ASSESSMENT OF INTERNAL AUDITING EFFECTIVENESS AND EFFICIENCY (IN

CASE STUDY OF ARBA MINCH TOWN IN OMO MICRO FINANCE INSTITUTION

ON GERO BRANCH).

A RESEARCH PAPER SUBMITTED TO THE DEPARTMENT OF ACCOUNTING

AND FINANCE IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR BA

DEGREE IN ARBA MINCH UNVERSITY

By: Gediyon Getu

JUNE, 2021

ARBA MINCH, ETHIOPIA.

 ABSTRACT

Internal audit can increase its effectiveness and efficiency by developing appropriate
performance metrics and monitoring against these metrics. Internal audits effectiveness and
efficiency should be periodically reported to stakeholder. In addition, internal audit may want to
help insure appropriate criteria are in place. When effectively managed, internal auditing
becomes an important element in helping an organization achieve its objectives. This study
investigated the internal audit effectiveness and efficiency in Arba Minch town omo micro
finance on gero branch. To analyze the issue the researcher includes internal auditor, chief
cashiers, accountants and executive officers of the branch and collect necessary data's using
primary &secondary data and analyzed the data using descriptive statistics method as shown
chapter four. After analysis the possible findings were revealed the following core points: the
internal audit office of the organization studied has low technical staff proficiency and high
staff turnover, which would limit its capacity to provide effective service to the management.
Most of the employees have low educational statues and need to upgrade their competencies to
enable them to provide the expected high quality service. The internal audit office report to the
president, the chief executive officer but the office does not administer its own budget.
Internal audit recommendations are not afforded enough attention. Though the audit tests are
generally well prepared they do not separately highlight the status of paste audit results and
they could be presented in a more consistent way. Besides, the audit evidence is attached to the
reports. Furthermore, there is strong mechanism in place to follow -up implementation of
audit recommendations.

Acronyms

AFCPA - American institute of certified public accountant

CEO - Chief executive officers

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IA -Internal Auditors

IJB -International Journal business

UK - United Kingdom

Table of contents
Contents Pag

DECLARATION OF ORIGINALITY.........................................................................................................i
LETTER OF CERTIFICATION.................................................................................................................ii
ACKNOWLEDGEMENTS.......................................................................................................................iii
ABSTRACT iv
Acronyms v
Table of contents........................................................................................................................................vi
list of table ……………………………………………………………………………………………….vii

CHAPTER ONE..........................................................................................................................................1
INTRODUCTION...................................................................................................................................1
1.1. Background of the Study..............................................................................................................1
1.2. Statement of the problem..............................................................................................................2
1.3. Objective of the study...................................................................................................................4
1.4. Scope of the study.............................................................................................................................4
1.5. Significance of the study...................................................................................................................4
1.6. Limitation of the study......................................................................................................................5
1.7. Organization of the Research Report................................................................................................5
CHAPITER TWO.......................................................................................................................................6
LITERATURE REVIEW ON INTERNATL AUDITING EFFICENCY AND EFFCTIVENESS.............6
2.1. Definition of internal auditing..........................................................................................................6
2.2 historical development of internal auditing........................................................................................7
2.3The roles and importance of internal audit..........................................................................................8

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 2.4 The scope of internal audit...............................................................................................................10
2.5. The responsibilities of internal audit...............................................................................................11
2.6 Independence of audit......................................................................................................................12
2.7. Professional efficiency....................................................................................................................13
2.8 scope of work..................................................................................................................................13
2.9 performance of audit work...............................................................................................................13
2.10 guidelines in measuring and assessment of internal auditor’s effectiveness and efficiencies.........14
2.11 Determinants of internal audit effectiveness and efficiency...........................................................15
2.11.1sector-private versus public.....................................................................................................15
2.11.2 Professional proficiency of internal auditors...........................................................................16
2.11.3 Quality of audit work..............................................................................................................16
2.11.4 Organizational independence..................................................................................................16
2.11.5 Career and advancement.........................................................................................................17
2.11.6 EMEPRICAL STUDY............................................................................................................17
2.11.7. RESEARCH GAP..................................................................................................................20
CHAPTER THREE...................................................................................................................................21
Research Methodology and design........................................................................................................21
3.1. Research Design.............................................................................................................................21
3.2. Target Population and sample size..................................................................................................21
3.3. Data type and source.......................................................................................................................21
3.4. Method of data collection...............................................................................................................21
3.5. Method of Analysis and Interpretation............................................................................................22
CHAPTER FOUR.....................................................................................................................................23
Data presentation, Discussions and analysis introduction......................................................................23
4.1 Demographic analysis of the study..................................................................................................24
4.2. Professional proficiency of internal auditors...................................................................................26
4.3 quality of audit work …………………………………………………………………………………27

