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Accounting and Finance Thesis and Dissertations

2021-08

Factors Affecting Internal Audit

Effectiveness on Ethiopian Private
Commercial Banks (A Case of Bahir Dar Branch)

Asmare Terefe

http://ir.bdu.edu.et/handle/123456789/12514
Downloaded from DSpace Repository, DSpace Institution's institutional repository
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BAHIR- DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

FACTORS AFFECTING INTERNAL AUDIT EFFECTIVENESS ON ETHIOPIAN

PRIVATE COMMERCIAL BANKS (A CASE OF BAHIR DAR BRANCH)

By
Asmare Terefe Yayeh
ID.NO: BDU1208350/12

June, 2021
Bahir Dar, Ethiopia
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BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

Factors Affecting Internal Audit Effectiveness on Ethiopian Private

Commercial Banks (A Case of Bahir Dar Branch)

By: Asmare Terefe

A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of
Masters of Science in Accounting and Finance

Advisor: Abebe Walle (Assistance Professor)

June, 2021
Bahir Dar, Ethiopia

@2021 Asmare Terefe

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Statement of Declaration
This is to certify that the thesis entitled “factors affecting internal audit effectiveness on
Ethiopian private commercial banks a case of Bahir Dar branch “submitted in partial fulfillment
of the requirements for the degree of Master of science in accounting and finance in Bahir Dar
University, is a record of original work carried out by me and has never been submitted to this or
any other institution to get any other degree or certificates. The assistance and help I received
during the course of this investigation have been duly acknowledged.
Asmare Terefe Yayeh ________ ________
Name of the candidate Date Signature
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BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

Approval of Thesis for Defense

I hereby certify that I have supervised, read, and evaluated this thesis titled “factors affecting
internal audit effectiveness on Ethiopia private commercial banks a case of Bahir Dar branch” by
Asmare Terefe prepared under my guidance. I recommend the thesis be submitted for oral
defense.

_______________________ _____________ _____________

Advisor name Signature Date
_____________________ _______________ ____________
Department Head Signature Date
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BAHIR DAR UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

Approval of thesis for defense result

As members of the board of examiners, we examined this thesis entitled “factors affecting
internal audit effectiveness on Ethiopia private commercial banks a case of Bahir Dar branch” by
Asmare Terefe. We hereby certify that the thesis is accepted for fulfilling the requirements for
the award of the degree of “master of science in accounting and finance”.

Board of Examiners
External examiner name Signature Date
_____________________ ________________ _____________
_____________________ ________________ _____________
Internal examiner name Signature Date
_____________________ ________________ _____________
_____________________ ________________ _____________
Chair person’s name Signature Date
_____________________ _______________ _____________
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Acknowledgement
First and foremost, I would like to thanks my Almighty, GOD and his mother St. marry for
giving me strength to finish the paper and support in my entire life. Secondly, I would like to
express my deepest thanks to my advisor Assistant Professor Abebe Walle for all his unreserved
help and persistent guidance in the preparation of this thesis. And also I would like to thank my
beloved family for long year’s assistance they provided for me to arrive at this level, particularly
my Mother W/ro Abeter Alamrew, my father Terefe Yayeh, my lovely brothers Gebeyaw and
Bekalu Terefe who are supported me to proceed this study. Finally, I would also like to extend
my thanks to the internal audit staff of the Office of private Commercial Banks of Ethiopia in
Bahir Dar branch for their cooperation in providing the necessary data and information by taking
their valuable time and effort.
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Abstract
An Internal audit is an independent ,objective assurance and consulting activity designed to add
value and improve organization operations to accomplish its objectives by bringing a systematic,
and disciplined approach to improve and evaluate the effectiveness of risk management, control,
and governance processes. The overall objective of this study was to examine factors affecting
the effectiveness of internal audit in Ethiopian private commercial banks. The study focused on
all Ethiopian private commercial banks in case of Bahir Dar branch. Explanatory research
design has been used with primary data by employing quantitative research method and a cross-
sectional survey design. The quantitative research method was used through 95 usable self-
administered questionnaires. The questionnaire were constructed in to a likert scale form and
distributed to internal auditors, accountants and managers and analyzed by using statistical
package for social science software. The Ordinary Least Square linear regression model was
used to analysis the collected data and examines the association between internal audit
effectiveness and seven study’s variables. According to the results of the study competency of
internal audit teams and management support were the two major statically significant factors
which determining the effectiveness of internal audit in Ethiopian private commercial banks. The
researcher recommended in order to improve internal audit effectiveness through competency of
internal audit staff the bank should be providing effective training and professional certification
program to internal auditors in a timely and planned manner and private commercial banks in
Ethiopia should give more attention to those factors which has positive effect on internal audit
effectiveness which are competency of internal auditors, independency of audit teams, training of
auditors, support from management, approved internal audit charter, relationship between the
internal and external auditor which plays a vital role for the effectiveness of an internal audit.

Key Words: internal audit, internal audit effectiveness, training of auditors, approved audit charter,
relationship between internal and external auditors.
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Table of Contents page

Statement of Declaration.................................................................................................................. i
Approval of thesis for defense result ............................................................................................. iii
Acknowledgement ......................................................................................................................... iv
Abstract ........................................................................................................................................... v
List of Tables ............................................................................................................................... viii
Acronyms ....................................................................................................................................... ix
CHAPTER ONE: INTRODUCTION ............................................................................................. 1
1.1 Background of the Study ....................................................................................................... 1
1.2 Statement of the Problem ...................................................................................................... 3
1.3 Objective of the Study ........................................................................................................... 5
1.3.1 General Objective ........................................................................................................... 5
1.3.2 Specific Objectives ......................................................................................................... 5
1.4 Research Hypothesis ............................................................................................................. 5
1.5. Scope of the Study................................................................................................................ 6
1.6. Significance of the Study ..................................................................................................... 7
1.7. Organization of the Study .................................................................................................... 7
CHAPTER TWO: LITERATURE REVIEW ................................................................................. 8
2. Theoretical and Conceptual Literature........................................................................................ 8
2.1. Definition of Auditing .......................................................................................................... 8
2.1.1 Historical Development of Auditing .................................................................................. 9
2.1.2. Features of auditing ....................................................................................................... 9
2.1.3. Objectives of auditing.................................................................................................. 10
2.1.4. Development of Auditing In Ethiopia ............................................................................. 11
2.1.5. Advantages of Auditing ............................................................................................... 12
2.1.6. Disadvantages/ Limitations of an Audit .......................................................................... 12
2.2. Definition and Roles of Internal Audit............................................................................... 13
2.2.1 Roles of an internal audit .............................................................................................. 14
2.2.2 Evolution of Internal Audit........................................................................................... 15
2.2.3 Internal Audit Functions ............................................................................................... 18
2.3. Basic Principles of Internal Audit .................................................................................. 19
2.4. Theories of Internal Audit .................................................................................................. 21
2.4. Types of Audits Performed by Internal Auditors ............................................................... 25
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2.5 Types of Auditors in Ethiopia ............................................................................................. 28

2.6. Empirical Literatures .......................................................................................................... 30
2.6.1 Factors affecting internal audit effectiveness ............................................................... 31
Conceptual Framework ............................................................................................................. 37
CHAPTER THREE: RESEARCH METHODOLOGY ............................................................... 39
3.1 Research design ................................................................................................................... 39
3.2. Population and Sampling of the Study ............................................................................... 39
3.2.1. Population of the Study ............................................................................................... 39
3.2.2. Sampling of the Study ................................................................................................. 40
3.3. Type and sources of Data ................................................................................................... 41
3.4. Methods of Data Collection ............................................................................................... 41
3.5. Data Analysis ..................................................................................................................... 42
3.6 Measurement of variables ................................................................................................... 42
3.7. Model Specification ........................................................................................................... 43
Chapter Four: Data Analysis and Interpretation ........................................................................... 44
4.1 Introduction ......................................................................................................................... 44
4.2. Descriptive statistics on demographic variables ................................................................ 44
4.2.1. Response Rate.............................................................................................................. 44
4.2.2. Demographic characteristics of respondents ............................................................... 44
4.2.3. Reliability Analysis ..................................................................................................... 47
4.3. Descriptive Statistics .......................................................................................................... 48
4.4. Assessment of Ordinary Least Square Assumptions ......................................................... 50
4.4.1. Assessment of Normality............................................................................................. 50
4.4.2 Assessment of Homoscedasticity ................................................................................. 50
4.4. 2 Assessment of Multi-co linearity................................................................................. 51
4.4.3 Assessment of Autocorrelation..................................................................................... 52
4.5. Regression Results and Hypothesis Testing....................................................................... 53
4.5.1. Regression Analysis Results........................................................................................ 53
4.5.2. Hypothesis Test ........................................................................................................... 56
Chapter Five: Major Findings, Conclusions and Recommendations............................................ 61
5.1. Summary of Research Findings ......................................................................................... 61
5.2. Conclusion of the Study ..................................................................................................... 62
5.3 Recommendation ............................................................................................................ 63
References ..................................................................................................................................... 65
Appendixes ................................................................................................................................... 68
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List of Tables
Table 4.1 Sex analyses of respondents ......................................................................................... 44
Table 4.2 Analysis of age of respondents ..................................................................................... 45
Table 4.3: respondents field of study ............................................................................................ 45
Table 4.4: analysis of experience of respondents in banking sectors ........................................... 46
Table 4.5 Education level of respondents ..................................................................................... 46
Table 4.6 Descriptive Statistics..................................................................................................... 48
Table 4.7 Assessment of Normality .............................................................................................. 50
Table 4.8 Co linearity Statistics .................................................................................................... 51
Table 4.9 Inter-Item Correlation Matrix ....................................................................................... 52
Table 4.10 Durbin-Watson test of Model Summary..................................................................... 53
Table 4.11 ANOVA results........................................................................................................... 53
Table 4.12 Model Summary ......................................................................................................... 54
Table 4.13 Regression Results of Coefficients ............................................................................. 55
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Acronyms
AAS = Auditing and assurance standard
COMPA = Competency of auditors
CPA = Certified public accountant
EAIAC = Existence of approved internal audit charter
EPCB = Ethiopian private commercial banks
IA = Internal Auditors
IAE = Internal Audit Effectiveness
IAF= Internal audit function
IIA = Institute of internal Auditors
INDA = Independence of audit teams
ISPPIA = International Standards for the Professional Practice of Internal Auditing
MgtS = Management Support
MoFED = Ministry of Finance and Economic Development
NBE = National bank of Ethiopia
OAG = Office of the Auditor General
OLS = Ordinary Least Square
QIA = Quality of internal audit work
RBIEA= Relationship between internal and external auditors
SPSS = Statistical Package for social Science
TA= Training of auditors
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CHAPTER ONE: INTRODUCTION

1.1 Background of the Study
An internal audit (IA) is an independent, objective assurance and consulting activity designed to
add value and improve an organization's operation. 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 (IIA, 2017).
Internal audit processes provide a reasonable but not absolute assurance for the
performance of the whole organization as well as its departments. At different management
levels and for the purpose of giving guidance and advice organizations have shown an increased
concern to their internal auditors. As long as changes occurred in business environment,
management has to play a big role in managing their institutions and be more effective in
applying its laws. Failing to do so, create scandals of financial embezzlements, frauds and losses
might face throughout the world largest companies and institutions in various sectors. (Davies, 2001).
According to Mihret and Yismaw, (2007) IA effectiveness is arguably the result of
the interplay among four factors: internal audit quality; management support; organizational
setting and attributes of the auditee. An internal audit function capability to provide useful audit
finding and recommendations would help to raise management interest in its recommendations.
The management support with resources and commitment to improve and implement the
internal audit recommendations is essential for attaining audit effectiveness. The organizational
setting in which internal audit operates should enable smooth audits that lead to reaching useful
audit findings. Thus, internal audit effectiveness should be viewed as vibrant process that is
continuously shaped by the interactions among the four factors.
Currently, an internal audit is considered an integral part of management and an essential
element of strong corporate governance. Dynamic changes in the global economy, the
complexity of regulations and technological advances in recent years have set new tools and
directions for development of the internal audit, which support management and create added
value to the organization. These capabilities also resulted in the new image of an internal auditor with an
extended set of skills and best practices adapted to the requirements of the environment (Olga, 2017).
With the rising demand for audit services, there are scientific and practical deliberations on
the evaluation of the effectiveness of the internal audit in the company. Researchers
from different countries and members of the association of the institute of internal auditors in
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a number of studies try to find proper measures to evaluate the audit work both from the
theoretical and practical point of view (Olga, 2017). Effectiveness becomes the main aspect
that affects the achievement of organization objectives. So, the organization must decide to
do some activities which will help to achieve organization objectives. The internal audit must be
effective that they could achieve the goals of their audit activity. Internal audit effectiveness is
the measurement of evaluating whether the internal audit function is able to achieve the goal of
the organization stated function (Adhista, 2015).
Organizations with effective internal audit activities are better able to identify business
risks, take appropriate corrective action and ultimately support continuous improvement.
Effective internal audit function could be a major asset for improving public confidence in
financial reporting and corporate governance if it contains these elements; organizational
independence, a formal mandate (existence of approved audit charter), unrestricted access of
information, sufficient funding, competent leadership, competent staff, existence of audit
committee, stake- holder support, professional audit standards and limited scope (Belay,
2007; Smet and Mention, 2011). To achieve the internal audit effectiveness, we had to pay
attention to the factors that might affect it (Adhista, 2015). Therefore, internal audit effectiveness
is essentials in the objective achievements of an organization and in line with this organization
whether private or public should make sure that their internal audit is effective in order to
achieve their objectives in an efficient manner.
According to MOFED (2004), internal audit manual there are many factors which affect
internal audit effectiveness of Ethiopian private commercial banks among these determinates like
lack of (independency of auditors, competency of internal audit teams, management support,
training of auditors, relationship between internal and external auditors, quality of audit work
and lack of newly adopted approved audit charter and the like) but in case of Bahir Dar branch
there was not sufficient research conducted on this topic. So the researcher was motivated to conduct a
research on the title factors affecting internal audit effectiveness in Ethiopian private commercial banks a
case of Bahir Dar branch. The objective of this study was to examine the influence of the mentioned
factors on the internal audit effectiveness of private Commercial Bank of Ethiopian a case of Bahir Dar
branch. This study contributes to internal audit department a new insight regarding to identified factors
through providing empirical evidence that increase the body of knowledge on auditing process and factors
that influence the internal audit effectiveness in banking sectors.
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1.2 Statement of the Problem

Internal audit effectiveness has become a fruitful topic over the decade because of the important
roles play by the internal auditors in organizational survival and achievement so the growing
importance of internal auditing as an economic factor has led to systematic research into the
factors that improve the performance of internal auditing. (Muazu and Siti, 2013).
The traditional role of internal auditors was focused merely on financial estimations and
monitoring internal controls. In recent years, however, the importance of an internal audit has
been significantly increased to consider a wider role of internal consultant for better risk
management performance, identify the factors affecting the internal audit efficiency and
enhancing the value of the enterprises. Even though, the internal auditors have many roles
and contributions to the organization and the public interest, it also faces many challenges from
the organization they work. Some of the challenges identified by the MOFED (2004), in their
internal audit manual are lack of management respect, lack of independence, assigned of
internal auditors to many tasks and conflict of interest and lack of professional
development. In addition to the above challenges, different factors like absence of strategic plan
and management support, organizational independence of internal auditors, adequate and
competent of internal audit and others factors affects internal audit effectiveness (MOFED,
2004).

