Key words: Internal audit, organizational performance and performance ...

THE ROLE OF INTERNAL AUDITING IN THE ORGANISATIONAL

PERFORMANCE OF THE RWANDA REVENUE AUTHORITY (RRA)

By

Pascal Buregeya

Submitted in fulfillment of the requirement for the degree

MAGISTER TECHNOLOGIAE: INTERNAL AUDITING

in the

Department of Auditing

FACULTY OF ECONOMIC SCIENCES

TSHWANE UNIVERSITY OF TECHNOLOGY

Supervisor: Dr Tshepiso Ingrid Ngwenya

June 2007

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DECLARATION BY CANDIDATE

I hereby declare that the dissertation submitted for the degree M Tech: Internal

Auditing, at the Tshwane University of Technology, is my own original work and has

not previously been submitted to any other institution of higher education. I further

declare that all sources cited or quoted are indicated and acknowledged by means of

a comprehensive list of references.

Pascal Buregeya

Copyright Tshwane University of Technology 2007

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This study is dedicated to my best friend and wife, Hyacinthe Musaniwabo and my

family for their love, support, patience and understanding during my protracted

absence.

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ACKNOWLEDGEMENTS

I would like to express my sincere gratitude and appreciation to the following

individuals and institutions for their contributions to the successful completion of this

study:

My supervisor, Dr Tshepiso Ingrid Ngwenya, for her positive attitude and guidance;

Professor Rwigamba Balinda, for giving me the opportunity for completing this

project;

The financial assistance of the Department of Labour (DST) towards this research is

hereby acknowledged. Opinions expressed and conclusions arrived at, are those of

the author and are not necessarily to be attributed to the DST.

My family and friends who supported me over the past two years, while completing

this project;

All the staff of Tshwane University of Technology who contributed to my study;

RRA and its staff for their assistance and support throughout the study;

God, my Creator, for giving me the strength and wisdom that I needed to complete

this project.

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ABSTRACT

This study provided an analysis of the role of internal auditing in the organizational

performance in the Rwanda Revenue Authority. The aim of the study was to show the

importance of the internal auditing within the organization. A wide selection of

literature was reviewed on the role and importance of internal audit and the

performance of the organization.

Qualitative research methods such as literature study, questionnaires and interview

were used towards answering the research questions and attaining the objectives of

the study. In order to enhance the validity and reliability, a variety of instruments were

used to collect the data, that is, the questionnaires and interview. The questionnaires

were distributed to all senior and middle managers and all internal auditors. The

interview was also administered to managers and auditors in order to fully understand

the topic under research. This interview, also aimed at compensating for the eventual

shortcomings of the questionnaires.

Computer spreadsheets were used to analyze the responses to the questionnaires.

On the basis of the data collected and interpreted, a number of findings and

conclusions were made and presented. Almost all the respondents agreed on the

importance of the role played by internal audit in improving the RRA performance.

Nevertheless, the RRA internal audit has to continue to improve its work in terms of

the quality of the work done, to expand its services to all domains and advice the

organization for its performance. For that, the recommendations are made to improve

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its contribution in organizational performance. The findings of the study were listed

and thereafter recommendations were made on the findings. Suggestions for further

research on the same topic were also made.

Key words: Internal audit, organizational performance and performance

measurement.

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TABLE OF CONTENTS

PAGE

ACKNOWLEDGEMENTS .......................................................................................... IV

ABSTRACT ................................................................................................................. V

TABLE OF CONTENTS ............................................................................................ VII

LIST OF FIGURES .................................................................................................... XV

LIST OF TABLES ................................................................................................... XVII

CHAPTER 1: INTRODUCTION .................................................................................. 1

1.1 INTRODUCTION ........................................................................................... 1

1.2. PROBLEM STATEMENT & RESEARCH QUESTION ....................................... 2

1.2.1 Problem statement ...................................................................................... 2

1.2.2 Research Question ...................................................................................... 4

1.3. AIM OF STUDY ................................................................................................. 5

1.4. SIGNIFICANCE OF THE STUDY ...................................................................... 5

1.5. LITERATURE REVIEW ..................................................................................... 8

1.5.1 Defining Internal Auditing ............................................................................ 9

1.5.2 The Role of Internal Auditing ..................................................................... 14

1.5.3. Independence........................................................................................... 16

1.5.4. Internal audit activity ................................................................................. 17

1.5.5. Control ...................................................................................................... 18

1.5.6. Organizational Performance ..................................................................... 18

1.5.7 Add value .................................................................................................. 20

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1.5.8 Risk Management ..................................................................................... 20

1.6. RESEARCH METHODOLOGY ....................................................................... 20

1.6.1 Type of study ............................................................................................. 21

1.6.2 Population and sampling ........................................................................... 21

1.6.3 Data Collection .......................................................................................... 22

1.6.4 Data Analysis ............................................................................................ 22

1.7 OVERVIEW OF THE STUDY ........................................................................... 24

1.8 SUMMARY ....................................................................................................... 25

CHAPTER 2: INTERNAL AUDITING WITHIN AN ORGANISATION ....................... 26

2.1 INTRODUCTION.............................................................................................. 26

2.2 THE NATURE OF INTERNAL AUDITING ........................................................ 27

2.2.1 Introduction................................................................................................ 27

2.2.2 Understand the History and Development of Professional ........................ 27

Internal Auditing ................................................................................................. 27

2.2.3 Why is there a need for an internal audit? ................................................. 30

2.2.4 Defining internal audit ................................................................................ 31

2.2.5 What are the auditors’ roles?..................................................................... 32

2.2.6 Types of internal auditing services ............................................................ 34

2.2.7 Advantages of internal auditing ................................................................. 35

2.3 ESTABLISHING AN INTERNAL AUDIT IN AN ORGANISATION ..................... 36

2.4 AN INTERNAL AUDITING ACTIVITY ............................................................... 38

2.4.1 Placement of internal auditing in the organization ..................................... 38

2.4.2 Independence............................................................................................ 39

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2.4.3 Types of audits .......................................................................................... 40

2.5 THE CHALLENGES FOR THE INTERNAL AUDIT PROFESSION ................... 45

2.5.1 Corporate Governance .............................................................................. 45

2.5.2 Risk management ..................................................................................... 45

2.5.3 Internal controls ......................................................................................... 47

2.5.4 Does auditing add value to the organization? ........................................... 49

2.5.5 Conflict in internal auditing ........................................................................ 50

2.5.6 What changes are affecting auditing? ....................................................... 50

2.5.7 Popular misconceptions ............................................................................ 52

2.5.8 The importance of tracking new developments ......................................... 53

2.5.9 Impact of information technology on internal auditing ............................... 53

2.5.10 Meeting the challenge ............................................................................. 55

2.6 QUALITY ASSURANCE AND AUDIT COMPETENCE ..................................... 57

2.6.1 The quality concept ................................................................................... 57

2.6.2 Professional internal auditing standards .................................................... 58

2.6.3 Audit competence ...................................................................................... 59

2.6.4 Measuring internal audit performance ....................................................... 59

2.7 INTERNAL AUDIT PROCESS.......................................................................... 60

2.8 APPROACHES TO OPERATIONAL AUDITING .............................................. 62

2.9 THE FUTURE FOR INTERNAL AUDIT ............................................................ 63

2.10 SUMMARY ..................................................................................................... 64

CHAPTER 3: THE ROLE OF INTERNAL AUDITING IN THE ORGANISATIONAL

PERFORMANCE ...................................................................................................... 65

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3.1 INTRODUCTION.............................................................................................. 65

3.2 PERFORMANCE OBJECTIVES OF ORGANISATION .................................... 65

3.3 THE MANAGEMENT PROCESS ..................................................................... 68

3.4 ORGANISATIONAL PERFORMANCE ............................................................. 69

3.4.1 What is it?.................................................................................................. 69

3.4.2 How do the 3 E’s relate to it?..................................................................... 70

3.4.3 Where quality fits in ................................................................................... 71

3.4.4 A model of organizational performance ..................................................... 71

3.4.5 Performance planning and implementation ............................................... 73

3.4.6 Contributing to organizational performance ............................................... 74

3.5 MEASURING PERFORMANCE ....................................................................... 75

3.5.1 Introduction................................................................................................ 75

3.5.2 Overview of performance measurement ................................................... 77

3.5.3 The performance measurement system design process ........................... 79

3.6 ASSESSING AND IMPROVING ORGANISATIONAL PERFORMANCE .......... 86

3.6.1 Why assess performance? ........................................................................ 86

3.6.2 Performance management ........................................................................ 87

3.6.3 Defining Performance Measurements ....................................................... 89

3.6.4 Measuring Actual Performance ................................................................. 91

3.7 EVALUATING OPERATIONAL PERFORMANCE............................................ 92

3.7.1 Productivity and performance measurement systems ............................... 94

3.7.2 Value for money (VFM) auditing ................................................................ 96

3.7.3 Benchmarking ........................................................................................... 97

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3.7.4 Effective measuring of internal auditing’s contribution to the enterprise’s

profitability .......................................................................................................... 99

3.8 SUMMARY ..................................................................................................... 102

CHAPTER 4: RESEARCH METHODOLOGY ........................................................ 103

4.1 INTRODUCTION............................................................................................ 103

4.2 RESEARCH DESIGN ..................................................................................... 103

4.2.1 Research objectives ................................................................................ 106

4.2.2 Research methods and techniques ......................................................... 106

4.2.3 Selection of targets groups ...................................................................... 107

4.2.4 Questionnaire and personal interview ..................................................... 107

4.2.5 Data preparation, processing and interpretation...................................... 108

4.3 SUMMARY .................................................................................................... 111

CHAPTER 5: RESULTS AND DISCUSSIONS ....................................................... 112

5.1 INTRODUCTION ........................................................................................... 112

5.2 CASE STUDY PRESENTATION .................................................................... 113

5.2.1 Background ............................................................................................. 113

5.2.2 CORPORATE STATEMENTS................................................................. 117

5.2.3 BUSINESS ENVIRONMENT ................................................................... 118

5.2.4 STRATEGIC DIRECTION: 2006 – 2008 ................................................. 121

5.2.4.1 Maximization of the Flow of Revenue ............................................... 121

5.2.4.2 Maintaining Effective Financial Management Systems ..................... 122

5.2.4.3 Maintaining Sound Internal Business Process .................................. 122

5.2.4.4 Developing a Capable and Effective Organization ............................ 122

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5.2.4.5 Satisfying Customer and Stakeholder’s Requirements ..................... 123

5.2.5 REVENUE AND FINANCIAL PLAN ............................................................. 123

5.2.5.1 Revenue Projections ......................................................................... 123

5.2.5.2 Budgetary Considerations................................................................. 124

5.2.6 MONITORING AND EVALUATION ARRANGEMENTS .......................... 126

5.2.6.1 Monitoring and Evaluation Mechanism ............................................. 126

5.2.6.2 Caveat .............................................................................................. 127

5.2.7 Quality Assurance Department................................................................ 128

5.3 RELIABILITY AND VALIDITY ......................................................................... 131

5.4 ANALYSIS OF RESPONSES ......................................................................... 133

5.4.1 Managers ................................................................................................ 136

5.4.1.1 Analysis of section A: Internal auditor’s image .................................. 136

5.4.1.1.1 What managers think about internal auditor? ............................ 136

5.4.1.1.2 The role of internal audit............................................................. 138

5.4.1.1.3 Frequency of internal audit ......................................................... 139

5.4.1.1.4 Audit reports, recommendations and follow up .......................... 140

5.4.1.2 Analysis of section B: Management satisfaction survey.................... 144

5.4.1.2.1 Usefulness of internal audit ...................................................... 145

5.4.1.2.2 Objectives and scope of internal audit’s work .......................... 146

5.4.1.2.3 Usefulness of discussions at the commencement of the audit . 147

5.4.1.2.4 Usefulness of discussions during the audit .............................. 148

5.4.1.2.5 Opening and communication with auditees .............................. 149

5.4.1.2.6 Timing of the audit fieldwork .................................................... 150

5.4.1.2.7 Duration of the audit ................................................................ 151

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5.4.1.2.8 The time it took to issue an agreed audit report ...................... 152

5.4.1.2.9 Fairness and balance of the audit report ................................. 153

5.4.1.2.10 Consultancy on matters included in the audit report................ 154

5.4.1.2.11 Usefulness of audit report ....................................................... 155

5.4.1.3 Analysis of section C: Performance management ............................ 156

5.4.1.3.1 Measuring performance ............................................................. 156

5.4.1.3.2 The outcome related to organization’s primary goals ................. 157

5.4.1.3.3 Achieving targets ........................................................................ 158

5.4.1.3.4 Training ...................................................................................... 158

5.4.2 Internal Auditors ...................................................................................... 158

5.4.2.1 Analysis of section A: Internal audit management ............................ 158

5.4.2.1.1 The current situation of internal audit department ...................... 159

5.4.2.1.2 Planning and resourcing of internal audit work ........................... 164

5.4.2.1.3 Achievement of defined goals .................................................... 165

5.4.2.1.4 Contribution to the attainment of the organizational objectives .. 166

5.4.2.1.5 Reasons and Expectation for Auditing the Internal Auditing

Department .............................................................................. 167

5.4.2.2 Analysis of section B: Independence of audit function ...................... 169

5.4.2.3 Analysis of section C: Internal audit scope of work ........................... 171

5.4.2.4 Analysis of section D: Internal audit professionalism ........................ 173

5.4.2.4.1 Levels and competencies of internal audit ................................. 173

5.4.2.4.2 Specialization in auditing and/or in internal control .................... 174

5.4.2.5 Analysis of section E: Internal control system ................................... 174

5.4.2.5.1 The scope of internal audit ......................................................... 175

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5.4.2.5.2 The reach of the remit of internal audit ....................................... 175

5.4.2.6 Analysis of section F: Performance audits ........................................ 176

5.4.2.6.1Activity conducted ....................................................................... 177

5.4.2.6.2 The prescribed policies .............................................................. 178

5.4.2.6.3 Function performed .................................................................... 178

5.4.2.6.4 Administrative and financial controls .......................................... 179

5.4.2.6.5 Internal auditors’ performance .................................................... 180

5.4.2.6.6 Contribution to organizational performance ................................ 181

5.4.2.6.7 Add value to the organization ..................................................... 182

5.4.2.7Analysis of section G: Performance measurement ............................ 182

5.5 SUMMARY ..................................................................................................... 184

CHAPTER 6: SUMMARY AND CONCLUSION ...................................................... 185

6.1 INTRODUCTION ................................................................................................. 185

6.2 RESTATE THE PROBLEM AND REVIEW THE METHODOLOGY .................................... 185

6.3 SUMMARY OF THE FINDINGS............................................................................... 190

6.4 CONCLUSIONS .................................................................................................. 193

6.5 RECOMMENDATIONS ......................................................................................... 201

6.6 LIMITATIONS OF THE STUDY ............................................................................... 203

6.7 CONCLUSION.................................................................................................... 204

6.8 RECOMMENDATIONS FOR FURTHER STUDIES ....................................................... 204

LIST OF REFERENCES ......................................................................................... 205

ANNEXURE A: QUESTIONNAIRE A ANNEXURE B: QUESTIONNAIRE B ANNEXURE C: QUESTIONNAIRE C

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LIST OF FIGURES

PAGE

Figure 2.1: Steps in the Internal Auditing Process ............................................................. 61

Figure 3.1: Desirable Performance Objectives .................................................................... 67

Figure 3.2: Relationship between economy, efficiency and effectiveness .................... 71

Figure 3.3: A model of organisational performance management .................................. 72

Figure 3.4: Performance measurement systems ................................................................ 81

Figure 3.5: A reference model for integrated performance measurement

systems .................................................................................................................... 84

Figure 3.6: The performance management process and the position of

performancemeasuremeny systems .............................................................................. 88

Figure 3.7: A typical control cycle ........................................................................................... 91

Figure 5.1: RRA structure 2006 ............................................................................................ 115

Figure 5.2 : Organisation structure of Quality Assurance Department ........................ 131

Figure 5.3 : Question 100 ....................................................................................................... 142

Figure 5.4: Questions 3 & 101............................................................................................... 145






Figure 5.10: Questions 9 & 107 ............................................................................................. 151

Figure 5.11: Questions 10 & 108 ........................................................................................... 152

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Figure 5.15: Questions 19 ....................................................................................................... 157














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LIST OF TABLES PAGE

Table 3.1: Characteristic of PMS design process and measures…………………….85

Table 4.1: Three levels……………………………………………………………………104

Table 5.1: RRA SWOT summary…….………………………………………………….119

Table 5.2: RRA Revenue collections 2002-2005 and Projections 2006-2008……..124

Table 5.3: RRA Projected revenue retention from revenue collections

2006- 2008………………………………………………………………......125

Table 5.4: Question 1 and 93…………………………………………………………….137

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CHAPTER 1: INTRODUCTION

1.1 INTRODUCTION

This introductory chapter has provided an outline of the aim and goals that were

pursued in this study. It has also offered the conceptualization and contextualization

for the research. The latter part of this chapter has provided an outline to the rest of

the study.

The research conducted in this study was qualitative and exploratory. Data collection

was done by means of a questionnaire and interview survey. The questionnaire was

consisted mainly of close-ended questions, with a limited number of open-ended

questions. Descriptive statistics and content analysis were used to analyze the data

obtained. Results were presented by means of tables and graphs.

