consider the impact of changes in business operations and its external environment in order to

identify and assess the risks faced by the business (COSO 2013).

2.1.2 Information and communication

Information includes all that are generated and collected from internal and external sources of

an organization, and processed by managers and staff in the management of the

organization’s activities. Communication is the process of collecting, providing and sharing

information within an organization and between the organization with external parties.

The information system includes the accounting system which is designed to timely identify

and record all transactions, to ensure true and fair presentation of the financial statements.

2.1.3 Control activities

According to (COSO 2013) , control activities are policies and procedures implemented to

address the assessed risks to the achievement of objectives. Control activities are executed

across all levels of managements and in all functions of an organization. Control activities

include such activities as authorizations, approvals, verifications, and reconciliations, reviews

of performance and segregation of duties. Appropriate control activities are expected to

reduce the chance of asset misappropriation in organizations.

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2.1.4 Monitoring

Monitoring is the process in which the quality of internal control is evaluated. Monitoring

provides management with information regarding whether or not their internal control system

be understood and implemented by the staff, be applied and followed on a daily basis, be

modified or improved to match with changes in external context (IAASB, 2009).

Monitoring activities could be categorized into ongoing monitoring and separate monitoring.

Ongoing monitoring occurs right within the operation process by managers and staff as

allowed within their responsibilities. Separate monitoring is usually performed by managers

and the internal audit unit.

3.0 The Importance of Internal Control in SMEs : Fraud Prevention & Detection

Due to the nature of small & medium business which has an small amount of capital for

investment purposes, it is impossible for them to invest and adopt such sophisticated internal

control in monitoring their business activities. Therefore, SMEs are unable to set up a proper

internal control system by including a department such as compliance or audit department

which could help in monitoring, preventing and detecting any fraudulent activities occur in

the business. Because of the absence of such controls in the business could cause the rate of

fraud increasing every year and especially toward SMEs which the market is growing

exponentially. As known that most of the businesses are frailty in facing the losses caused by

fraud and those which are less is able to absorb the losses may face bankruptcy which

probably affecting the SMEs as well. (Mohd Danial Afiq Bin Khamar Tazilah1,
Introduction, 2015)

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Therefore, internal control system plays a vital role that help in preventing and detecting

fraud which the process is affected by the management, the board of directors and other

personnel that is designed to minimize risk exposures to an acceptable level given the

company’s objectives. (Mohd Danial Afiq Bin Khamar Tazilah1, Introduction, 2015)

So, it is good that the business owner could establish a strong and efficient internal

control system as well as an internal audit department to reduce the chances of fraud occur

which may cause the company a huge loss. (Shanmugam et al , 2012)

As well as, internal control can help an entity achieve its performance and profitability

objectives, and prevent loss of resources. Also, it can help in ensuring the reliability of

financial reporting. And it can help to make sure that the enterprise complies with

government laws and regulations, avoiding damage to its reputation and other consequences.

(Mohd Danial Afiq Bin Khamar Tazilah1, Conclusion, 2015)

4.0 Role of internal controls in business resilience and growth of small businesses

Internal control’s responsibility is to ensure that corporate objectives are being achieved with

reliable financial reporting, efficient operations and compliance with the country laws.

(Kelebetse, 2019)

(Amy Buben, 2017) illustrates that Implementing internal controls provide reasonable

assurance of :

I ) Effectiveness and assurance of operations.

II ) Reliability of financial reporting.

III ) Compliance with laws and procedures.

Combining all these facilitate safeguarding of assets as depicted in Figure 1.

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 Figure 1-1 Internal Controls original source (Amy Buben, 2017)

Globally, internal control failure among small businesses often leads to loss of assets, fraud,

waste, mismanagement, inefficiency, loss of client assurance, and failure to achieve business

goals. (Kelebetse, 2019)

So, policies and procedures set up by internal controls also help the corporate leadership to

manage risk which may hinder the corporate performance or challenge the existence of that

company (Zakaria, K.M., A. Nawawi, and A.S.A. Salin, 2016).