4.4 Organization independence..............................................................................................................28

4.5. Top management support................................................................................................................30
CHAPTER FIVE.......................................................................................................................................33
CONCLUSION AND RECOMMENDATION.....................................................................................33
5.1 CONCLUSION...............................................................................................................................33
5.2 RECOMMENDATION...................................................................................................................34

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REFFERENCES........................................................................................................................................36
APPENDIX 38

CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
The histories of an audit want back to the earliest civilizations of the world, notably the Egyptian
and the Greek. In ancient times it was the practice to check of the accounts of an estate, domain
or manor by having such accounts called out by those who compiled them with those in
authority. The foundation for modern accounting and the root cause for an overall change in the
accounting professional is the grade invention of double –entry book keeping by an Italian
monarch and mathematician, Lucapaciollysss in 1494 (arenas and Laebbaek, 1991).

Traditionally, people understand internal audit as an activity of self imposed internal check and
audit which also supposedly involved the activity of going around telling people what they were
doing wrong. However even if one sees it in a narrow sense, the contributions of the activity of
internal audit is potentially of major importance as an effective internal audit system leads to
improved accountability, ethical and professional practices, effective risk management, improves
quality of out and supports decisions making and performance tracking . Historically it was
always held that internal auditing is confined to merely ensuring that the accounting and allied
records have been properly maintained , the assets management system is place in order to
safeguard the assets and also to see whether policies and procedures are in place and are duly
being complied with . With changing times this concept has undergone a sea change with
required to its definition and scope of coverage. Modern approach suggests that it should not be
restricted to financial issues alones but also on issues such as cost benefit analysis, resource
utilization and their deployment, matters of propriety, Effectiveness of the management, etc.
Internal audit is to be understood as an independent and objective appraisal services with in an
office (Google)

According to the’’ standard for the professional practice of internal auditing ‘’, which was issued
by the institute of internal auditors, the definition of internal auditing is an independent

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evaluation, function in an organization, it examines and evaluates an organization activities and
provides services to the organization. It is kinds of management control and works through
measuring and evaluating the effectiveness of other controls, in other words internal auditing are;
appropriate control, reliability of information system asset protection and efficient use resources
(Mcavoice 1977).

The Institute of internal Auditors of Uk and Ireland defines internal audit as: “Internal Auditing
is an independent, objective assurance and consulting activity designed to add value and improve
an organizations operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes.” (Institute of internal auditing, 2010)

The Institute of Internal Auditors New York defines Internal Audit as; ‘’ Internal audit is
independent, appraisal activity within an organization for the review of accounting , financial
and other operation on the basis as a basis of services to the organization. It is a managerial
control which functions by measuring and evaluating the effectiveness of other controls.” The
above definitions of internal auditing call for internal audit, to be an independent function with
an organizations placing greater emphasis on its objectivity. Thus internal auditing primly
provides an independent objective opinion to the head at the government Department /offices.
The definitions stress on two aspects of internal audit assurance and consultancy. It is important
that in fulfilling both those roles, internal audit remains independent of the project .It is the
management’s responsibility primarily to manage the project and they should therefore make the
decisions, but internal audit could act as a facilitator with in this process (institute of internal
auditing 2013).

1.2. Statement of the problem

Internal auditing became very important to world businesses, since industrial revolution resulted
in factory systems that were financed by stockholders. This situation necessitated the need for
internal auditing to protect shareholders best interest. The major factors assist in emergences of
internal auditing will be the extend span of control system faced by management in business
(institute of internal auditing research foundation, 2003). Today, in businesses worldwide, the
internal, the internal control functioning became very important for operations and achieving the
objective of organizations. The role of internal auditing is to assess the effectiveness and

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efficiency of the internal control system and to find out whether system is functioning as
intended (Fadziletal, 2008).

The demand of internal audit unit in most African countries increased since it early inception
1930; when internal audit practices are fully exercised (Giorigis 2004). For example in Ethiopia
less attention is given to operational audits as well as the application of modern techniques such
as How charting, statistical sampling, and computer auditing. Internal auditors spend by enduring
that accounting records are properly maintained and reliable. Furth or more the majority of
internal audit department do not have a written audit charter. Therefore, the objectives, authority,
scope, and responsibilities of internal auditing are not spelled out in most organizations, and no
measures exist to ensure that the internal audit department is recognized as acting with the
authority and support of senior management. In support to this in Ethiopia in order to assess the
state of internal auditing in the country as a basis for further action to strength the function, the
office of the auditor general auditor conducted a survey in 2001 E.C.