The general aim of the study was to determine how the internal auditing can

contribute in improving organizational performance for the Rwanda Revenue

Authority (RRA).

The internal auditing profession has undergone considerable changes during the past

few years. Its role in general management has increased, i.e. various services it is

called upon to provide as a management consultant, the extent of involvement in the

decision making process of management and the conduct of management

performance and operational audits. The study investigated on the importance of

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internal auditing within an organization and how can contribute in improving

organizational performance.

Internal auditing has become a very important function in business today as stated by

The Institute of Internal Auditors (IIA) (http://www.theiia.org.), the role of the internal

auditor in the business world is often overlooked. The first line of defense against

theft and corporate malfeasance, internal auditors shine the light that keeps

corporations, investors and employees safe from secrets.

As a result of fraudulent corporate behavior which is followed by dramatic losses at

major companies, much attention has recently been given to internal auditing. With

the new Sarbanes-Oxley disclosure law, management, and corporate boards are

turning more and more to internal auditors for the greater assurance that the controls

which are in place are adequate to mitigate the risks that might be threatening the

organization, the finance and operational reports which are accurate and

comprehensive. (http://www.theiia.org.).

1.2. PROBLEM STATEMENT & RESEARCH QUESTION

1.2.1 Problem statement

Businesses exist because of the need of investors and entrepreneurs to make their

money work for them. Large and medium sized businesses are generally not

managed by their owners; instead, they appoint individuals, who have the ability and

skills in that particular industry to operate (Technikon Pretoria, 2002: 24).

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According to Barlow et al. (1995:31), internal auditing can help unit managers, at all

levels in the organization, to correct performance problems. By doing so, it improves

their performance and by that contributes to improving organizational performance.

Chambers (1997: vii) cited that it is rare indeed to find an enterprise of any size,

which does not have an internal auditing function. In many cases, the internal auditing

has now eclipsed other management services to become management’s primary

source of advice on efficiency, effectiveness, and economy. Accompanying its status

within enterprises, internal auditing is now much more strongly established

professionally.

However, in Rwandan enterprises seldom have an internal auditing function. One of

the causes of business failure in Rwandan organizations is the absence of an internal

auditing function. Also not all internal auditing departments function at their full

potential because internal auditing is a relatively new profession in the Rwandan

business environment. A number of internal auditing functions are in the process of

either being established or of being upgraded.

Being part of the structure in many organizations, the internal auditing function is

actually operational in few of them. Sometimes, organizations resort to external audit

exercised by national as well as international private auditing agencies to carry out

the audit function. This shows that the internal audit function is neglected and

considered as useless in most of organizations in Rwanda.

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Having the above in mind, one can wonder why this important function is neglected in

Rwandan organizations.

This is because managers of organizations are not aware of its usefulness?

Do managers confuse the mission and role of internal audit with that of external

audit?

Why is it necessary to set up internal auditing function in the organization on top of

control organs or mechanisms already established?

Our attention was particularly focused on one of those organizations called Rwanda

Revenue Authority. Rwanda Revenue Authority is one of the rare organizations that

have an internal auditing function.

1.2.2 Research Question

It was in this viewpoint that the present research was guided by inquisitiveness to

answer the following major question: Is internal audit contributing to the

improvement of the organizational performance of the Rwanda Revenue

Authority?

The following sub-questions seemed to be relevant in explaining more clearly the

main question above in the following way:

What type of competent and skillful personnel does the RRA have?

How does this service enjoy a good hierarchical position for the guarantee of its

independence?

What type of mission does it necessary and adequately has to achieve its

objectives?

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1.3. AIM OF STUDY

The aim of the research was:

To understand the importance and advantages of the internal audit function within

an organization;

To explain how internal audit can contribute to organizational performance;

To examine the relationship between effective internal auditing functions and

organizational performance;

To evaluate the extent to which internal audit, in the Rwanda Revenue Authority,

is contributing to the improvement of organizational performance;

To propose measures to increase organizational performance through an effective

internal audit service.

1.4. SIGNIFICANCE OF THE STUDY

In 1944, Arthur E. Hald, one of the founders of the IIA Inc, as quoted by Flesher

(1996:3) made the following statement:

“Necessity created internal auditing and is making it an integral part of modern

business. No large business can escape it. If they haven’t got it now, they will have it

sooner or later, and, if events keep developing as they do at present, they will have to

have it sooner”.

These words became true as internal auditing became one of the fastest growing

professions of the second half of twentieth century (Flesher, 1996:3). The activities of

internal auditing expanded from being a watchdog (performing assurance activities for

6

management) to being a guide dog for management. Coetzee (2004:17) emphasized

that modern internal auditing’s responsibility is seen as a broad activity in the current

business environment.

With this in mind, Coetzee (2004:17-18) further stated that internal auditors need to

add value to an organization by making sure that the activities of an organization are

performed economically, efficiently and effectively.

However, the aims of this study is to indicate that internal auditing is necessary to

assist the managers to have the time and all skills needed to perform every required

task as requested by management. According to Barlow et al. (1995:20), the auditor

needs the assistance of managers: first, to understand the nature of business and its

risk areas and, secondly, to get commitment to the auditing process. Unless

managers feel part of the process, they’re unlikely to correct the control deficiencies

identified by the auditor.

Furthermore, the other aim is to prove the internal auditing role in improving

organizational performance and that the internal auditors, as management

consultants, should advice management on how to achieve organizational objectives.

This study also aimed to correct the popular misconceptions regarding internal audit.

Pickett (2004:1; 3) echoed that, many newly appointed auditors come to the job with

a number of misconceptions that causes audit role to be seen as one of “procedure

enforcement”, where they police the way people are complying with procedures within

7

an organization, others see its role as one of pure consultancy, where the auditor

simply does what the business unit manager in question asks.

According to Barlow et al. (1995:28), auditing purpose is to improve organizational

performance. But aren’t managers primarily responsible in improving the

performance? Yes most certainly is the answer to this question. So, how can the

auditing function improve organizational performance? It can do so by addressing a

fundamental need of owners and top managers that the system of control in place in

the organization is operating as intended. It can also provide value-adding consulting

work for managers.

Based on this, the empirical study was focused on how auditors can contribute to the

Rwanda Revenue Authority’s performance. To do this, auditors must have a thorough

knowledge of the business. If the auditor doesn’t understand the business, he may

focus on the wrong area or fail to provide meaningful recommendations for

improvement to organizational performance (Barlow et al., 1995:41).

Birkett et al. (1999:9-12) argued that the purpose of internal audit is to assist

management in fulfilling their responsibilities and achieving the organization’s

objectives. Whereas the scope of work of the internal auditing department includes

operational audits, compliance audits, financial audits, an assessment of the

economic use of resources and efficiency and effectiveness of operations.

8

The present research aimed at clarifying the notion of internal auditing by the

summary analysis of its past impact and the definition of its mission. In the same time,

the usefulness of internal auditing of the organization should be put in a conspicuous

position, notably the one of the RRA, given the comprehension of his mission, its

norms, its means, and tools to the criteria definition of his opportunity.

It aimed also at diagnosing the service of internal auditing of the RRA. Our research

should allow decision-maker to understand the internal auditing role in the

organizational performance and opportunity criteria for the establishment of internal

auditing service in the organization.

This study was important due to the fact that an organization cannot afford to operate

ineffectively in a competitive environment. It is crucial for the Rwanda Revenue

Authority to be aware of all the factors that influence their business strategy. And one

way is to have an effective internal audit function, which can play an important role in

contributing to organizational performance. If this study concluded that little is being

contributed by internal auditors to improve organizational performance, measures

should be taken by the RRA in order to help and assist them to achieve their

objectives.

1.5. LITERATURE REVIEW

According to Sekaran (2003:63), literature survey is the documentation of a

comprehensive review of published and unpublished work from secondary sources of

data in those areas of specific interest to the researcher. The library is a rich storage

9

base of secondary data where researchers used to spend several weeks and

sometimes months going through books, journals, news papers, magazines,

conference proceedings, doctoral dissertations, master’s theses, government

publications, and financial, marketing, and other reports, to find information on their

research topic.

With computerized databases now readily available and accessible, the literature

search is much speedier and easier, and can be done without entering the portals of

a library building. The purpose of the literature review is to ensure that no important

variable that has in the past been found repeatedly to have had an impact on the

problem is ignored. This section contains a literature overview and theoretical

background of an internal auditing; the evolution of its role and the definition of certain

concepts are provided through this section.

1.5.1 Defining Internal Auditing

“To appreciate fully the role an internal auditor can play in an organization, it is

important to consider the most fundamental question of all- What is internal auditing?

The existing definition traces its origin to the 1947 Statement of Responsibilities of

Internal Auditing. Although revisions to the original definition have broadened the

auditor’s purview to include all aspects of operations, the profession had been

challenged by changes in practice to place increased emphasis on the value-added

aspect of its services (IIA, 1999:5)”.

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One of the elements of the first Statement of Responsibilities of Internal Auditing

accepted by the IIA Inc in 1946, was a formal definition of internal auditing (Sawyers

& Sumners, 1973:5), namely:

“Internal auditing is an independent appraisal function established within an

organization to examine and evaluate its activities as a service to the organization”.

This statement becomes more meaningful when one focuses on its key terms. As

stated by Moeller (2005:3-4): Auditing includes the total range of levels of service,

from detailed checking of accounting balances to higher-level operational appraisal.

The term internal defines work carried on within the organization by its own

employees. The remainder of the IIA’s definition of internal auditing covers a number

of important terms that apply to the profession:

“Independent means auditing that is free of restrictions that could significantly limit

the scope and effectiveness of the review or the later reporting of resultant

findings and conclusions.”

“Appraisal confirms the need for an evaluation that is the thrust of internal auditors

as they develop their conclusions.”

“Established confirms that internal audit is a formal, definitive function in the

modern organization.”

“Examine and evaluate describe the active roles of internal auditors, first for fact-

finding inquiries and then for judgmental evaluations.”

“Its activities confirm the broad jurisdictional scope of internal audit work that

applies to all of the activities of the modern organization.”

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“Service reveals that help and assistance to management and other members of

the organization are the end products of all internal audit work.”

“To the organization confirms that internal audit’s total service scope pertains to

the entire organization, including all personnel, the board of directors and its audit

committee, stockholders, and other interested stakeholders.”

The Auditing Practices Board (APB) Definition The APB Auditing Guidelines- Guidance for internal auditors was published in

October 1990. The definition of internal auditing is (Pickett, 1997:3):

“Internal audit is an independent appraisal function established by management for

the review of internal control system as a service to the organization. It objectively

examines, evaluates, and reports on the adequacy of internal control as a contribution

to the proper, efficient, and effective use of resources”.

This definition tends to be adopted by Consultative Committee of Accountancy Bodies

(CCAB) accountants and includes the three E’s (economy, efficiency, and

effectiveness). It was under revision in 1996 as a Practice Note with more

convergence towards the IIA definition and emphasis on corporate governance.

The Institute of Internal Auditors (IIA) Definition (1991) “Internal auditing is an independent appraisal function established within an

organization as a service to the organization. It is a control that functions by

examining and evaluating the adequacy and effectiveness of other controls”.

12

Although brief, it contains the basic principles, on which internal audit is based

(Pickett, 1997:4).

The New Definition of Internal Auditing

As stated by Pickett (1997:5) 1991 saw a new definition in the IIA’s updated

standards and guidelines:


organization as a service to the organization. The objective of internal auditing is to

assist members of the organization and on the board, in the effective discharge of

their responsibilities. To this end it furnishes them with analysis, appraisals,

recommendations, counsel, and information concerning the activities reviewed.”

Whilst the first sentence is the same, the next two add new features: the provision of

advice, and information that assists management in discharging their responsibilities.

This definition does more than simply relate to internal auditor’s role and purpose. It

identifies opportunities and responsibilities. It demands a management-oriented

approach, since it deals with effectiveness of operations and assistance to

management and the board.

1994 changes

The 1994 definition of internal auditing from the IIA statement of responsibilities

reads:


organization to examine and evaluate its activities as a service to the organization.

13

The objective of internal auditing is to assist members of the organization, including

those in management and on the board, in the effective discharge of their

responsibilities. To this end internal auditing furnishes them with analysis, appraisals,

recommendations, counsel, and information concerning the activities reviewed. The

objective includes promoting effective control at reasonable cost.”

The additional last sentence is taken from the 1988 definition of internal audit. This

brings back into play the practicality and reasonableness that should attach to audit

recommendations. All organizations now have to be cost conscious since most

controls impact on resources (Pickett, 1997:6). As business process became more

complicated, information more widely obtainable, and the corporate world in general

more sophisticated, the need for the internal audit profession to adapt to this new

environment became evident. In 1997, the IIA Inc assembled a multi-national group,

consisting of practitioners, academics, and consultants, known as the Guidance Task

Force (GTF) to study the needs of the profession (IIA, 1999:1).

This group studied the internal auditing profession from several perspectives, for

example, the global profession, internal auditing knowledge, and the future of the

profession. The study concluded amongst other things, that the then prevailing

definition of internal auditing was insufficient to articulate what the modern internal

auditing profession does. This definition was also insufficient to support the

profession in providing consulting services with regard various issues.

The IIA Inc Board of Directors approved on 26 June 1999 the following new definition

of internal auditing (Krogstad, Ridley & Rittenberg, 1999:27):

14

“Internal auditing is an independent, objective assurance and consulting activity

designed to add value and improve an organization’s operations. It helps an

organization accomplish its objectives by bringing a systematic, disciplined approach

to evaluate and improve the effectiveness of risk management, control, and

governance processes.”

This definition squares with objective of this research. Recent developments tend to

be based on the concept of lifting the audit profile to deal with complicated specialist

high profile area/issues. This brings prestige but also the need to meet high

expectations. It can only be achieved where the audit function is actively

implementing a strategy with clear steps for enhancing professionalism. The ability to

offer a wide range of services whilst still retaining a formal methodology steeped in

professionalism is the feature of the new internal audit department. It is necessary to

market the audit service for those managers who still hold the old fashioned view of

the profession as a ticking and checking function. Taking responsibility for parts of the

control systems is another strong possibility hard to resist (Pickett, 1997:37).

1.5.2 The Role of Internal Auditing Internal auditors need to make a significant contribution to meeting their

organization’s main need, namely to reach its objectives. The IIA Inc has assisted

individual internal auditors and internal auditing activities in this task by publishing the

Competency Framework for Internal Auditing (CFIA) and the Professional Practices

Framework (PPF) as sets of guidelines to fulfill this task (Coetzee, 2004:28).

15

According to Pickett (2004:50), the traditional internal auditor fought for propriety

against all comers. The battle involved checks over transactions and assets to make

sure every thing was in order. The new-look internal auditor spends a great deal of

time considering the organization’s approach to corporate governance, risk

management, and control. It is only after this consideration that the chief audit

executive (CAE) can start to define the internal audit role. This straightforward

approach is further complicated when defining the internal audit role, and reference

should be made to:

Actual corporate audit practices

Best international auditing standards

Expectations of stakeholders and the marketplace

The organization’s corporate governance, risk management, and control

arrangements, along with the formulation of the internal auditors’ contribution to these

challenges, may be compared to best practice and want key players would like to see

from their internal audit shop.

Ridley and Chambers (1998:111) stated that like any product or service, the success

of modern internal auditing lies in the way it is promoted, sold and serviced in the

organization market-place. Sawyer (1973), quoted by Ridley and Chambers

(1998:111), saw this when he summarized the first chapter of his book:

“Modern internal auditing, to be successful, must be grounded on management

support and acceptance and on imaginative service to management. Also, it must

have a reporting status in the company that ensures proper consideration of the

16

findings and recommendations developed by the auditors. To this end, the internal

auditor’s charter must set forth explicitly his (her) broad authority and correlative

responsibility; the management directive must spell out clearly the requirement for

prompt and responsive replies to his (her) audit reports; and the auditor’s job

description must call for the efforts of superior people, not average ones. Audit

manuals should supply standards and guidelines, not detailed instructions. The

auditor must mount a continuing campaign to sell his (her) product to executive

management; and the product he (her) sells must be of the quality that will capture

and keep management’s interest.”

According to the IIA, internal auditors are grounded in professionalism, integrity, and

efficiency. They make objective assessments of operations and share ideas for best

practices that provide counsel for improving controls, processes and procedures,

performance, and risk management; suggesting ways to reduce costs, enhancing

revenues, and improving profits; and deliver competent consulting, assurance, and

facilitation services. Internal auditors are well disciplined in their craft and subscribe to

a professional code of ethics. They are diverse and innovative. They are committed to

growing and enhancing their skills.

1.5.3. Independence

This study is in agreement with Flesher (1996:40), when he says that internal auditors

should be independent of the activities they audit. Internal auditors are independent

17

when they carry out their work freely and objectively. Independence permits internal

auditors to render the impartial and unbiased judgments essential to the proper

conduct of audits. It is achieved through organizational status and objectivity. The

organizational status of the internal auditing department should be sufficient to permit

the accomplishment of its audit responsibilities.

Objectivity is an independent mental attitude which internal auditors should maintain

in performing audits. Internal auditors are not to subordinate their judgment on audit

matters to that of others. Designing, installing, and operating systems are not audit

function. Also, the drafting of procedures for systems is not an audit function.

Performing such activities is presumed to impair audit objectivity (Flesher, 1996:40).