5.0 The Impact of Internal Audit Quality on Financial Performance of Yemeni

Commercial Banks: An Empirical Investigation

According to (IIA, 2011), the IA is an objective and independent activity to increase the

quality of the operation of institutions and work to add value to them.

IA is one of the most important aspects contributing to adding value to institutions by

improving the monitoring and follow-up process to improve outputs (Coram et al, 2008).

Also, IA is a significant tool to maximize businesses outcomes for institutions

(Drogalas et al, 2015).

The efficiency of IA exerts a high positive impact on adding value to the work and improving

performance (Postula et al, 2020).

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6.0 EFFECT OF INTERNAL CONTROL SYSTEMS ON FINANCIAL
PERFORMANCE OF SMALL AND MEDIUM SCALE BUSINESS ENTERPRISES

Benefits of an internal control system include effectiveness and efficiency of operations,

reliability of financial reporting and compliance with applicable laws and regulations.

(Douglas Ong’ang’a Nyakundi, 2014)

Studies show that 90% of the business start-ups do not operate beyond the third anniversary

due to lack of sound internal control systems (Katuntu, 2005).

There is a significant positive relationship between internal control system and financial

performance. (Douglas Ong’ang’a Nyakundi, 2014)

6.1 The Effect of the Internal Audit and Firm Performance

The internal audit department is very important inside a firm that the internal audit is

regarded as the key element in the application of accounting systems which in turn, helps in

evaluating the work of the department. The internal audit is considered as the backbone of the

business accounting as it is the section that records all businesses related to the sector. The

efficiency of internal audit helps develop the work of the company because the financial

reports reflect the internal audit department’s quality. (Ebrahim Mohammed Al-Matari,
2014)

The internal audit support enhances the system of responsibility that the executive directors

and employees have towards the owners and other stakeholders (Eighme & Cashell, 2002).

Internal audit makes a large contribution to the achievement of company goals, and the

implementation of strategies for their achievement (Ljubisavljević & Jovanovi, 2011)

In addition, the internal audit function is responsible for reinforcing management and audit

committee (Hutchinson & Zain, 2009).

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Along this line of argument, (Al-Shammari , 2010) mentioned many factors of internal

audit functions and they are provided below :

1. The internal control systems and arithmetic evaluations in an attempt to; ensure that the

accounting system and internal controls systems are appropriate, ensure that the systems are

suitable for the facility and propos system enhancements.

2. Assessing plans and procedures to determine weaknesses or defects in the systems and

procedures used by the company and to propose modifications and enhancements needed,

and to provide authority to the internal auditor for the examination of the aspects of

establishment activity.

3. Taking into consideration the staff commitment to the company policies and procedures

and therefore, internal auditor has to monitor these policies and procedures’ implementation

and to clarify them to the employees.

4. Safeguarding established funds as the development and implementation of systems is an

attempt to make sure that the facility safeguards assets and funds against manipulation and

fraud, to detect fraud and minimize losses stemming from neglect/abuse (e.g. loss of proper

storage).

6.2 The Effect of the Organization’s Internal Control System on Organizational

Effectiveness

An effective system of internal control can give managers the means to provide

accountability for their programs, as well as the means to obtain reasonable assurance that the

programs they manage meet established goals and objectives

(Al-Syaidh et al., 2015; El-Masri et al., 2015).

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The internal control system consists of all the variables that may contribute some way or

another to the success or failure of any organization and by establishing a robust internal

control system the organization promotes efficient and effective operations to produce quality

products and services that are consistent with its objectives and goals (Agbejule & Jokipii,
2009)

7.0 Internal Control and SMEs’ Sustainable Growth : The Moderating Role of Multiple
Large Shareholders

Effective internal control may promote sustainable growth for business through :

First : Internal control is used to reduce the likelihood of corporate misconduct and fraud. As

well as being exerted from the top down, internal control can also be exercised bottom-up as

an important internal governance mechanism providing internal checks and balances to

constrain management’s ability to extract private benefits and expropriate shareholders

(Jensen 1993; Bushman and Smith 2001; Acharya et al. 2011). Due to lack of prevention

and detection mechanisms, weak internal control provides convenient opportunities for

managers to exploit private benefits, which may destroy sustainable growth.