There are so many researches involving at international level on factors affecting the
effectiveness of an internal audit in private and public sectors. Like, George (2015) in Greece,
Huong (2018) in Vietnam, Achina(2016) in Ghana, Aburabe(2017)in Libya, Omri,et.l(2016)
Mustika ,Alqadi(2017) in Jordan and others who conduct research paper on the topic factors
affecting internal audit effectiveness in different countries. Generally their finding shows that the
independence of an internal audit, competence of the internal audit, management support, quality
of internal audit work, internal audit proficiency, organizational independence and career
advancement are the most determinant factors for internal audit effectiveness.
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To the country level Mihret and Yismaw (2007), Sisay (2018), Wondwosen(2019),
Arefayne(2019), Shewamene(2014), Beza(2017), Fetu (2016,). Shiferaw(2017), and others
conducted a research paper on this topic. Generally their finding shows that audit quality,
management support, organizational setting, attributes of the auditees, competence of an internal
audit, independence of the internal audit, career advancement, management perception, existence
of audit committees and availability of information technology are the major determinates factor
for internal audit effectiveness at the country level both in public and private sectors but in case
of Bahir Dar branch there was not sufficient research conducted on this topic..
Therefore, the main purpose of this study was tried to fill gap in literature for the past
studies by identify the following additional factors that affect the internal audit effectiveness in
Ethiopia private commercial banks, which are training of auditors, relationship between internal
and external auditors and the existence of newly adopted approved audit charter. The study
designed to examine and analysis seven main factors which affect internal audit effectiveness in
banking industry in Ethiopian. These factors are obtained from MOFED internal audit manual
(2004) those factor includes lack of (independence of internal audit team, the competence of
internal audit team, relationship between internal and external auditors, training of auditors,
existence of approved internal audit charter, management support, the quality of internal audit
work) on the effectiveness of internal audit in Ethiopian private commercial banks case of Bahir-Dar
branch. Based on the identifying factors the researcher formulates the following research questions.
1. Does the independency of internal audit teams affect internal audit effectiveness of Ethiopia
private commercial banks?
2. Does competency of internal auditors affect internal audit effectiveness of Ethiopia private
commercial banks?
3. Does the relationship between internal and external auditors affect internal audit
effectiveness in Ethiopia private commercial banks?
4. Does training of auditors affect internal audit effectiveness of Ethiopia private commercial banks?
5. What is the effect of management support on internal audit effectiveness of Ethiopia private
commercial banks?
6. Does the existence of approved audit charter affect the internal audit effectiveness of
Ethiopia private commercial banks?
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1.3 Objective of the Study

1.3.1 General Objective
The general objective of the study was to examine factors affecting internal audit effectiveness in
Ethiopian private commercial banks a case of Bahir-Dar branch.
1.3.2 Specific Objectives
Specifically, the researcher was tried to achieve the following specific objectives
 To investigate the effect of independency and competency of internal auditors on the internal
audit effectiveness in private commercial banks of Ethiopia.
 To investigate the effect of competency of internal auditors on the internal audit effectiveness
in private commercial banks of Ethiopia.
 To assess the effect of internal and external auditor relationship on internal audit
effectiveness in private commercial banks of Ethiopia.
 To investigate the effect of training of auditors on internal audit effectiveness in private
commercial banks of Ethiopia.
 To assess the effect of quality of audit work on internal audit effectiveness in private
commercial banks of Ethiopia.
 To assess the effect of management support on internal audit effectiveness in private
commercial banks of Ethiopia.
 To investigate the effect of approved audit charter on internal audit effectiveness in private
commercial banks of Ethiopia.

1.4 Research Hypothesis

After related literatures were extensively reviewed on training of auditors, competency of
internal auditors, relationship between the internal and external auditor, management support,
organizational independence, existence of the approved audit chartered and the quality of audit work
on internal audit effectiveness the researcher developed the following directional research hypotheses.
H1: Competence of internal audit teams has positive and significant effect on the effectiveness of
internal audit (IA) in Ethiopian private commercial bank.
H2: Independence of IA has positive and significant effect on the effectiveness of IA in
Ethiopian private commercial bank.
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H3: Quality of IA work has positive and significant effect on the effectiveness of IA in Ethiopian
private commercial bank.
H4: Management support has positive and significant effect on the Effectiveness of IA in
Ethiopian private commercial bank.
H5: Training of auditors has positive and significant effect on the effectiveness of IA in
Ethiopian private commercial bank.
H6: the existence of approved audit charter has positive and significant effect on the
effectiveness of IA in Ethiopian private commercial bank
H7: the relationship between internal and external auditor has positive and significant effect on
the effectiveness of IA in Ethiopian private commercial bank.

1.5. Scope of the Study

The scope of the study was emphasis on factors affecting effectiveness of internal audit systems
on private commercial banks in case of Bahir Dar branch. Every research endeavor has its own
delimitation that limits the application of conclusions to be drawn from the analysis and makes it
manageable in a given various constraint. As a result due to shortage of time and resource, data
constraints it is limited on analysis focused on Ethiopia private Commercial Banks a case of
Bahir Dar branch which mainly focuses factors which determine the effectiveness of an internal
audit in recent years. In addition the intent of this study was to investigate the effect of selected
factors on internal audit effectiveness such factors were independence of auditors, competency of
internal audit staffs, relationship between the internal and external auditor, training of auditors,
quality of audit work, management supports and existence of approved audit charter.
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1.6. Significance of the Study

This study conducted to examine the effect of management support, existence of IA
independence, adequate and competent internal audit staff, the quality of audit work, training of
auditors, existence of approved audit charter and relationship between internal and external
auditors on internal audit effectiveness in Ethiopian private commercial banks. The study
outcomes are providing different important significances. The study is significant to explore the
factors which affecting the effectiveness of an internal audit by taking private Commercial Bank
of Ethiopia as a case study. The results of this study are expected to be significant to various
aspects. This study will contribute to easily identify the determinants of internal audit
effectiveness that will enable the private commercial bank of Ethiopia managements to correct
the operational problem faced. More over the findings of the study will support to identify gaps
in the systems of internal control in private commercial banks and also significant to the private
commercial banks of Ethiopia to know its weakness and strength of internal audit practice and to
take a corrective action on their internal auditing process. It is also significant for the researcher
to increase the knowledge of a researcher in this study area and how a proposal was prepared.
The study will also serve as a reference material for those who are interested to undertake a study
on the same topic.

1.7. Organization of the Study

This research paper consists of five chapters. The first chapter with its sub topics was
introductory parts incorporated the introduction, statement of the problem, research objectives,
research questions, research hypotheses, significant of conducting the study, scope and limitation
of the study. The second chapter describes the detail review of related literatures with regard to
the internal audit effectiveness and the variables which affect the internal audit effectiveness.
The third chapter expresses the information regarding the methodology and sampling techniques
used to conduct the research. The fourth chapter was the analysis, discussions and presentation
part of the research findings and finally the last chapter describe about the conclusions and
recommendations of the study followed by suggestions for future research, the references and
appendixes.
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CHAPTER TWO: LITERATURE REVIEW

2. Theoretical and Conceptual Literature
2.1. Definition of Auditing
A comprehensive definition of auditing expressed on a statement of basic auditing concepts
AAS (1973) as follow: “Auditing is a systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and events to ascertain the degree of
correspondence between those assertions and established criteria and communicating the results
to interested users”. Different authors have defined auditing differently some of the definition is:
“Auditing is an examination of accounting records undertaken with a view to establishment
whether they correctly and completely reflect the transactions to which they purport to relate.”-
L.R.Dicksee, 2003. “Auditing is concerned with the verification of accounting data determining
the accuracy and reliability of accounting statements and reports.” - R.K.Mautz, 2006.

According to Spicer and Pegler (2009): "Auditing is such an examination of books of accounts
and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is
properly drawn up, so as to give a true and fair view of the state of affairs of the business and
that the profit and loss account gives true and fair view of the profit/loss for the financial period.
According to the definition given by the International Federation of Accountants (IFAC), “An
audit is the independent examination of financial information of any entity, whether profit-
oriented or not and irrespective of its size or legal form when such an examination is conducted
to express an opinion thereon.”

According to R.R. Comber, (2017) Audit is an independent examination of the financial books
and records of some person or persons responsible or accountable to the third party with a view
of verifying the accountancy of statement prepared by the accounting party. According to
Montgomery; “Auditing is a systematic examination of the books and records of a business or
the organization to ascertain or verify and to report upon the facts regarding the financial
operation and the result thereof.”
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2.1.1 Historical Development of Auditing

The word Audit is derived from Latin word “Audire” which means ‘to hear.’ Auditing is the
verification of financial position as disclosed by the financial statements. It is an examination of
accounts to ascertain whether the financial statements give a true and fair view of financial
position and profit or loss of the business. It is the intelligent and critical test of accuracy,
adequacy and dependability of accounting data and accounting statements. In early days an
auditor used to listen to the accounts read over by an accountant in order to check them. Auditing
is as old as accounting; it was in use in all ancient countries such as Mesopotamia, Greece,
Egypt, Rome, U.K. and India. The original objective of auditing was to detect and prevent errors
and frauds. Auditing evolved and grew rapidly after the industrial revolution in the 18th century
with the growth of the joint stock companies the ownership and management became separate.
The shareholders who were the owners needed a report from an independent expert on the accounts of
the company managed by the board of directors who were the employees (IIA, 2017).
The objective of an audit shifted and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds. With the increase in the size of the
companies and the volume of transactions, the main objective of an audit shifted to ascertain
whether the accounts were true and fair rather than true and correct. Hence, the emphasis was not
on arithmetical accuracy but on a fair representation of the financial efforts. The later
developments in auditing pertain to the use of computers in accounting and auditing. In
conclusion it can be said that auditing has come a long way from hearing of accounts to taking
the help of computers to examine computerized accounts (Botha & Boon, 2003).

2.1.2. Features of auditing

 Audit is a systematic and scientific examination of the books of accounts of a business;
 Audit is undertaken by an independent person or body of persons who are duly qualified for the job.

 Audit is a verification of the results shown by the profit and loss account and the state of
affairs as shown by the balance sheet.
 Audit is a critical review of the system of accounting and internal control.
 Audit is done with the help of vouchers, documents, information and explanations received
from the authorities.
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 The auditor has to satisfy himself with the authenticity of the financial statements and report
that they exhibit a true and fair view of the state of affairs of the concern.
 The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of shareholders, directors,
Memorandum of Association and Articles of association etc, in order to establish correctness
of the books of accounts(Botha & Boon, 2003).
2.1.3. Objectives of auditing
According to Davies, 2001 the objectives of auditing are changing with the advancement of
business techniques. Earlier it was only to check the correctness of receipts and payments. The
objectives of the auditing have been classified under two heads: Main objective and
Subsidiary objectives
The main objective of the auditing is to find reliability of financial position and profit and loss
statements. The objective is to ensure that the accounts reveal a true and fair view of the business
and its transactions. The objective is to verify and establish that at a given date balance sheet
presents true and fair view of financial position of the business and the profit and loss account
gives the true and fair view of profit or loss for the accounting period. It is to be established that
accounting statements satisfy certain degree of reliability. Thus, the main objective of auditing is
to form an independent judgment and opinion about the reliability of accounts and truth and
fairness of financial state of affairs and working results.
The subsidiary objectives of the auditing are: 1. Detection and prevention of fraud: one of the
important subsidiary objectives of auditing is the detection and prevention of fraud. Fraud refers
to intentional misrepresentation of financial information. 2. Detection and prevention of errors: is
another important objective of auditing. Auditing ensures that there is no misstatement in the
financial statements. Errors can be detected through checking and vouching thoroughly books of
accounts, ledger accounts, vouchers and other relevant information (Davies, 2001).
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2.1.4. Development of Auditing In Ethiopia

The process of auditing professionalization in Ethiopia appears to exhibit distinct Patterns during
the three epochs when the state followed capitalist-oriented (pre 1974), Communist (1974
through to 1991), and then capitalist-oriented (1991 onwards) ideologies. It is apparent from the
foregoing quote that performance auditing in a rudimentary sense was started for the government
system of Ethiopia in the early 20th century explains that the contribution of foreign advisors to
the kings of Ethiopia during the period from the 1890s through to the 1970s led to the issuance of
government regulations and proclamations.
In discussing the contribution of foreign advisors to the development of auditing in Ethiopia,
Kinfu (1990) considers as initial contributions the role of consultants during the Construction of
the Ethio-Djibouti railway in the 1890s and of the legal, military, and foreign affairs advisers in
the 1930s. The author then attributes developments of accounting and auditing from 1934 to the
early 1970s to the Anglo-American legal and financial advisors to Emperor Haile Silassie I
(1928-1974). The first substantial development during this period was the issuance of Ministry of
Finance directives in 1942 (Argaw 2000 & Merissa 1981). This was followed by the formation
of the Audit Commission by Proclamation No. 69/1944 to undertake external audit of accounts
of the Ministry of Finance (Government of Ethiopia 1944), which was subsequently mandated to
conduct the external audit of other budgetary institutions as well. This marks the start of today’s
Office of the Federal Auditor General of Ethiopia (OFAG), which, amongst other duties,
monitors and regulates the accounting and auditing profession in Ethiopia.
In about the same time frame, the Ethiopian Highway Authority and Ethiopian Airlines
were established. In addition, the Ethiopian Telecommunications Corporation and the Ethiopian
Electric Light and Power Authority became autonomous state-owned enterprises. These
phenomena led to involvement of foreign companies as partners, financiers or consultants to the
Ethiopian state-owned enterprises. Consequently, internal audit was introduced in these
enterprises with a view to strengthening internal controls. As a consequence of the growth of
demand for trained manpower in accounting and auditing up to the early 1940s, the Addis Ababa
College of Commerce was established in 1943. The Colleges of Business were then established
at Addis Ababa University in 1963. These institutions have played essential role in the
development of the accounting and auditing profession in Ethiopia by producing trained
manpower (Argaw 2000a; Kinfu 1990).
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Other significant developments in the history of accounting and auditing in Ethiopia took place
in the 1960s. Firstly, the Commercial Code of Ethiopia was proclaimed in 1960 (Government of
Ethiopia 1960). This Code contains accounting and external auditing provisions which still serve
as the legal basis for financial reporting and external audit of companies (Argaw 2000a;
Kinfu1970; Negash& Merissa 1981; World Bank 2007). The code contains some requirements
for financial accounting, reporting, and external auditing of companies that operate in Ethiopia.
The second development was the formation of the Office of the Auditor General (OAG) in 1961
by Proclamation 199/1961(Government of Ethiopia 1961). This proclamation accorded the OAG
greater authority that was provided in the 1944 proclamation that established the Audit
Commission (Argaw 2000; Kinfu 1990). The proclamation has subsequently been revised three
times, in 1979, 1987 and 1997. The 1997 version of the proclamation is the legal basis for
external audit for government organizations in Ethiopia to date of writing (O. Ray, 1995).
2.1.5. Advantages of Auditing
 Auditing helps to assure the shareholders that the business enterprises is being run or managed in
their best interest.
 Audited accounts could be more easily acceptable in the Inland Revenue for tax purposes.
 Audited accounts can be very useful for investigating bank loan or overdraft.
 Audited accounts can be used as a basis for business combination such as merger and acquisition.
 Auditing helps to prevent or detect fraud or errors within an enterprise.
 Auditing helps to highlight those weakness or strength in the internal control system of a company.
 Auditing serve as a psychological check and moral deterrent against fraudulent practice by the
employees of an enterprise
 An audited account promotes the confidence of investors and investment analyst.
2.1.6. Disadvantages/ Limitations of an Audit
A key issue for accountants and auditors is that there are limitations to assurance services and
therefore, there is always a risk involved in the wrong conclusion will be drawn. Assurance can
never be absolute. Assurance providers will never give a certification of absolute correctness due
to the limitations of auditing which are:
 Testing is used do not oversee the process of building financial statements from start to finish.
 The accounting systems on which assurance providers may place a degree of reliance also have
inherent limitations.
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 Assurance providers would not text every item in the subject matter.
 The client’s staff members may collude in fraud that can then be deliberately hidden from the
auditor or misrepresent matters to them for the same purpose.
 Assurance provision can be subjective and professional judgments have to be made.
 Assurance providers rely on the responsible party and its staff to provide correct information,
which in some cases may be impossible to verify by other means.
 Some items in the subject-matter may be estimates and are therefore uncertain. It is impossible to
conclude absolutely that judgmental estimates are correct.
 It does not take into account the productivity and the skills of the employees of the business.
 Different accountants use different techniques therefore; it would be hard to compare audits
between companies who have used different accountants.