1.5.4. Internal audit activity

The IIA defines an internal audit activity as (Pickett, 2004:3-4):

“A department, division, team of consultants, or other practitioner(s) that provide

independent, objective assurance and consulting services designed to add value and

improve an organization’s operations. The internal audit activity 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.”

The definition above indicates that an internal audit activity is a collection of individuals which

are those for a purpose which in this case, refers to consultation of services in improving the

organizational operations as a whole.

18

1.5.5. Control

Moeller (2005:70) stated that a common textbook application of internal control is:

“Internal control comprises the plan of organization and all of the coordinate methods

adopted within a business to safeguard its assets, check the accuracy and reliability

of its accounting data, promote operational efficiency, and encourage adherence to

prescribed managerial policies. This definition recognizes that a system of internal

control extends beyond those matters which relate directly to the functions of the

accounting and financial departments”

1.5.6. Organizational Performance

What matters most to an organization’s stakeholders is its organizational

performance, i.e. how well it achieves its mission. Performance is an important aspect

of an organization’s operation (Barlow et al., 1995:71-73). Performance is all about

how well, for that matter, perform activities. Performance is a central concern to the

organization. There are three aspects of organizational performance that an auditor

should be aware of. There are effectiveness, efficiency, and economy (Es). All three

are measures of how well an activity performs.

Barlow et al. (1995:73) explain the three Es in the following way:

“Effectiveness is the extent to which an activity achieves its stated performance

objectives.”

“Efficiency is the extent to which a process or activity has been optimized such that,

all other things remaining constant”:

19

Its output has been maximized for a given amount of input; or

Its input has been minimized for a given amount of output.

“Economy is the extent to which an organization, unit or activity gets the right quantity

and quality of a resource at the right time and best possible price.”

Cleary, since an organization can set performance objectives addressing the needs

for efficiency and economy in its activities, the concept of effectiveness encompasses

both these performance parameters. Therefore, since organizational performance

encompasses effectiveness, it also encompasses efficiency and economy. To

evaluate performance, you must have performance objectives. Without them, you

simply cannot manage performance. You must know what you are trying to achieve.

Barlow et al. (1995:86-87) argued that a performance measure is yardstick against

which the level of performance objective achievement can be determined. To be

useful, performance objectives must have corresponding performance measures and

standards. From a performance viewpoint, it is no good setting performance

objectives, if you cannot measure their level of achievement. A performance standard

is the minimum required level of performance. It is defined in terms of the

performance measure and used for evaluating performance. Without a performance

standard, you cannot evaluate performance – you cannot decide whether actual

performance is good or bad.

20

1.5.7 Add value

More recently, a new point in the internal auditor’s role that is loosely described as

adding value to the organization. Meanwhile, adding value has been described by the

IIA in the following way as voiced by (Pickett, 2004:13):

“Organizations exist to create value or benefit to their owners, other stakeholders,

customers, and clients. This concept provides purpose for their existence. Value is

provided through their development of products and services and their use of

resources to promote those products and services. In the process of gathering data

to understand and assess risk, internal auditors develop significant insight into

operations and opportunities for improvement that can be extremely beneficial to

their organization. This valuable information can be in the form of consultation,

advice, written communications or through other products all of which should be

properly communicated to the appropriate management or operating personnel.”

1.5.8 Risk Management

The CIPFA (2001:1) defined risk management as a term applied to a logical and

systematic method of establishing the context, identifying, analyzing, evaluating,

treating, monitoring and communicating risks associated with any activity, function or

process in a way that will enable organizations to minimize losses and maximize

opportunities that are prevailing.

1.6. RESEARCH METHODOLOGY

21

The research focused on the role of internal auditing in improving organizational

performance. For the function to make a valuable contribution in improving

organizational performance, the internal audit managers need to manage the internal

audit department effectively.

Thereafter, a survey is used to address the knowledge of and the role played by

internal audit regarding the organizational performance.

1.6.1 Type of study

Qualitative methods are used to describe internal audit’s role in improving

organizational performance, to identify performance of managers, auditors and

auditees and to link them to the organizational performance. In other words, these

methods are used to establish relationship between manager/ auditor/ auditee

performance about internal audit’s role and performance objectives. Furthermore, the

mechanisms are used to find out factors leading to the improvement of organizational

performance and internal audit’s contribution in improving organizational

performance.

1.6.2 Population and sampling

Rwanda Revenue Authority (RRA) is the universe of the survey. This organization

was selected based on only the following criteria: It is one of the few organizations in

Rwanda that has established an internal audit function. A survey of questions was

administered to three categories of employees in the targeted population. The first

category of respondents ranged from first-level supervisors to departmental heads.

22

The second category concerned the internal auditors and the third category

concerned the division heads.

Huysamen, quoted by Welman and Kruger (2001:64), stated that as a general rule,

we should not use any sample with less than 15 units, but preferably one with more

than 25 units of analysis. Even though the sample is 200 respondents below, it’s

reliable and valid due to the fact that all the managers and the all internal auditors are

included in the research.

1.6.3 Data Collection

The information was collected through various data collection instruments as outlined

below:

- Documentary sources;

- A survey questionnaire;

- A supplementary interview was also administered to managers and auditors in order

to fully understand the topic under research. This interview, also aimed at

compensating for the eventual shortcomings of the questionnaire.

1.6.4 Data Analysis

The first step of data analysis was about organizing raw qualitative data by using a

coding technique. According to Coldwell and Herbst (2004:97) a code is a symbol,

usually numerical, that is used to represent responses to survey questions. It is a

technical procedure by which data are categorized or grouped into a number of

groups sacrifices some detail, but is necessary for efficient analysis. The objective is

23

to reduce a large number of responses to a few categories that contain critical

information needed for analysis.

As stated by Hair et al. (2003:230) responses must be coded either before or after the

data are collected. If at all possible, it is best to code the ahead of time. Coding

means assigning a number to a particular response, in order for the answer to be

entered into a database. When interviews are completed using a computer-assisted

approach, the responses are entered directly into the database. When self-completed

questionnaires are used, it is good to use a scanner sheet because then responses

can be directly scanned into the database.

In other instances, however, the raw data must be manually keyed into the database

using a PC (Personal Computer). Most popular software, for example SPSS, includes

a data editor that looks like a spreadsheet that can be used to enter, edit, and view

the contents of the database. Missing values typically are represented by a dot (.) in a

cell so they must be coded in a special way.

The open coding, focusing on major themes or concepts, which was identified during

the analysis such as organizational performance, effective internal auditing, and

internal auditing contribution in organizational performance was used. In the second

phase, data falling under each of the three themes or question was analyzed,

interpreted separately, and integrated in the underlying theories and thereafter a

holistic picture of the analysis depicting the contribution of internal auditing to the

Rwanda Revenue Authority’s performance was highlighted.

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1.7 OVERVIEW OF THE STUDY

The research consists of six chapters, which are summarized in the following way:

Chapter 1: The reader is introduced to the problem that the study investigates, as

well as the broad context within which the problem exists. The conceptual framework

underlying the study is set out.

Chapter 2: This chapter relates the importance of internal auditing within an

organization. Before the 1950s, internal audit activities in many organizations focused

on financial audit, and internal audit department were heavily involved in the review of

financial statements. At present, however, internal audit takes on a much broader and

deeper perspective.

The objective of internal auditing is to assist all members of management in the

effective discharge of their responsibilities by furnishing them with analyses,

appraisals, recommendations and pertinent comments concerning activities reviewed.

Internal auditors are concerned with any phase of business activity in which they may

be of service to management (Chun, 1997:248).

Chapter 3: This chapter deals with the contribution of internal auditing in improving

organizational performance. As seen above, internal auditing is to assist all members

of management in the effective discharge of their responsibilities by furnishing them

with analyses, appraisals, recommendations and pertinent comments concerning

25

activities reviewed. Internal auditors are concerned with any phase of business

activity in which they may be of service to management. By doing so, it contribute to

improve organizational performance.

Chapter 4: Survey research is conducted to supplement the theoretical component of

the study. In this chapter, the research methodology is described in terms of research

design, methods and techniques.

Chapter 5: This chapter begins with case study presentation and thereafter results of

questionnaire and interview survey, related to the contribution of internal auditing in

improving organizational performance are reported and interpreted.

Chapter 6: Conclusions are drawn from both the theoretical and empirical

components of the study. Based on the limitations of the study, recommendations are

made regarding future research.

1.8 SUMMARY

The focus of this chapter was to describe the purpose, procedures and methodology

of the study. In addition, the problem statement and research question, the aims and

significance of the study were discussed. The definition of the key theoretical

concepts that are used in this study was provided to explain more about internal

auditing.

26

CHAPTER 2: INTERNAL AUDITING WITHIN AN

ORGANISATION

2.1 INTRODUCTION

The internal auditing plays a vital role in many organizations. Therefore, internal

auditing function is necessary for any organization.

This chapter focuses on the functions and objectives of internal audit and the

conditions necessary for them. The basic function of internal audit is a special kind of

economic control. In other words, internal audit itself is a special kind of control

function over other controls within an organization. In addition, internal audit still has

three sub-functions, that is supervision, attestation and evaluation, which are

essential to achieving the control function. Internal audit is an integrated part of the

process of accountability; its general objective is to ensure and promote the effective

performance of accountability assumed by the management of an organization. The

three important conditions necessary for achieving the functions and objectives of

internal audit: independence, organizational status and objectivity.

This chapter contains a literature overview and theoretical background of a system of

internal auditing. In addition, the definitions, objectives and elements of internal

auditing, the limitations of internal auditing and the importance of internal auditing in

the organization and corporate governance are illustrated.

27

2.2 THE NATURE OF INTERNAL AUDITING

2.2.1 Introduction

The effectiveness of internal auditing involves the understanding of management

needs and working with management to serve those needs. That understanding is an

essential ingredient for the establishment of internal audit credibility such that

management will respect and listen to internal auditor’s counsel. Components like

working together, managers and internal auditors can achieve increased

effectiveness and promote overall organizational welfare (Moeller, 2005:10).

2.2.2 Understand the History and Development of Professional

Internal Auditing

“In the last decade, and more especially during the last five to six years, enterprises

both in the private and public sectors have experienced many new challenges and

demands. The combination of a harsh economic climate, rapid developments in

technology, market conditions, internationalization and cost-awareness have

demonstrated the need for solutions. All sectors have experienced increased

expectations as regards the achievement of defined objectives, efficient use of

resources, improved quality in products and services and, in addition, attention to

significant risks such as environmental awareness. In recent years, corporate

governance has been the subject of critically important discussions in many countries

around the globe. In this context: the term ‘corporate governance ‘encompasses the

proper management of corporations and public sector enterprises. Important

28

elements are ethics, accountability to owners, creditors, workers, authorities and the

public-at-large, who demand sound financial and operational control over the

activities of the enterprise (Ridley & Chambers, 1998: xxiii)”.

The only way of addressing issues of these natures, is an effective system of internal

control put in place by management concerned, with oversight from a board of

directors. Such a system will represent the only effective way of preventing problems

as opposed to reacting to them only after loss has taken place. In establishing and

maintaining an effective system of internal control calls for skills that can only be

provided in the system by a competent and professionally qualified internal auditing

function.

In an internal auditing, some of its main purpose is to have a mature profession

whose practitioners are experts in internal control, fraud detection and prevention,

and other areas of corporate governance structure. The audit objective includes

promoting effective control at reasonable cost that the company will be able to cope

with.

Strong corporate governance is an essential tool in public trust and reliability for

private and public organizations where auditing is a key factor in this process.

Auditing in this document refers to both internal and external auditing and in addition

to statutory auditor attestations on financial reports, internal auditing is an essential

linkage in assuring an adequate system of internal control.

29

Auditing plays a vital role in business, government and economy scenarios. Auditing

services have been changing rapidly over the last decade in an accelerated pace.

Audit practices have been evolving in response to growing public expectations of

accountability, and to the complexities in economic and technological advances being

made in business organizations (Cosserat, 2000: 3).

IIA (1999: 1) stated that internal auditing is a dynamic profession that today stands at

a crossroads. On the one hand, internal auditing has achieved a level of

professionalism that it is acknowledged around the globe. The Institute of Internal

Auditors (hereafter referred to as “The IIA” helped the profession achieve its current

status by developing the Standard for the Professional Practice of Internal Auditing

(hereafter referred to as the “standards”) 20 years ago and, through this process,

became the leader in defining the profession and the nature of practice. The

Standards has changed the way in which internal auditing is both understood and

performed in organizations around the world.

On the other hand, both the present and the future challenge that this profession with

its uncertainty and opportunity arises from the confluence of sweeping environmental

and organizational forces impacting the profession of today. Consensus that seems to

be building the Standards and the development of additional guidance have not kept

up with the dynamic contexts in which internal auditing is practiced and applied.

30

Auditing, like any other profession, exists to satisfy a societal need. It is therefore

important to expect that auditing changes as the needs and demands of the society

change (Porter & Simon, 2003: 18).

2.2.3 Why is there a need for an internal audit?

As stated by Barlow et al. (1995: 22) the need for internal audit arises out of a

governing board’s concerns about how well its managers are running the

organization. In companies, the governing board is the board of the directors whereas

the job of ensuring the company performs is well entrusted, by its owners, the board,

which in turn largely entrusts the job to its top managers. Top managers in turn

delegate certain responsibilities to their unit managers, who then delegate to their

sub-units managers, and so on goes the chain of delegation. Therefore, the board,

representing the interests of all stakeholders, but shareholders in particular, needs

assurance that managers are doing their job effectively and efficiently according to

the regulations and procedures of that specific company. They need this assurance

because of the agency problem that may arise.

Ratliff et al. (1996:12-13) argued that the increased complexity in larger organizations

gives rise to the need for a management device to monitor the control system itself.

Management seeks assurance that the control systems are properly designed and

functioning satisfactory. If control is inadequate and note operating properly, then

regardless of how well management has planned, the organization may be in danger

of not achieving established goals and objectives which may lead to the down fall of

31

the particular organization. Management is responsible for the organization’s internal

control, and increasingly utilizes internal auditors to monitor the performance of the

organization’s control systems. Auditors serve as a feedback mechanism for the

management function.

2.2.4 Defining internal audit

Pickett (2003:239) stated that the starting place of internal audit theory is the

definition of internal audit. A standard definition is made up of important issues that

form the basic framework of internal audit principles. The divergence of interpretation

of the audit role is explored in terms of the way we may in practice move away from

the standard definition. Internal auditing is performed in a variety of ways, each with

its own approach and style. Accordingly it is important that a formal definition is

devised and agreed since it will have a vital impact on the perceived role of the audit

function.

Management often asks auditors exactly what they are responsible for, and a variety

of responses may be received. Some auditors feel that they should police

organization while others are convinced they must check the accuracy of accounting

records. Still others feel obliged to search out poor value for money or new and

improved ways of using resources. Much depends on the audit charter and

management expectations. On must have a model developed by the profession which

represents the true scope of internal auditing. In this model, management is clearly

32

responsible for controlling risks to ensure objectives are met, while the scope of audit

work is based on reviewing risk management and controls.

A generally accepted definition of internal auditing is in the following way (IIA, 2003:

6): The Institute of Internal Auditor’s (IIA) Definition:

“Internal auditing is an independent, objective assurance and consulting activity

designed to add value and improve an organization’s operations. It helps an

organization accomplish its objectives by bringing a systematic, disciplined approach

to evaluate and improve the effectiveness of risk management, controls and

governance processes.”

Although brief, it contains basic principles, on which internal audit is based.

Meanwhile IIA Performance Standard 2100 deals with the nature of internal audit’s

work and says that: “The internal audit activity evaluates and contributes to the

improvement of risk management, control and governance systems.” (Pickett, 2003:

239).

2.2.5 What are the auditors’ roles?

Internal auditors are grounded in professionalism, integrity, and efficiency. They make

objective assessments of operations and share ideas for best practices; provide

counsel for improving controls, processes and procedures, performance, and risk

management; suggest ways for reducing costs, enhancing revenues, and improving

profits; and deliver competent consulting, assurance, and facilitation services.

33

Internal auditors are well disciplined in their craft and subscribe to a professional code

of ethics. They are committed to growing and enhancing their skills. They are

continually on the lookout for emerging risks and trends in the profession. They are

good thinkers. And to effectively fulfill all their roles, internal auditors must be

excellent communicators who listen attentively, speak effectively, and write clearly.

Sitting on the right side of management in today’s modern-day internal auditors are

consulted on all aspects of the organization and must be prepared for just about

anything that may arise. They are coaches, internal and external stakeholder

advocates, risk managers, controls experts, efficiency specialists, and problem-

solving partners in business (http/www.theiia.org/index.cfm?doc_id=293).

According to Flesher (1996:4-5), although the modern role of the internal auditor

involves performing at times as a management consultant and auditing for efficiency

and effectiveness as much as for financial propriety, such activity has not always

been among the internal auditor’s duties. The profession of internal auditing has

changed considerably over the past half century. Prior to 1941, internal auditing was

essentially a clerical function with no organization and no particular standards of

conduct. The internal auditing function was essentially an arm of the accounting

function.

Because much of the record keeping at that time was performed manually, auditors

were needed to check the accounting work after it was completed in order to locate

errors in postings and footings. Manual processing also made fraud easier.

