International Journal of Management (IJM)

Volume 12, Issue 6, June 2021, pp. 201-210, Article ID: IJM_12_06_018
Available online at https://iaeme.com/Home/issue/IJM?Volume=12&Issue=6
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: 10.34218/IJM.12.6.2021.018

© IAEME Publication Scopus Indexed

THE ROLE OF INTERNAL FINANCIAL AUDIT

IN DETECTING IRREGULARITIES IN PRIVATE
INSTITUTIONS
Qazi, Jaweed Hameed and Prof. Dr. Syed, Shabibul Hassan

ABSTRACT
The study's general objective is to analyze the role of internal financial audit, as an
anti-irregularity agent. It has specifically aimed at Searching in the literature the
importance of internal auditing in aggregating values of administrative probity,
analyzing contributions provided by internal auditing and investigating the differences
between fraud and errors committed internally. This is a study of a basic nature, with
an explanatory procedure, carried out using the reviews and opinion of the authors who
addressed similar issues. For the selection of sources, the following inclusion
descriptors were considered: internal financial audit, irregularities (i.e. fraud, error,
money laundering) and the theme addressed, and for exclusion: Articles that escaped
the line of research and articles considered repeated concerning the theme. The period
from 2015 to 2021 was considered. The research was considered satisfactory,
concerning the theme addressed.
Key words: Financial Audit, Private Institution, education, income
Cite this Article: Qazi, Jaweed Hameed and Syed, Shabibul Hassan, The Role of
Internal Financial Audit in Detecting Irregularities in Private Institutions, International
Journal of Management (IJM), 12(6), 2021, pp. 201-210.
https://iaeme.com/Home/issue/IJM?Volume=12&Issue=6

1. INTRODUCTION
In view of the current growth of private institutions, the internal financial auditor has become
fundamental and indispensable in organizations in detecting irregularities with thorough
examinations of the financial statements presented by the internal control, with the duty to
comply with the requirements of the applicable standards, for the efficiency and credibility of
the company as a whole (Joseph, Albert & Byaruhanga, 2015).
With the corruption schemes explicitly demonstrated in the media and social media
involving private companies, the business sphere began to pick up plans that emphasize
administrative inviolability and implement them, so that investors obtain confidence in what
they invest. Among these anti-improbity strategies, the importance and the role of the internal
financial auditor in controlling irregularities are notorious (Kehinde, Ahmad, & Popoola, 2017).

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 The Role of Internal Financial Audit in Detecting Irregularities in Private Institutions

The performance of the internal financial auditor was not thought of as exclusive to detect
irregularities including corruptions and/or errors, but, to harmonize the work in such a way that
the functions of each one of those who compose the company's team, have their attributions
fulfilled within the requirements of the rules of good organizational functioning. However,
market priorities require a change of scheme, as what was previously just an auditor's
assignment has become a real priority: avoiding irregularities to give credit and reliability to
the scope of investors (Othman et al., 2015).
With this, it is observed the indispensability of the development of focused audit, in addition
to the quality of the service provided, in an action that is a filter that separates the reliable
information within the financial companies, that is, it emphasizes the positivity of the successful
works, and by identifying any action that harms the company, this information must be passed
on to management so that it punishes, through internal sanctions, errors or fraud that cause
distrust to investors or that harm the story of financial prosperity achieved in their investments
(Tamaş, Petraşcu, & Toader, 2018).
Thus, this study has as its main inspiration to demonstrate the importance of the work
performed by the internal financial auditor within organizations, generating greater reliability
for the organizational scope, because of this significance not only for the internal financial area
but also for the external area.
The entities face several obstacles during their development, among them the occurrence of
financial irregularities that hinder the private institutions to achieve the desired objectives.
Given this, the need for a professional to assist managers in supervising activities arose
(Drogalas et al., 2017). Therefore, an internal financial audit is essential to the entity and seeks
to assist management with guidelines and suggestions, giving direction to the work,
collaborating as a kind of management assistance. Therefore, the following question arises:
what is the importance of the internal financial auditor in the process of detecting irregularities?
This study aimed to analyze the role of internal financial auditing, as an anti-irregularity
agent. In specific terms, it aimed to: seek in the literature the importance of internal financial
audit in aggregating values of administrative probity, analyze contributions that may be
provided by internal financial audit in private institutions and investigate the different type of
financial irregularities committed internally.