Second : Effective internal control is associated with lower capital cost. Effective internal

control can reduce corporate risk and protect the interests of investors through a series of

procedures and activities, and thus decrease a firm’s cost of capital

(Beneish et al. 2008; Dhaliwal et al. 2011) . Firms with low capital cost have a comparative

advantage in resource allocation to create value and competitiveness, which in turn is helpful

to promote sustainable growth of the firms.

Third : Effective internal control leads to more efficiency of investment and operation. The

optimal decision making in investment and operation is based on the information quality

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provided and assured by internal control. Effective internal control reduces wrong decisions

and behaviors of a firm, and hence improves the efficiency of operation and investment by

providing high-quality information (Cheng et al.; Cheng et al., 2013 ; 2018) . Internal

control is not only linked to the efficiency of investment and operation in a firm, but also

correlated with the resource allocation efficiency (D’Mello et al. , 2017) , thereby jointly

influencing the firm’s sustainable growth.

8.0 CHALLENGES FACED THE INTERNAL AUDIT PROFESSION IN YEMEN :

(Baker and Writer, 2013), Internal auditors need to face the challenge of complex and

frequent changes in regulations, as they have to assure the compliance of the company with

those laws.

Yemen does not have its own established internal auditing standard, and has not adopted the

international standard (Abdualmogni, 2006).

8.1 Independency and Proficiency Challenges Faced Internal Auditors : (Murad

Thomran, 2020)

1- Internal audit department is belongs directly to the highest level in the organization

structure.

2- Internal auditors don’t have any authority or power related to the activities which they are

auditing.

3- After the audit activity Internal auditors provides an objective suggestions to the managers

to improve their departments.

4- Internal auditors have the knowledge, skills, and other competencies needed to perform

their responsibilities.

5- Internal auditors are concern about developing their knowledge, skills, and other

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competencies.

6- Internal auditors have sufficient knowledge of the international internal audit standards.

7- Internal audit director is supervising the performance of the activities on the base of plan

and program of the activities.

8- Internal audit director are communicating to the senior management when the standards

are not applicable.

8.2 External Challenges Faced Internal Audit Profession : (Murad Thomran, 2020)

1- Lack of professional bodies to carry this responsibility.

2- Inapplicable standards with the Yemeni business environment.

3- Non- mandatory legislation to apply the internal audit standards.

4- Absence of awareness in the originations about the significant of applying the standards.

5- Lack of understanding and perception of internal audit standards by internal auditors.

6- Limited availability of professionals in the field of internal auditing.

There is a weaknesses in the internal auditors’ independency and proficiency due to the lack

of awareness of the role internal audit function in the organization, which can be considered

as main challenges, that result from the absent of role of professional bodies as well as the

absence of mandatory guidelines, standards and regulations to govern the internal audit

practice in Yemen. (Murad Thomran, 2020)

The change and improvement of internal audit function in the business sector will be a

lengthy and slow process if existing problems are not overcome. Hence, effectiveness of

internal audit function will be easy to say than done. (Murad Thomran, 2020)

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9.0 Summary Of Articles

9.1 Article Number One

 Year : 2015
 Author(s) : Mohd Danial Afiq Bin Khamar Tazilaha , Norhusnaida Binti Che
Hussainb
 Title : The Importance of Internal Control in SMEs: Fraud Prevention & Detection
 Purpose : The purpose of this study is to determine the relationship of internal control
(control environment, information and communication, control activities, risk
assessment and monitoring) in prevention and detection of fraud among SMEs in
Malaysia.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1: Control environment is a component that able to prevent and detect fraud in
SMEs.
- H2: Risk assessment is a component that would not be able to prevent and detect
fraud in SMEs.
- H3: Control activities are a component that able to prevent and detect fraud in SMEs.
- H4: Information and communication would not be able to prevent and detect fraud in
SMEs.
- H5: Monitoring is a component that able to prevent and detect fraud in SMEs.