34

Combining the need for uncovering errors and the need to catch misappropriations

resulted in the internal auditor being little more than a verifier. Today, the internal

auditor is established as an integral part of the management team. A look at the

evolution of internal auditing provides a perspective on the function of internal

auditing in today’s world; a function that includes not only financial auditing, but

operational auditing as well.

2.2.6 Types of internal auditing services

Given his role in improving organization performance, auditing should be the auditor’s

primary service that is provided. However, he often provides other auditing-related

services which include the following:

Helping managers to prevent and detect fraud;

Carrying out fraud investigations;

Carrying out impact assessments;

Managing the relationship with external auditors;

Helping managers to design and implement controls;

Educating managers in performance management;

Helping managers to self assess the quality of their control; and

Training managers and management trainees in auditing.

The auditor can also advise unit managers on business matters and problems. He

can do so on an ad hoc basis without promoting it as a service that he provides or

more formally. The trap is that, if the auditor gets too involved in advising unit

35

managers on resolving operational problems, he may lose sight of his primary

objectivity and independency. Advising managers on operational matters, falls into

the realm of management consulting whereas management consulting is not the

auditor’s role. Whether auditors should get involved in management consulting is an

issue hotly debated by many audit functions nowadays.

When an auditor advises a unit manager on operational matters, he should make it

clear to that particular manager that he’s merely providing professional advice and

nothing more. He should say that the advice is based on his personal experience and

knowledge, and isn’t an opinion base the results of an audit. He might tell the

manager that he isn’t wearing his auditor’s hat in other words (Barlow et al., 1995:35).

2.2.7 Advantages of internal auditing

The advantages to an organization with an internal auditing function are outlined in

the following way by TUT (Tshwane University of Technology) guideline (Technikon

Pretoria, 2002:49-50):

It increases the reliability and integrity of financial and operational information

used by management in the decision making process;

It increases the effectiveness of the system of internal control within the

organization;

It strengthens the system for ensuring that assets are safeguarded;

It increases and advances the more economical effective and efficient use of

resources within the organization;

36

It helps to ensure that the organization’s objectives with regard to its plans and

activities are met and that these plans and activities are performed according to

the standards set by management;

It helps to ensure the performance, follow-up and evaluation of policies, plans,

systems and procedures;

It strengthens the external auditor’s reliance on the system of internal control;

It contributes to the prevention and early identification of errors and fraud;

It contributes to staff productivity, diligence and improved quality in the

performance of their tasks and;

It evaluates all the activities of the organization and helps to ensure that it

functions more effectively, efficiently and economically.

2.3 ESTABLISHING AN INTERNAL AUDIT IN AN ORGANISATION

Previous sections have dealt with the nature and role of internal auditing within an

organization. This section offers approaches for organizing for an effective internal

audit function. Many, if not all, organizations today have an internal audit function –

the Sarbanes-Oxley Act (SOA) effectively require internal audit in today’s

organization. Some smaller private or not-for-profit organizations today still may not

have a reliable internal audit function but need to organize one. Other corporations

may be concerned about improving the effectiveness of their existing internal audit

function. This section provides some guidance on options for establishing an effective

internal audit function to better achieve internal audit’s goal of service to

management.

37

Moeller (2005:278) stated that there is no single or optimal way to organize an

internal audit function in a modern organization. A senior manager, and soon to be

CAE, who has been given the challenge to establish a new internal audit function has

a variety of options, depending on the organization’s overall business, its geographic

and logistical structures, the various control risks it faces, and its overall culture. The

attention and interest of the audit committee and senior management can also be

major factors.

The condition for any effective organization is a strong leader; for internal audit, that

leader is a CAE who understands the needs of the overall organization and its

potential control risks as well as the contributions that internal audit can make. This

person must have the support of both the audit committee and senior management.

The effective internal audit department must be organized in a manner that serves

senior management and the audit committee by providing the best, most cost-

effective audit services to the entire organization.

Sawyer and Dittenhofer (1996:885) voiced that the internal audit department reflects

the audit director’s philosophy. The director’s basis responsibilities are: the audit

charter, the functions and responsibility statement, the statement of audit policy,

securing the help of external auditors, emphasizing enterprise policy and designing

brochures to explain the internal audit function. Others functions involve marketing

the internal audit function, specific ways of selling internal auditing, attributes of

leadership in internal auditing, the elements of creativity, selling internal auditing

through the problem-solving partnership and environmental concerns.

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2.4 AN INTERNAL AUDITING ACTIVITY

Cascarino and Esch (2005:312) argued that internal audit activities are performed in

diverse legal and cultural environments; within organizations that vary in purpose,

size, complexity, and structure; and by persons within or outside the organization.

While differences may affect the practice of internal auditing in each environment,

compliance with the international standards for the Professional Practice of Internal

Auditing is essential if the responsibilities of internal auditors are to be met.

Dealing with the responsibility of internal audit for governance matters, IIA Standard

2130: Governance indicates the following (Cascarino & Esch 2005:182):

“The internal audit activity should contribute to the organization’s governance process

by evaluating and improving the process through with (1) value and goals are

established and communicated, (2) the accomplishment of goals is monitored, (3)

accountability is ensured, and (4) values are preserved.”

2.4.1 Placement of internal auditing in the organization

To be able to fulfill its responsibilities successfully, it is important for internal auditing

to have the support and acceptance of management and the Board of Directors, as

this will determine the level of support and respect it enjoys from the rest of the

organization. With the advent of corporate governance, internal auditing is

increasingly seen as a very important function within the organization and it is

therefore imperative that internal auditors ensure that they possess the necessary

competence, to perform the function satisfactorily.

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When internal auditing is accepted and acknowledged by an organization’s leaders as

a management activity, internal auditors can fulfill their most fundamental role –

helping management and the board achieves their objectives. Competent internal

auditing professionals bring to the table objectivity, integrity, expertise in

communication, the ability to identify enterprise-wide risks, and the skill to assess the

effectiveness of controls put in place by management to mitigate those risks.

As a partners to management, internal auditors are in a position to help protect the

organization against both traditional and emerging risks; provide productive

consultation and ideas about how opportunities and vulnerabilities can be balanced;

and make valuable recommendations for assessing and strengthening corporate

governance. And their broad understanding of the organization and its culture

prepares internal auditors for effectively monitoring risks associated with new

business lines; mergers, acquisitions, joint ventures, and other partnerships; new

systems deployments ; restructuring; management estimates, budgets, and forecasts;

environmental issues; and regulatory compliance (www.theiia.org).

2.4.2 Independence

According to Pickett (1997:58), all definitions of internal audit contain the word

“independence” and this is an important component of the audit role that should be

played at all times. It is both a concept and a process that prevail. One could assume

that since internal audit is located within the organization it cannot be independent.

The counter argument suggests that internal audit has to be totally independent, or it

40

has little use. The real position falls somewhere between. There are degrees and a

quality of independence that has to be earned to ensure that audit is sufficiently

distanced from the particular operation being reviewed.

Venables and Impey (1991:303) debated that internal audit must protect and preserve

its independence to ensure it remains capable of making impartial audit judgments

which will be perceived as objective. It must never usurp the operational manager’s

role. The function of audit is to observe and make recommendations. In all

circumstances auditors must take special care to ensure their independence is not

compromised. For internal auditing to be effective, it needs to be independent of the

activities it audits. This will ensure that internal auditors remain objective in the

performance of their tasks. Independence is gained through its status and reporting

lines, within the organization and the objectivity in which it functions on audits

assignments.

2.4.3 Types of audits Porter et al. (2003: 512) stated that internal auditors’ key responsibility is providing

assurance to the company’s directors and senior executives about all aspects of the

company’s control environment. However, the internal audit requirements of the

directors and senior executives can vary widely and, as a result, the types of internal

audit work performed, and the way in which it is carried out, can differ markedly.

41

The different types include compliance audits, financial audits, performance and

operational audits, environmental audits, fraud audits, quality audits, program results

audits, IT audits.

Compliance audits

Cascarino and Esch (2005: 123) echoed that compliance audits are carried out in

order to determine whether a business entity has complied with specific policies,

plans, procedures, laws, regulations or contracts that affect the organization. In order

to successfully complete a compliance audit, there must be established criteria

against which the compliance can be measured.

Financial audits

Arens et al. (2006:15) voiced that a financial statement audit is conducted to

determine whether the overall financial statements (the information being verified) are

stated in accordance with specified criteria. Normally, the criteria are generally

accepted accounting principles (GAAP), although it is also common to conduct audits

of financial statements prepared using the cash basis or some other basis of

accounting appropriate for the organization. In determining whether financial

statements are fairly stated in accordance with GAAP, the auditor performs

appropriate tests to determine whether the statements contain material errors or other

misstatements.

Performance and operational audits

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Cascarino and Esch (2005: 124) stated that performance auditing involves firstly

determining management’s objectives, followed by establishing whether the

management controls that exist lead to effectiveness, efficiency and economy.

An auditor must determine:

Which key performance indicators are in use;

Whether they are appropriate; and

Whether control objectives have been achieved.

The term “operational audit” is commonly used to cover a variety of audit types. An

operational audit may cover the evaluation of some or all of:

Internal controls;

Compliance with laws, regulations and company policies;

The reliability and integrity of financial and operating information; and

The effective and efficient use of resources.

Environmental auditing

Environment auditing has been defined as:

“A management tool comprising a systematic, documented, periodic and objective

evaluation of how well environmental organization, management and equipment are

performing with the aim of helping to safeguard the environment by:

Facilitating management control of environment practices;

Assessing compliance with company policies, which would include meeting

regulatory requirements.”

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Where an enterprise has environmental considerations as some of their objectives it

is entirely necessary and appropriate that internal controls should facilitate the

assured achievement of those objectives. Hence environmental auditing becomes

something that concerns internal auditors. Business may choose to have separate

environmental audits conducted by someone other than internal audit; but internal

audit should be in a position to provide this service to the business, and to take

account of work done by others that contributes to meeting this objective (Chambers

& Rand, 1997: 10).

Fraud audits

Fraud auditing involves support management in the establishment of an environment

that encourages the detection and prevention of fraud in commercial transactions.

This may involve assisting in setting the standard for the organization with an

appropriate code of conduct and conflict-of-interest policy (Cascarino & Esch, 2005:

124).

Quality audits

Chambers and Rand (1997: 10-11) argued that enterprises that have adopted total

quality management (TQM) principles and have sought to develop (and perhaps to

register) so-called quality systems (QS) under ISO, British or other similar standards,

may entrust to specialist quality auditors the task of reviewing the enterprise’s

performance with respect to TQM and QS. As with environmental auditing, it is not

appropriate for internal audit to take on this responsibility: if the organization has

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objectives relating to TQM and QS it is appropriate for internal audit to review the

internal controls that contribute to the achievement of those objectives.

Program-results audits

Cascarino and Esch (2005: 126-127) confirmed that program-results auditing is

auditing the accomplishment of established goals and objectives for operations and

programs. In practical terms, this means audits that determine whether the desired

results are being achieved, as well as whether management has considered

alternative to achieve the same results at a lower cost. In addition, the cost-

effectiveness of a given program is evaluated, as is the cost benefit of continuing a

program. Typically, in the private sector, efficiency and effectiveness are measured in

terms of profitability.

IT audits

Ridley and Chambers (1998: xxxi) voiced that internal auditors need to understand

the challenges and impact of technology on management and organizations; these

challenges and impacts are rarely only internal. They span across organizations and

their supply chains at national and international levels. Technology embraces the use

of all applied sciences and communications are an important area using technology,

but there are many other areas. Technology is also fundamental to control in all

operations and their success.

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2.5 THE CHALLENGES FOR THE INTERNAL AUDIT

PROFESSION

2.5.1 Corporate Governance

Corporate governance is an expression that, other the last two decades, has now

found its way into popular literature. It has been described by Sir Adrian Cadbury as

the way organizations are directed and controlled. This declaration contains many

insightful elements including the performance/conformance argument. An

organization’s main task is to achieve its objectives. But at the same time, an

organization must adhere to all relevant standards, rules, laws, regulations, policies

and expectations that form a framework within which this performance must be

assessed. The internal auditor who has a sound grasp of corporate governance is

best placed to play a major role in the drive to ensuring sustainability as well as

success in all business and service sectors (Pickett, 2003: 21-22).

2.5.2 Risk management

Organizations want to understand risk and need appreciating the importance of risk

management to an organization. Good corporate governance codes require the board

to install a system of risk management and tell their shareholders about this system

(Pickett, 2003: 127).

An organization cannot get smaller its way to magnitude. It must develop, and one of

the keys to successful growth is effective risk management. Risk assessment, as

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defined by The IIA Standards for the Professional Practice of Internal Auditing, is a

systematic process, for assessing and integrating professional judgments about

probable adverse conditions or events. Risk impacts an organization’s ability to

compete and to maintain its financial strength and the quality of its products and

services. It’s the internal auditor’s job to identify all auditable activities and relevant

risk factors and to assess their significance (www.theiia.org).

Decisions at all levels in an organization should be made in conjunction with an

integrated risk management process that ensures all key existing and emerging risks

are analyzed and mitigated where appropriate. The IIA defines risk as:

“The uncertainty of an event occurring that could have an impact on the achievement

of objectives. Risk is measured in terms of consequences and likelihood” (Pickett,

2004: 39).

According to Birkett et al. (1999: 58-59), risk refers to the likelihood that an event,

condition, or action may unfavorably affect an organization or its actions. Certain

factors in events, conditions, or actions may be seen as posing risks for an

organization or its activities. Adverse effects can take a number of forms, depending

upon operative risk factors. The meaning of a risk is seen as the product of the

degree of its adverse effect and the probability of its occurrence. In assessing the

significance of adverse effects identified with risk factors, ultimate reference will be

made to a “failure to accomplish established objectives and goals”; indeed, the actual

process of establishing goals and objectives “should explicitly recognize the risks

47

associated with not achieving” them. As an outcome, different risks may be assigned

relative significance.

2.5.3 Internal controls

Moeller (2005:69-70) has found that internal control is the most important and

fundamental concept that an internal auditor must understand. An internal auditor

reviews both operational and financial areas of the organization with an objective of

evaluating their internal controls. Virtually all internal audit procedures focus on some

form of this evaluation of internal controls. While internal auditors generally have a

good understanding of what is meant by internal controls, others may respond to a

“can you define good internal control?” question with answers along the lines of one

or more characterizations:

Good internal controls means everything is well documented – which is a correct

answer.

Good internal controls mean strong security processes – correct again.

Good internal controls mean the debits equal the credits – also true.

Although many professionals use the term, they often have to step back and think

about it when asked for a definition. Yet, internal controls are a positive set of general

procedures necessary for all well-managed and well-functioning business systems. A

common textbook application of internal control is given (see section 1.5.5).

The Committee of Sponsoring Organizations (COSO) defines internal control in the

following way (Whittington & Pany, 2006:224):

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Internal control is a process, affected by an entity’s board of directors, management,

and other personnel, designed to provide reasonable assurance regarding the

achievement of objectives in the following categories:

Effectiveness and efficiency of operations

Reliability of financial reporting

Compliance with applicable laws and regulations.

Pickett (2004:44) starts the consideration of internal controls by setting out the IIA

definition of control in the following way:

“Any action taken by management, the board, and other parties to enhance risk

management and increase the likelihood that established objectives and goals will be

achieved. Management plans, organizes, and directs the performance of sufficient

actions to provide reasonable assurance that objectives and goals will be achieved.”

This point is further developed by the IIA, which argues that control processes are:

“The policies, procedures, and activities that are part of a control framework,

designed to ensure that risks are contained within the risk tolerances established by

the risk management process.”

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission

has suggested that (Pickett, 2003: 181-182):

“Senior executives have long sought ways to better control the enterprises they run.

Internal controls are put in place to keep the company on course toward profitability

goals and achievement of its mission, and to minimize surprises along the way. They

49

enable management to deal with rapidly changing economic and competitive

environments, shifting customer demands and priorities, and restructuring for the

future growth. Internal controls promote efficiency, reduce risk of asset loss, and help

ensure the reliability of financial statements and compliance with laws and

regulations. Because internal control serves many important purposes, there are

increasing calls for better internal control systems and report cards on them. Internal

control is looked upon more and more as a solution to a variety of potential

problems.”

Birkett et al. (1999: 60) voiced that control is effected through specific controls, which

vary in terms of their type and area of application. Controls may be of the following

types: preventive (to detect undesirable events from occurring), detective (to detect

and correct undesirable events which have occurred), or directive (to cause or

encourage a desirable event to occur).

2.5.4 Does auditing add value to the organization?

Barlow et al. (1995: 40) echoed that if auditing is to survive and, moreover, flourish, it

must be effective and add value to the organization. It must provide a relevant service

to the organization and staying relevant demands it be responsive to change. As

organization respond to change, their auditors must also respond. They may have to

encourage unit mangers to assess the quality of their own control system and report

the results upwards.

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2.5.5 Conflict in internal auditing

There is conflict of interest between auditors and managers whereby managers may

restrict auditors to perform their nature of work according to the scope specified,

whereby inhibiting independency and objectivity of work being performed. The conflict

between internal audit and other management services revolves around the difficulty

of defining the special interests of each of these services so that their roles do not

overlap to any great extent, and where they do overlap there should be an

understanding of how the potential conflict situation should be dealt with. If

approached with skill, the conflicts may be contained. They may be creative to the

extent that argument may lead to reappraisals and better solutions. Handled badly,

however, they may be damaging (Chambers et al., 1987: 70).