2.2. Definition and Roles of Internal Audit

Different literatures define an internal audit in different ways, but the standard definition is made
up of important issues that form the basic framework of internal audit principles. A simple and
more traditional meaning of internal auditing is defined as: an independent appraisal function
established within an organization to examine and evaluate its activities as a service to the
organization (Arens et al., 2005).
Later on the new Institute of Internal Audit (IIA, 2001), defined an internal audit as: “an
independent objective assurance and consulting activity designed to add value and improve an
organization’s operations. It helps an organization to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control and governance processes.”The work of the internal audit is to ensure that organization
policies and programs are in line with the corporate or business objectives. They are also
responsible for evaluation of the organization’s internal controls to determine their effectiveness
in protection of the resources of the organization. Internal audit function is very important in
assisting the organization in achieving its objectives.
According to Weber (2013), an internal audit should provide management the necessary
tools to steer the affairs of the entity hence establishing a strong audit function. According to
Institute of Internal Auditors (IIA) (2009) internal auditing can be defined as a self-governing,
objective and consulting activity that is designed in order to add value and develop the
operations of an organization. The function helps an organization to carry out its objectives by
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bringing an organized, disciplined approach in order to assess and develop the effectiveness of
risk management, control and governance processes. Thus, internal auditing is being performed
by professionals with a thorough understanding of the business culture, systems and processes.
The internal audit activity offers guarantees that internal controls in place are sufficient in to
alleviate the risks, governance processes are helpful and competent, and organizational goals and
objectives are being met (IIA, 2013). This definition suggests that internal audits has undergone
a paradigm shift from an emphasis on accountability about the past to improving future outcomes
which helps internal auditors operate in more effective and efficient manner (Nagy &Cenker, 2012).
Internal auditing is a profession and activity involved in advising organizations regarding
how to better achieve their objectives through managing risks and improving internal control.
Internal auditing involves the utilization of a systematic methodology for analyzing business
processes or organizational problems and recommending solutions (Davies, 2001). Auditing
Practices Board Guidelines (APBG) defined internal audit as “An independent appraisal function
which is established by the management of an organization for the purpose of reviewing internal
control system as a service to the organization. It objectively examines, evaluates and reports on
the adequacy of internal control as a contribution toward appropriate, economic, effective, and
efficient utilization of resources.”
2.2.1 Roles of an internal audit
The main role of the internal audit function is to guarantee that management official controls are
being applied in effective manner. The internal audit function, even though not obligatory,
subsists in most private enterprise or corporate entities and in government including federal,
state, and county and city governments. The task, quality and strong point of an internal audit
function may differ extensively within the approach of top executives and traditions of
companies and organizations. By measuring and evaluating the effectiveness of organizational
controls internal auditing itself is an important managerial control device which is directly linked
to the organizational structure and the general rules of the business (Cai, 2011).
The need for improved internal control and auditing mechanisms is one of the most
important issues in public debate regarding to corporate governance. Compliance with corporate
governance principles especially IAF leads to better organizational performance (Omolaye and
Jacob, 2017). Hence, It is mandatory to enhance the quality of IA activities and audit processes,
the external auditor should verify the integrity, transparency and commitment of IA to the
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internal audit standards in preparing the report and that it is in favor of the external auditor and
the external auditing process to activate the communication between him and the internal auditor
in order to achieve a positive role in facilitating the external audit process. (Laith, 2016)
In the last decades, important changes took place in what concerns the attention given to
the evaluation of the benefits, effectiveness and performance of internal auditing. Therefore,
internal auditing registers a continuous evolution, determined by the dynamic environment in
which it operates. (Audit financier, 2017) Hence, Value adds role of IAF is helping to achieve
the efficiency, effectiveness and economy of the company’s performance and resources
utilization, helping management to achieve the company’s goals. (Pinto, ET, al., 2014) However,
Value adding is also influenced by the effectiveness of the internal auditing (Mihret
&Woldeyohannis, 2008; Mihret, et al., 2010; Mihret A.G., 2011). However, different researchers
suggest that the IA function may not always be effective (Al-Twaijry, et al., 2003;
Mihret&Yismaw, 2007; Mihret, et al., 2010; Ramachandran, et al., 2012; Wubishet&Dereje, 2014).
2.2.2 Evolution of Internal Audit
The major factors that led to the emergence of internal auditing were as a result the extended
span of control faced by management in business activities which involve the employment of
thousands of people and conducting operations in many places. Falsifications and improperly
maintenance of accounting records were among the problems, also growth in the level of
transactions contributes towards the needs of an internal auditing. Though the goals that are
usually required to achieved by the early generation internal auditors were mainly and primarily
on the safeguarding of organizational assets. That why the National Industrial Conference
Board’s study of internal auditing explained that in those days the main reasons of establishing
internal auditing was to safeguard company assets and detection of fraud (IIA, 2003).
Before 1941, internal auditing was basically a clerical function within the organization and
there were absent of standards that guide the conduct of the internal auditing. This is because
procedure of a record keeping at the time was manually; auditors were needed to check the
records after they were created for accuracy and for errors in postings, in which auditors were
concerned with the occurrences and discovery of fraud quickly. Hence, the internal auditor was a
verifier or a detector to safeguard organizational assets. In line with this, the internal auditor was
performing a function similar to a security officer or security agency (Cassandra et al, 2008).
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The recent concept of internal auditing was that of an arm of management, because the internal
auditors serve as an integral part in the management process and are mainly concerned with the
proper utilization of resources, avoiding of inefficiency and fraud. This development was as a
result of the change in technology as system of recording becoming computerized one records
are subjected to automatic checking procedures. Thus, the need to verify every transaction has
reduced giving internal auditor’s time to reach beyond the historical clerical limits (IIA, 2003).

At the year 1941, there was an increase in the development of internal auditing as two important
events occurred. One of the events was the publication of the first book on the topic by the
author Victor Z. Brink’s internal auditing. The second important event was in the same year 24
persons come together towards forming the Institute of Internal Auditors (IIA). Equally, at the
year 1948 another scholar called Arthur H.Kent’s wrote on “Operational Audits” which is
published in the internal auditor article and was the first article to explain the expanded-scope of
the internal audit (IIA, 2003; Ramamoorti, 2003; Savouk, 2007) and the aim of operational
auditing is to improve organizational efficiency and effectiveness through verification of written
records; ensuring compliance with relevant policies and procedure; and reporting
recommendations for improvements to senior management (Cassendra et at, 2008).

By the year 1978, The IIA formally approved the Standards for the Professional Practice of
internal auditing which had the following motives: Helping in communicating to others the
scope, role, performance and objectives of internal auditing; Unifying internal auditing
throughout the world and improved internal auditing establishing the basis for consistent
measurement of internal auditing operations and ensure the recognition of the professionalism of
internal auditing. Also, the standards provided definition and objective of internal auditing as
follows: “Internal auditing is an independent appraisal activity established within an organization
as a service to the organization. It is a control mechanism which examines and evaluates the
adequacy and effectiveness of other controls.” The Standards provided the criteria within which
internal audit department operations should be evaluated and measured in terms of
professionalism, independency, scope & responsibilities, performance of audit work as well as
the management of the internal audit department (Ramamoorti, 2003; Savouk, 2007).
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In the year 1993, the scope of internal auditing was expanded and contains the followings; (i)
Reviewing the reliability and integrity of financial and operating information and the means to
identify, classify, measure and report such information (ii) Reviewing the systems to ensure
appropriate compliance with the relevant laws, plans, policies and procedures established which
could have a significant impact on organizational operations and reports on the finding which
will show whether the organization is incompliance or not (iii) Reviewing the means of
protecting assets as appropriate and verify the existence, value and ownership of such assets (iv)
Appraising the economy and efficiency with which resources are employed (v) Reviewing
operations or programs to ascertain whether results are consistent with established objectives and
goals and whether the operations or programs are being carried out as planned (Savouk,2007;
Ramamoorti, 2003 & IIA, 2003).

Therefore, looking at the above scope it’s clearly shows that at the year of 1990s the internal
auditor’s responsibilities cover the entire organizational activities. Though,Dhamankar and
Khandewale (2003) provided that covering all aspects of an organization by the internal audit
will not result in effective internal audit, rather might dilute their effectiveness and result in poor
quality of the internal audit findings. In this situation for the internal auditors to carry out such
scope, they need to increase their numbers so as to carry such responsibilities effectively.

By the year 2002 to date, the new definition of internal auditing was designed by IIA which
encompass the professions through the expanding of the roles and responsibilities of the internal
audit by defining it as “an independent, objective assurance and consulting activity which is
designed to add value and improve an organization’s operations. It helps an organization in
accomplishing its objectives by bringing a systematic disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance processes (IIA, 2010;
Savouk, 2007). Therefore, the internal audit is required to put more efforts towards improving
organizational operations.
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2.2.3 Internal Audit Functions

Despite the fact the function of the internal auditor varies across organizations (Prawitt, Smith &
Wood, 2008).Nevertheless, as a result of the increase in accounting scandals in recent years the
internal audit function has received impressive attention as an important contributor to effective
corporate governance and financial reporting because a high quality internal audit function
focused on improving financial reporting through ensuring standard compliance (Prawitt et al,
2008). Consequently, considering the past decade there was only limited number of studies that
focused on the explanation of the current functions of the internal audit (Sarens &
Abdolmohammadi, 2011) while it is essential to have an effective and efficient internal audit
function within an organization (Kinsella, 2010) this is because internal audit function that is
well performing serve as one of the strongest means to monitor and promote good governance
system in any organization (Belay, 2007).

At the same time, making the existing internal audit function able within the organization is more
effective than completely purchasing such function from outsiders (Corama, Fergusona
&Moroney, 2006). Also Salicvsu (2007) noted that the ability to make the internal audit function
especially in attainment of the desired objectives largely depends on the independence of audit
personnel. Meanwhile, it is agreed that the purposes of establishing internal audit was not only to
prevent or detection of fraud, promotion of clerical accuracy, protection of assets, policies and
procedures compliance but also to have clear definition of duties and responsibilities; account for
the accuracy of information and coordination of all controls(Haun, 1955; Pizzinia, Lin
,Vargus&Ziegenfus, 2011).

In this vein, the functions to be performed by the internal auditor within an organization need to
be taking into consideration in order to assist such organization in their objective achievement.
Recently, the internal auditing profession provided a wider range of activities which are goes
beyond evaluations of accounting functions only but also involved some activities including: (i)
Reviewing accounting systems (ii) Reviewing information technology environments (iii)
Assessing compliance with policies and procedures, good practices, relevant laws, rules and
regulations (v)Advising on the design of new systems or changes the present ones (vi)Taking in
special examination (Aguolu, 2009; Ahmad etal, 2009, Latshaw, &Zoll, 2003).
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2.3. Basic Principles of Internal Audit

All internal audits are conducted with certain fundamental features designed to establish the
credibility of the internal auditor and outline the elements essential for performance of internal
audit activities. According to Norman Marks, 2007 the basic principle of an internal audit includes.
 Independence: The Internal Auditor shall be free from any undue influences which force him to
deviate from the truth. This independence shall be not only in mind but also in appearance. Also,
the internal auditor shall resist any undue pressure or interference in establishing the scope of the
assignments or the manner of conducting an audit. The independence of the internal audit
function as a whole and the internal auditor within the organization plays a large role in
establishing the independence of the Internal Auditor (Norman Marks, 2007).
 Integrity and Objectivity: The Internal Auditor shall be honest, truthful and be a person of high
integrity. He shall operate in a highly professional manner and seen to be fair in all his dealings.
He shall avoid all conflicts of interest and not seek to derive any undue personal benefit or
advantage from his position. The internal auditor shall conduct his work in a highly objective
manner, especially in gathering and evaluation of facts and evidence. He shall not allow prejudice
or bias to override his objectivity, especially in arriving at conclusions or reporting his opinion.
 Due Professional Care: The Internal Auditor shall exercise due professional care and diligence
while carrying out the internal audit. “Due professional care” signifies that the Internal Auditor
exercises reasonable care in carrying out the work to ensure the achievement of planned
objectives. The Internal Auditor shall pay particular attention to certain key audit activities such
as establishing the scope of the engagement to prevent the omission of important aspects,
recognizing the risks and materiality of the areas, having required skills to review complex
matters, establishing the extent of testing required to achieve the objectives within specified
deadlines(Norman Marks, 2007).
 Confidentiality: The Internal Auditor shall at all times, maintain utmost confidentiality of all
information acquired during the course of the audit work. He shall not disclose any such
information to a party outside the internal audit function and any disclosure shall be on a “need
to know the basis.” The Internal Auditor shall keep confidential information secure from others.
Under no circumstance any confidential information shall not be shared with third parties outside
the company, without the specific approval of the management/ Client or unless there is a legal
or a professional responsibility to do so (Norman Marks, 2007).
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 Skills and Competence: The Internal Auditor shall have sound knowledge, strong inter-personal
skills, practical experience and professional expertise in certain areas and other competence
required conducting a quality audit. The Internal Auditor shall either have or shall obtain such
skills and competencies as necessary for the purpose of discharging his responsibilities. In
addition to the basic technical skills, the Internal Auditor shall have the softer skills (such as
interpersonal and communication skills) required to engage with a multitude task of stake-
holders (Norman Marks, 2007).
 System and Process Focus: An Internal Auditor shall adopt a system and process focused
methodology in conducting audit procedures. This methodology is more sustainable than the one
adopted to test transactions and balances as it goes beyond “error detection” to include “error
prevention” (Norman Marks, 2007).
 Participation in Decision Making: In conducting internal audit assignments, the Internal
Auditor shall avoid passing any judgment or render an opinion on past management decisions.
As part of his advisory role, the Internal Auditor shall avoid participation in operational decision
making which may be subject of a subsequent audit. The focus of the Internal Auditor shall
remain with the quality and operating effectiveness of the decision making process and how best
to strengthen it, such that the chance of flawed or erroneous decisions is minimized. However,
the Internal Auditor is at full liberty to present the lessons which can be learnt from such past
decisions (Norman Marks, 2007).
 Sensitive to Multiple Stakeholder Interests: The Internal Auditor shall evaluate the
implications of his observations and recommendations on multiple stakeholders, especially
where diverse interests may be conflicting in nature. In such situations, the Internal Auditor shall
remain objective and present a balanced view (Norman Marks, 2007).
 Quality and Continuous Improvement: The quality of the internal audit work shall be
paramount for the Internal Auditor since the credibility of the audit reports depends on the
reliability of reported findings. The Internal Auditor shall have in place a process of quality
control to ensure factual accuracy of the observations; to validate the accuracy of all findings and
continuously improve the quality of the internal audit process and the internal audit reports
(Norman Marks, 2007).
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2.4. Theories of Internal Audit

