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Chapter I
THE PROBLEM AND ITS BACKGROUND

Background of the Study

An essential condition for the survival of a company or more generally of an

organization lies in the ability of its members to act reliably and ef ciently to
achieve the objectives of the organization. The substantial coordination of
behavior can be achieved in numerous ways. In a very small business, the
manager can verify directly that the tasks are performed in the way he thinks is
suitable. But the supervision of the manager and the mutual adjustment among
various actors Mintzberg, (1982) quickly became insuf cient when the number
of the rms increased. However, it may be wished to maintain these ways of
controlling but it would only be applied to the part of the organization.

It is necessary that management put in place mechanisms to ll the gap in

supervision. Business performance is a major concern these days due to the
importance of global competition. One factor of this performance lies in the
ethical and responsible behavior of its performers. But at the end of the 20th
century, the Enron and WorldCom scandals show that there was a lack of
control in organizations (Bertin, 2007). Following these nancial scandals,
actions were taken. It has become essential to provide an ethical control in the
interest of leading to better take into account the content of internal control, to
overcome the weaknesses of economic and legal support.

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In a common interest, ways to measure the impact of moral decisions have

been found and the company must be able to justify its activities (Ethical
norms and values) this control may be performed by the internal audit (Mercier
2000).
Organizational performance can also be "the ability of an organization to
identify and implement appropriate strategies within the framework of the
aims it pursues" (Bouquin, 1997). The objectives vary; organizations may want
to become the largest company in the world or to remain a successful
specialized business or even be best able to achieve the goals it has set.
Once the purposes have been de ned, success depends on the ability to de ne
appropriate strategies and to implement them. Organizational arrangements
must ensure the level of performance in both economic and strategic scopes
and we call internal control the combination of such devices.
It is necessary to periodically test the effectiveness and suitability of a
particular aspect of internal control. Auditing is the process of studying and
evaluating internal control and certain of its aspects, as well as its expected
performance. The ensuing result may help to determine the effectiveness of the
company. It is something important because the challenges of every business
day are for the companies to be competitive so as not to be forced out of the
market.
An internal audit is a management tool used in ensuring transparency in the
conduct of business. Auditing took the entire stage after the industrial
revolution since before this period, transactions increased, precipitated by the
development of large corporations, limited liability companies, and there
became the need for divorce of ownership from control. Hence managers and
shareholders became two different partners.

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Then it became apparent for managers to render accounts of their stewardship

to those who have pooled their resources together for the business. It is
noteworthy that an independent person is appointed to represent the interest
of the shareholders in reviewing the report of managers to ensure accuracy and
transparency. This is how auditing started.
Moreover, the analysis intends to especially point out the advantages that an
internal audit can offer to the management of the entity. According to the
International Standards for the Practice of Internal Auditing (Standards) (IIA
2009a), the role the audit lls in improving the performance of the organization
implicitly leads to more responsibilities for the internal auditors in identifying
and nding fraud.
The nancial and corporate strategy of a company is underpinned by effective
internal systems in which the internal audit has an important role, raising the
reliability of the internal control system, improving the process of risk
management, and, above all, satisfying the needs of internal users. The
internal audit also supports and enhances the system of responsibility that the
executive directors and employees have towards the owners and other
stakeholders.
The Internal Audit Department provides a reliable, objective, and impartial
service to the management, board of directors, and audit committee. In turn,
stakeholders are interested in return on investment, sustainable growth, strong
leadership, and reliable reporting on the nancial performance and business
practices of a company. Proper understanding of the role and importance of the
internal audit is one of the preconditions for successful strategy
implementation and achievement of company goals (Cascarino & Van Esch,
2007). 2 Dependable information is essential to the very existence of society.
The investors deciding to buy or sell securities, the banker deciding whether to

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approve a loan, the government in obtaining revenue based on income tax

returns, all are relying upon information provided by others.
Therefore, there is a need for independent auditors of professional competence
and integrity who can provide information to users which constitutes a fair
picture of what is going on (Richard & Irwin, 2006). The profession of internal
auditing, as with many other professions, has its roots in the industrial
revolution of the nineteenth century (Cascarino & Van Esch, 2007). Dating back
to 3500 BC, extant records of various civilizations indicated by patterns of
checks and ticks that veri cation of records took place (Cascarino & Van Esch,
2007). Presumably, this was done by two of cials working together, with one
of cial reading from one of the record sheets and the other checking against
the other sheet. The name, auditor, derives from the Latin ‘audits’, meaning
‘hearer’ (Cascarino & Van Esch, 2007). Auditing, in general, involves an annual
risk assessment and planning exercise to determine the overall audit coverage
which is followed by individual audit planning.

The preliminary review is used to obtain and record an understanding so that an

audit area may be broadly evaluated. From this evaluation, the extent of
compliance testing or substantive testing required may be determined
(Cascarino, 2012). There has been an emphasis that government ministries in
Namibia should establish audit committees Beakes, Benedict & Kandandu
(2015). The Public Accounts Committee (PAC) of Namibia recommended that
the ministries and of ces must establish audit committees. (Ihuhua, 2012).
Currently, in Namibia, the only document that governs the audit of 3
committees in the private sectors and State-owned Entities (SOEs) is the
Corporate Governance Code for Namibia (NamCode).

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So far no documentation regulates government ministries' audit committees,

but only the PAC recommendations (Ihuhua, 2012). Following the 1994 King
Report on Corporate Governance for South Africa and its successors, King II
and King III, Namibia established the NamCode based on King III report that
guides all Namibian corporate entities with a list of best practice principles to
assist and guide directors to make the right choice for their entities for good
corporate governance (Deloitte, 2013). According to Deloitte (2013), the
NamCode guides all Namibian corporate entities, as well as public entities, on
various governance-related aspects; including audit committees.

Notwithstanding the provision of these codes, suitably quali ed committee

members with some levels of independence are essential to an ef cient audit
committee. Otherwise, there will be no assurance of effective internal controls,
processes, and systems in place. Kauaria (2005) observes that there is an
absence of an effective internal audit function in the government ministries in
Namibia. Furthermore, Masawi (2012) states that most Namibian companies
do not have enough representation of quali ed board members and audit
committee members while public institutions are dominated by political
appointees; a situation that compromises the ef ciency within SOEs and
government ministries, being the most affected institutions. It is against this
background and problem that this paper presents the following objectives.

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