2.5.6 What changes are affecting auditing?

The impact of globalization in the world with regard to issues like cultural background

and customers’ needs has critical affected the audit performance. Other factors like

competition, marketing and technology have also affected how auditing in general

should be done.

The objective is to focus auditors on the issues facing the profession, and thus

themselves. Auditors must address them to remain effective contributors to

organizational performance. The necessity for constantly managing high levels of

change in organizations necessitates constant attention to organization risk

exposures. Factors like structural, investment, and operational changes within the

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organization affect the priorities and practice of internal auditing. In addition, the

organization’s actions to establish its future market positioning and responses to

opportunities/challenges affect internal auditing. With accelerating change, internal

auditing skills must evolve as rapidly as the technology and the environment. The

technology of controls needs to be understood, if reasonable and prudent judgment in

evaluating control practices is to be exercised (Birkett et al., 1996:78-79).

2.5.6.1 Accountability

Barlow et al. (1995: 49) said that all stakeholders in both the public and private sector

are increasingly demanding accountability from those responsible for running

organizations. Audit committees are popular method of increasing accountability. The

audit committee will meet regularly and hear representations from both internal and

external auditing on the activities covered. A properly structured audit committee will

strengthen the independence of both internal and external auditing. Therefore, they’re

increasing in popularity, particularly with auditors.

2.5.6.2 Value-For-Money auditing (VFM)

The increased highlighting on the liability of managers has led to a move towards

VFM auditing. VFM auditing focuses on the economical, efficient and effective use of

an organization’s resources. This is what managers now want auditors to examine.

The public sector is using VFM auditing more frequently. In the private sector,

auditors are considering VFM issues. Even where traditional financial auditing is

being carried out, e.g. in the safeguarding of assets, auditors need to question

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whether these assets are needed in the first place, an economy or efficiency question

(Barlow et al., 1995: 51).

2.5.6.3 An internal service

Barlow et al. (1995: 51) stated that from another angle, auditors also turn to VFM

auditing to show the value added to the organization exceeds the cost of running the

auditing function. The difficulty is in showing these benefits, as it isn’t always possible

to put a monetary value to the benefits accruing. Being a service to the organization

also implies a customer-oriented focus. To make auditing successful, auditors must

manage customer relationships effectively. To achieve their performance objectives,

auditors have to work with managers. They can’t hope to achieve them without

drawing on the knowledge of unit managers and gaining their co-operation and

support. A critical part of the auditing process then is to foster participatory relations

with the auditing function’s customers, i.e. managers.

2.5.7 Popular misconceptions

As seen in the introduction, many newly appointed auditors come to the job with a

number of misconceptions. Some see the audit role as one of “procedure

enforcement,” where they police the way people are complying with procedures within

an organization. Others see the role as one of pure consultancy, where the auditor

simply does what the business unit manager in question asks. Among the most

popular misconceptions are those listed below: risk averse, audit instructions, design

control, finger pointer, the terminator, Checker; and Corrector (Pickett, 2004: 6).

53

2.5.8 The importance of tracking new developments

Pickett (2004: 14-17) voiced that the emergence of the new internal auditor has been

plotted above, and stopped at a level where the audit role revolved around providing

guidance as well as assurances on risk management and internal control. But it does

not really stop here. Things move on as new developments come to the fore. These

developments are many and varied, including the use of business models for self-

assessment purposes and regulatory agencies who take a firm view on compliance

issues. The final point to consider is that there is no single model of the audit task that

can be held up as the accepted standard. There is no “one size fits all” standard that

can be adopted universally. Fortunately, this diversity of approaches creates a rich

blend of audit policies that make the job potentially much more rewarding.

2.5.9 Impact of information technology on internal auditing

Chambers et al. (1987: 309) echoed that the use of information technology in internal

audit is no longer an option; it is a necessity (The IIA Research Foundation (1991)

Systems Audibility and Control). Information is a fundamental resource of an

organization. It is worth stating that in order to help the user in achieving required

objectives, information must be: relevant, understandable, reliable, complete,

objective, timely and comparable. Information is essential to the managers of an

organization. Taking decisions, strategic or operational, requires information as the

main input to the decision-making process.

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According to Pickett (2004: 87) there are internal auditors who specialize in reviewing

information systems and the technical aspects of information technology that drives

all progressive organizations. In fact, the IIA recognizes the need to consider

information systems (IS) issues as part of the overall audit process. Draft

Implementation Standard 1210.A3 makes this point clear by saying:

“Internal auditors should have general knowledge of key information technology risks

and controls and available technology-based audit techniques. However, not all

internal auditors are expected to have the expertise of an internal auditor whose

primary responsibility is information technology auditing.”

The IIA Practice Advisory 2100-6: Control and Audit Implications of E-commerce

Activities highlights the challenges facing internal auditors in organizations that

increasingly use IT in business operations, and provides guidance as to the role and

responsibilities of internal audit (Cascarino & Esch, 2005: 207):

“Continuous changes in technology offer the internal auditing profession both great

opportunity and risk. Before attempting to provide assurance on the systems and

processes, an internal auditor should understand the changes in business and

information systems, the related risks, and the alignment of strategies with the

enterprise’s design and market requirements. The internal auditor should review

management’s strategic planning and risk assessment processes and its decisions.”

Cosserat (2000:608) stated that information technology is rapidly changing the global

business market. It is altering not only the way business is conducted, but also the

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way information is accessed. These developments present auditors and accountants

with a major challenge. Fundamental to the ability to deal with the pace of change in

professional practice is an ability to manage change itself – to capitalize on the

opportunities presented, and to recognize real and potential threats. Key

considerations, both now and in the immediate future, are the rapid advances being

made in financial software and the use of the Internet (e.g. in electronic commerce).

2.5.10 Meeting the challenge 2.5.10.1 The New Dimensions of Internal Auditing

Pickett (2003: 751) stated that it is accepted that internal audit must deliver added

value to the organization and this is defined by the IIA as:

“Organizations exist to create value or benefit to their owners, other stakeholders,

customers, and clients. This concept provides purpose for their existence. Value is

provided through their development of products and services and their use of

resources to promote those products and services. In the process of gathering data to

understand and assess risk, internal auditors develop significant insights into

operations and opportunities for improvement that can be extremely beneficial to their

organization. This valuable information can be in the form of consultation, advice,

written communications or through other products all of which should be properly

communicated to the appropriate management or operating personnel”.

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2.5.10.2 The Audit Reputation

There is a view that the organization of the future will revolve around its reputation

and that the so-called chief risk officer will become the chief reputation officer. In turn,

the internal audit shop will have to consider its own reputation and what it means to

the organization. William E. Chadwick (quoted by Pickett, 2003:752) has considered

the importance of the audit image:

“Internal auditors should be proud of the contributions they make to the internal

controls of an organization. Unfortunately, they rarely receive the recognition they

deserve, because their accomplishments often are overshadowed by the bad news

they must impart. Therefore, it is important for internal auditors to educate their clients

on the value of internal auditing and build relationships that can withstand a negative

audit. Using humor is a great way to begin that process. Internal auditing doesn’t

have to be doom and gloom. Auditors need to let the world in on this well-kept secret

and, at the same time, improve their image and enhance communication with their

clients.”

Pickett (2003: 752) emphasized that when he said that the internal auditor helps drive

and is driven by the corporate governance agenda. In the past auditors would define

their role and responsibilities by considering what they would most enjoy doing and

what fitted their skills base. Nowadays, the internal auditor can only really view their

role by reference to societal expectations and the challenge is inherent in the ability to

judge how business and public services will develop.

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2.5.10.3 Globalization

Pickett (2003: 754) pointed out that on real development in internal auditing coincides

with the way business (and public services) are becoming increasingly

internationalized. Physical location is no longer an issue as buying activity is moving

away from the local high street as it launches into hyperspace through the internet.

The IIA has grasped this new thinking and is developing the profession into a global

internal auditing organization.

Cascarino and Esch (2005:87) echoed that in recent years, companies have

increasingly competed in a global environment. This has brought undeniable

opportunities with the potential to expand on a massive scale. At the same time, the

domestic market becomes less important to the firm involved as the percentage of

business done overseas increases. Of course, the reverse is also true, in that

overseas competition may now attack the domestic market.

2.6 QUALITY ASSURANCE AND AUDIT COMPETENCE

2.6.1 The quality concept

The challenges for the new-look internal auditing call for many things. They call for

sound procedures in addition to a well-trained staff and a mechanism for managing

the risk of poor standards – that is, a quality assurance mechanism. The internal audit

department issues assurances on corporate governance, risk management and

control, while at the same time it needs to consider how it can be assured of

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delivering a good service. The solution to this dilemma is found in Attribute standard

1300, which states (Pickett, 2003: 353):

“The CAE should develop and maintain a quality assurance and improvement

program that covers all aspects of the internal audit activity and continuously monitors

its effectiveness. The program should be designed to help the internal auditing activity

add value and improve the organization’s operations and to provide assurance that

the internal audit activity is in conformity with the Standards and the Code of Ethics.”

Venables and Impey (1991: 63) stated that: “Quality assurance is essential to

maintaining an internal auditing department’s capability to perform its functions in an

efficient, effective manner. Quality assurance is also important in achieving and

maintaining a high level of credibility with management, the audit committee, and

others who rely on the work of the internal auditing department.” (IIA Statement of

Internal Auditing Standards no 4)

2.6.2 Professional internal auditing standards

Moeller (2005:259-260) noted that every profession requires a set of standards to

govern its practices, general procedures, and ethics. These standards allow

specialists performing similar work to call themselves professionals because they are

following a recognized and consistent set of best practice standards. The key

standards for internal auditors are the Institute of Internal auditors’ (IIA’s) Professional

Standards for the Practice of Internal Auditing. The IIA revised its standards in 2004

after comments derived from a lengthy exposure draft.

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Pickett (2004: 110) stated that the IIA standards mentioned throughout the text form a

clear framework for the audit role, position, and performance. The attribute standards

are mandatory and help construct the shape and form of well-positioned audit shop.

The performance standards are mandatory and describe the activities of a quality

audit service. Implementation standards are set within this framework and deal with

specific services relating to assurance, consulting, fraud, and information systems

auditing. Practice advisories provide additional non-mandatory guidance that is cross-

referenced to the relevant standards. As already mentioned, this orientation guide is

based around IIA standards.

2.6.3 Audit competence

“So far, it has argued that the role of internal audit is now fundamental to the

corporate governance equation. It could be said that the role of internal audit has the

potential to be fundamental, but this depends on whether the audit department is up

to the task. There really is a new-look internal audit, able to apply a sophisticated

blend of audit approaches and techniques to add value to the business and to help

the board and audit committee exercise their directing and oversight role respectively.

Much depends on whether the auditor is competent to do this job. As Practice

Advisory 1210-1 states: Each internal auditor should possess certain knowledge,

skills, and other competencies” (Pickett, 2004: 129-130).

2.6.4 Measuring internal audit performance

What cannot be measured cannot be improved (Anon).

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Ridley and Chambers (1998: 214) said that at a time when internal auditing is being

challenged by outsourcing alternatives and by other methods of reviewing managerial

effectiveness, it is particularly important to be able to measure its contribution to the

enterprise’s profitability. Standards which govern internal audit practice make this

obligatory.

Chambers et al. (1987: 273) argued to make sure that the chief internal auditor

measures internal auditing performance and takes corrective action to improve

performance.

2.7 INTERNAL AUDIT PROCESS

Pickett (2004:151-152) noted that in one sense, there is no audit process as such.

The audit process will depend on the approach that is adopted. It is important to set a

context for audit work so that the actual fieldwork can be related to the bigger

corporate picture. Most organizations now have to report on their internal controls,

and although this is primarily based around the financial reporting system, there is a

view that the broader control dimension needs to be considered to give a complete

picture to shareholders and other stakeholders.

According to Puttick and Esch (1992: 56) the procedures and activities are divided

into four stages, namely:

Pre-engagement activities;

Planning;

Compliance and substantive procedures, and

Evaluating, concluding and reporting.

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According to Ratliff et al. (1996:183), the audit process can be divided into nine steps,

as illustrated below:

Steps Task flow Risk consideration

1 Select riskiest area (Step 1)

2

3

4 Reassessing risk Significant (Step 4) uncertainty of risk

5 1. Revised risk less than others ranked Reassess risk or (Step 5) 2. Reasonable certainty of risk 6 Recommendations based on risk (step 6)

7

8

9

Figure 2.1: Steps in the Internal Auditing Process

Adapted from Ratliff et al. (1996: 184)

Selection of auditee Selection of auditee

Audit planning

Preliminary survey operations

Internal control Description & analysis

Expended tests Of control system

Develop Findings & Recommendation

Reporting

Follow up

Audit Evaluation

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2.8 APPROACHES TO OPERATIONAL AUDITING

For the reason that of the many areas of coverage, no single approach can be taken

to operational audits. However, some general functions are usually applicable to most

operational audits (Taylor & Glezen, 1991: 48-49):

1. Plan the work to be performed, including the establishment of standards by which

the audited operation is to be evaluated.

2. Gather evidence with which to measure the performance of the operation.

3. Analyze and investigate deviations from the standards.

4. Determine corrective action, where needed.

5. Report the resultants to the appropriate level of authority.

Gray and Manson (2000:224) argue that operational auditing is a term used to show

that modern internal auditing is concerned with the whole organization and not merely

with finance and accounting; consequently it involves the audit of operations in

general, such as those relating to production, personnel, advertising, research and

development, etc. While it is true to say that modern statutory auditors do concern

themselves with the whole organization, operational auditing has been developed

more by the internal audit function than by external auditors. Operational auditing

encompasses both efficiency and effectiveness auditing.

Chambers (1992:200) said that it is appropriate for internal auditing to have the

authority and responsibility to review all operations from the perspective of

effectiveness, efficiency and economy. Auditing for the 3 Es includes a value for

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money emphasis, though the expression VFM auditing refers to a particular approach

to auditing. Management and the board need reassurance. There is more to be

gained from this sort of independence review function than from a function that largely

restricts itself to compliance auditing in accounting areas.

2.9 THE FUTURE FOR INTERNAL AUDIT

Internal audit is both in a state of flux and of development. This presents excitement

and a challenge, but can also lead to frustration. These can be a lack of

standardization of terminology, which can lead to uncertainty, indecision and inaction.

Equally so the internal auditor can view it as a time of opportunity and creativity. All

the basics are now in place, and the auditor can not only view history in the making,

but also shape it (Chambers et al., 1987: 317).

Ridley and Chambers (1998: 30) echoed that as the name suggests (with its allusion

to the Oracle at Delphi), a Delphi study is essentially future-focused and is used to

probe future when it is difficult or not appropriate to extrapolate the future from the

past. Given the significant and rapid changes being experienced within internal audit,

as evidenced by current literature, it is appropriate to use a future-oriented study

focusing on concerns/issues of today and tomorrow. Such a study requires the

participants not to meet each other as they consider their benchmarks of best practice

and guidelines. They can be guided by the internal audit unit, but not led by it.

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According to Moeller (2005:740), internal auditing plays an important role in the

organization today and an increasingly important direction for individuals. It is also

fascinating field where the effective internal auditor must have some financial and

operational, as well as information systems, skills. These are tools that an internal

auditor can develop and build upon as work progresses from one audit area to

another. Legislation such as SOA (Sarbanes-Oxley Act) has changed many things,

but internal audit continues to be a group that provides important and valuable service

to management in today’s organizations.

2.10 SUMMARY

In this chapter, the evolution, the definition and the importance of internal auditing and

corporate governance was described. In addition, the challenges for internal audit

profession, impact of information technology on internal auditing and the organization

of internal audit department are reviewed.

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CHAPTER 3: THE ROLE OF INTERNAL AUDITING IN

THE ORGANISATIONAL PERFORMANCE

3.1 INTRODUCTION

This chapter deals with the role of internal audit to improve the performance of an

organization. To assist managers in improving organizational performance, the

internal auditor must consider all performance objectives that make an organization

effective. Furthermore, he must ensure that all aspects of the business that could

have a significant impact on organizational performance are covered. This chapter

explains what is organizational performance, how to measure it, to assess and to

evaluate it.

3.2 PERFORMANCE OBJECTIVES OF ORGANISATION

If an organization hasn’t established performance objectives, how can it hope to

improve its performance? Performance is about achieving performance objectives.

Therefore, without performance objectives, you can’t even think about performance.

To improve performance, one needs clear-defined, measurable performance

objectives. Similarly, if his performance objectives don’t support the organization’s

performance objectives, he misdirects his efforts, no matter whether his controls are

good or bad. Auditors must ask whether organization have the right performance

objectives, before they evaluate their controls.

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Therefore, given that auditors are in the performance improvement business

evaluating only controls is too narrow a focus and limits the value auditors can add.

Auditors must evaluate the quality of a manager’s entire control system. In the context

of organizational performance, control is all about performance management (Barlow

et al., 1995: 32).

Operational auditors must have standards against which current operations can be

compared and evaluated. For financial auditing, the criteria for evaluating the

presentation of financial statements are generally accepted accounting principles. But

it is management’s responsibility to develop and use appropriate standards to

evaluate operating activities. Operational auditors will usually start with criteria that

have been established by management (performance standards) or by some

oversight board or agency.