Theory is defined by Gill and Johnson (2002) as a formulation regarding the cause and effect
relationships between two or more variables, which may or may not have been tested. In a similar
contribution to that of Sutton and Stew (1995), Whitten (1989) contends that if the presence of theory is
to be guaranteed, the researcher must ensure that what is passing as good theory includes a plausible,
coherent explanation for why certain relationships should be expected in our data. Relevant literature and
associated theories that have been formulated on internal audit concepts such as Agency, contingency,
lending credibility, Institutional and Communication theories
A. Agency Theory
Agency theory is all about the relationship between the organization owner(s) and its top
management (Adams, 1994). It supports a positivist group of philosophy (Adams, 1994;
Changwony&Rotich, 2015). In corporate form of organizations the top management manages the
whole organization on behalf of the owners as an agent. Jensen and Meckling (1976) focus on
the relationship between the agents and the principals with the argument that managers (agents)
engage in actions that promote their own interests at the expense of principals and propose
solutions to the unaligned goals and different risk profiles.
The agency theory acknowledges the separation of business ownership and management as
business owners resort to hiring the services of professionals who run the entities on a day to day
basis (Horn & Tyler, 2011). As a result of this, management can use its power for personal
benefits. Therefore, it is unquestionable to employ an independent body (internal auditors) which
are the agents of audit committee and the board of directors to evaluate the top management
performance and control whole activities of the organization to protect the owners from such
theft and to reduce the problems for the sake of the organization stakeholders (Endaya&Hanefah,
2013; Peursem&Pumphrey, 2005).
However, internal auditors may have different motives (financial rewards from managers, personal
relationships with managers) to act against the board of directors interest and its audit committee. To
perform internal audit activity professionally and perfectly they must have the ability to make well-
justified judgments, future positioning of internal auditors and their salaries, educational and professional
certification and experience in conducting an audit (Endaya&Hanefah, 201; Greenawalt, 1997;
Mihret&Yismaw, 2007). And the existence of an effective audit committee with absolute authority in the
organization has resolved the above problems (Endaya&Hanefah, 2013).
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Adams (1994) in his article stated that Agency theory can provide for richer and more
meaningful research in the internal audit discipline. Agency theory contends that internal
auditing in common with other intervention mechanisms like financial reporting and external
audit helps to maintain cost-efficient contracting between owners and managers. Agency theory may
not only help to explain the existence of IA in organizations but also helps to explain some of the
characteristics of the internal audit department size and scope of its activities, such as financial versus
operational auditing. The fundamental purpose of the auditor is therefore to promote confidence-
reinforcing trust in financial information. Agency theory is, therefore, a theory that is useful in
accountability and helps in the development of an audit. Therefore, IA has so many attributes for
corporate firms like share companies by accomplishing its goals, brings a disciplined and systematic
approach to well improve and evaluate internal audit effectiveness. (Weil, 2002)
B. Contingency Theory
The goal of an audit is to test the reliability of a company’s information, policies, practices and
procedures. Government regulations require that certain financial institutions undergo
independent financial audits, but industry standards can mandate audits in other areas such as
safety and technology. Regardless of the audit subject various factors impact a company’s final
results and the contingency theory takes these factors into account during the audit process. The
contingency theory of leadership and management states that there is no standard method by
which organizations can be led, controlled and managed. Organizations and their functions
depend on various external and internal factors. The presence of such factors is why auditing can
be managed by applying the contingency theory; with a recognition that processes and outcomes
of audits are dependent on variable and contingent factors (Davoren, 1994).
On a broad level, the audit process is straightforward. Auditors require access to documents,
systems, policies and procedures to manage an audit. They must remain compliant with industry
standards, government regulations and internal requests. Audit teams may begin the audit
process with meetings where they gather risk and control awareness, after which the field work
begins. During the audit process, auditors perform substantive procedures and test controls. They
then draft reports that submit to management and regulatory authorities. The audit sub processes,
particularly in planning and field work, include contingencies such as business type, employee
skill level, applicable laws, available audit workforce, available technology and systems
(Davoren, 1994).Daft (2012) in his book writes: Contingency means: one thing depends on other
things and Contingency theory means it depends; audit functions are task-oriented and can be
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loosely structured. The functions also can vary considerably depending on the area of a company
under audit and the type of business model, so auditors must carefully manage their inspections
and take variables into account to get the job done. The contingency theory also can be applied to
an audit team’s structure. Audit teams use a mix of structure and contingency to get the output
rolling quickly. The subject of auditing projects can include such diverse areas as evaluation of
production processes, inspection of company accounts, and assessment of compliance with
industry standards. Selecting auditors with specialized training or those who have a particular
skill in the subject area minimizes the learning curve and reduces opportunities for errors. The
quality and output of audits remains assured when audit teams use resources according to
expertise and experience and when auditors are flexible and can adapt to process fluctuations
(Davoren, 1994).
C. Lending Credibility Theory
Volosin (2007) in his book mentioned that the lending credibility theory was similar to the
agency theory, and it states that audited financial statements can enhance stakeholder’s faith in
management’s stewardship. The business world consists of different groups that are affected by
or participate in the financial reporting requirements of the regulatory agencies. They are
shareholders, managers, creditors, employees, government and other groups. The major
recipients of the annual reports are the shareholders, including individuals with relatively small
shareholding and large institutions such as banks or insurance companies. Their decision is
usually based on the financial reporting and the performance of the company’s management,
who have a responsibility to act in the interests of investors. The auditor is appointed by the
company’s shareholders and reports his results to his clients.
The aim of the auditor’s report is to comment on how accurately the company presents its
financial situation and how it is performing. This should reassure the shareholders that their
investment is secured and also help to reduce the practice of misleading accounting procedures
designed to show the company in a more favorable light. Basically, the audit is represented as a
process designed to evaluate the credibility of information of a company’s financial statements
(Letza, 1996).
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D. Institutional Theory
Institutional theory explains how organizational structures and practices are shaped through
changes induced by normative pressures, including both external and internal sources such as
laws and regulations or by the professions (Zucker, 1987; Mihret et al., 2010; Abu-Azza, 2012).
Institutional theorists consider organizations as members of an organizational field which
comprises several organizations or industries that are interrelated in some way. This interrelation
is exhibited in the form of relationship of dependence of some form that leads some
organizations to influence others. DiMaggio and Powell (1983) argue that institutions result from
the processes of pressures that create structures. Structures are rules and resources that enable
functioning of social systems (Giddens, 1984). DiMaggio and Powell (1983) explain three
institutional pressures coercive, mimetic and normative isomorphism that influence
organizational structures and practices. Coercive isomorphism takes place as a consequence of
organizational attempts to gain legitimacy; mimetic isomorphism occurs when organizations
respond to uncertainty by emulating practices of other organizations and normative isomorphism
arises when institutional changes happen due to organizations recognition of professions. In the
same way Arena &Azzone, (2009) identified the institutional pressures that impact both
individuals in part and organization as a whole as laws and regulations (coercive isomorphism);
choices of other organizations (mimetic isomorphism) and consultation or professional bodies
(normative isomorphism). Isomorphic processes can increase the efficiency of IA activities of an
organization.
E. Communication theories
Both IIA Standards and previous studies support the study of internal auditing according to
effective communication theory. Earlier studies confirm the importance of effective
communication skill in organizations specifically in IAD (Golen, 2008; Hahn, 2008). In ability to
communicate effectively can be related to inappropriate information or communication
complexity (Endaya& Hanefah, 2013). Both little and much information are not suitable to
communicate effectively (Hahn, 2008). Internal auditor’s effective communication can be
explained through the existence of effective communication between internal auditors and
auditee, organization members and internal auditors themselves (Endaya& Hanefah,
2013).Effective communication skill is a need for internal auditors and internal audit
effectiveness since this study examined such a skill through communication theory.
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2.4. Types of Audits Performed by Internal Auditors

Internal audits are conducted for different reasons and with varying objectives and with each type of risk
exposure an organization would need to conduct a particular type of internal audit. Some audits are
required by regulation or policy, while others are requested by management to help improve processes or
identify internal control weaknesses (Olga, 2017). The following is a summary of the various types of
audits which will generally be conducted in an organization:
2.4.1 Operational Audit
The Operational audit evaluates performance of a particular function or department to assess its efficiency
and effectiveness. Financial data may be used, but the primary sources of evidence are the operational
policies and achievements related to organizational objectives. Internal controls and efficiencies may be
evaluated during this type of audit. Some areas of operational audits include: organizational structure,
processes and procedures, accuracy of data, management and security of assets, staffing, and productivity
(Arens, Best, Shailer and Fiedler, 2005; Olga, 2017).
2.4.2 Compliance Audit
The objective of compliance audit is to determine whether the organization being audited following
procedures, regulations, or policies established by a higher authority. Performance of compliance audit is
dependent on the existence of verifiable data and recognized criteria or standards, such as laws and
regulations, or an organization’s policies and regulations. Compliance Audit evaluates an area adherence
to established laws, standards, regulations, policies and procedures. Compliance audits are done because
of a policy or statutory requirement. While the audit is done for regulatory reasons, the objectives are still
to ensure adequate control over an important internal audit process (Arens et al., 2005; Olga, 2017).
2.4.3 Financial Audit
Financial Audit is a historically oriented independent evaluation performed for the purpose of attesting to
the fairness, accuracy and reliability of financial data. The central objective is to ensure that the financial
activity of the department, unit or area is completely and accurately reflected in the appropriate financial
reports and prepared in accordance with accepted auditing standard (Arens et al., 2005; Olga, 2017).
2.4.4 Follow up Audit
Following up Audit is an audit conducted approximately six months after an internal or external audit
report has been issued. They are designed to evaluate corrective action that has been taken on the audit
issues reported in the original report. The purpose of a follow-up audit is to revisit a past audits
recommendations and management’s action plans to determine if corrective actions were taken and are
working or if situations have changed to warrant different actions (Arens et al., 2005; Olga, 2017).
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2.4.5 Investigative Audit

Investigative Audit is an audit that takes place as a result of a report of unusual or suspicious activity on
the part of an individual or a department. Fraud and financial irregularity audits are designed to verify the
existence and magnitude of suspected fraud and financial irregularities. It is usually focused on specific
aspects of the work of a department or individual. Investigations are conducted to determine the extent of
loss, assess weaknesses in controls and make recommendations for corrective actions conducted at the
request of the Audit Committee of the Board of Trustees, the President or other senior members of the
organization management as a result of a tip from the organization’s hotline or at the discretion of the
Director (Arens et al., 2005; Olga, 2017).
2.4.6 Information Technology Audit
Information technology (IT) Audit is evaluating controls related to the institution’s automated
information processing systems. The information technology audit function develops audit programs to
assess, evaluate and make recommendations to management regarding the adequacy of internal controls
and security inherent in an organization’s information systems and the effectiveness of the associated risk
management. The goal is to ascertain that IT systems are safeguarding assets, maintaining data integrity
and efficiently operating to achieve business objectives (Olga, 2017).
2.4.7 Management Audit
Management audit also called performance audit are internal consulting projects. Because an
internal audit is an activity independent of management, it is often an excellent resource to
provide independent and objective insight on the efficiency of business processes. Management
can request internal auditors to review a business process, organization or strategy and the
auditors do not have to worry about backlash from management. A common management audit
is a review of organizational structure, such as having internal audit look at how administrative
work is divided among divisions and if there are opportunities to be more efficient (Olga, 2017).
2.4.8 Grant and Contract Audits
Grant and contract audits are designed to evaluate the contracting process, compliance with the
provisions of grants and contracts and third-party contractual performance. These audits may be
performed with respect to any function, activity, department, or unit of the organization and may
include all types of contracts; e.g., federal and private grants and contracts, construction
contracts and professional service contracts (Arens et al., 2005).
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2.4.9 Forensic Audit

The forensic audit is normally performed by a forensic accountant who has the skill in both
accounting and investigation. Forensic Accounting is the type of engagement that undertaking
the financial investigation in response to a particular subject matter, where the findings of the
investigation normally are used as evidence in court or conflict resolution among the
shareholders. The investigation is covering numbers of areas include fraud investigation, crime
investigation, insurance claims as well as a dispute among shareholders (Arens, 2009).
2.4.10Value for Money Audit
Value for money audit refers to audit activities that perform in assessing and evaluating three
main difference factors: Economy, Efficiency, and Effectiveness. Economy, auditor assess and
evaluate whether the resources that entity purchases are at the low cost with acceptable quality
where efficiency audit, auditor check whether resources that entity use have better conversion
ratio. Effectiveness, by the way, look at the big picture of objectives whether the entity using the
resources meets it objective or not. The auditor might review the entity’s purchasing system to
assess and evaluate whether it is helping the entity to purchase materials or services at the low
costs or not. Value for money audit is really important for the entity since it helps the entity not
only to improve resource efficiency usage but also making sure that the entity obtains good
quality material at the low costs (Arens, 2009).
2.4.11 Special Audit
A special audit is a type of audit assignment that normally done by the internal auditor. This has
happened when there is the problem/case occurred in the organization like fraud, business case
or other special cases. The special audit is a bit different from the forensic audit as a special audit
done by the internal staff of the entity. Once the auditor completes the audit then the reports is
prepared by the audit team and then submit to audit committee or board of directors (Arens, 2009).
2.4.11 Systems Audit and Procedural Audit
These are those an audits that are normally carried out on the internal control system of an
enterprise in order to determine their efficiency or effectiveness as well as whether they can be
relied upon to generate adequate or acceptable information for management decision making and
for inclusion in the books of account or financial statement(Arens, 2009).
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2.5 Types of Auditors in Ethiopia

The Commercial Code of Ethiopia contains articles that are related to the auditing practice in
Ethiopia. The Commercial Code of Ethiopia contains provisions requiring partnership and
corporation (Share Company) to keep books and accounts related to corporations specifically
about appointment of auditors, competency of auditors, professional secrecy and liabilities of
auditors. Furthermore, the code specifies persons who are founders and beneficiaries of a
company or its subsidiary, persons related by blood to the fourth degree or persons who receive
remuneration from company founders it also states that directors are not to engage in auditing
that company (principle of independence). In addition, according to the code, an auditor is liable
for breach of professional secrecy, for negligence in the performance of professional services,
and for breach of contract. According to the Commercial Code, auditors are liable to the client
and third party for losses they cause for issuing inappropriate report for failure to inform the laws
for any offences that they knew were committed by the client that affects the public.
A. Internal Auditors
The history of the development of internal auditing in Ethiopia dates back to about the middle of the
1940s just about the time when the internal audit was evolving as an organized profession in Untied
States. An internal audit in Ethiopia had its early legislative root in the Constitution of 1931 which
authorized the establishment of an “Audit Commission” (articles 34) and the Audit Commission itself
was established much later by Proclamation 69/1944 to audit the accounts of the Ministry of Finance. The
same Proclamation mandated the Ministry of Finance to audit other budgetary institutions as a measure of
internal control over the financial operations of the budgetary institutions. It appear that this early practice
of internal auditing as per Proclamation. 69/1944 was in fact to be the root of what the inspection
department of the ministry of finance and economic development (MoFED) continued to perform to this
day until the recent reorganization.
The latter part of the 1940s witnessed the establishment of internal audit functions in key
public sector institutions such as the national defense, education, road construction and other
non-budgetary public sectors, which included the Ethiopian Airlines, Telecommunication and the
financial sector consisting of the modern layer of the Ethiopian economy. These institutions in
one way or the other had external links or financing operations which created awareness of the
need for internal controls to sectarian appropriate financial management and to safeguard
organizational assets. The period of the early 1950s marked the introduction of a budgetary
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system in government. The commencement of an annual public budget in 1955 for the first time
in the history of the country in a system of financial administration based on the annual budget
with all its attendant requirements for strengthened internal control in the budgetary agencies.
This entailed the formation of internal audits as an integral part of the budgetary internal control
system (R.G. Saxena, Hmaly a, 2001).
Generally internal auditors are employees of a company, partnerships, government agencies and other
entities. The Institute of Internal Auditors (IIA) is the primary organization supporting internal auditors.
Its mission is to “provide dynamic leadership for the global profession of internal auditing.” The IIA has
developed a set of professional standards to be followed by internal auditors. Internal auditors often
conduct financial, internal control, compliance, operational and forensic audits within their organizations.

B. Governmental Auditors
Government auditors are employed by various locals, state and federal governmental agencies. At the
federal level the three primary agencies are the Office of Auditor General, the audit service corporation
and the federal Inland Revenue authority. The office of Auditor General is a federal organization headed
by the auditor general. This office is responsible for conducting financial statement audit, compliance
audit and operational audit of various Federal Government offices. The regional governments have also
their own regional audit bureau with similar functions. The Federal Inland Revenue Authority is
responsible for administering the federal tax laws. Thus, the authority’s auditors audit the returns of
taxpayers for compliance with applicable tax laws. That is the auditors examine the tax returns of the
taxpayer to ensure that it is prepared in accordance with the tax laws and regulations. The authority’s
auditors are known as tax auditors. Another government organ that performs an audit is the audit Service
Corporation. The Audit services corporation audits the financial statements of the public enterprises.
Thus, the type of audit performed by the audit service corporation is financial statement audit (R.G.
Saxena, Hmaly a, 2001).