2. THE RELATIONSHIP OF FINANCIALS ACCOUNTING AND

AUDITING, CONCEPTUALIZATION AND OBJECTIVES OF
INTERNAL AUDIT
Accounting is a social science, which aims to protect a set of elements that make up the entities'
assets, as well as providing information about the organization's economic and financial
situation (Lenghel, 2015). Because of the great importance of these statements, financial
investors realized the need for a professional who did not have employment ties with the
company to prove the real situation of the financial statements.
As a consequence of the need for this general verification, the professional independent
auditor emerged who carries out his work without any labour connected with the entity. This
professional develops his activities interconnected with accounting practices and with the use
of accounting standards established by competent bodies that regulate the profession of
accountant in Pakistan. Besides, considering market requirements, the internal financial audit
emerged as a branch of the audit, where the internal financial auditor is an employee of the
company, which is the main focus of this research (Adetoso & Akinselure, 2016).
The internal financial audit is an independent evaluation activity, which consists of advising
management; evaluation of financial statements and administrative records; contributing to the

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 Qazi, Jaweed Hameed and Syed, Shabibul Hassan

efficiency, effectiveness, legality; and effectiveness of the organization and internal control
(Ismajli et al., 2017).
The internal financial auditor's objectives are to examine the data provided by internal
control and prove its efficiency and effectiveness, observe compliance with laws and internal
rules, bring protection to the entity's assets, reduce indications of irregularities and financial
loss, as well as formulate an opinion about the situation in which the company finds itself
(Alina, Cerasela & Raluca-Andreea, 2018). In this way, reducing the indicators of irregularities,
practices that end up tainting the company's integrity in the face of possible investors.
Therefore, it is understood the importance that accounting has on the work of the auditor
and the relevance of the analysis made by this professional in the information collected,
strengthening and safeguarding the integrity of the company with recommendations for the
improvement of departments, to finally achieve the objectives outlined by the entity with safety
and efficiency helping it to achieve its goals.

3. THE ROLE OF THE INTERNAL FINANCIAL AUDITOR IN ADDING

VALUE TO THE ORGANIZATION
The auditor works together with the company's management, evaluating internal financial
controls and always seeking to reduce the risks that can harm both business and consumers
because if losses are proven, they will certainly be passed on to the consumer through their
products (Chen & Keung, 2018)
The professional internal financial auditor has become a fundamental part of organizations
because it contributes to the efficiency, legality, and effectiveness of the organization, through
rigorous inspections exercised through its techniques that prove the quality of internal financial
control, thus reducing the irregularity indicators, practices that end up tarnishing the integrity
of the company before the population and potential investors (Kabuye et al., 2017)
The internal financial auditor works to bring compliance with internal rules and protection
of the entity's assets, always within the standards of the rules and legislation in force, reducing
indications of irregularities and financial losses (Asiedu & Deffor, 2017). In addition to
contributing recommendations for improvements and enhancement of internal financial control
systems, contributing to good management.
The activity provided by the internal financial audit adds value to the company's
performance, the report prepared by this professional is of great importance for the company in
decision-making, bringing credibility and confidence to the financiers, investors and suppliers,
thus opening doors for growth of the entity and both employees and administrators benefit from
this growth (Ikbal et al, 2020).
In this way, the auditor works as a tool for the control and prevention of illicit acts on the
information, standing out as a fundamental part, contributing and an efficient way to achieve
the objectives and vision of management.

4. RESPONSIBILITY FOR THE PREVENTION AND DETECTION OF

FINANCIAL IRREGULARITIES
According to Tamaş, Petraşcu & Toader (2018), the internal financial auditor is not responsible
and cannot be held responsible for preventing fraud or errors. However, his/her work must be
planned preventively, analyzing the probability of detecting errors or fraud within the business
organization that impairs the accuracy of the financial statements (Astuti, 2018). The entity's
managers have the primary responsibility for detecting and preventing reports in the financial
statements, so it is of great importance to have clear communication between those responsible
for the management and the auditor, facilitating the discovery of irregularities (Oladejo et al.,

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 The Role of Internal Financial Audit in Detecting Irregularities in Private Institutions