In the absence of standards, operational auditors will have to borrow from other

sources or develop some type of criteria against which to compare performance. This

is often a difficult task, and auditors should get management’s reaction to the

suitability of any criteria developed in this way. Reasonable criteria for evaluating

performance are absolutely essential for successful operational auditing, because no

evaluation of operations is possible without a standard for comparison. While

subjectivity cannot be completely avoided, objective criteria that are considered

appropriate and reasonable by both the internal auditors and auditees are necessary

for the process to be successful (Cascarino & Esch, 2005: 34).

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Tangen (2003:348) stated that a very broad definition of performance is used, which,

in turn, means that the term can be separated into different types of performance

objectives that are desirable from both an internal and external point of view of a

company. Several classifications of performance objectives can be found in literature.

However, most of them are similar to the one presented by Slack et al. (2001), quoted

by Tangen (2003:348), which distinguishes between five types of performance

objectives: cost, flexibility, speed, dependability and quality. An example of the effect

these performance objectives have on an operation is illustrated in Figure 3.1.

Figure 3.1 : Desirable Performance Objectives

Adapted from Tangen (2003:349)

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The Role of Performance Objectives

Management control is meant to ensure that an organization is working towards its

stated performance objectives. Performance objectives and goals are the statement

of corporate intent, while management objectives define how the corporate objectives

will be met. In line with these objectives, internal control ensures that programs to

ensure performance objectives are properly planned and executed. Internal audit

provides an independent assessment and ensures that management’s system of

internal control will be effective and function as intended.

Performance objectives direct the emphasis of day-to-day activities within the

organization and may, in themselves, conflict. The way in which management

prioritizes performance objectives directs the development of controls. This will affect

the overall system of controls designed and therefore the audit priorities. A final point

is that performance objectives must take account of the cost of trying to achieve them

(Cascarino & Esch, 2005: 40).

3.3 THE MANAGEMENT PROCESS

Cascarino and Esch (2005: 131) say that the management process begins with an

understanding of the organization’s business. Until this is achieved, any attempt to

determine organizational needs will be at best misleading and at worst disastrous.

Once the overall objectives and environment of the business have been established,

establishing the needs becomes a comparatively easy task. Identifying and examining

the key activities whose effective performance can make or break an organization will

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determine the organization’s needs. These key activities must themselves be

monitored and therefore ambitious performance objectives must be established early

in the planning process.

3.4 ORGANISATIONAL PERFORMANCE

What matters most to an organization’s stakeholders is its organizational

performance, i.e. how well it achieves its mission. Performance is an important aspect

of an organization’s operation. Auditors and managers have an important role to play

in improving organizational performance.

According to Armstrong (2000: 138-139) elevated levels of organizational

performance are based on a clear understanding of the organization’s mission,

strategies and goals. They involve the clarification of what individuals and teams must

do to support the achievement of these goals, the systemic review of performance in

relation to the goals, and the agreement of performance improvement plans to

achieve better results in the future.

3.4.1 What is it?

Barlow et al. (1995: 71-72) noted that it has been stressed that an organization must

be concerned with achieving its mission. In other words, it must be concerned with its

performance. Performance is all about how well we, or machines for that matter,

perform activities. Perform activities is to achieve performance objectives. Activities

produce outputs that satisfy specific customer needs. And performance objectives

simply reflect the aim of satisfying these needs.

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In general, “performance” refers to the need for organizations to be efficient

producers of outputs that are relevant to the needs of stakeholders – this is the

principal measure of their effectiveness. Hence, organizational performance may be

defined as the ability of an organization to use its resources efficiently, and to produce

outputs that are consistent with its objectives and relevant for its users. Yet, while the

general elements of organizational performance (efficient, effectiveness, and

relevance) are widely shared, there is no simple or universally recognized definition of

what performance is at the level of an individual organization. The performance of an

organization is closely linked to the goals and objectives it wants to achieve. Specific

performance elements need to be defined and agreed by the organization

(www.isnar.cgiar.org/publications/pdf/rmg7-ch1.pdf).

3.4.2 How do the 3 E’s relate to it?

Barlow et al. (1995:72-73) echoed that there are three aspects of organizational

performance that an auditor should be aware of. “They’re effectiveness, efficiency

and economy – fondly known as the 3 E’s. All three are measures of how well an

activity performs. Noticeably, since an organization can set performance objectives

addressing the needs for efficiency and economy in its activities, the concept of

effectiveness encompasses both these performance parameters. Therefore, since

organizational performance encompasses effectiveness, it also encompasses

efficiency and economy (Barlow et al., 1995: 73)”.

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The relationship between economy, efficiency and effectiveness is given in the

following figure.

Figure 3.2: Relationship between economy, efficiency and effectiveness Adapted from Barlow et al. (1995:74)

3.4.3 Where quality fits in

Barlow et al. (1995: 75) cited that quality is the potential of a product or service to

satisfy customer needs. The consumer experiences the quality of a product or service

when he consumes or uses it and if the level of satisfaction experienced exceeds his

expectations, then he judges the product or service to be good quality. On the other

hand, if the level of satisfaction falls short of his expectations, he judges the product

or service to be poor.

3.4.4 A model of organizational performance

The model of organizational performance management has four components:

Customer needs;

Performance objectives;

Risk; and

Control.

Input Activity Output Economy Efficiency Effectiveness

Doing things right Doing the right things

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OBJECTIVE COMPONENT

YES Performance evaluation RISK COMPONENT No CONTROL COMPONENT

Figure 3.3: A model of organizational performance management

Adapted from: Barlow et al. (1995: 75)

The above model indicates that organizations exist to satisfy customer needs. The

customer satisfaction came from providing services that produce and deliver outputs.

Things that matter to the customer are quality of the output and how much it cost

them.

Customers needs/ expectations

Performance Objectives

Performance measures

Performance standards

Activities

Resources

Threats

Required performance

Actual performance

Does actual match

required?

Accept Risk

Reduce Risk

CONTROLS

Preventive Detective

Control Strategy

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3.4.5 Performance planning and implementation

Mintzberg (1994: 108), quoted by Halachmi (2002:238), said, planning is:

“About breaking down a goal or a set of intuitions into steps, formalizing those steps

so that they can be implemented almost automatically and articulating the anticipated

consequences or result of each step.”

Epstein, Grifel and Morgan (2004: 5-6) noted that the auditor advocates internally (to

management) to adopt performance management systems. The auditor may

encourage management to develop and implement such systems by , for example,

providing information on management improvements or operational benefits that can

be achieved by using such systems, briefing or providing guidance reports to

management on best practices in performance management, or providing guidance

on initial system planning and design.

Armstrong (2000: 23) stated that the framework for performance management is

provided by the performance and development plan (or agreement), which the

outcome of performance is planning. Performance planning is therefore the starting

point of the performance management cycle whereas Cascarino and Esch (2005: 78-

79) saw it as difficult parts of strategic management is to move from planning to

implementation of the strategic decisions.

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Witana (1997:2; 7), took it further by stating that effective planning cannot be done

without fully analyzing the environment in which the organization operates. Proper

implementation cannot go even forward without this effective planning.

3.4.6 Contributing to organizational performance

Barlow et al. (1995:41) echoed that the purpose of the auditing is to improve

organizational performance. Auditors can add value to the organization by improving

the performance of its activities and the quality of its managers. To contribute to

organizational performance auditors must have a thorough knowledge of the

business. If the auditor doesn’t understand the business, he may focus on the wrong

areas or fail to provide meaningful recommendations for improvement to


Ridley and Chambers (1998: 38) stated that to be effective, internal auditors must

have the acknowledged support of top management and the board of directors

through its audit committee. The education, experience, and professionalism of the

internal auditors help determine the effectiveness of the internal audit function.

Ree (2002:357) stated that nowadays, there are two important approaches that

contribute to organizational performance:

(1) achieving greater efficiency by reducing the occupancy costs by reducing the

amount of space per employee; and

(2) achieving greater effectiveness by improving the productivity of the employees by

providing a comfortable and satisfying working environment.

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The profitability or performance of an organization depends to a great extent on

meeting the generic performance criteria: effectiveness, efficiency, productivity,

flexibility, and creativity.

3.5 MEASURING PERFORMANCE

3.5.1 Introduction

Sureshchandar and Leisten (2005:26) stated that the word measurement is derived

from the Sanskrit word ‘‘maya’’ that means fantasy, illusion, delusion, hallucination or

mirage. The authors cited that numbers are supposed to throw some concreteness to

the otherwise abstractness of the characteristics being measured has got such a root.

But, perhaps it also reveals a subtle indication of the fact that measurement, if not

substantiated by solid concepts and theory, would be nothing but witchcraft. In an

environment of rapid change and fierce competition attempting to measure and

manage performance is obligatory.

Armstrong (2000: 52) voiced that it is often said that “if you can’t measure it, you can’t

manage it” and “what gets measured gets done”. Certainly, you cannot improve

performance until you know present performance is.

Epstein, Grifel and Morgan (2004: 5) noted that the auditor may provide advice on

determining performance measures or performance expectations. Working outside

the traditional audit process, the auditor advises management or other users of

performance information concerning what measures would be relevant indicators of

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an organization’s performance, or what performance expectations (e.g., goals,

objectives, targets) should be set. The auditor may also develop possible

performance measures, with other officials deciding on the final selection of

measures. Sources of advice for performance expectations can include historical

trends, legislative requirements, customer expectations, industry standards, and

internal or external benchmarks.

Armstrong and Baron (1998), quoted by Epstein, Grifel and Morgan (2004: 5), point

out:

“Measurement is an important concept in performance management. It is the basis for

providing and generating feedback, it identifies where things are going well to provide

the foundations for building further success, and it indicates where things are not

going so well, so that corrective action can be taken. In general, it provides the basis

for answering two fundamental questions: Is what is being done worth doing? and

Has it been done well?”

According to Tesoro and Tootson (2000: 6), performance measurement is a process

of developing indicators that report on the accomplishment and progress of an

organization. It includes both the setting of targets for desired performance and the

review of performance against these targets. Of course, to gauge performance

accurately, you must collect and evaluate information that is truly indicative of

performance.

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Robison (2004:510) argued that measurement has become such an accepted

approach within organizations that considerable effort is expended in trying to identify

“What” can be measured and “How” to measure it. However, few people genuinely

challenge “Why” they should measure in the first place. Every measurement activity

incurs costs to both implement and maintain. Every additional measure is potentially

reducing the efficiency of the process. Without the knowledge of the exact

circumstances under which a measurement system either will or will not improve the

performance, it is difficult to genuinely justify the additional cost of implementation a

measurement system.

3.5.2 Overview of performance measurement

Traditionally, while discussing performance measurement, three aspects have been

considered: cost, time and quality. Kueng (2000), quoted by Sureshchandar and

Leisten (2005:18), stated that normally it has been argued that process performance

should be measured in terms of quality, effectiveness, efficiency, timeliness and

costs. The author believes that process performance should not be focused on just

these generic aspects, but rather on those people who have an interest in the

business process; in other words the stakeholders. Such an approach of stakeholder

driven performance measurement lends greater credence to our approach of the

holistic scorecard that essentially aspires to address all the requirements of the

stakeholders and with strategies that will enhance business performance in its totality

(Sureshchandar & Leisten, 2005:18).

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Poister (2003: 4) viewed that performance measurement is intended to produce

objective, relevant information on program or organizational performance that can be

used to strengthen management and inform decision making, achieve results and

improve overall performance, and increase accountability. Osborne and Gaebler,

quoted by Poister (2003: 4) pointed out in the book Reinventing Government, “What

gets measured gets done” (1992:146).

Harry Hatry (1978:1), quoted by Poister (2003: 4), stated that a long time proponent

of performance measurement at the Urban Institute, has for some time used a sports

analogy to point out the need for performance measurement: “Unless you are keeping

score, it is difficult to know whether you are winning or losing”.

Performance measures help managers and others assess the status of their

agencies’ performance and gauge their progress in delivering effective programs. Or,

as Osborne and Gaebler, quoted by Poister (2003: 4), stated, “If you don’t measure

results, you can’t tell success from failure”. Furthermore, “if you can’t see success,

you can’t reward it”, and “if you can’t recognize failure, you can’t correct it”. Thus,

performance measures are essential for letting managers know “how things stand”

along the way so that they can act accordingly to maintain or improve performance.

Cascarino and Esch (2005: 34-35) stated that performance measurement is a

philosophy in which feedback is used to make ongoing adjustment to the way in

which an organization goes about achieving its vision. Cited by these authors, the

process starts with the setting of business objectives and the development of

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strategies and plans to achieve these objectives. This is followed by the development

of appropriate performance measures to assess progress towards the objectives.

Performance measurement is a balanced, methodical attempt to assess an

organization’s effectiveness in various terms – financial, client satisfaction, internal

business and innovation/learning.

Tesoro and Tootson (2000:7) voiced that the companies use performance

measurement systems in a number of ways, including: to gauge success in achieving

goals; to provide recommendations for organizational change; to give feedback to

management; and to assess internal inputs and outcomes.

As stated by Longenecker and Fink (2001:14-15), organizations which do not

integrate ongoing performance measurement and feedback into their management

development programs tend to experience lower than expected performance

improvements and higher dissatisfaction and turnover of their managers.

Performance feedback can be used to recognize and reward improvements in

performance, and provide an opportunity to demonstrate that the knowledge, skills, or

practices taught in training are truly valued by the organization and are critical to

career development.

3.5.3 The performance measurement system design process

Neely et al. (2002: 14) viewed that a process is a method of operation – the means by

which inputs are converted into outputs. During the process of designing a

performance measurement system (PMS), inputs such as the organizational context,

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the nature of market place and the business strategy have to be considered. Upon

completion of the process, a set of measures has to be implemented, which, if used

properly, will stimulate improvements in business performance. At the heart of this

process is a procedure – a set of logical steps.

Tangen (2005:46) echoed that a successful performance measurement system

(PMS) is a set of performance measures (i.e. a metric used to quantify the efficiency

and effectiveness of action) that provides a company with useful information that

helps to manage, control, plan and perform the activities undertaken in the company

whilst Epstein, Grifel and Morgan (2004: 4) saw it as systems or practices, or

management controls over systems, that are adequate to provide relevant and

reliable performance information.

Poister (2003: 15) noted that measurement systems are the principal vehicle for

observing, reporting, and using performance measures, and most people who are

directly involved in performance measurement are engaged in designing,

implementing, managing, maintaining, or using performance measurement systems.

As shown in Figure 3.4, in addition to the general management function, performance

measurement systems consist of three components, which pertain to data collection

and processing, analysis, and consequent action or decision making. First,

management is responsible for clarifying and communicating the strategic framework

within which the performance measurement system will be used – including the

agency’s mission, strategies, goals, and objectives, and the targets to be attained –

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and ensuring that the system is appropriately oriented to that framework. Second,

management is responsible for the design, implementation, and maintenance of the

agency’s programs, services, and operations, as well as standards, and for using

measurement systems to improve overall performance.

System Data Analysis Action

Management

Figure 3.4: Performance measurement systems

Adapted from Poister (2003: 16)

Tesoro and Tootson (2000: 9-10) argued that a practical performance measurement

system is composed of three simple elements: (1) a set metrics and indicators; (2) a

Mission Strategy Goals Objectives Targets

Programs Services Operations Standards

System purpose and

uses for performance

measures

Data collection

Data processing

Computation of

performance indicators

Quality assurance

Comparisons .Over time .Against targets .Across units .External benchmarks .Other breakouts

Decision regarding: . Strategy . Programs . Service delivery . Operations . Resources . Goals . Objectives . Targets . Standards Performance indicators Program evaluation

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reporting process and delivery tool; and (3) a diagnostic and analysis tool. The

elements are briefly described below.

Metrics and indicators. An interrelated set of indicators must be in place to gauge

the effectiveness of a process or outcome and facilitate internal comparison of an

organization’s performance over time (Tesoro & Tootson, 2000: 9).

Reporting Process and Delivery Tool. Regular, periodic examination of the

indicators is necessary to recognize trends and patterns and to plan appropriate

actions. Report on sales, inventory, accounting, and other departmental data in a

succinct, abbreviated format that permits managers to examine the relevant

information at a glance. The data can be presented in various formats, including hard

copy, oral presentation, electronic bulletin boards, and on the web (Tesoro & Tootson,

2000: 9).

Diagnostic and Analysis Tool. The process is as follows: “A document is needed

that helps people to interpret the data, compares projected results with actual results,

and lists any recommendations for performance improvement. This tool usually

presents an analysis of the results in terms of contribution to business goals.

Correlation between items and trend analysis are examples of techniques that you

can use to present your recommendations. It goes without saying that the information

must reach the right people at the right time in order to be an effective tool and that

these people act on the recommendations that the tool generates for them (Tesoro &

Tootson, 2000: 10)”.

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Ammons (1995:159) stated that to be successful, a performance measurement

program needs to be built around a common conceptual theme which continued over

time. And if the measurement is done on a one-time basis, it will neither highlight key

trends nor identify important changes in that specific performance over time.

Bititci, Carrie and McDevitt (1997:47; 49) echoed that the research to date revealed

two critical considerations with respect to the structure of performance measurement

systems: which are, integrity; and deployment.

Integrity

Integrity refers to “the ability of the performance measurement system to promote

integration between various areas of the business.”