C. Independent (external) Auditor

An independent auditor also known as certified public accountant or external auditor has no
connection to the organization being audited. Independent auditor conducts the audit on a fee
basis and is primary responsible to third parties-creditors and shareholders. The type of audit
carried out by the independent auditor is financial statement audit. In Ethiopia, the authorized
auditors perform financial statement audit. In addition, the Audit service corporation a government
owned organization performs financial statement audit (R.G. Saxena, Hmaly a, 2001).
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2.6. Empirical Literatures

As the main aim of this research was to assess factors affecting the effectiveness of internal audit
on Ethiopian private commercial banks in case of Bahir Dar branch, different authors and
researcher’s idea and recommendations regarding the related topic of internal audit are analyzed
and presented. Although the prologue of an internal audit in Ethiopia is dated in the 1940s the
time also the United States and most European countries are adapted. The effectiveness of the
internal audit in the banking industry in particular is challenged because of the factors that hinder
the development of internal audits in Ethiopia is difficult to Cleary identified and administered.
For the ease of presenting the literature those studies concurring the main factors that influence
the effectiveness of an internal audit; such as management support, independence of internal
auditors, competency of internal audit staff, training of auditors, existence of approved audit
charter, relationship between internal and external auditors and quality of internal audit work
reviewed by different researchers are included in this literature as they are proofed the key
determinant factors in the respective case studies.
Internal Auditing Effectiveness (IAE)
According to Ditten Hofer (2001) IAE is the achievement of objectives and goals of the internal
audit function (IAF). Based on the official definition of IA, the ultimate objective of the internal
audit function is the creation of value added to the organization. Therefore, an internal audit
function (IAF) is effective when it actually contributes to create added value to the organization
(Mihret et al. 2007; Gros et al. 2016).Previous studies claimed that an effective IAF aims to add
value to the organization by helping its management and board of directors to evaluate and
improve the effectiveness of risk management, internal control and governance processes
(Gramling et al. 2004; Yee et al. 2008). Al-Twaijry et al. (2003) confirmed that IA could bring
added value by helping organizations to achieve its economic objectives through the
implementation of internal audit recommendations by senior management. In addition,
Tamosiuniene &Savcuk (2007) argued that the IAF is able to improve the competitive advantage
for the company by ensuring high-quality financial reporting and improving the governance
process. To recap, an effective IAF aims to achieve its ultimate goal which consists in creating
added value and improves the organization’s performance.
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Moreover, Dittenhofer (2001) pointed out that the effectiveness of IA contributes not only to the
adequacy of procedures and operations of each department audited but also to the effectiveness
of the organization as a whole. These findings have also supported other studies revealed that IA
brings added value to the organization by improving its organizational performance
(Mihret&Woldeyohannis 2008; Cohen &Sayag 2010; Octavia 2013). Some studies have
suggested that the effectiveness of IA improves the economic performance of organizations by
increasing the rate of return on capital employed (Mihret et al. 2010; Aikins 2011). Radu (2012)
suggested that the effectiveness of IA helps senior management in fulfilling its governance
responsibilities and that good governance in turn allows harmonizing interests of stakeholders
and increasing the company performance. To recap, an effective IAF aims to achieve its ultimate
goal, which consists in creating added value for the organization.
2.6.1 Factors affecting internal audit effectiveness
This study aimed to identify the factors that determining effectiveness of IA in private
commercial banks of Ethiopia, a case of Bahir-Dar, branch is as follows below:
Competency of Internal Audit Teams
Staff competency is an important key to the effectiveness of the internal audit activities (Al-
Twaijry et al. 2003; Alzeban& Gwilliam 2014). The International Standards for the Professional
Practice of Internal Auditing (ISPPIA) highlights the importance of internal audit team who
possesses the knowledge, skills, and other competencies necessary to perform their
responsibilities (ISPPIA, Standard 1210). Indeed, internal auditors must collectively have the
necessary education, professional qualifications, experience and training to be able to add value
and improve the organization's operations (Mihret&Woldeyohannis 2008; Ali &Owais 2013). In
addition to competency internal auditors require good interpersonal skills in communication,
persuasion, collaboration and critical thinking to effectively fulfill their duties (Fanning
&Piercey 2014). Previous studies suggest that competence of internal auditors is a critical
determinant of IA effectiveness (Albrecht et al. 1988; Van Gansberghe 2005; Al-Matarneh
2011). In the Saudi environment, AlTwaijry et al. (2003) noted that the adequate level of
competencies of internal audit staff in terms of training, experience, knowledge, and professional
qualifications have a positive influence on the effectiveness of IA. Similar results were obtained
in other studies conducted in Malaysia (Ahmad et al. 2009), Iran (Alizadeh 2011) and South
Africa (Staden&Steyn 2009). Furthermore, Ziegenfuss (2000) ranked the auditor education
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levels, the staff experience, the percent of certified staff and the training hours per internal
auditor among the most important inputs of the internal audit performance. In Taiwan, Hung
&Han (1998) found that the training and professional abilities of internal auditors positively and
significantly affect the progress of annual auditing plan. Moreover, Abdolmohammadi (2009)
has demonstrated that certified internal auditors improve the compliance with the ISPPIA in
Anglo-Saxon countries. Other studies suggest that lack of competence of internal auditors is an
obstacle to the effectiveness of IA in a number of African countries as Ethiopia, Ghana and
Kenya (Mihret&Yismaw 2007; Onumah& Yao Krah2012;Dellail&Omri 2016Walter
&Guandaru2012). Against this background the researcher can formulate the first research
hypothesis:
H1: Competence of internal audit teams has positive and significant effect on the effectiveness of
internal audit in Ethiopian private commercial banks.
Independence of Internal Audit
During the last year’s professional, bodies and standard-setters have emphasized the importance
of independence and objectivity of internal auditors for the internal audit quality, despite their
employment status in the organization. The independence is a key element of the effectiveness of
IA (Ahmad et al. 2009; Al-Akra et al. 2016). ISPPIA (Standard 1100) requires that the internal
audit department must be independent in achieving their work to add value to the organization.
The few researchers that have examined this issue have found that the greater the independence
and objectivity of internal audit department, the greater the internal auditor’s effectiveness. A
survey conducted by Alizadeh (2011) has shown that the organizational independence of the IAF
is among the five important factors of the effectiveness of IA in Iranian companies. In fact,
internal auditor’s members of the IIA are independent, and they can manage conflicts between
the loyalty of the profession and the organization's requirements. These arguments lead to the
formulation of the second hypotheses:
H2: Independence of IA has positive and significant effect on the effectiveness of IA in
Ethiopian private commercial bank.
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The Internal Audit Quality

Internal audit quality is examined as one of the variables associated with internal audit
effectiveness by Mihret and Yismaw (2007). Based on the public sector of Ethiopia, the findings
indicate that internal audit effectiveness is affected by the internal audit quality, along with the
support of management, the organization environment and the characteristics of the organization.
In another research Barac and Van Staden (2009) studied the relation between the perceived
quality of internal audit and the safety of corporate governance structure in South Africa. In
contrast to the above, the results indicate that there is no correlation between the corporate
governance structures and the perceived quality of internal audit. More recently, examining one
hundred and eight Israeli organizations, Cohen and Sayag (2010) also considered the quality of
internal audit work as a factor of internal audit effectiveness. Along with the above Alzeban and
Gwilliam (2014) emphasize the impact of internal audit quality to internal audit effectiveness.
According to the above literature, the researcher formulates third research hypothesis is as follows:
H3: Quality of IA work has positive and significant effect on the effectiveness of IA in Ethiopian
private commercial bank.
Management Support for Internal Audit
Top management support is crucial to the acceptance and appreciation of the IAF within an
organization. ISPPIA states that internal auditors should be supported from top management and
Board of Directors to execute its duties and fulfill its responsibilities. Indeed, the internal audit
department should have sufficient resources to improve the effectiveness of its activities.
Reporting on the Malaysian public sector, Ahmad et al. (2009) indicated that management
support has a considerable influence on the implementation of internal audit recommendations
and the internal audit would be well resourced in terms of number of staff and budget. Cohen
&Sayag (2010) found that management support was strongly related to the three auditing
effectiveness dimensions (auditing quality, audit evaluations, and added contribution of IA) in
Israeli organizations. Alzeban & Gwilliam (2014) found that management support was the most
important factor influencing IA effectiveness within the Saudi Arabian public-sector
organizations. They noted that IA effectiveness would be enhanced by hiring trained and
experienced staff and providing sufficient resources. Based on the preceding discussion, the
researcher can formulate the fourth research hypothesis.
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H4: Management support has positive and significant effect on the Effectiveness of IA in
Ethiopian private commercial bank.
Training of Internal Auditors
Internal auditors require some of the competencies such as training and communication skills
(CBOK, 2010). In order to be successful in their work internal, auditors are required to write,
speak and listen effectively (Lewis and Graham, 2003). As stated by Anam& Rab (2015),
Training is an important factor to upgrade skills of auditors. New audit techniques need to be
learnt to make audit effective. Audit management flaw in some organizations is their reluctance
to budget sufficiently for training auditors. Expense control is understandable, but some
organizations allow very little for any outside training, instead opting to rely on on-the-job
training. The small and highly trained staff would prove to be much more effective and valuable
to their organizations than a large number of auditors with little or no ongoing training
Champlain (2003). Follow that CPA firm must not accept an audit engagement without first
determining that member of its staff have the technical training and proficiency needed to
function effectively in the particular industry (Ray, Walter, Kurt & Robert, 1992).Some
researchers (Smith, 2005; Sawyer et al., 2003; loss, 2000) agreed to the opinion that internal
auditors must get exceptional training skills to succeed and advance in the international
marketplace that is changing and complex. In every situation, internal auditors must recognize
and know how to effectively acquire training at different level of auditing operation (Sawyer et
al., 2003). Effective auditors must have substantial levels of training and communication with
management. When high levels of training are developed with management, auditors can acquire
knowledge which will significantly support audit evaluations. Fadzil et al. (2005) found that the
audit work performance and scope greatly affect the training, communication and information
perspectives of the internal control system. From the above discussion the researcher develops
the fifth hypothesis as follows:
H5: Training of auditors has positive and significant effect on the effectiveness of IA in
Ethiopian private commercial bank.
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Existence of Approved Internal Audit Charter

Internal audit charter is defined by the IIA as a formal written document that defines the activity
purpose, authority and responsibility of auditors. The charter should be established the internal
audit activity’s position within the organization authorize access to records, personnel and
physical properties relevant to the performance of managements and defined the scope of
internal audit activities (IIA, 2001). Additionally, an internal audit charter typically includes the
responsibilities of the IA in broad terms, the standards followed by the IA and the relationship
between the IA and the audit committee. It may also define access to the information
(documents, records, systems and personnel) necessary to perform and reach conclusions on the
work and it is a vehicle for asserting that there are no unreasonable limitations on the scope of
the auditor work. The charter should clearly identify and record any limitations and alter to
actual or potential changes on internal and external conditions that affect its ability to provide
internal control assurance from a forward-looking perspective (O. Regan, 2002). Different
authors have been explained the presence of defined audit charter in organizations will helps
auditors to be effective. For instance, O. Regan (2002) concludes that a well drafted charter is an
important ingredient for the IA effectiveness. It helps to direct the efforts of audit staff and
defines what the board can expect on the assurance it required on internal control from an IA.
Van Peursem (2005) added that the presence of a strong charter adds an official and respected
layer of authority to the position of IA in the company. It is also an important feature of insuring
success in achieving the independent status of an IA. Furthermore, the existence of audit charter
in organization influences senior management to flow the recommendations of the internal
auditor (Van Peursem, 2005) which in turn affects IA effectiveness. From the above discussion
the researcher formulates the sixth hypothesis as follows:
H6: the existence of approved audit charter has positive and significant effect on the
effectiveness of IA in Ethiopian private commercial bank.
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Relationship between internal and external auditors

The well-maintained relationship between internal and external auditors has long been seen as
important to the success of internal audit functions and provides numerous benefits to the
organization and external stakeholders as well. The coordination and cooperation may include
the planning, opinions, reporting and exchange of information that may facilitate higher quality
audits and thus could prevent audit work duplication (i.e. internal vs. external audit). Accounting
and professional standards acknowledges to address the relationship between internal and
external auditors. For instance, ISPPIA on coordination between the two suggests that
coordination should include sharing information and coordination of activities. This includes
developing and maintaining a professional relationship between the respective audit parties,
which consequently assists internal auditors in achieving their objectives and providing better
service to the company. From the external auditors’ perspective, the information provided by the
internal auditor likely assists in providing a higher-quality audit opinion and possibly one
delivered with greater resource efficiency in circumstances where the external auditor is able to
rely on work carried out by the internal auditor. Academic studies indicate that appropriate
cooperation increases the economy efficiency and effectiveness of audits and helps management
provide a high-quality public service (Alzeban &Gwilliam, 2014). Research has shown that lack
of coordination between internal and external auditors is a major factor impairing the quality of
both forms of audit in the public sector in developing countries (Brierley et al., 2001).
Furthermore, the main reason for the presence of financial errors and irregularities were the lack
of cooperation between internal and external audit teams. The arguments presented above leads
to the formulation of the seventh hypothesis as follows:
H7: the relationship between internal and external auditor has positive and significant effect on
the effectiveness of IA in Ethiopian private commercial bank.
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Conceptual Framework
To achieve the research objective and to test the research questions the researcher develops the
following conceptual research framework by using dependent variable (IAE) and independent
variables(independency of IA, management support, competency of IA, Training of auditors,
existence of approved audit charter, auditors relationship and quality of audit work).

Independence of
Internal Audit
Management (INDA) Competency of
Support (MgtS) Internal Audit
Team (COMPA)

Training of
Internal Auditors
(TA)
Internal audit
effectiveness (IAE)

Approved
Internal Audit
Charter (AIAC)

(
The Internal Audit Quality Relationship between
(QIA) internal and external
auditors (RBIEA)
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Knowledge gap
This literature review has argued that the dynamics in an internal audit setting influence internal
audit effectiveness. According to the literature review is argued seven potential factors related
with the effectiveness of IA. These are competence of IA teams, independence of IA, quality of
IA work, training of auditors, approved audit charter, relationship between internal and external
auditors and management support. The researcher suggests the following gaps in the literature:
Most research in auditing has traditionally been conducted and interpreted under the
theoretical aspect of agency theory. Some researchers recommended institutional theory. But
lack of literatures with a combination of agency, institutional, and communication IA theories.
Therefore, this study identifies the factors determining the effectiveness of IA in banking
industry according to the framework created in the study and interpreted based on IA theory
including agency, leaning credibility, institutional and communication theories.
Therefore, the main purpose of this study was tried to fill gap in literature for the past
studies by identify the following additional factors that affect the internal audit effectiveness in
Ethiopia private commercial banks, which are training of auditors, relationship between internal
and external auditors and the existence of newly adopted approved audit charter. The study
designed to examine and analysis those main factors which affect internal audit effectiveness in
banking industry in Ethiopian.
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CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research design
Research design was a detailed outline of how an investigation was taking place. A
research design would typically include how data is to be collecting, what instruments was
employing, how the instrument would be used and the intended means for analyzing collected
data. This study was expected to investigate on the factors affecting internal audit effectiveness
of Ethiopian private commercial banks in case of Bahir Dar city branch offices.
Explanatory studies are showing the causal relationship between variables (Saunders, Lewis and
Thornhill, 2009). In this study the researcher was used explanatory types of research design was
necessary in such a study situation to explain the relationship between variables. Therefore,
studying the data in quantitative method through statistical tests such as correlation and
regression in order to get the clear view of the relationship has been explaining in detail with
reasons through qualitative data. Therefore, in this study the researcher was used quantitative
and qualitative research approach to know the factors affecting internal audit effectiveness with
regard to independence of auditors, competency of internal audit staffs, management supports,
training of auditors, existence of approved audit charter, internal audit quality work and the
relationship between internal and external auditors. Therefore, in this study the researcher was
used quantitative methods to test the relationships between the independent and dependent
variable whereas qualitative method was used in order to examine the skill, filling and perception
of internal audit staffs regarding to internal audit effectiveness and determinate factors.
3.2. Population and Sampling of the Study
3.2.1. Population of the Study
The population of the study was Ethiopian private commercial banks internal audit staff in Bahir
Dar branch. Currently, there are sixteen private commercial banks in Ethiopia. Therefore, the
population of the study was internal audit staff of all Ethiopian private commercial banks which
have branch office in Bahir Dar City, which are around 95 in number.
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3.2.2. Sampling of the Study

The researcher was used purposive/judgmental sampling method to choose and picks only those
internal audit staff best meet the purpose on the study logically assumed to be representative of
the population. Target individual with known experience or expertise in auditing area was
selected purposively as a target sample of the population in 16 Ethiopian private commercial
banks that has branch office in Bahir Dar City.
Lists of EPCB that has branch office in Bahir Dar City and selected sample

Year of No of branch No of internal No of sample selected

establishment office in Bahir auditors in Bahir from internal auditors
No Private commercial banks
Dar city Dar branch in Bahir Dar Branch

1 Bank of Abyssinia S.C 1996 13 15 15

2 United Bank S.C 1998 8 8 8
3 Awash International Bank S.C 1994 7 7 7
4 Dashen Bank S.C 1995 10 12 12
5 Lion International Bank S.C 2006 2 2 2
6 Abay Bank S.C 2010 17 17 17
7 Nib International Bank S.C 1999 4 4 4
8 Wegagen Bank S.C 1997 5 5 5
9 Buna International Bank S.C 2009 9 9 9
10 Addis International Bank S.C 2011 3 3 3
11 Zemen Bank S.C 2009 1 1 1
12 Berhan International Bank S.C 2010 4 4 4
13 Debub Global Bank S.C 2012 1 1 1
14 Enat Bank S.C 2012 3 3 3
15 Cooperative Bank of Oromia S.C 2011 2 2 2
16 Oromia International Bank S.C 2008 2 2 2
95
Total
Source: NBE for Year of establishment and survey study
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3.3. Type and sources of Data

To conduct this study, the researcher was used only primary types of data. The data were
obtained through questionnaires. Primary sources allow the researcher to examine the evidence
firsthand without the opinions, analysis and interpretations of others. The survey questionnaire
helps the researcher to collect a primary source of data. Questionnaires allow the collection of
large amounts of data within a short period of time. To collect the data from the respondent
structured questionnaire was used. These were distributed to the internal audit staff of the private
banks, and their response was assumed to be filled using experience, attitude, opinion, skill and
perception on internal auditing.
3.4. Methods of Data Collection
The researcher was used different methods of data collection based on the nature of data
(Creswell, 2009). To collect data, the researcher was used structured questionnaire and the
questionnaire was distributing for purposely selected internal audit staff employees. The
questionnaires were prepared in the form of five item Likert-Scale type, where the lowest scale
represent strongly disagree and the highest scale represent strongly agree (Likert, 1932). The
data collected using questionnaire converted to represent the variables in the hypotheses. The
questionnaire was structured in regard with the research hypotheses and the relevant literature
review. Firstly, questions were selected mainly by eight surveys that examined similar research
field: (Arena and Azzone, 2009; Seif, 2017; Hella and Mohamed 2016; George, et al., 2015; and
Mihret and Yismaw, 2007, Wondeson S, 2019).The questionnaire was organized in two sections.
The first part deals about respondent general information which was related with the
participant’s background. The second part holds Likert scale questions for the identified seven
independent variables and the dependent variable of internal audit effectiveness.
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3.5. Data Analysis