 Methodology : This study is qualitative study which determine the relationship of

internal control (control environment, information and communication, control
activities, risk assessment and monitoring) in prevention and detection of fraud among
SMEs in Malaysia.
 Sampling : The sampling of this study consists of 200 questionnaires.
 Results : The findings of this research are that the five component of internal control
which are control environment, risk assessment, control activities, information and
communication and monitoring need to work together in order to achieve an effective
and strong internal control system. Nevertheless, The findings indicate that the SMEs
should be able to maintain such basic internal control system in their company
especially in monitoring and managing their activities through an independent unit
such as internal audit department. Therefore, The findings recommended that the

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 SMEs to outsource those departments so that it can be cost effective and the system
will be more reliable as outsourcing company has more experience in designing the
internal control system which is suitable for the SMEs from different sectors.
 Recommendation for future research : Future research could critically analyze
how’s the current internal control of a company, and try to evaluate the internal
control system of the company then come out with a better internal control system
which suit the current situation of the company. Moreover, the future research such as
comparing the internal control system in different business sectors can be done too.

9.2 Article Number Two

 Year : 2019
 Author(s) : Onthatile M. Kelebetse, Suryakanthi Tangirala, Tiroyamodimo Sethate,
Gangappa Kuruba
 Title : Role of internal controls in business resilience and growth of small businesses
in Gaborone
 Purpose : The purpose of this study is to evaluate whether internal controls have an
implication in the resilience and growth of small businesses in Gaborone.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : Internal controls have significant impact on business resilience and growth in

organizations.
- H2 : The major inhibition of having internal control in small businesses is the costs
associated with the implementation of internal controls.
- H3 : Lack of resources/knowledge inhibit the implementation of internal controls in
small businesses.

 Methodology : This study is quantitative study which evaluate whether internal

controls have an implication in the resilience and growth of small businesses in
Gaborone.
 Sampling : The sampling of this study consists of 23 questionnaires.
 Results : The findings of this research are that the Internal control procedures are
fundamental and important steps in reducing theft and fraud. Small businesses should
have internal controls in place to ensure that the organization operates efficiently and

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 effectively. These controls are designed to monitor the firm’s assets, prevent fraud,
minimize errors, authenticate the accuracy and reliability of accounting data and
promote the efficient operation of the firm while ensuring that established
management practices are followed. The findings indicate that it is evident that small
businesses in Gaborone have internal controls as businesses which voted for the
subject were more than those who voted against the issue of having internal controls.
 Recommendation for future research : There is no any recommendation for future
research.

9.3 Article Number Three

 Year : 2014
 Author(s) : Tumisang Sankoloba1 and Prof. B.N. Swami1
 Title : Impact of Internal Controls in Managing Resources of Small Business: Case
Study of Botswana
 Purpose : The Purpose of this study is to examines the importance of internal controls
in managing resources of small businesses of Botswana.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : Internal controls are expensive therefore Small businesses in Botswana have not
implemented internal controls.
- H2 : Small business fail because the owners/management are not familiar with the
internal controls.
- H3 : Authorization and record keeping are done by the same person thus increasing
chances of having resources being wasted.

 Methodology : This study is quantitative study which examines the importance of

internal controls in managing resources of small businesses of Botswana.
 Sampling : The sampling of this study consists of 52 questionnaires.
 Results : The findings of this research Thirty eight percent of small businesses have
been operating for less than five years. This is due to lack of proper internal controls.
The findings indicate that Government regulations in Botswana state that the board of
directors should review annually effectiveness of internal controls and report to
shareholders. The findings indicate that internal controls are moderately expensive to

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 implement and that most businesses have internal controls. Even though most small
businesses have internal controls the owners cannot clearly explain how those internal
controls are operating.
 Recommendation for future research : There is no any recommendation for future
research.