The main purposes where to determine the serviced quality, methodology and educational and
skill content as well as organizational structure of internal auditing. Hence the finding of survey
at the time indicate that the scope and professional content of internal auditing work was
severally limited , low level financial and compliance audits, pre audit , non audit work such as
witnessing the hand- over of stores, cash and personal transfers and to answer the following
Research question:

1. What activities are done to maintain professional proficiency of internal auditors?

2. What is the level of audit quality in the branch and how it attained?

3. How organization independence operate to have better internal audit practice?

4. How top management support the internal audit section of the organization?

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1.3. Objective of the study

1.3.1. General Objective of the Study

The main objective of this paper would be to assess the effectiveness and efficiency of internal
auditing practice in omo micro finance institution in Arba Minch town on Gero branch and how
it is effective and also efficient to find out the level of internal control system –effectiveness of
the branch

1.3.2. Specific objective of the study

1. To identify what activities are done to maintain professional proficiency of internal auditors.
2. To assess the level of audit quality in the branch and how it attained

3. To assess how organization independence operate to have better internal audit practice

4. To invest get how top management support the internal audit section organization

1.4. Scope of the study

The study would be bases mainly in omo micro finance institution in Arba Minch town on Gero
branch, and internal Audit departments in the branch. Decisions and conclusions would be only
base on the views expressed by respondents and no special investigation would be conducted
apart from in addition.

1.5. Significance of the study

There is the need for the internal audit to be effective and efficient so as to create improvement
in the organization. In addition internal audit is the major control part of any organization; so
conducting this will have the following significances to;

 For the company managing Bodies:-it’s very important to understand and solve the
potential problems under internal auditing which hinder its effectives and efficiency in
improving overall organization.
 For the Government:-To have clear image and information over the organization internal
auditing procedure.
 For external Auditor: - It reduce burden of further external auditor examination of
existing facts during overall organization auditing through providing information.
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  For the researcher: - serve as additional academic Knowledge in the area and use full
input for future professional development.
 For other Researcher: It helps them to conduct future study in the area over issues which
were uncovered currently by this study.

1.6. Limitation of the study

The research would be faced the following limitations in conducting of the study.

 Time constraints interview to collect the data.

 Some staff members not are around for same time because of their work nature.

1.7. Organization of the Research Report

This paper would be organized under five chapters. The first chapter deals with the problem and
which include background of the study, statement of the problem, research objectives, scope of
the study, limitation of the study, , significances of the study and organization of the research
report. The second chapter deals with review of related literature on the need to identity critical
internal auditing issues and empirical study. The third chapter includes research methodology
and design, target population and sample size, data type and source, method of data collection
and method of analysis and interpretation. Under chapter four deals with data analysis and
presentation of findings of the study. Lastly but not least, chapter five present’s conclusions draw
from the findings, recommendations would be made to address the problems uncovered. All
Other reference materials would be used in the study is listed under Reference part.

CHAPTER THREE
Research Methodology and design
3.1. Research Design
The research design selected for this study would be descriptive research design. Descriptive
studies are non- experiment researches that describe the characteristics of a particular individual,
or of a group It deals with the relationship between variable and developed of generalization and

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use of theories that have universal validity. It also involves events that have already taken place
and may be related to present conditions (Kothan, 2004).

3.2. Target Population and sample size

In Omo micro finance Gero branch totally 22 employees, from the target populations select 10
employees. To select the sample the researcher use non probability judgmental sampling
technique which is based on the researcher judgment Select this method because of gain accurate
and sufficient information about the internal auditing effectiveness and efficiency in omo micro
finance Gero branch. Based on this the researcher select 10 target respondents such as two
managers, one auditor, one accountant, two chief cashiers, one executive officer and three
employees of the finance that have jobs related with finance and audit section.

3.3. Data type and source

This study would be utilized both primary and secondary data to get accurate information.
Primary source of data is obtained from the employee of the organization through distributing
questioners where as secondary source of data focus on written documents, googl, internat and
previous researches.

3.4. Method of data collection

For collecting the data suitable technique would be used depending up on the nature of data. The
primary data would be collected from 10 employees of by using closed and open- ended self
administered questioner. Using questionnaire as data collecting tool is, due to its ability to
generate relevant information as compared to others data collecting instrument which enhances
the problem solving ability of the study (Grecner, 2008). The secondary data would be also
collected from secondary sources like documents, googl, internat and previous researches
regarding the study topic.

3.5. Method of Analysis and Interpretation

Data analysis is very important aspect of project, as it basically involves the analysis of all the
information that would be collected. The information collected needs to be analyzed so that can
be easily reducing in order to provide the justification for the work would be done during
research. Data analysis is a body of methods that help to describe facts, detect patterns, develop
explanations and test hypothesis. Having the goal of this study in mind, the raw data would be
processed by tabulating that identifying and classifying each answer which statistic by the

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researcher. The data is analyzed and interpreted the finding by descriptive statistics method with
table and percentage.

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