After the data were collected the raw data were converted into suitable form for analysis and
interpretation. This was achieved through check the completeness, internal consistency and
appropriateness of the answers to each of the questions. Statistical Package for Social Science
(SPSS) software for version 21 was employed to run the data through the statistical tools used for
this study, namely descriptive analysis, correlation and multiple regression analyses.
According to the survey instruments selected which was likert scale questionnaire model, the
researcher used ordinal (ranked) type of categorical data. In this aspect, the data collected using
questionnaire converted to represent the variables in the hypotheses. This was through taking
mean values of the item responses for each construct. Mean values were chosen because item
responses that ranged from strongly agree to strongly disagree generate ordinal data (Mihret, et
al., 2010). The descriptive results are presented by tables, frequency distributions and
percentages to give a condensed picture of the data. Whereas to determine the relationship
among the variables and to test the research hypothesis correlation and regression analysis
method was used by meeting the ordinary least square (OLS) assumptions of the linear
regression. Assumption of homoscedasticity: Data values for dependent and independent
variables have equal variances. Assumption of absence of co linearity or multi-co linearity:
There is no correlation between two or more independent variables. Assumption of normal
distribution: The data for the independent variables and dependent variable are normally
distributed.
3.6 Measurement of variables
Both dependent variable items and all of the independent variables items were measured on a
Likert-scale.
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3.7. Model Specification

The research was used multiple regressions models to evaluate the relationships between a set of
independent variables and a dependent variable. Based on the objective of the study multiple
regressions performed to estimate the magnitude of the effect of the independent variables on the
dependent variable. Multiple R and R² measure the strength of the relationship between the set of
independent variables and the dependent variable. An F-test was used to determine the
relationship could be generalized to the population represented by the sample. A t-test was used
to evaluate the individual relationship between each independent variable and the dependent
variable. Therefore, the researcher was used ordinarily least square regression model with cross
sectional data to estimate the effects of above identified factors (independent variables) on
internal audit effectiveness (dependent variable).
OLS regression model was as follows:
IAE = α+β1INDA+β2COMP+β3MgtS+β4TA+β5QIA+β6RBIEA+β7EAIAC+ε
Where:
IAE=Internal audit effectiveness
α = Constant term
β1 up to β7= coefficients of independent factors that affect IAE
INDA= Independency of auditors
COMP= Competency of internal audit staff
MgtS= Management support
TA= Training of auditors
QIA= Quality of internal audit work
RBIEA= Relationship between internal and external auditors
EAIAC= Existence of approved internal audit chartered
ε= Error term
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Chapter Four: Data Analysis and Interpretation

4.1 Introduction
As it was mentioned in the previous chapter, the aim of this study was to analyze the factors
affecting internal audit effectiveness of Ethiopian private commercial banks a case of Bahir Dar
branch. Hence, this chapter presents the analysis and discussion of research findings obtained
from the questionnaires. It reports the investigation results obtained from all internal auditors.
The discussion begins with the questionnaires response rate followed by the descriptive statistics
of the respondent’s related questions like qualification, field of study and professional
certification and year of experience in internal audit department. The results of the regression
assumption test and multiple regression results also reported and finally the results of
hypothesis testing were presented.
4.2. Descriptive statistics on demographic variables
4.2.1. Response Rate
The questionnaires were distributed to the internal auditors of the private Commercial Bank of
Ethiopia in Bahir Dar branch offices. For these a total of 95 questionnaires were distributed to all
the internal audit staff from which 85 questionnaires was collected giving the response rate of
89.5%. This shows good response rate for questionnaires from internal auditors.
4.2.2. Demographic characteristics of respondents
The demographic information of the respondents in this study encompassed sex, age and level of
education; it also shows working experience and current status of respondents within the bank.
Table 4.1 Sex analyses of respondents
Frequency Percent Cumulative Percent
Male 55 64.7 64.7
Female 30 35.3 100.0
Total 85 100.0
Source: Survey data (2021) SPSS output
According to the Survey study of the researcher, the participant has a sex analysis present in
table 4.1shows among 85 sampled respondents 55 (65%) respondents are males and the rest
30(35%) respondents are females. From these the researcher generalizes most of the respondents
are males.
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Table 4.2 Analysis of age of respondents

Item Frequency Percent Cumulative Percent
21 up to 30 36 42.4 42.4
31 up to 40 42 49.4 91.8
more than 40 7 8.2 100.0
Total 85 100.0
Source: Survey data (2021) SPSS output
According to the survey study of the researcher, the participant has Age analysis of the
respondents states under table 4.2 shows that most of the respondent age grouped under the age
of 31 up to 41 years old which are 42(49.4%) respondents are grouped under these age groups
and 36(42.4%) respondents are grouped 21 up to 30 years age group and the remaining 7(8.2%)
respondents are grouped under the age group of more than 40 years old.
Table 4.3: respondents field of study
field Frequency Percent Cumulative
Percent
Accounting 52 61.2 61.2
Economics 13 15.3 76.5
Management 20 23.5 100.0
Total 85 100.0
Source: Survey data (2021) SPSS output
According to the Survey study the participants of the study indicated they had highest level of
education qualification in the different fields of study. In this regard 52 respondents (61.2%) had
accounting educational background 20 respondents (23.5%) had management background and
the remaining 13 respondents (15.3%) had economics and other field’s educational background.
Descriptive statistics of the data are presented in table 4.3 most internal audit teams had a
background in accounting. This shows that IA activity in Ethiopian private commercial banks
has limited on financial operation areas. According to Paape, the scope of IA in those Private
Banks had not expanded to non-financial operation areas and IA team including most accounting
background staffs could lack skills, experience, and knowledge in other fields.
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Table 4.4: analysis of experience of respondents in banking sectors

Frequency Percent Cumulative Percent
less than 5 years 45 52.9 52.9
6 to 10 years 6 7.1 60.0
11 to 20 years 33 38.8 98.8
more than 20 years 1 1.2 100.0
Total 85 100.0
Source: Questionnaire result, SPSS output 2021
Based on the survey study respondents had different working experiences in the banking sector
ranged from less than five years up to above twenty years. Based on the respondent’s response
among 85 participants, 45(52.9%) respondents had less than five years working experience in a
banking sector, six(7.1%) respondents had between six to ten years working experience in the
banking sector and the remaining 33 (38.8%) respondents had between eleven to twenty years
working experience in the banking sector. It shows that respondents had less work experience in
the internal audit activity of the bank. Since majority of the respondent (52.9%) had less than
five years working experience in the sector. Descriptive statistics of the data are presented in
table 4.4. Based on the participant’s response, internal auditors in Ethiopia private commercial
bank in Bahir Dar branch had medium levels of experience in banking sector in different
positions. It shows that auditors in EPCB had less experience on the banking activity and the
ability to audit auditee and add value to the organization or department specifically.
Table 4.5 Education level of respondents
Item Frequency Percent Cumulative Percent
degree 59 69.4 69.4
masters 26 30.6 100.0
Total 85 100.0
Source: Survey data (2021) SPSS output
In terms of educational background, the respondents indicated they obtained the highest levels of
education qualification. According to the participant response 59(69.4%) of the respondents
obtained a bachelor degree as their highest educational level in a different field of study. In other
way 26 (30.6%) of the respondents obtained a post graduate degree or masters as their highest
level of education. Descriptive statistics of the data are presented in table 4.5. Based on this
result, most of the IA team members were well educated. They held a bachelor and post graduate
degree in different field of study. This result was consistent with prior IA standards (IIA, 2011)
 P a g e | 47

and studies (Mihret, et al., 2010; George, et al., 2015, WodajoA, 2019). Even if internal auditors
of the bank have high education qualification in the different background or field of study but in
terms of professional certifications the IA teams of most Ethiopian private banks in Bahir Dar
branch are not certified personnel in certified institute of accounting and American institute
certified public accountant. According to Bou-Raad&Capitanio, (1999) Professional
certifications have great quality in regard of adding value and enhance department and
organizational performance as well as organization audit effectiveness. So regarding to
professional certification most private banks has ineffective.
4.2.3. Reliability Analysis
In a likert-scale questionnaire measuring the consistency or reliability of the questionnaire is
essential. Reliability analysis has been employed in prior IA researches those adopt liker scale
questionnaire (Mihret, et al., 2010; George, et al., 2015). To measure such a reliability analysis,
Cronbach’s Alpha (α) is the most common measure of reliability scale. If a reliability analysis
value (α) greater than 0.600 is acceptable (Cronbach's, 1951). According to Field, (2009) a
reliability analysis value (α) greater than 0.700 is very acceptable for data analysis, Based on
table 4.6 the reliability analysis value for Cronbach’s Alpha (α) of this study is greater than 0.70
for each variables. Therefore, the responses generated from each variable in this study were
acceptable (reliable) for data analysis.
Table 4.6: Reliability Statistics
Variables Cronbach's Alpha
Independency of internal audit 0.777
Management support 0.755
Internal audit quality 0.693
Internal audit effectiveness 0.701
Competency of internal audit 0.750
Training of auditors 0.691
Relationship between intern and external auditors 0.756
Existence of approved internal audit charter 0.697
Source: Survey data (2021) SPSS output
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4.3. Descriptive Statistics

According to Amal Mohammed, 2016 states that when the mean score of descriptive statistics
was one or less than it indicates respondents are strongly disagree, mean score is between 1.00
and 2.00 states respondents are disagreed on the asked questionnaire, if mean sore is between
2.01 and 3.00 it states respondents are neutral on the asked questionnaire, if mean value is
between 3.01 and 4.00 it indicates respondents are agreed on identified variable and if the mean
score is between 4.01 and 5.00 it indicates respondents are strongly agreed on the asked
questionnaire and identified variables. Based on these the value of mean and standard deviation
of each variable was presented under table 4.7 shows the mean score was greater than 4.00 for
each variable and the value of standard deviation was less than 1.00 for each variable.
Table 4.7 Descriptive Statistics
Variables N Minimum Maximum Mean Std. Deviation
INDA 85 4.00 5.00 4.40 .318
MGT 85 3.00 5.00 4.56 .477
QIA 85 3.00 5.00 4.38 .351
COMPA 85 3.25 5.00 4.4412 .41484
TA 85 3.33 5.00 4.4431 .52299
RBIEA 85 3.60 5.00 4.4071 .34976
EAIAC 85 3.00 5.00 4.2000 .48917
Source: Survey data (2021) SPSS output
Generally from the descriptive statistics the researcher generalizes that the mean score and
standard deviation of respondents regarding to independency of audit teams, competency of
auditors, management support, training of auditors, the existence of approved audit charter,
quality of audit work and relationship between internal and external auditors had greater than
4.00 and less than 1.00 respectively, which indicates the respondents had strongly agreed on the
effect of those identified variables on internal audit effectiveness as a result the response and
perception of respondents were closer each other from each identified factors.
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Pearson correlation matrix analysis

INDA MGT QIA IAE COMPA TA RBIEA EAIAC
Pearson Correlation 1 .466** .342** .359** .199 .038 .334** -.214*
INDA Sig. (2-tailed) .000 .001 .001 .068 .728 .002 .049
N 85 85 85 85 85 85 85 85
Pearson Correlation .466** 1 .677** .639** .486** .083 .461** -.277*
MGT Sig. (2-tailed) .000 .000 .000 .000 .453 .000 .010
N 85 85 85 85 85 85 85 85
**
Pearson Correlation .342 .677** 1 .444** .452** .187 .381** -.256*
QIA Sig. (2-tailed) .001 .000 .000 .000 .086 .000 .018
N 85 85 85 85 85 85 85 85
Pearson Correlation .359** .639** .444** 1 .549** .176 .357** -.120
IAE Sig. (2-tailed) .001 .000 .000 .000 .107 .001 .273
N 85 85 85 85 85 85 85 85
Pearson Correlation .199 .486** .452** .549** 1 .080 .216* -.198
COMPA Sig. (2-tailed) .068 .000 .000 .000 .464 .047 .069
N 85 85 85 85 85 85 85 85
Pearson Correlation .038 .083 .187 .176 .080 1 .148 .022
TA Sig. (2-tailed) .728 .453 .086 .107 .464 .178 .844
N 85 85 85 85 85 85 85 85
Pearson Correlation .334** .461** .381** .357** .216* .148 1 -.154
RBIEA Sig. (2-tailed) .002 .000 .000 .001 .047 .178 .158
N 85 85 85 85 85 85 85 85
Pearson Correlation -.214* -.277* -.256* -.120 -.198 .022 -.154 1
EAIAC Sig. (2-tailed) .049 .010 .018 .273 .069 .844 .158
N 85 85 85 85 85 85 85 85
*. Correlation is significant at the 0.05 level (2-tailed).
Source: Survey data (2021) SPSS output
By default, SPSS always creates a full correlation matrix. Each correlation appears twice: above
and below the main diagonal. The correlations on the main diagonal are the correlations between
each variable and itself -which is why they are all 1 and not interesting at all. As a rule of thumb,
a correlation was statistically significant if it’s “Sig. (2-tailed)” < 0.05. Based on this internal
audit effectiveness has strongly correlated with management support, competency of internal
audit teams, quality of internal audit, independency of audit teams and relationship between
internal and external auditors being: r = 0.639, 0.549, 0.444, 0.359 and 0.357 respectively based
on N = 85 sampled internal auditors and at significance, with a P-value of 0.000 and 0.001. This
 P a g e | 50

means there's a 0.000 probability of finding the sample correlation or it is a larger one if the
actual population correlation is zero. Internal audit effectiveness has no strong correlation with
training of auditors and existence of approved audit charter. Note that training of auditors does
not strongly correlate with each other. Its strongest correlation is 0.187 with quality of internal
audit but p = 0.086 so it's not statistically significantly.
4.4. Assessment of Ordinary Least Square Assumptions
4.4.1. Assessment of Normality
In order to test the normality of data Skewness and Kurtosis test of normality, distribution was
used and conducted under SPSS version 21. The Skewness and Kurtosis tests are showing
normality when the result is within the range of +3 and -3 (Aczel, 2008). The results of normality
distribution test after conducting transformation of variables was presented below in Table 4.8.
According to the table the Skewness value was between -0.675 to 0.041 and Kurtosis value was
between -1.182 to 0.086 all value fill in the range of -3 and +3 so it satisfy normality
assumption.
Table 4.8 Assessment of Normality
Variables Statistic Skewness Kurtosis
INDA 85 -.675 .086
MGTS 85 -.514 -1.162
QIA 85 -.520 .265
IAE 85 -.299 -.217
COMPA 85 -.351 -.339
TA 85 -.358 -1.182
RBIEA 85 .041 -.714
EAIAC 85 -.337 -.150
Source: Survey data (2021) SPSS output
4.4.2 Assessment of Homoscedasticity
This is called the variance of the residuals is constant and is it assumes that the variation in the
residuals (or amount of error in the model) is similar at each point across the model. In other
words, the spread of the residuals should be fairly constant at each point of the predictor
variables (or across the linear model). To test this assumption, it needs to plot the standardized
values our model would predict, against the standardized residuals obtained (Naeem
Aslam,2014). Based on these the variation of residuals under or above the fitted line of the
scatter plot is similar across each point. So it satisfies Homoscedasticity assumptions.
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4.4. 2 Assessment of Multi-co linearity