Deployment

Deployment refers to “the deployment of business objectives and policies throughout

the hierarchical structure of the organization” as illustrated in Figure 3.5. The

objective of deployment, in this context, is to ensure that:

• performance measures used at various levels of the organization reflect the

business objectives and policies;

• deployment is consistent through the hierarchy of the organization;

• deployment is relevant and correct with respect to the impact and influence of

individual business areas (i.e. processes, functions and activities).

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The audit method

Having identified and defined the key characteristics of an integrated performance

measurement system (i.e. integrity and deployment), the researchers at the University

of Strathclyde have developed and tested a method for auditing the integrity and

deployment of the performance measurement system as defined in the reference

model. The audit process consists of three phases. These are: data collection;

integrity audit; and deployment audit.

Figure 3.5: A reference model for integrated performance measurement Systems Adapted from Bititci, Carrie and McDevitt (1997:50)

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Najmi, Rigas and Fan (2005:113-114) said that the framework was developed to

facilitate the reviewing of business performance and performance measurement

systems simultaneously and takes into account several key characteristics of the

PMS design process and its associated measures presented in the literature, as

shown in Table 3.1. Table 3.1 can be treated as a checklist when the PMS and

measures are being reviewed.

Table 3.1: Characteristic of PMS design process and measures Characteristics of PMS design process Characteristics of measures Performance measures should be derived Performance measures should from the company’s strategy enable/facilitate benchmarking The purpose of each performance measure Ratio based performance measures are must be made explicit preferable to absolute numbers Data collection and methods of calculating Performance criteria should be directly the level of performance must be made under control of the evaluated clear organizational unit Everyone (customers, employees and Objective performance criteria are managers) should be involved in the preferable to subjective ones selection of the measures The performance measures that are Non-financial measures should be selected should take account of the adopted organization The process should be easily revisitable – Performance measures should be simple measures should change as and easy to use circumstances change Performance measures should provide fast feedback Performance measures should stimulate continuous improvement rather than just monitor.

Adapted from Najmi, Rigas and Fan (2005:114)

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3.6 ASSESSING AND IMPROVING ORGANISATIONAL

PERFORMANCE Epstein, Grifel and Morgan (2004: 3-4) stated that organizational performance has

become an important issue for organizations as they face increasing demands to

demonstrate that they generate relevant outputs for clients and beneficiaries. The

auditor may use existing performance measures to assess performance. However,

when existing performance information is found inadequate during an audit, or when

the auditor is examining issues not adequately covered by current measures, the

auditor follows auditing standards issued by an appropriate authority to determine

what performance information is needed, obtains the required data, and issues a

performance audit report that reflects performance as measured by the auditor.

Standards used may be those issued by IIA.

Cascarino and Esch (2005: 38-39) stated that improving performance measurement

involves the development of integrated performance measurement systems.

Integrated systems are built around a strategic theme, such as business strategy or

value creation. Different approaches to performance assessment are briefly

introduced.

3.6.1 Why assess performance?

The adage ‘‘ if you do not know where you want to go, any path will take you there’’ is

more relevant in business performance measurement (BPM) than in any other field,

the rationale being that the central tenet of any performance measurement system

should be a tie-in with the logical success map focusing on goal congruence and

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organizational alignment. In today’s era of intense competition, organizations around

the globe have been more focused in assessing their own performances on a number

of criteria that are deemed critical for their long term survival and success

(Sureshchandar & Leisten, 2005:12).

The ability to define, measure, and evaluate performance is an essential condition for

its improvement. Before an organization can improve its performance, it needs to be

able to measure and evaluate its present performance. Periodic assessment not only

helps research organizations to improve their performance over time, but also provide

a means of communicating performance information to shareholders. While in the

private sector market share and profitability provide fundamental indicators of a

company’s performance, such measures do not apply in public-sector organizations

(www.isnar.cgiar.org/publications/pdf/rmg7-ch1.pdf).

3.6.2 Performance management

Aguilar (2003), quoted by Hass, Burnaby and Bierstaker (2005:180), indicated that

performance measures must be an integral part of the organization’s culture and

reward system. He stated that:

“The key purpose of performance management is to align the entire organization

behind the goal of turning the strategic plan into effective action. Communications

should serve to inform employees, to involve them in the process and ultimately to

empower them to implement change and to keep implementing change on an

ongoing basis.”

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According to Bititci, Carrie and McDevitt (1997:46), the performance management

process is seen as a closed loop control system which deploys policy and strategy,

and obtains feedback from various levels in order to manage the performance of the

business. The performance measurement system is the information system which is

at the heart of the performance management process and it is of critical importance to

the effective and efficient functioning of the performance management system. It is

asserted that performance management should be viewed as a key business process

which is central to the future well-being and prosperity of any manufacturing

enterprise.

Figure 3.6 summarizes this view of the performance management process (Bititci,

Carrie & McDevitt, 1997:47).

Figure 3.6: The performance management process and the position of performance measurement system Adapted from Bititci, Carrie and McDevitt (1997:47)

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Williams (2002:4) said that the need to measure and manage performance has long

been recognized as a universal issue affecting companies in all types of industries be

it a competitive or more in the demanding market.

Poister (2003:204-205) argued that in order for an agency to function effectively, it is

essential for managers, employees, programs, and organizational units to direct their

work toward meeting targets and accomplishing objectives that are consistent with

higher-level goals and objectives, top management priorities, strategic initiatives, and

the agency’s mission.

3.6.3 Defining Performance Measurements

Laitinen (2002), quoted by O’Regan and Ghobadian (2004:409), suggested that

performance “can be defined as the ability of an object to produce results in a

dimension determined a priori, in relation to a target”. He also suggests that a well-

organized system of performance measurement may be the single most powerful

mechanism at management’s disposal to enhance the probability of successful

strategy implementation. An effective performance measurement system ought to

cover all indicators of performance that are relevant for the existence of an

organization and the means by which it achieves success and growth.

Cascarino and Esch (2005: 142) stated that before measurement can take place,

standards must be defined. Measurement standards must be relevant to the task in

hand and accepted by both the controller and those being controlled. The

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measurement indicators themselves should be comparatively inexpensive but

effective.

On the other hand, Poister (2003:47) support the authors above by stating that for

the most part the relevant types of performance measures include measures of

outputs, efficiency, productivity, service quality, effectiveness, and customer

satisfaction. Depending on the purpose of a given performance measurement system

and the level of detail on which the monitoring may focus, various of these will be of

paramount importance, but it usually makes sense to consider all of these types of

measures in designing a performance measurement system.

According to Najmi, Rigas and Fan (1997:119), maintaining the effectiveness of the

organization and the measurement systems requires a systematic review process.

The process of reviewing performance is a complex task that spans the whole

organization. Involving the appropriate persons in spending sufficient time reviewing

the PMS is a costly exercise. Nevertheless, it is very important to the continuous

adjustment of the business and its performance orientation in today’s markets. A

good PMS review process seeks the correct balance between organizational benefits

and the efforts required.

All of these authors believe that in order for performance measurement to be

effective, there should be standards to measure such performance indicators and the

indicators concerned should be in such a way that they shown sign of efficiency,

effectiveness and customer satisfaction.

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3.6.4 Measuring Actual Performance

Cascarino and Esch (2005: 142-143) stated that after the performance

measurements have been agreed upon, actual performance can be measured. In a

continuous flow process, measurement may involve samples taken for evaluation. In

other types of process, external monitoring or observation for comparison to the

standard may be required. The simple process of measuring is insufficient. It is in

comparison to an appropriate standard that you can judge whether actual

performance is effective and efficient. If corrective actions are necessary, steps must

be taken to implement appropriate control structures to remedy the situation. This

could involve closer supervision of operations or improved detective controls.

Alternatively, the control cycle may need to be revisited in order to redefine standards

or introduce revised performance measurement criteria. The diagram below explained

in a nutshell steps to be taken in this particular process.

Figure 3.7: A typical control cycle

Adapted from: Cascarino & Esch (2005:142)

SETTING STANDARDS OF PERFORMANCE

DEFINING PERFORMANCE

MEASUREMENTS

MEASURING ACTUAL

MEASUREMENTS

COMPARING ACTUAL WITH STANDARDS

TAKING CORRECTIVE ACTION IF NECESSARY

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3.7 EVALUATING OPERATIONAL PERFORMANCE

An overview of evaluation

Chambers Dictionary defines the verb evaluate as:” to determine or estimate the

value of”. Value in this case does not necessarily mean monetary value but any kind

of value that a process of evaluation is connected to measurement. In order to

determine or estimate value, you must measure and be able to interpret the results of

that measurement. As in the case of strategic management, we do not measure for

the sake of measurement. We measure as a guide to future action. We want to know

how good our current strategy is, how well it is being implemented and what

adjustments are needed to improve what we are currently doing (Witana, 1997:6).

Witana (1997:1-2), continued to argue that, for many people, monitoring and

evaluation is not one of the ‘sexiest’ of subjects. It involves the clear definition of

measures and criteria, the systematic collection of data and painstaking analysis. Yet

evaluation is absolutely critical both to knowing where you are as an organization and

to identifying how you can improve what you are doing.

The research is about improving the performance of whole organization. It is

underpinned by the concept of evaluation - looking at what you are doing, measuring

the results and looking for reasons why things have gone well or badly. In particular,

nothing of any value can be done without evaluation. Even though evaluation and

review have a whole stage of the cycle to themselves, evaluation should never be

seen as something which is done only at the end of the process. Evaluation enables

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the strategy to be tested at every stage. Analyzing the environment will involve much

(sometimes painful!) evaluation.

The initial draft strategy must be evaluated by exposing it through consultation with

stakeholders. During implementation, good quality evaluation allows management at

every level in the organization to know what progress they are making towards their

goals and objectives and how well they are putting policies and values into practice.

Rouse and Puterill (2003:801-802), argue that performance evaluation is a

judgmental process with respect to a performance area concerning the

appropriateness and adequacy of goals, their decomposition and the organization

control system.

The appropriateness and adequacy of goals. Stakeholder expectations provide

major criteria in the evaluation of organization goals and its survival. For some

organizations, the needs of target groups must be explicitly included in the

evaluation. Conflict concerning appropriate goals and their relative importance

may arise where several cultures exist within the same organization. The

adequacy of goals is affected not only by this conflict but also by efforts directed to

learning to do better.

The decomposition of goals. A major principle of evaluation is that goals can be

pursued through strategies operationalised via plans and performance norms or

standards and accommodated within an organization control system.

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The organization control system. The organization control system comprises

performance measures, methods of data analysis and individuals engaged in an

evaluation of performance areas.

Accountability is a major purpose of the evaluation judgmental process requiring

consideration of the effectiveness, efficiency and economy of performance area.

Evaluation is viewed in a broad sense encompassing not only performance

measurement but also the raison d’être of the organization. The latter comprises

goals and objectives, organization structure taking into account operational and

support processes, and behavioral strategies such as worker empowerment and

reward schemes.

3.7.1 Productivity and performance measurement systems Overview Chambers and Rand (1997:13) stated that organizations are likely to have in place a

number of key performance measures, so as to, among other things, assess the

achievement of their objectives and goals, assess their progress, and compare

relative performance. The nature and form of such measures will, of course, vary

between types of organization and indeed specific specialized forms of measurement

may apply in certain industries or sectors. However, there are a number of general

measures of effectiveness, efficiency and economy which usually apply universally.

The need to apply effective and realistic performance measurement methods is often

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generated as a by-product of fundamental change processes where, for example, an

organization is re-focusing its strategy and position.

Ree (2002:358) argued that increasing prosperity, especially in the 1970s, led to a

new criterion for organizational focus: productivity. Customers become more and

more conscious of the value of service, quality, and other aspects.

Whereas Bolton and Heap (2002: 310), viewed performance and productivity as gains

that arise from improvement initiatives (of whatever form) must be consolidated

“locked-in” to the organization as a new baseline. Too often, this does not happen

and the gains are dissipated within a short time. This lock-in must be a positive act

which recognizes the gains and explicitly protects them.

The audit implication for measurement

Chambers and Rand (1997:13) voiced that during the course of a review of an

operational area, the auditor is often faced with the need either to set the review

findings into an appropriate context, or to indicate the performance of the area under

review against the criteria previously established by management. In most cases, it is

preferable to utilize the measurement standards and criteria put in place by

management as this results in the auditor using a common and compatible language

when communicating results and points of concern. Whatever the form of

measurement applied, its use must be founded on both accurate and reliable data

and a proven method; otherwise the credibility of internal audit will suffer.

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Chambers and Rand (1997:13-14) continued to argue that although it is important to

establish a reliable and meaningful vocabulary for the measurement of performance

in key operations, auditors must not lose sight of the fact that such measures can only

point to potential areas of improvement and do not of themselves offer solutions.

Assuming that the conclusions drawn from the review of such criteria are accurate

and relative, they can then be used to frame and support audit recommendations and

the appropriate corrective action(s).

3.7.2 Value for money (VFM) auditing

Ridley and Chambers (1998: 228) viewed that in essence, value for money auditing

endeavors to assess economy, efficiency and effectiveness making use of carefully

chosen and carefully interpreted performance measures. So the approach taken is a

value for money approach to evaluating the internal auditing function. A refinement of

the value for money audit approach is to organize the chosen performance measures

into three hierarchies where the more junior levels of performance measures are

intended to interpret the measurement of the more senior ones. The most senior

measure in each hierarchy is intended to most accurately reflect the most important

measure of economy (or efficiency, or effectiveness).

Barlow et al. (1995: 51) voiced that the increased emphasis on the accountability of

managers has led to a move towards VFM auditing. VFM auditing focuses on the

economical, efficient and effective use of an organization’s resources. This is what

managers now want auditors to examine. The public sector is using VFM auditing

more frequently. And, in the private sector, auditors are considering VFM issues.

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Even where traditional financial auditing is being carried out, e.g. in the safeguarding

of assets, auditors need to question whether these assets are needed in the first

place, an economy or efficiency question.

The writers have shown that, the concept of adding value to the auditing services for

the money being paid by the auditees, is of significance in the auditing field to survive.

3.7.3 Benchmarking

According to Witana (1997: 28), benchmarking is the making of external evaluations

of your organization’s performance that could be an extremely powerful tool in

improving the way your organization does things. Identify an area of your

organization’s activity which you feel could be improved (if possible, keep it

something relatively simple and straightforward). The following are the necessary

steps:

1. Identify the measures you will use - for example, time taken or cost - and evaluate

your current practice against those measures.

2. Choose an organization that you know of which uses a similar practice and which

you believe is more efficient or effective than your own. If possible, (probably by

contacting the organization and winning their co-operation) find out how efficiently

or effectively they carry out that practice in comparison with your organization.

3. Compare your efficiency or effectiveness with theirs. Try to identify, by talking to

the other organization, the reasons why their practice is better.

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St-Pierre and Delisle (2006:106-107) found the importance of evaluating performance

as obvious for business enterprises in general, and for Small and Medium Enterprises

(SME’s) in particular. Facing increased competitive pressure due to globalization, as

well as increased quality and service requirements from their customers, small- and

medium-sized manufacturers must increase their productivity and their

competitiveness in order to survive and prosper, even if they do not intend to become

“world class” enterprises. One approach to the evaluation of a SME’s situation is to

compare the firm’s business practices and performance with those of a group of

similar firms, that is, to “benchmark” the organization. As management challenges

have increased in complexity, benchmarking has become a strategic tool for

organizations of all sizes.

A full benchmarking exercise, such as that developed for large enterprises, does not

suit very well SME’s and their reality. Ribeiro and Cabral (2003), quoted by St-Pierre

and Delisle (2006:107), in a recent review of the literature on that topic, summarize

the benchmarking process in these four steps:

(1) planning, i.e. decide what will be part of the benchmarking exercise and who

will contribute to it;

(2) information gathering in order to establish the comparison basis;

(3) analysis of the gaps between the enterprise and its partner(s), on an individual or

collective basis; and

(4) adoption or implementation of changes in the enterprise in order to straighten

out the situation, if need be.

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3.7.4 Effective measuring of internal auditing’s contribution to the

enterprise’s profitability

Introduction

Chambers and Rand (1997:18) stated that at a time when internal auditing is being

challenged by outsourcing alternatives and by other methods of reviewing managerial

effectiveness, it is particularly important to be able to measure its contribution to the

enterprise’s profitability. In this section, it is taken a look at performance measures for

internal auditing – measures of inputs (economy), process (efficiency) and especially

outputs (effectiveness). Appropriate specific measures are recommended. In doing

this it will be identifying the key aspects of internal auditing which need to be focused

upon in order to improve internal audting’s contribution to the enterprise’s profitability.

It is considered the difficulties of reaching reliable measures of internal audit

performance, and a distinguish between qualitative and quantitative measures. It is

suggested a value for money approach to assessing internal audit performance.

It will be necessary to identify the categories of performance measures which may be

used to evaluate internal audit performance and the strengths and weaknesses of

each. Advice on their interpretation is given. The measurement of internal audit is

placed in context with: (a) the general business environment, (b) professional

standards for internal auditing, and (c) good management practice on planning and

control.

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Placing internal audit in context

Ridley and Chambers (1998: 215) stated that whether or not internal audit prospers in

constrained times, in such times it certainly behooves internal audit to be able to

demonstrate that their activity’s cost effective and is managed so as to maximize its

cost effectiveness. Where internal auditing is not a mandatory requirement, by statute

law or by regulation, there is added pressure for audit to be able to demonstrate its

worth. There are indications that managements are now placing internal auditing

under a microscope, with the intention of determining whether it pays its way. Internal

auditing is a costly service to run. Large amounts of profits from sales are needed to

resource even a modest internal audit function.