9.4 Article Number Four

 Year : 2020
 Author(s) : Saddam A. HAZAEA1, Mosab I. TABASH2, Saleh F.A. KHATIB3, Jinyu
ZHU4, Ahmed A. AL-KUHALI5
 Title : The Impact of Internal Audit Quality on Financial Performance of Yemeni
Commercial Banks: An Empirical Investigation
 Purpose : The purpose of this study is to give a brief background of the IA system in
Yemen and examines its impact with regards to financial performance in Yemeni
commercial banks based on five factors: (i) independence of IAs, (ii) adherence to IA
standards, (iii) governance principles implementation, (iv) size of the IA, and (v)
frequency of internal audits committees’ meetings.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : Independence of internal auditors and following the IA standards have a positive

effect on improving financial performance.
- H2 : Governance principles implemented in commercial banks have a positive effect
on improving financial performance.
- H3 : Size of IA and frequency meetings of internal auditors affect to enhance financial
performance in commercial banks.

 Methodology : This study is quantitative study which give a brief background of the
IA system in Yemen and examines its impact with regards to financial performance in
Yemeni commercial banks based on five factors: (i) independence of IAs, (ii)
adherence to IA standards, (iii) governance principles implementation, (iv) size of the
IA, and (v) frequency of internal audits committees’ meetings.

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  Sampling : The sampling of this study consists of 50 questioners to 10 Yemeni
commercial banks.
 Results : The findings of this research are that the independence of the auditors,
following the relevant international auditing standards that govern the workflow in
addition to governance, have a significant and positive impact in improving financial
performance in commercial banks. The findings indicate that the size of the IA
department (AC) has a positive effect, but insignificant, in addition to that there is
little positive impact concerning the frequency of meetings of audit committees and
auditors on improving the financial performance of commercial banks.
 Recommendation for future research : There is no any recommendation for future
research.

9.5 Article Number Five

 Year : 2014
 Author(s) : Douglas Ong’ang’a Nyakundi, Micah Odhiambo Nyamita, Tom
Matwetwe Tinega
 Title : EFFECT OF INTERNAL CONTROL SYSTEMS ON FINANCIAL
PERFORMANCE OF SMALL AND MEDIUM SCALE BUSINESS ENTERPRISES
IN KISUMU CITY, KENYA
 Purpose : The purpose of this study is to investigate the effect of internal control
systems on financial performance among Small and Medium scale Enterprises in
Kisumu city, Kenya; specifically assessing the relationship between internal control
systems and return on investment; and establishing the level of business knowledge of
an entrepreneur in internal control systems and its effect on financial performance.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :
- Ha1 : There is a relationship between return on investment and internal control
system(s) among SMEs.
- Ha2 : The levels of business knowledge of entrepreneurs in internal control systems
affect financial performance of small and medium business enterprises.
- Ha3 : There is a relationship between growth in profits among SMEs and the strength
of internal control systems.

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  Methodology : This study is both quantitative and qualitative study which investigate
the effect of internal control systems on financial performance among Small and
Medium scale Enterprises in Kisumu city, Kenya; specifically assessing the
relationship between internal control systems and return on investment; and
establishing the level of business knowledge of an entrepreneur in internal control
systems and its effect on financial performance.
 Sampling : The sampling of this study consists of 394,684 population.
 Results : The findings of this research are that the majority of SMEs does not
financial procedure manuals, especially one on internal control systems. The study
also reveals that majority of SMEs do not have an internal audit department and the
few that have, the departments are ill-equipped with inadequately trained personnel as
well as inadequate financial resources. Consequently, conducting irregular audit
activities without regular audit reports. They however, agree that the few reports that
are produced in the department address the weaknesses in the system. It was further
revealed that a good number of SMEs in the study engaged external auditors, though
for convenience purposes, when users of such externally audited financial statements
such as financial institutions demand so, casting doubts on the commitment towards
strong internal control systems. On the effectiveness of the internal control systems,
the study found out that the efficient internal controls positively influence financial
performance. The findings indicate that there is a significant relationship between the
level of knowledge on ICS and growth rate in revenue.
 Recommendation for future research : Future research should be a deliberate
attempt to educate proprietors on the significance of business knowledge in internal
control systems.