Multi-co linearity is a statistical problem which occurs when the explanatory variables
(independent variables) are much correlated with each other (Hair, et al., 1998). It means when
the strong correlation among predicators and the existence of R value greater than 0.80, tolerance
value below 0.10 and Variance Inflation Factor (VIF) greater than 10 in the correlation matrix
(Field, 2009). Tolerance in this case defined as a statistical tool which used to indicate the
variability of the specified independent variables from other independent variables in the model
(Pallant, 2007). Based on Table 4.9, the tolerance levels for all variables were greater than 0.10
and the correlation between dependent and independent variables; the correlation matrix of all
variables among the predictors was also less than 0.80. Therefore, correlation value, tolerance
level and VIF value indicates that there were no Multi-co linearity problems in this study. The
relationship between dependent variable (effectiveness of IA) and independent variables
(competence of IA team, independence of IA, quality of IA, existence of approved audit charter,
the relationship between internal and external auditor, training of auditors and management
support) some variables are significant.
Table 4.9 Co linearity Statistics
Variable Tolerance(1/ VIF) VIF
INDA 0.756 1.323
MGTS 0.414 2.418
QIA 0.497 2.013
COMPA 0.731 1.368
TA 0.945 1.058
RBIEA 0.752 1.331
EAIAC 0.898 1.113
Source: Survey data (2021) SPSS output
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The aim of this test was to analyze whether the independent variables are correlated each other.
This test was done by analyzing the value of tolerance and variance inflation factor (VIF).
However, table 4.9 above shows that there is no Multicollinearity between variables because the
value of VIF is less than 10 and tolerance value is greater than 0.10 as well as the value of R is
0.717 which are less than 0.80 based on these they conclude that there is no problem of
multicollinearity in those study.
The Inter-item correlation matrix of all the variables has the paired values among the predictors
are less than 0.80 see table 4.10 below indicates that there were no Multicollinearity problems
that alters the analysis of the findings rather it leads to the acceptance of R value, tolerance and
VIF value.
Table 4.10 Inter-Item Correlation Matrix

INDA MGT QIA IAE COMPA TA RBIEA EAIAC

INDA 1.00 .466 .342 .359 .199 .038 .334 -.214
MGT .466 1.00 .677 .639 .486 .083 .461 -.277
QIA .342 .677 1.00 .444 .452 .187 .381 -.256
IAE .359 .639 .444 1.00 .549 .176 .357 -.120
COMPA .199 .486 .452 .549 1.00 .080 .216 -.198
TA .038 .083 .187 .176 .080 1.00 .148 .022
RBIEA .334 .461 .381 .357 .216 .148 1.00 -.154
EAIAC -.214 -.277 -.256 -.120 -.198 .022 -.154 1.00

Source: Survey data (2021) SPSS output

4.4.3 Assessment of Autocorrelation
If there were patterns in the residuals from a model then they can be considered as auto
correlated (Brooks, 2008). The Durbin-Watson (DW) is a test for first order autocorrelation
(Field, 2009). It assumes that the relationship between an error and the previous of an error. In
this type of test the null hypothesis can’t be rejected when DW result is near 2 (Hair, et al.,
1998). Because, it shows there is little or no evidence of autocorrelation. This assumption can be
tested with the Durbin-Watson test which test for serial correlation between errors and the value
closer to 2 are acceptable (Field, 2009). In this survey data SPSS output Durbin-Watson statistics
value is 1.880 close to 2 suggests that there is no severe autocorrelation among error terms.
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Table 4.11 Durbin-Watson test of Model Summary

Model R R Square Adjusted R Std. Error of the Durbin-Watson
Square Estimate
a
1 0.717 0.515 0.471 0.212 1.880
a. Predictors: (Constant), EAIAC, TA, COMPA, INDA, RBIEA, QIA, MGT
b. Dependent Variable: IAE
Source: Survey data (2021) SPSS output
4.5. Regression Results and Hypothesis Testing
The regression result that was obtained by regressing the internal audit effectiveness in adding
value for the corporate organization, improving organizational performance and identifying
noncompliance activities and the internal auditors ability in adding value for their organization
on training of auditors, independence of audit teams, competency of internal audit staffs:
management supports, quality of audit work, relationship between internal and external auditors
and existence of audit charter. Finally, the hypothesis tests were undertaken based on the
regression output results.
4.5.1. Regression Analysis Results
The regression analysis was used to examine a dependent variable of internal audit effectiveness
explanation by independence of audit teams, competency of internal audit staffs, management
supports, training of internal auditors, quality of audit work, relationship between internal and
external auditors and existence of approved internal audit charter. The result shows indicators of
internal audit effectiveness by using the variables identified in the model. When doing regression
analysis the researcher determines whether or not there is a relationship between the attributes
and internal audit effectiveness by examining the ANOVA result.

Table 4.12 ANOVA results

Model Sum of Squares df Mean Square F Sig.
Regression 3.223 7 0.460 9.008 .000b
1 Residual 3.936 77 0.051
Total 7.159 84
a. Dependent Variable: IAE
b. Predictors: (Constant), RBIEA, TA, EAIAC, INDA, COMP, QIA, MgtS
Source: Survey data (2021) SPSS output
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If the F statistic is significant, assume the independent variables taken together have a
relationship with the dependent variable. In this study the probability of the F statistic for the
regression analysis is 0.0001b, less than the level of significance of 0.05. Hence, the dependent
variable has relationship with the independent variable identified in this study. Generally the F-
ratio in the ANOVA table (see above) tests whether the overall regression model is a good fit for
the data. The table shows that the independent variables statistically significantly predict the
dependent variable F= 9.008, P-value (0.0001) < 0.05, it is possible to say the model is a good fit
for the variable identified in this study.
Table 4.13 Model Summary

Model R R Square Adjusted R Std. Error of the Durbin-Watson

Square Estimate
a
1 .717 .515 .471 .212 1.880
a. Predictors: (Constant), EAIAC, TA, COMPA, INDA, RBIEA, QIA, MGTS
b. Dependent Variable: IAE
Source: Survey data (2021) SPSS output
The model summary of the study was shown in table 4.13 the R column represents the value of R
and the multiple correlation coefficients. R can be considered to be one measure of the quality of
the prediction of the dependent variable (IAE). The value of R is 0.717 indicates a good level of
prediction. R square statistic represents the strength of the relationship between dependent
variables (internal audit effectiveness) and other independent variables. In this study the value of
R square statistic tells us the proportion of variance in the independent variable that is accounted
for by the dependent variable. Table 4.13 shows that the value of R Square is 0.515. It means that
the ability of independent variables to explain the dependent variable is 51.5%.While, 48.5% is
affected and explained by another factor beyond this research model. In other words, the overall
contribution of training of auditors, independence of audit teams, competency of internal audit
staffs, management supports, quality of audit work, relationship between internal and external
auditors and existence of approved audit charter accounted for 51.5% for the internal audit
effectiveness of the bank.
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Table 4.14 Regression Results of Coefficients

Unstandardized Standardized t Sig. 95.0% Confidence

Model Coefficients Coefficients Interval for B
Lower Upper
B Std. Error Beta Bound Bound
(Constant) 1.317 .554 2.378 .020 .214 2.419
INDA .085 .084 .092 1.012 .315 -.082 .252
MGTS .292 .076 .477 3.867 .0001 .142 .443
QIA -.070 .094 -.084 -.750 .456 -.257 .116
COMPA .233 .065 .331 3.565 .001 .103 .363
TA .062 .046 .111 1.362 .177 -.029 .153
RBIEA .053 .076 .063 .690 .492 -.099 .205
EAIAC .050 .050 .083 .992 .324 -.050 .149
a. Dependent Variable: IAE
Source: Survey data (2021) SPSS output
Estimated model coefficients, Unstandardized coefficients indicate how much the dependent
variable varies with a change in an independent variable when all other independent variables are
held constant. Generally the beta (β) sign includes both a sign of positive (+) and negative (-)
coefficients. It shows the effect of independent variables over the dependent variable (Field,
2009). Based on Table 4.14 except beta sign of quality of internal audit work all other
independent variables have positive (+) beta value. Thus, independent variables were
(competence of IA team, independence of IA, training of auditors, relationship between internal
and external auditors, existence of approved internal audit charter and management support) had
a positive effect on predicting the dependent variable of effectiveness of internal audit but quality
of IA work has a negative beta value which shows there was a negative relationship between
quality of IA work and internal audit effectiveness.
Therefore, the researcher generalize that any increase in independent variables lead to increase
in the dependent variable. The independent variable with the level of significance (sig.) value
less than 5% can make a significant contribution to the predicted value of the dependent variable.
Whereas, a variable beyond this level of significance cannot make a significant contribution to
the predicted value of the dependent variable (Brooks, 2008; Hair, et al.1998). Based on Table
4.14, the statistical significance of the independent variable over the dependent variable at 5%
 P a g e | 56

level of significance; five independent variables (independence of IA, quality of IA, training of
auditors, existence of approved audit charter and internal and external auditors relationship) were
not significantly contributed for the dependent variable (IAE) because the p value was greater
than 0.05 level of significance. But the independent variable (competence of IA teams and
management support) was significantly contributed for the dependent variable (IAE) because p
values of those variables were less than level of significance of 0.05.
4.5.2. Hypothesis Test
The regression analysis results which were presented in the table 4.14 help the researcher to
make an accurate test of research hypotheses proposed at the beginning of this study. The
hypotheses sought to test for a significant positive association of training of auditors,
independence of audit teams, competency of internal audit staffs, management supports,
relationship between internal and external auditors and quality of audit work as well as existence
of approved audit charter with internal audit effectiveness. The following hypotheses test were
conducted based on the regression results of the internal audit effectiveness obtained from the
regression SPSS output.
H1: Competency of internal audit teams has positive and significant effect on the
effectiveness of internal audit (IA) in Ethiopian private commercial banks.
The first hypothesis of this research revealed that there was direct relationship between the
competency of internal audit teams and internal audit effectiveness. This hypothesis was
supported by the regression result as of the regression results shows there was significant related
with the effectiveness of the internal audit at 0.05 level of significance. So competency of
internal audit teams has direct relationship in to audit effectiveness and has statically significant
effect on the bank internal audit effectiveness at 5% level of significance because the value of
p=0.001 is less than that of 0.05 level of significance so competency of internal audit teams has
significant effect in to internal audit effectiveness.
Previous studies suggest that competence of internal auditors was a critical determinant of IA
Effectiveness. This result is consistence with some previous researchers (Mihert and Yismaw,
2007; Solomon, 2019; Mustika, 2015;Hailemariam, 2014; Berehe, 2016;Lan Huong, 2018;
George et al., 2015) they found that competency of internal auditors have positive relationship
with internal audit effectiveness. Based on the above results hypotheses was accepted which
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indicated that there is statistically positive and significant relationship between competency of
internal audit staffs and internal audit effectiveness. So the first hypothesis was confirmed.
H2: Independence of IA teams has positive and significant effect on the IAE in Ethiopian
private commercial banks.
The second hypothesis of this research proposed that the effectiveness of the internal audit was
directly related with the independence of audit teams. The positive beta sign and a statistically
insignificant result of independence related with the internal audit effectiveness (β = 0.085, t =
1.012, p value 0.315), so P>0.05.The regression result highly indicates that there was positive
relation between internal audit effectiveness and independency of audit teams because it has
positive beta value. So based on regression result independency of audit teams has positive
impact but not significant effect on the banks internal audit effectiveness but insignificance of
independency of audit teams in determining the internal audit effectiveness didn’t mean that it
doesn’t completely contribute to the effectiveness of an internal audit.
This result was inconsistent with Alizadeh (2011) has shown that the organizational
independence of the IAF is among the five important factors of the effectiveness of IA in Iranian
companies. Furthermore, Cohen and Sayag (2010) found that more organizational independence
to the internal auditors plays the vital role in assurance of internal audit effectiveness in the
Israeli context. And Hella and Mohamed (2016), who found that independence and objectivity is
an important determinant of the effectiveness of the internal audit. Zulkifli et al (2014) result of
the study there were significant positive relationships between independence and objectivity, and
the effectiveness of an internal audit in the Malaysian public sector. Based on the above results,
the hypotheses were not confirmed which indicated that there is statistically positive but
insignificant relationship between independence and internal audit effectiveness. So the second
hypothesis was not confirmed.
H3: Quality of IA work has positive and significant effect on the IAE in Ethiopian private
commercial banks.
The third hypothesis of this research revealed that there was direct relationship between the
quality of internal audit work and internal audit effectiveness. This hypothesis was not supported
by the regression result as of the regression results shows that there was indirect and insignificant
relationship between qualities of IA work with the effectiveness of the internal audit at 5% level
of significance because the value of p=0.456 is greater than that of 0.05 level of significance
 P a g e | 58

therefore quality of internal audit work has indirect and insignificant effect in to internal audit
effectiveness. This result was inconsistent with previous study conducted by (LanHuong, 2018;
George et al., 2015), result shows quality of IA work have a strong impact on audit effectiveness.
However, Based on the above results, hypotheses is not accepted which indicated that there is
statistically indirect and insignificant relationship between quality of IA work and internal audit
effectiveness. Therefore, the third hypothesis was not confirmed.
H4: Management supports have positive and significant impact on IAE of Ethiopian
private commercial banks.
The fourth hypothesis of this research revealed that there was direct relationship between
management support and internal audit effectiveness. This hypothesis was supported by the
regression result as of the regression results shows there was significantly related with the
effectiveness of the internal audit at 0.05 level of significance. So management support has direct
relationship in to internal audit effectiveness and has significant effect to the bank audit
effectiveness at 5% level of significance because the value of p=0.0001 is less than that of 0.05
level of significance so management support has positive and statically significant effect in to
internal audit effectiveness. This result was consistent with previous study conducted by
researchers (Mihert and Yismaw, 2007; LanHuong, 2018 in Vietnam companies, Hailemariam,
2014 in Ethiopia public sectors,Berehe,2016 in Ethiopia construction sector) management
support have a strong impact on audit effectiveness. Based on the above results, hypotheses were
accepted which indicated that there was statistically significant and positive relationship between
management support and internal audit effectiveness. So the fourth hypothesis was confirmed.
H5: Training of auditors has positive and significant effect on the IAE in Ethiopian private
commercial banks.
The fifth hypothesis of this research revealed that there was direct relationship between the
training of auditors and the effectiveness of internal audit. This hypothesis was not supported by
the regression result, as per the regression results training of auditors has direct and insignificant
effect on the effectiveness of an internal audit. Even if this variable has a coefficient of positively
related with the effectiveness of an internal audit as a result of its insignificant regression
analysis output result leads not to support the proposed hypothesis (H5). But insignificance of
the training of auditors in determining the internal audit effectiveness didn’t mean that it doesn’t
completely contribute to the effectiveness of an internal audit. Based on the above results,
 P a g e | 59

hypotheses were failed to accept which indicated that there is no statistically significant
relationship between training of auditors and internal audit effectiveness. The fifth hypothesis
was not confirmed.
H6: the existence of approved internal audit charter has positive and significant effect on
the effectiveness of IA in Ethiopian private commercial banks.
The sixth hypothesis of this research revealed that there was direct relationship between the
existences of approved internal audit charter and the effectiveness of the internal audit. This
hypothesis was not supported by the regression result, as per the regression results existence of
approved audit charter has direct and insignificant effect on the effectiveness of the internal
audit. Even if this variable has a coefficient of positively related with the effectiveness of an
internal audit as a result of its insignificant regression analysis output result leads not to support
the proposed hypothesis (H6). But insignificance of the existence of approved audit charter in
determining the internal audit effectiveness didn’t mean that it doesn’t completely contribute to
the effectiveness of internal audit. This result was consistent with previous study conducted by
researchers (Berehe, 2016 in Ethiopia road construction sector) existence of approved audit
charter have no strong impact on audit effectiveness. Based on the above results, hypotheses
were failed to accept which indicated that there is no statistically significant relationship between
existence of approved internal audit charter and internal audit effectiveness. The sixth hypothesis
was not confirmed.
H7: the relationship between an internal and external auditor has positive and significant
effect on the effectiveness of internal audits in Ethiopian private commercial banks.
The seventh hypothesis of this research revealed that there was direct relationship between an
internal and external auditor relationship and the effectiveness of the internal audit. This
hypothesis was not supported by the regression result as per the regression results relationship
between internal and external auditors has direct and insignificant effect on the effectiveness of
an internal audit. Even if this variable has positive beta coefficient shows positively related with
the effectiveness of internal audit as a result of its insignificant regression analysis output result
leads not to support the proposed hypothesis (H7). But statically insignificance of the
relationship between internal and external auditors in determining the internal audit effectiveness
didn’t mean that it doesn’t completely contribute to the effectiveness of the internal audit. This
result was inconsistent with previous study conducted by researchers (Mustika, 2015 in
 P a g e | 60

Indonesia), conclude that relationship between internal and external auditors have a strong
positive and significant impact on internal audit effectiveness. Based on the above results,
hypotheses were failed to accept which indicated that there is no statistically significant
relationship between internal and external auditor relationship and internal audit effectiveness.
The seventh hypothesis was not confirmed.