2021). Because of the risks, an analysis is made by the auditor through information passed on
by the specific internal control, making it evident that even in the face of this prevention, the
risks of irregularities are not eliminated, and this fact may still occur in the organization (Razali,
2020).
The auditor has the duty to keep the administrative part of the organization always informed
in writing of any irregularities observed in the company and to suggest measures by the
management. If deviations from internal rules are found, this information must be passed on to
the person who requested the work, informing the applicant of the effect on his report if the
corrective measures are not met the entity's departments, verifying their performance and
compliance with laws and internal rules (Kazingizi, 2020).
It is essential to implement an efficient internal control system to check reports and their
dimensions in all departments of the entity, making it clear that the responsibility for internal
control lies with the company's management. It is evident that the auditor is only responsible
for certifying the veracity of the information passed on by this control.

5. FINANCIAL IRREGULARITIES
The term financial irregularity applies to an intentional act of omission and/or manipulation of
financial transactions and operations, adulteration of documents, records, reports, information
and financial statements, both in physical and monetary terms (Vasilev, Cvetković & Grgur,
2019).
Financial irregularity, how the individual intentionally acts to benefit or favour others,
manipulating information to circumvent internal and external laws. Financial irregularities
appear in different ways in an organization, such as concealment of assets, alteration of
documents, improper modification of liabilities and assets, withdrawal of cash, fraud, causing
incalculable damage to the entity's assets, money laundering as well as the credibility of the
work or services provided to third parties (Donelson, et al., 2021).
Moreover, the financial error applies to an unintentional act of omission, inattention,
ignorance or misinterpretation of facts in the preparation of records, information and financial
statements, as well as of the entity's transactions and operations, both in physical and monetary
terms (Zhu, 2018). Likewise, mistakes are acts committed by employees or administrators
without the intention of harming or attracting for themselves or third parties, advantages. There
is no intention to circumvent laws and regulations, they are actions committed due to ignorance,
inattention, but which end up harming the entity in the preparation of its financial statements
(Amiram et al., 2018).
The importance of compliance with ethics and morals by the business managers themselves
is just as important as the ethical and moral attitude of each employee of the company. The
practice of correct behavioural attitudes between the two classes mutually prevents the
occurrence of illicit and errors in the entity. Thus, contributing to its growth and strengthening.

6. EXTERNAL AND INTERNAL FINANCIAL AUDIT:

CHARACTERIZATION AND DIFFERENTIATION
The need for external audit arose from the development of the capitalist system itself,
previously small companies saw the need to modernize, innovating the workplace, adapting
computerized systems and transforming their organizational scope (Shahzadi et al., 2018).
Organizations saw that to make so many investments it was necessary to obtain resources
from third parties. Therefore, there was a need for a professional auditor who was independent
to audit the accounting information and issue an opinion that would bring security to investors,
as these investors wanted to have security in the company and in the data they provided to them,

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 Qazi, Jaweed Hameed and Syed, Shabibul Hassan

as well as, whether that entity would have the capacity to make a profit (Quick & Henrizi,
2019).
The external or independent financial audit is carried out by an accountant professional,
with a bachelor's degree in accounting sciences, registered with the Institute of Chartered
Accountant of Pakistan (ICAP), and approved in competition with the Securities and Exchange
Commission of Pakistan (SECP) (Mahmood et al., 2018). Thus, this professional activity is
performed through auditing standards and accounting techniques determined by competent
bodies to be applied in the performance of work. The professional external or independent
auditor has his/her vision focused in addition to presenting to all stakeholders the situation in
which the organization's accounting and financial statements are in, the situation of compliance
with the rules and legislation in force, as his/her interest is also focused on the good collective.
With the evolution of business in Pakistan, businessmen realized the importance of greater
organization in internal processes, thus it emerged to internal financial audit as an extension of
external audit and also of the accountant. To perform the function of an internal financial
auditor, there is no need for specific training. Its emergence was due to the great business
development and the need for a periodic audit within the organizational set, to verify
compliance with internal rules and the efficiency of the company's functional departments,
contributing to the growth of the organizational scope (Shakeel, et al., 2020).
The internal financial audit carries out its work, according to the standards of Institute of
Certified Internal Auditors (ICIA-Pakistan), i.e. 100-Independence, 200-Professional
Proficiency, 300-Scope of Work, 400-Performance of Audit Work, 500- Management of the
Internal Auditing Department, instituted by International Internal Audit Standard Board
(IIASB), through actions within the scope of the entity in an independent way from the other
sectors of the organization, having as a principle to assist those responsible for senior corporate
management (ICIA-Pakistan, 2021).
The internal financial audit action is organized with rigorous and objective characteristics,
to add values to the organization's work, presenting aids for the development of management
processes and internal controls, indicating solutions for the collected and unreliable information
found in the analysis (Saud, 2015).
The two audit functions are, in fact, very similar within the company, but with some
important differences. Both certify the efficiency and effectiveness of the internal control, the
accounting records, the veracity of these data and the application of techniques to verify the
reliability of the data, that is, all necessary techniques are used to verify and certify the
credibility of the information collected from the audited departments. of the business entity
(SILVA; GODOY, 2016).
The external or independent auditor performs his audit work within the corporations in an
independent manner, that is, there is no employment relationship with the audited institution,
and his functions are provided for in a contract and established by specific legislation. Unlike
the internal financial auditor, who is an employee of the entity, the functions performed within
the company are much broader. The internal financial auditor has his task defined by the
managerial scope, therefore, his work is periodic (Masood & Afzal, 2016).