9.6 Article Number Six

 Year : 2014
 Author(s) : Ebrahim Mohammed Al-Matari, Abdullah Kaid Al-Swidi, Faudziah
Hanim Binti Fadzil
 Title : The Effect of the Internal Audit and Firm Performance : A Proposed Research
Framework

24
 Purpose : The purpose of this study is to propose a structure of the relationships
between the internal audits characteristics (IAC); such as professional qualifications
of the chief audit executive of the Internal Audit (IA), size, experience, and
qualification; and firm performance.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : There is a relationship between qualifications of the chief audit executive and

Firm Performance.
- H2 : There is a relationship between the size of the internal audit and firm
performance.
- H3 : There is a positive relationship between the experience of internal audit and firm
performance.
- H4 : There is a positive relationship between qualification of internal audit and firm
performance.

 Methodology : This study is qualitative study which propose a structure of the

relationships between the internal audits characteristics (IAC); such as professional
qualifications of the chief audit executive of the Internal Audit (IA), size, experience,
and qualification; and firm performance.
 Sampling : The sampling of this study consists of 528 observations.
 Results : The findings of this research are that The internal audit department is very
important inside a firm where the internal audit is regarded as the key element in the
application of accounting systems and this in turn, helps in evaluating the work of the
department. The findings indicate that the internal audit is considered as the backbone
of the business accounting as it is the section that records all businesses related to the
sector. Also the findings indicate that the efficiency of internal audit helps develop the
work of the company because the financial reports reflect the internal audit
department’s quality.
 Recommendation for future research : First, the future researchers to empirically
examine the effect of factors of internal audit on firm performance. Second, the future
authors should employ this study in the developing countries considering the
necessity of this type of research in this environment. More importantly, future studies
could compare between two or more countries in the same economy and culture; for
example in the Middle East or exactly in the gulf countries. Third, with respect to the

25
 importance of audit quality, the present research considers audit quality as a
moderator between the association of audit characteristics and firm performance.

9.7 Article Number Seven

 Year : 2016
 Author(s) : Buthayna Mahadeen1, Rand Hani Al-Dmour2, Bader Yousef Obeidat1 &
Ali Tarhini3
 Title : Examining the Effect of the Organization’s Internal Control System on
Organizational Effectiveness: A Jordanian Empirical Study
 Purpose : The purpose of this study is to investigate the impact of the internal control
system (Control environment, Communication, Risk management, Control activities
and Monitoring) on organizational effectiveness in Jordan.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H0 : There is no statistically significant impact at (α≤0.05) of the internal control

system on the organizational effectiveness.
- H0-1 : There is no statistically significant impact at (α≤0.05) of the environment on
the organizational effectiveness.
- H0-2 : There is no statistically significant impact at (α≤0.05) of the communication on
the organizational effectiveness.
- H0-3 : There is no statistically significant impact at (α≤0.05) of the risk management
on the organizational effectiveness.
- H0-4 : There is no statistically significant impact at (α≤0.05) of the control activities
on the organizational effectiveness.
- H0-5 : There is no statistically significant impact at (α≤0.05) of the monitoring on the
organizational effectiveness.

 Methodology : This study is quantitative study which investigate the impact of the
internal control system (Control environment, Communication, Risk management,
Control activities and Monitoring) on organizational effectiveness in Jordan.
 Sampling : The sampling of this study consists of 151 questionnaire.
 Results : The findings of this research are that there is a statistically significant effect
of Control Environment and Monitoring on the organizational effectiveness. The
findings indicate that there is no statistically significant effect of Communication,
Risk Management and Control Activities on the organizational effectiveness.

26
  Recommendation for future research : There is no any recommendation for future
research.

9.8 Article Number Eight

 Year : 2018
 Author(s) : Thi Thu Ha Le,1 Manh Dung Tran 2
 Title : The effect of internal control on asset misappropriation: The case of Vietnam
 Purpose : The purpose of this study is to examine the effect of internal control system
on asset misappropriation in Vietnamese firms.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : There is a significant relationship between control environment and asset

misappropriation.
- H2 : There is a significant relationship between risk assessment and asset
misappropriation.
- H3 : There is a significant relationship between information and communication and
asset misappropriation.
- H4 : There is a significant relationship between control activities and asset
misappropriation.
- H5 : There is a significant relationship between monitoring and asset
misappropriation.