Summary of hypothesis test results

Variables P- value Level of influence Accept/reject H1
Competence of internal audit teams 0.001 Significant Fair to reject H1
Independence of IA 0.315 insignificant Not accept H1
Quality of IA work 0.456 insignificant Not accept H1
Management support 0.0001 significant Fair to reject H1
Training of auditors 0.177 insignificant Not accept H1
Existence of approved audit charter 0.324 insignificant Not accept H1
Relationship between internal and 0.492 insignificant Not accept H1
external auditor
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Chapter Five: Major Findings, Conclusions and Recommendations

5.1. Summary of Research Findings
The objective of the study was to examine factors affecting internal audit effectiveness by using
statistical analysis of descriptive statistics.
The results from Pearson Correlation analysis showed that the five independent variables
(competency, independence of audit teams, management support, quality of audit work and
relationship between internal and external auditors) were positively and significantly correlated
with the dependent variable (internal audit effectiveness) however there was no significant
correlations between the independent variables of training of auditors and approved audit charter
with the dependent variable of internal audit effectiveness.

Furthermore, in Multiple Regression analysis which has been conducted by SPSS V 21 R-square
indicates that 51.5% ( = 0.515) of the variation in a dependent variable (internal audit
effectiveness) can be explained by the seven independent variables (competency, independence
of audit teams, management support, quality of audit work and relationship between internal and
external auditors, training of auditors and existence of approved audit charter).

According to SPSS output of the coefficient table it summarizes that only competency of IA and
management support were significantly affecting the dependent variable of IAE as significance
values of those variables is 0.001 and0.0001 respectively which are less than 0.05. Based on the
standardized coefficients of beta value it is found that management support (β = 0.477) is the
most effective factor whereas quality of internal audit work (β = -0.084) is found to be the least
effective factor in affecting internal audit effectiveness of the private banks.
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5.2. Conclusion of the Study

This study examines factors that affect internal audit effectiveness in Ethiopian private
commercial banks a case of Bahir Dar branch. The data used to test our hypotheses were
collected through questionnaire.
From the findings of the study the researcher conclude that competency of internal auditors and
management support was very important and has statically significant effect on the effectiveness
of internal audit in Ethiopian private commercial banks regardless of adequate training of
auditors, relationship between internal and external auditors as well as independency of audit
teams and existence of approved audit charter. The roles of internal auditor’s activity in order to
improve an internal audit, as well as enhancing organizational performance and value added to
banking industry would increase, when the competency of internal auditors and management
support is more improved and guaranteed.

The researcher conclude that even if training of auditors, relationship between internal and
external auditors,: independency of audit teams and existence of approved audit charter have
positive effect on IAE of banks, but it was statically insignificant effect on internal audit
effectiveness because the p value of these four independent variables is greater than the level of
significance . But statically insignificance of the relationship between those variable in
determining the internal audit effectiveness didn’t mean that it doesn’t completely contribute to
the effectiveness of the internal audit rather it is important for audit effectiveness. However,
there were indirect associations between quality of IA work and effectiveness of IA in Ethiopia
private commercial banks.

Based on regression analysis the researcher conclude that very strong contributions for internal
audit effectiveness was arising from competency of internal auditors and management support
combined with independence of the internal audit, relationship and training of auditors with the
availability of approved IA charters. Therefore, the overall effect of this variable was very
important for the internal audit effectiveness of the banking sector.
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5.3 Recommendation
As per the findings from the analysis of the collected data, the following recommendations were
forwarded in order to achieve internal audit effectiveness.
 Competency of internal audit staffs has a positive and significant effect on internal audit
effectiveness. Based on these the researcher recommended the bank should be providing
effective training and professional certification program to internal auditors in a timely and
planned manner for the purpose of improving internal audit effectiveness trough competency
of an internal audit.
 The finding of this study shows management support has also positive and statically
significant effect on internal audit effectiveness. The researcher recommended that in order
to improve internal audit effectiveness of the bank, the manager should provide sufficient
support and encouragement for developing the internal audit staff and provide sufficient
budget for internal audit department to carry out its duties and responsibilities successfully.
 The international standard for professional practice of internal auditing requires that the
internal audit activity must be independent in mental attitude to all matters relating to the
assignment of professional responsibility and required to have adequate knowledge, training,
proficiency and experience in the field of auditing. Therefore, the researcher recommended
that private commercial banks in Ethiopia should give more attention to competency of
internal auditors, independency of audit teams, training of auditors and support from
management, approved internal audit charter, relationship between internal and external
auditors in order to improve an internal audit, as well as enhancing organizational
performance and value added to the banking industry.
 The researcher also recommended that auditors should be free from management
interference, bias both academically and materially as well as maintain professionalism code
of ethics through continuous training, education and improve a harmonious relationship with
all staff members regardless of their positions in order to make an internal audit effective.
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Limitation of the study

The study has a methodological limitation which is questionnaire based and the measurement of
variables both the dependent and independents variable was established according to the
perceptions of the internal auditors. The study was only limited to cover the selected factors and
sample private banks in case of Bahir Dar branch due to time and cost constraints. Moreover, the
study was depend on the level of the respondent’s knowledge regarding the standards set for the
audit profession and the code of ethics were considered as a limiting factor that could influence
the outcomes of the study.
Directions for further studies
The researcher encourages further research to extend the results of this study and improve the
results by minimizing the limitation of the study. Therefore, the researcher suggests the
following future research areas: it is important to examine the effect of other determinants on IA
effectiveness in future researches, such as auditee attribute, senior management's response,
internal audit methodology/process:, outsourcing of internal audits, internal audit scope ,
organization setting and external audit. Furthermore, future similar research could use larger
sample size with a wider scope and design a scale for measuring the effectiveness of internal
auditing.
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Appendixes
Appendix A: Questionnaires
BAHIR DAR UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
Questionnaires
Dear Participant: The objective of this questionnaire is to explore information regarding factors
affecting internal audit effectiveness the research is conducting for the partial fulfillment of
Master of Accounting and Finance at Bahir Dar University. The questioners will be distributed to
all Private Commercial Banks in Ethiopia Internal audit staff at Bahir Dar city branch office. The
result of the study is expected to contribute to identify the factors affecting internal audit
effectiveness. Therefore your honest and genuine participation by responding to the questions is
highly appreciated. Your answers are completely confidential. Your name will not be written on
this form, will never be used in connection with any of the information you tell me used for
academic purpose only, to seek information on factors affecting internal auditing effectiveness in
Ethiopian private commercial banks in Bahir Dar City branch office.
Thank you in advance for your support and participation
With best regards
Asmare Terefe Email: asmareter8090@gmail.com

Section I. General Profile

General Instruction: Please indicate your choice by putting “√” mark in the bracket.
1. Sex: Male (___) Female (___)
2. Age : Below 20 ( ) 21 to 30 (__), 31 to 40 (___),above 40 years (___)
3. Your field of study: Accounting (___), Management (__), Economics (__), other specify
(_____________________)
4. You’re current Level of Education: Diploma (______), Bachelor’s Degree (_____),
Master’s Degree (_____), other specifies (_______________________).
5. Your Service in the banking industry: Less than 5 years (___), 6 to 10 years (___), 11 up to
20(___), above 20 years (___),
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Part II: - Internal Audit effectiveness affecting variable related Questions

The Questionnaire is prepared in Likert-scale form with five (5) point scales. I ask you to tick (√)
that indicates your opinion in table below. The values of scales are 5= strongly agree (SD), 4=
Agree (A), 3= Neutral (N), 2= Disagree (D), 1= Strongly Disagree (SD)
No SA A N D SD
(5) (4) (3) (2) (1)
Independence of internal audit (INDA)
1. Internal audit staff is sufficiently independent in performing their
professional obligations and duties
2 Internal audit provides reports to the board of directors (audit committee)
3 Internal audit staff has free access to all information, departments
and employees in the organization
4 Internal auditors have unrestricted access to all departments and
employees in the organization
5 Internal audit participate in the development of the company processes

Competency of Internal Audit staffs (COMPA)

6 Internal auditors have a deep professional knowledge on the overall
activities of the department
7 The bank audit department or division has progressed in terms of
appropriately qualified or professional staff
8 Internal auditors are proactive (controlling a situation rather than just
responding).
9 Internal auditors has adequate education
Management support of Internal Audit (Mgts)
10. Senior management provides sufficient support and encouragement
for training and developing the internal audit staff.
11 There is management commitment to strengthen internal audit division

12 Senior management supports internal audit to perform its duties and

Responsibilities
Training of auditors (TA)
13 Training of auditors affect internal auditing effectiveness
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14 The bank provide effective and continuous training for auditors

15 Effective training of auditors used to improve internal auditing
Quality of Internal Audit work (QIA)
16 examination of reliability and integrity of information and working
papers properly done by internal auditors
17 Audit findings are supported by sufficient evidence
18 External auditors use internal audit working papers and reports in
conducting their audit.
19 Internal audit work was efficiently performed according to the audit plan.

20 Internal audit report is accurate (clear and logical).

The existence of approved internal audit charter (EAIAC)
21 Internal audit charter is maintained (available) in your office /sector
22 The purpose and authority of internal audit is clearly defined in charter.

SA A N D (2) SD
Relationship between internal and external auditors (RBIEA) (5) (4) (3) (1)
23 There is effective relationship between internal and external auditors

24 Communication and relationship between internal and external

auditors are important for improving internal audit effectiveness
25 External and internal auditors consult on the timing of work in
which they have a mutual interest
19 External and internal auditors share their working papers
27 Senior management helps to promote effective co-operation
between internal and external audit
SA A N D SD

(1)
Internal Audit Effectiveness (IAE) (5) (4) (3) (2)
28. Internal audit is performed in accordance with the IIA Standards (ISPPIA)

29 Internal audit evaluate and improves the effectiveness of risk

management and governance process
30 Internal audit ensures that it adds value to the business.
31 Internal audit improves organizational and department’s performance.
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32 Internal audit reviews the reliability and integrity of financial information

33 Internal audit reviews economical and effective use of the firm resources

34 Internal audit reviews the reliability and integrity of financial information

Please suggest if you face any kind of idea in evaluation of internal audit effectiveness in your
bank that is not addressed in this questionnaire.
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………
………………………………………………………………………………………………………

Appendix A: Frequency Table

sex of respondents

Frequency Percent Valid Percent Cumulative

Percent

male 55 64.7 64.7 64.7

Valid female 30 35.3 35.3 100.0

Total 85 100.0 100.0

age of respondents

Frequency Percent Valid Percent Cumulative

Percent

21 up to 30 36 42.4 42.4 42.4

31 up to 40 42 49.4 49.4 91.8

Valid
more than 40 7 8.2 8.2 100.0

Total 85 100.0 100.0

field of study of respondents

Frequency Percent Valid Percent Cumulative

Percent

accounting 52 61.2 61.2 61.2

economics 13 15.3 15.3 76.5

Valid
management 20 23.5 23.5 100.0

Total 85 100.0 100.0

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experience of respondents in banking sector

Frequency Percent Valid Percent Cumulative

Percent

less than 5 years 45 52.9 52.9 52.9

6 to 10 years 6 7.1 7.1 60.0

Valid 11 to 20 years 33 38.8 38.8 98.8

more than 20 years 1 1.2 1.2 100.0

Total 85 100.0 100.0

Appendix B: Reliability Statistics for Variables

Scale: ALL VARIABLES
I. Reliability Statistics

Cronbach's Cronbach's Alpha Based on N of Items

Alpha Standardized Items
.616 .680 8
Source: Survey data (2021) SPSS output
II. Assessment of Ordinary Least Square Assumptions
Test of normality

N Skewness Kurtosis

Statistic Statistic Std. Error Statistic Std. Error

INDA 85 -.675 .261 .086 .517

MGT 85 -.514 .261 -1.162 .517
QIA 85 -.520 .261 .265 .517
IAE 85 -.299 .261 -.217 .517
COMPA 85 -.351 .261 -.339 .517
TA 85 -.358 .261 -1.182 .517
RBIEA 85 .041 .261 -.714 .517
EAIAC 85 -.337 .261 -.150 .517

Source: Survey data (2021) SPSS output

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Assessment of Homoscedasticity

Source: Survey data (2021) SPSS output

Assessment of Multicollinearity
a
Coefficients

Model Unstandardized Coefficients Standardized t Sig. Collinearity Statistics

Coefficients

B Std. Error Beta Tolerance(1/ VIF) VIF

(Constant) 1.317 .554 2.378 .020

INDA .085 .084 .092 1.012 .315 0.756 1.323

MGT .292 .076 .477 3.867 .000 0.414 2.418

QIA -.070 .094 -.084 -.750 .456 0.497 2.013

1
COMPA .233 .065 .331 3.565 .001 0.731 1.368

TA .062 .046 .111 1.362 .177 0.945 1.058

RBIEA .053 .076 .063 .690 .492 0.752 1.331

EAIAC .050 .050 .083 .992 .324 0.898 1.113

a. Dependent Variable: IAE

Source: Survey data (2021) SPSS output

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Correlation Matrix
INDA MGTS QIA IAE COMPA TA RBIEA EAIAC
INDA 1.000
MGTS .466 1.000
QIA .342 .677 1.000
IAE .359 .639 .444 1.000
COMPA .199 .486 .452 .549 1.000
TA .038 .083 .187 .176 .080 1.000
RBIEA .334 .461 .381 .357 .216 .148 1.000
EAIAC -.214 -.277 -.256 -.120 -.198 .022 -.154 1.000

Source: Survey data (2021) SPSS output

III. Regression Results
Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

a
1 .717 .515 .471 .212

a. Predictors: (Constant), EAIAC, TA, COMPA, INDA, RBIEA, QIA, MGT

Source: Survey data (2021)

a
ANOVA

Model Sum of Squares df Mean Square F Sig.

b
Regression 3.685 7 .526 11.670 .000

1 Residual 3.474 77 .045

Total 7.159 84

a. Dependent Variable: IAE

b. Predictors: (Constant), EAIAC, TA, COMPA, INDA, RBIEA, QIA, MGT
Source: Survey data (2021) SPSS output
Coefficients
Unstandardized Standardized t Sig. 95.0% Confidence Interval for B
Model Coefficients Coefficients
Lower Bound Upper Bound
B Std. Error Beta

(Constant) 1.317 .554 2.378 .020 .214 2.419

INDA .085 .084 .092 1.012 .315 -.082 .252

MGTS .292 .076 .477 3.867 .0001 .142 .443

QIA -.070 .094 -.084 -.750 .456 -.257 .116

COMPA .233 .065 .331 3.565 .001 .103 .363

TA .062 .046 .111 1.362 .177 -.029 .153

RBIEA .053 .076 .063 .690 .492 -.099 .205

EAIAC .050 .050 .083 .992 .324 -.050 .149

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Source: Survey data (2021) SPSS output

Pearson Correlation Matrix
INDA MGT QIA IAE COMPA TA RBIEA EAIAC
** ** ** ** *
Pearson Correlation 1 .466 .342 .359 .199 .038 .334 -.214

INDA Sig. (2-tailed) .000 .001 .001 .068 .728 .002 .049

N 85 85 85 85 85 85 85 85
** ** ** ** ** *
Pearson Correlation .466 1 .677 .639 .486 .083 .461 -.277
MGT Sig. (2-tailed) .000 .000 .000 .000 .453 .000 .010
N 85 85 85 85 85 85 85 85
** ** ** ** ** *
Pearson Correlation .342 .677 1 .444 .452 .187 .381 -.256
QIA Sig. (2-tailed) .001 .000 .000 .000 .086 .000 .018
N 85 85 85 85 85 85 85 85
** ** ** ** **
Pearson Correlation .359 .639 .444 1 .549 .176 .357 -.120
IAE Sig. (2-tailed) .001 .000 .000 .000 .107 .001 .273
N 85 85 85 85 85 85 85 85
** ** ** *
Pearson Correlation .199 .486 .452 .549 1 .080 .216 -.198
COMPA Sig. (2-tailed) .068 .000 .000 .000 .464 .047 .069
N 85 85 85 85 85 85 85 85
Pearson Correlation .038 .083 .187 .176 .080 1 .148 .022
TA Sig. (2-tailed) .728 .453 .086 .107 .464 .178 .844
N 85 85 85 85 85 85 85 85
** ** ** ** *
Pearson Correlation .334 .461 .381 .357 .216 .148 1 -.154
RBIEA Sig. (2-tailed) .002 .000 .000 .001 .047 .178 .158
N 85 85 85 85 85 85 85 85
* * *
Pearson Correlation -.214 -.277 -.256 -.120 -.198 .022 -.154 1

EAIAC Sig. (2-tailed) .049 .010 .018 .273 .069 .844 .158
N 85 85 85 85 85 85 85 85
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Source: Survey data (2021) SPSS output