7. BODIES RELATED TO THE AUDITOR'S WORK

The main bodies that govern auditing in Pakistan are addressed, which are responsible for
creating specific standards for the work developed by auditors in the performance of their duties
in organizations, they are SECP, the ICAP, Audit Oversight Board (AOB), and Institute of Cost
and Management Accountants of Pakistan (ICMAP).

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 The Role of Internal Financial Audit in Detecting Irregularities in Private Institutions

SECP was created on January 1, 1999, whose main objective is to inspect Pakistan’s capital
market, as well as the creation of rules exercised by the external auditor, and accounting
standards that must be performed by the entities. Thus, for the auditor to exercise his activity
in the securities market, he must be duly registered with the SECP (Saud, 2015).
ICAP was created on July 1, 1961, this institute creates its own statute and is governed by
it, as well as by the laws in force in the country. This institute currently works together with the
Government of Pakistan to review and translate the International Financial Reporting Standards
so that accounting practices can be executed as per international standards in Pakistan (Badshah
& Mellemvik, 2017).
AOB is a legal entity created by SECP under SECP Act in 2016. The board acts as a
supervisory body that regulates the exercise of the accounting programs, as well as advising
accountant professionals to comply with duly established standards for the accountant
profession. The main objective of the board is the overseeing and monitoring of the exercise of
the accountant programs (World Bank, 2018).
ICMAP was created in 1951, this institute is formed under the CMA Act to regulate cost
and management accountants in Pakistan. The institution is responsible for administrating
CMA programs, setting ethical requirements, and establishing quality assurance programs to
monitor its members (Parvaiz, Mufti & Wahab, 2017).

8. METHODOLOGY
The present study was developed in the context of Pakistan, which is involved bibliographic
research and ran from 2015 to 2021. Bibliographic research of a basic nature is developed from
materials already prepared and published, which are mainly made up of books, articles and
scientific journals, written and published by specialists, and aim to lead the reader to have direct
contact with the reasoning of the investigation of the problem (Ferrari, 2015).
In view of the definitions contemplated for the construction of this scientific work, a survey
of academic research on the topic addressed was used. The researcher accessed more than 100
articles or scientific works through Google Scholar, however, for the usefulness of the study,
only (17) articles were adhered to. All material found was applied to the development of this
academic work
For the selection of sources, the following inclusion descriptors were considered: internal
financial audit, irregularities including fraud, money laundering, and errors, and consequently
the theme addressed, and the following exclusion criteria: articles that did not follow the line
of research and articles considered repeated concerning the theme.