 Methodology : This study is quantitative study which examine the effect of internal
control system on asset misappropriation in Vietnamese firms.
 Sampling : The sampling of this study consists of 850 questionnaire.
 Results : The findings of this research are that the regression model confirms that
control environment has the most impact on fraud control in the businesses. The
findings indicate that the control activities are an important component of the internal
control system. An entity’s control activities such as segregation of duties,
authorization and approval may address the possibility of embezzlement and collusion
with external parties. The findings indicate that all five control components contribute
significantly toward fraud control in the firms. Of the five components, control
environment presents the strongest influence, followed by control activities and

27
 information and communication. Risk assessment and monitoring show slighter
impact on fraud control.

 Recommendation for future research : There is no any recommendation for future

research.

9.9 Article Number Nine

 Year : 2019
 Author(s) : Liangcheng Wang , Yining Dai and Yuye Ding
 Title : Internal Control and SMEs’ Sustainable Growth : The Moderating Role of
Multiple Large Shareholders
 Purpose : The purpose of this study is to examines the relationship between internal
control and sustainable growth, and assesses a moderating role of multiple large
shareholders.
 Research Question(s) / Hypothesis : The researchers test the following hypothesis,
stated in the alternative form based on theoretical expectations :

- H1 : SMEs with effective internal control have higher sustainable growth.

- H2 : The role of effective internal control on sustainable growth is more prominent in
SMEs with multiple large shareholders.

 Methodology : This study is qualitative study which examines the relationship

between internal control and sustainable growth, and assesses a moderating role of
multiple large shareholders.
 Sampling : The sampling of this study consists of 3514 observations.
 Results : The findings of this research are that the internal control is positively
correlated with the sustainable growth rate. The result indicates that sustainable
growth rate is higher in firms with effective internal control. The findings indicate that
the balance of power among multiple large shareholders strengthens the role of
internal control in sustainable growth. The results for the control variables suggest
that sustainable growth is higher for firms with greater leverage ratio, firms with more
profit, and larger firms.

28
  Recommendation for future research : There is no any recommendation for future
research.

9.10 Article Number Ten

 Year : 2020
 Author(s) : Murad Thomran, Hamed M. S. Ahmed
 Title : CHALLENGES FACED THE INTERNAL AUDIT PROFESSION IN
YEMEN
 Purpose : The purpose of this study is aims to identify the challenges hindering the
internal audit profession in Yemen.
 Research Question(s) / Hypothesis : The researchers trying to answer the following
questions, stated in the alternative form based on descriptive design :

- Q1 : Is the independency and proficiency of internal auditors considered as main

challenges facing the internal audit profession in Yemen?
- Q2 : What are external challenges facing the internal audit profession in Yemen?

 Methodology : This study is quantitative study which aims to identify the challenges
hindering the internal audit profession in Yemen.
 Sampling : The sampling of this study consists of 152 questionnaire.
 Results : The findings of this research are that there is a weaknesses in the internal
auditors’ independency and proficiency due to the lack of awareness of the role
internal audit function in the organization, which can be considered as main
challenges, that result from the absent of role of professional bodies as well as the
absence of mandatory guidelines, standards and regulations to govern the internal
audit practice in Yemen. The findings indicate that the lack of experts, absence of
training providers, moreover the absence of the educational institutions are additional
obstacles facing the profession.
 Recommendation for future research : There is no any recommendation for future
research.

29
10.0 Conclusion

The result of this study finding that the internal control is very important for all small

business. Where the internal control plays an important role in helping the business to

achieve its goals, resilience & growth, reducing risks & losses, Also it helps in

preventing & detecting of fraud. However the internal control affects the quality of business

activities by ensuring that it is doing well. Although internal control raising the performance

of financial & administrative of business. As much as the findings indicate the internal

control facing more challenges & problems especially in growing countries. Moreover the

findings indicates that internal control helping the sustainability for business.

11.0 Recommendations

Generally this study recommended the small business to implement the internal control

system in their business to guarantee high quality & efficiency for the operations

performance of the business.

30
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