9. RESULTS AND DISCUSSION

The results obtained in this research were given through the general objective and the specific
objectives, where it was possible to clarify the importance of the audit, its contribution to private
institutions and the financial irregularities in the internal scope.
With the development of this research, it was possible to analyze the importance of the work
performed by the internal financial auditor within organizations, generating greater reliability
for the organizational scope. In principle, the relationship between accounting and auditing was
shown, so that in this way it could bring understanding about the role of auditing and the
classification of external and internal financial auditing.
So that it was possible to bring a clearer understanding of internal and external financial
auditing in private institutions, portraying its main characteristics, the singularities between
internal and external financial audits were highlighted, objectively facilitating this

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 Qazi, Jaweed Hameed and Syed, Shabibul Hassan

understanding, clarifying, the priori, and the elements. It should be noted that more emphasis
was placed on internal financial auditing, as this is the main focus of this research.
Regarding the auditor's responsibility in detecting irregularities, as Ismajli et al. (2017)
point out, the auditor is not responsible for detecting financial irregularities. As Zhu (2018)
complement, the responsibility for detecting illicit acts is the primary competence of the entity's
managers. In view of this, it is not the auditor's responsibility to resolve, but to give his/her
opinion independently.
Regarding the importance of the internal financial auditor, Alina Cerasela & Raluca-
Andreea (2018) and Asiedu & Deffor (2017) agree that the internal financial auditor performs
his functions by reducing the indicators of illicit acts. Thus, the importance of auditing in terms
of assessing the company's situation for greater operational and administrative efficiency is
highlighted.
As Drogalas et al. (2017) complement, the internal financial auditor works to bring
compliance with internal rules and protection of the entity's assets. Thus, in the current context
in which companies find themselves, the auditor is seen as a key element and has become an
indispensable instrument for assessing the efficiency of managers and ensuring the credibility
of the information generated.
Concerning financial irregularities, it is necessary to distinguish between errors and fraud
committed internally. According to Drogalas et al. (2017) and Donelson et al (2021), errors are
involuntary attitudes, which can be committed by employees or administrators without the
intention of deceiving or attracting any type of advantage to themselves. Unlike error, fraud is
an illegal action, committed with the aim of causing data to the entity and obtaining advantages.
Although these attitudes can happen over the same means, as in documents, accounting records,
among others, the two actions have different characteristics that can cause data to entities and
prevent it from reaching its objectives in a safe way (Joseph, Albert & Byaruhanga, 2015)
According to Kazingizi (2020), the audit contributes to the growth of the organizational
scope. Thus it is seen that the contribution of the audit ensures greater solidity of the company
and consequently opens doors to new jobs. As Ikbal et al. (2020) complement, the auditor
contributes to the inspection of controls, reducing the occurrence of illicit acts. In this way, it
contributes to the inspection of controls and reduces the occurrence of illicit acts.
The bodies that regulate and supervise the profession of auditors in Pakistan were also
emphasized, as they are the ones who establish the guidelines and standards to be followed by
these professionals. Such standards contribute to the improvement of the work carried out by
the auditors.
It was observed that the path traced to obtain information about the auditor's role and its
importance within private organizations for addressing financial irregularities has been
achieved. It is worth mentioning that the theme goes beyond that presented in this work since
the auditor's work has the participation of all departments of the organization. All functions and
competencies of the auditor are the basis for ethical and efficient work with organizations,
emphasizing that this was the inspiration that was proposed to be sought in the literature.

10. CONCLUSION
With the development of this scientific work and the theme addressed, as well as the data
collected and presented, it was possible to obtain important information capable of bringing an
understanding of the role of internal financial audit in detecting irregularities in private
institutions. This inspiration arose to bring more relevant information about the theme to
society, with the principle of answering the objectives of this research.

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 The Role of Internal Financial Audit in Detecting Irregularities in Private Institutions

In this way, it was possible to understand the emergence of internal financial auditing and
what led this profession to gain such importance within business organizations, as well as its
indispensability and influence on managers' decision-making. However, it was possible to
understand the concept of the financial audit and the application of techniques capable of
making a filter in the company's statements, as well as to understand the contribution of
accounting in the practices of the audit.
The internal financial audit has gained its space over the years in the market, contributing
to the achievement of the objectives set by the managers. This professional demonstrates his
importance and contribution in adding probability values through his work of verifying
company data. However, even in the face of the work developed by this professional, the
company is not exempt from the occurrence of possible irregularities, and it is also clear that
this professional is not primarily responsible for detecting illicit acts.
Therefore, to avoid the occurrence of irregularities, it is up to the managers to invest more
and more in the implantation of computerized systems capable of detecting the occurrence of
errors or frauds that hinder the development of the company, always working in a preventive
way, as well as placing it as a principle of its ethics and morals, both for the managers
themselves and the employees. This vision should be part of the company's history as being a
key part of mutual growth.

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