Integrating performance measures with good management

The performance measures used to evaluate internal audit should harmonize with

those which are applicable to the enterprise as a whole (Ridley & Chambers,

1998:226-228):

“The importance of the objectives identified for audit is that these should underpin an

organization’s overall aims and objectives, so that audit’s achievements aid the

development of the organization as a whole.”

Top management and the board should take the trouble to satisfy themselves that

this is so. The Charted Institute of Public Finance and Accountancy (CIPFA) suggests

there are four fundamental questions to be asked of internal auditing without which

performance measures for internal audit have little meaning:

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1. Does internal audit have agreed and established goals?

2. Is the work planned and resourced in such a way as to make achievement a

realistic possibility?

3. Does the achievement of these goals contribute to the attainment of the corporate

objectives, i.e. establishing and maintaining internal control?

4. Does internal audit achieve its defined goals?

These questions should be addressed by the audit committee, by management, by

the head of internal audit, and by external audit. The Charter of the internal auditing

unit is a device which assists greatly in enabling these four questions to be answered

in the affirmative.

Interpreting performance measures

Ridley and Chambers (1998:226) voiced that any performance measure may mislead

if it is interpreted on its own. There is a need to be cautious about placing too much

confidence in performance measures. It might be that they indicate a high degree of

audit success and yet overlook important issues which bear upon internal audit

effectiveness. Here just two possible issues of this sort are highlighted:

First, audit independence. This is prerequisite of successful internal auditing.

Secondly, the scope of internal auditing work. Two quotations are helpful here:

“Whether or not audit is able to perform the full range of audit functions effectively and

efficiently largely depends upon management attitude and support, which is itself

largely influenced by status and independence. The real sign of independence is that

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auditors are not impeded in their efforts to examine any area within the organization

whereas status often determines the significance attached to audit findings by

management. There is no persuasive reason why… internal auditing should not

[appraise operations generally, weighing actual results in the light of planned results].

Perhaps the only limiting factors are the ability to afford so broad an audit, the

difficulty of obtaining people who can do a broad type audit, and the very practical

consideration that individuals may not like to be reported upon. While persons

responsible for accounts and for the safeguarding of company assets have learnt to

accept audit, those responsible for far more valuable things – the execution of plans,

policies and procedures of a company – have not so readily learnt to accept the idea.”

3.8 SUMMARY

An internal auditor must ensure that all services contribute to organizational

performance. Where an organization provides more than one service to achieve its

mission, the internal auditor needs to concern himself how well the organization

performs in all services. The service concept internally must be applied by internal

auditor, just like the organization provides external services; each unit provides a

service to other units – its internal customers. The service concept should apply to all

levels within the organization.

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CHAPTER 4: RESEARCH METHODOLOGY

4.1 INTRODUCTION

This chapter describes the method through which the information was gathered that

was used in showing the role of internal auditing in the organizational performance for

the Rwanda Revenue Authority. Issues such as data collection, data analysis are

discussed.

4.2 RESEARCH DESIGN

Perspectives on research methodology

The term “research methodology” is commonly used, but what exactly is meant by it?

Does it refer to approaches, methods, techniques or instruments, or “all of the above”.

Mouton (1998:37), distinguished between three levels of the methodological

dimension of research, namely: methodological paradigms, research methods and

research techniques. Methodological paradigms which is the most abstract level,

include the distinction between qualitative and quantitative research whereas

research methods are those used in certain stages of research process, for example

sampling, data collection and data analysis.

This dimension between paradigms, methods and techniques is helpful in forming a

better understanding of the concept “research methodology”. The three levels are set

out in table 4.1

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Table 4.1: Three levels

LEVEL EXAMPLE

Methodological paradigms Qualitative or quantitative research

Research methods Sampling; data collection; data analysis

Research techniques Sampling techniques; data collection techniques;

data analysis techniques

Adapted from: Mouton (1998:37)

Other terms related to research methodology are “research strategy” and “research

design”. Du Plooy (2001:81) cited that research strategy guides research effort by

defining the context within which it will be conducted and it also provides link between

the research objectives and research activities while research strategy is derived from

the methodological paradigm – qualitative or quantitative – that fits a particular

research problem. Research design is defined as a plan of how a research project will

be conducted, who or what is involved, and where and when it will take place.

In this chapter, a combination of Mouton’s (1998) three methodological levels and the

concepts “research strategy” and “research design” is used to describe the

methodology used in this study.

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Research design encompasses factors such as researcher control of variables, time

dimension and research environment. These factors are described in the sections

that follow, as they apply to this study.

Control of variables

According to Leedy (1997:189), an ex post facto research design aims to study a

specific situation or phenomenon as it is. No attempt is made to manipulate any of the

variables in the situation. Cooper and Schindler (2003:149) remark that researchers

should avoid manipulating variables, but they should adhere to sampling procedures,

otherwise bias will be introduced. This is in contrast to experimental designs, where

variables are deliberately manipulated in order to observe cause-and-effect

relationships. This study is therefore based on an ex post facto research design.

Time dimension

According to Cooper and Schindler (2003:149) a cross-sectional study is carried out

only once and provides a snapshot view of a situation or phenomenon. The objective

of this study was to describe a current situation, not to observe trends or changes.

Although future studies might be undertaken to establish whether changes have

occurred in the approach of internal auditing, the danger of bias exists when data is

collected a second or third time from the same respondents. Therefore, a cross-

sectional time dimension is appropriate for this research.

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Research environment

According to Cooper and Schindler (2003:150) research can be undertaken either

under actual environmental, laboratory or simulated conditions. Research undertaken

in the actual environment is known as field conditions. This study is undertaken under

actual environmental conditions and can therefore be classified as field research.

4.2.1 Research objectives

In order to address the research problem in an organized and systematic manner, the

following research objectives have been formulated:

To understand the importance and advantages of the internal auditing within

an organization

To explain how an Internal Auditor can contribute to organizational

performance


organizational performance

To propose measures to increase organizational performance through an

effective internal audit service.

4.2.2 Research methods and techniques

In this chapter the more concrete levels of research methodology are discussed.

These include data collection and data analysis methods and techniques. The

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method of the study is to gather and analyze data from literature, questionnaire and

interview.

4.2.3 Selection of targets groups

Rwanda Revenue Authority (RRA) is the universe of the survey. This organization

was selected based on only the following criteria: It is one of the few organizations in

Rwanda that has established an internal audit function. A survey questionnaire was

administered to three categories of employees in the targeted population. The first

category was comprised by top managers (Questionnaire A), the second was

composed of the internal auditors (Questionnaire B) and the third concerned the

middle managers (Questionnaire C). Given that the number of respondents was

small, there was no need of sampling.

4.2.4 Questionnaire and personal interview

The self-administered questionnaire has become ubiquitous in modern living. Often a

short questionnaire is left to be completed by a participant in a convenient location or

is package with a product (Cooper and Schindler, 339).

This research used a traditional paper questionnaire. The researcher first answered

the questionnaires, and then the questionnaires sent to a few selected individuals.

These individuals then had to explain what they understood from the questions. In

this way the researcher could be sure that the targeted population would understand

the questions. With all these questionnaires, the objective was to determine the

validity and reliability of the information that was put together and respondents

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themselves have to complete the questionnaires. Total validity and reliability is always

the ideal during the project. Rating scales is used as a response method. It consists

to judge properties of objects without reference to other similar objects.

A personal interview (i.e. face-to-face communication) is a two-way conversation

initiated by interviewer to obtain information from a participant. The differences in the

roles of interviewer and participant are pronounced. They are typically strangers, and

the interviewer generally controls the topics and patterns of discussion. The

consequences of the event are usually insignificant for the participant. The participant

is asked to provide information and has a little hope of receiving any immediate or

direct benefit from this cooperation. They are real advantages as well as clear

limitations to personal interview. The greatest value lies in the depth of information

and detail that can be secured.

The interview can also do more things to improve the quality of the information

received than with another method (Cooper and Schindler, 323; 325). This is the

reason why personal interview is used in this research; it helped to compensate the

eventual shortcomings of the questionnaire.

4.2.5 Data preparation, processing and interpretation


below:

- Documentary sources

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- A survey questionnaire



compensating the eventual shortcomings of the questionnaire.

The data gathering process entails the collection of primary and secondary data.

Wegner (1999:13) defined primary data as “data which is captured at the point where

it is generated…” and secondary data as “data collected and processed by others for

a purpose other than the problem at hand…” Cooper & Schindler (1998:78) describes

primary data as “data that is collected for its closeness to the truth and control over

error in order to answer the research question”. They further stated that secondary

data is data that is collected through studies made by others and has at least one

level of interpretation (analysis) performed upon the data. The said authors suggested

a strategy for the collection of secondary data, namely:

Select and analyze a topic

Explore the topic and form a focus

Get an overview and retrospective information

Get more current or specific information

Get more in-depth information

Evaluate the information found to determine if it is relevant and appropriate.

Open-ended and close-ended questions require different types of data analysis. The

different methods and techniques were used in this study. The researcher coded all

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answers from the different questionnaires and all the data was captured and

computerized. The researcher was responsible for the capturing, coding and the

verification of data.

Once the data begin to flow in, attention turns to data analysis. If the project has been

done correctly, the analysis planning is already done. Decisions should have been

made about how to analyze the data. Two topics are addressed. Firstly data is

prepared, which includes editing, coding, and data entry. These activities ensure the

accuracy of the data and their conversion from raw form to reduced and classified

forms that are more appropriate for analysis. Secondly, the preparation of a

descriptive statistical summary was used to understanding the data being collected

(Cooper and Schindler, 2003:454-455).

The first step of data analysis was about organizing raw qualitative data by using

coding technique. The open coding focusing on major themes or concepts which was

identified during the analysis such as organizational performance, effective internal

auditing, and internal auditing contribution in organizational performance was used.

In the second phase, data falling under each of the three themes or question was

analyzed, interpreted separately, and integrated in the underlying theories and

thereafter a holistic picture of the analysis depicting the contribution of internal

auditing to Rwanda Revenue Authority’s performance was highlighted.

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4.3 SUMMARY

The aim of the research was to investigate the function of internal auditing in

improving the organizational performance in RRA. This chapter showed the

methodology and techniques used in this research. The target population of the study

was composed by all senior managers, middle managers and internal auditors and

questionnaires were distributed respectively to the group concerned.

The questionnaires were distributed, with the assistance of the internal audit division,

to all senior managers, middle managers and internal auditors. The researcher

collected the completed questionnaires from the respondents. These actions (the

efforts of the researcher and internal audit division) ensured the validity and reliability

process of the study. The feedback on the questionnaires represented 86% of the

targeted group for this empirical research.

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CHAPTER 5: RESULTS AND DISCUSSIONS

5.1 INTRODUCTION

In chapter 1, the conceptual framework underlying this study is set out. The purpose

of this chapter is to report the findings of the empirical component of the study. As

stated in chapter 1, the study reported here examined how the internal audit can

contribute to improve the organizational performance of the Rwanda Revenue

Authority (RRA).

Every research project is characterized by a certain research strategy and design, as

well as specific research methods and techniques. As a result, every research project

is set within a particular context. It is important to always to take this context into

account when analyzing the data obtained and interpreting the results. For example,

this study is exploratory in nature. However, the purpose is not to generalize the

findings to the population, but to gather a wide range of perspectives on internal audit.

Furthermore, information about response rate, as well as the profile of units of

analysis and data sources, help to build the context of the study.

The methodology used in this research is qualitative in nature. A survey is used to

address the knowledge of and the role played by internal audit regarding the

contribution in organizational performance. A structured self-questionnaire is

administered to the target population and a supplementary interview was also

administered for compensating the shortcomings of the questionnaire. The

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questionnaire was constructed from information gained by an extensive review of the

literature.

The respondents comprise of RRA employees; managers on one side, considered

here as auditees and all senior and middle managers were selected. These were

expected to provide information relating to their satisfaction with the internal audit

function. On the other side, the RRA internal auditors were covered to provide

information on the impact of their work and different problems associated to their

assignments. In this chapter, the case study is briefly presented. The chapter

concludes with a number of general conclusions that can be drawn from the results.

5.2 CASE STUDY PRESENTATION

5.2.1 Background

The Rwanda Government announced the idea of setting up the Rwanda Revenue

Authority (RRA) in February 1997 as a major tax modernization initiative to try and

redress the detrimental impact on the revenue collecting capacity of the Departments

of Tax and Customs shattered by the events of the 1994 war. Rehabilitation of these,

therefore is the background to the formation of the RRA in the quest to restore

procedures and controls by the government of Rwanda.

Also, RRA has been created after the Government has realized the success of other

similar bodies in neighboring countries such as Tanzania (Tanzania Revenue

Authority), Uganda (Uganda Revenue authority) and Ghana (Ghana Revenue

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Authority). The Government of Rwanda has decided to deal with that issue by

adopting the policy used by other countries.

Parliament having reviewed changes to fiscal policy in January 1998, preparations

were made and on the 1st January 1998, the autonomous of the RRA was launched.

In nutshell, the (RRA) is a quasi-autonomous central body that was established in

1998 with the tasks of assessment, collection and accounting for tax, customs and

other specified revenues, and for administering and enforcing the laws relating to

those revenues.

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Figure 5.1: RRA STRUCTURE 2006

In accordance with the law no 15/97 of 08 November 1997 establishing the RRA, in

its article 5 and 6, RRA is a public institution put under the responsibility of the

Ministry in charge of finance. RRA has the powers to establish contributions in terms

of tax and customs duties, to receive them, and to take up administrative functions as

well as to account for them to the tutor authority in the limitation of the fiscal and

customs laws. It is also in charge to grant exemptions provided by the fiscal and

customs laws, in accordance with the procedures it has adopted. Moreover, the RRA

has the duty to give advice to the government regarding policies on revenues.

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The RRA is governed by the Board of Directors which is composed by eight

members:

The president of the council, nominated by an order of the Prime Minister, upon

decision of the cabinet of Ministers;

The Commissioner General;

The Secretary General in the Ministry in charge of commerce and industry,

member of the duty;

The Governor of the national Bank of Rwanda, member of the duty;

Three members of integrity and distinguished of sectors of accounting, law or

economics or other relevant sectors, nominated by the Prime Minister, upon

decision of the cabinet of Ministers.

These have overseeing powers generally and are policy makers in particular.

However, they are responsible to the Minister of Finance and Economic Planning.

Apart from the Board of directors, there is another committee, “the management

team” which governs the RRA and it is responsible of the RRA management and this

on daily basis. At the top of the committee, there is the Commissioner General, who is

the chairperson of that committee, deputized by the Deputy Commissioner General

helped by four Commissioners (the Commissioner of Customs and Excise

Department, Internal Revenues Department, Large Taxpayers Department and

Internal Assurance Department). On that committee, there are also six Directorates

commonly known as support Departments. Those are:

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The Directorate of the Revenue Protection (RPD);

The Directorate of Information Technology (IT);

The Directorate of Legal and Taxpayer Services;

The Directorate of Finance;

The Directorate of Human Resources and Administration;

The Directorate of Planning and Research.

5.2.2 CORPORATE STATEMENTS

RRA Vision

“To become a highly efficient and modern revenue collection agency enhancing

national growth and development, and instilling equity, transparency, and professional

values in RRA staff.”

RRA Mission Statement

“To contribute to the national development of Rwanda by maximizing revenue

collection at minimum cost and providing quality input to tax policy development,

while ensuring a high quality and equitable service.”

RRA Core Strategic Values

Commitment to RRA’s vision and mission

Integrity, honesty, professionalism and team working

Respect and courtesy

Transparency in service delivery, and

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A customer focused approach

RRA Mandate

The Rwanda Revenue Authority was established under law No 15/97 of 8 November

1997 as a quasi-autonomous body charged with the task of assessing, collecting, and

accounting for tax, customs and other specified revenues. This is achieved through

effective administration and enforcement of the laws relating to those revenues. In

addition, it has been mandated to collect non-tax revenues under Ministerial Order

number 006/03/10/min of 9 May 2003.

The Authority is also responsible for providing advice to the Government on tax policy

matters relating to revenue collections. And finally, RRA performs other duties in

relation to tax administration, as may be directed by the Cabinet. It was established

as part of the reform program by the Government of Rwanda designed to restore and

strengthen the main economic institutions of the country. In establishing the Authority,

the Government wanted to improve its resource mobilization capacity while serving

the public with better quality and courteous service. The Authority is therefore

required to assist taxpayers in understanding and meeting their tax obligations.

5.2.3 BUSINESS ENVIRONMENT

The performance of the RRA is critical to the success of the Government of Rwanda's

economic and social reform program, including the alleviation of poverty. The

Authority also works to create an improved tax environment, which will encourage

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enterprise and help to promote international trade and sustainable, longer-term

economic growth.

The most important task is, and will continue to be, the maximization of revenue

receipts. The RRA's success in this will depend partly on factors which the Authority

does not control, notably the existing framework of tax policy and legislation, which is

set by the Government, and the current health state of the monetized part of the

Rwandan economy. There are many other challenges, opportunities and areas for

further improvement that need to be addressed, and these will form a central part of

the RRA's strategy and core priorities for 2006 and beyond. A fairly scanned business

environment in which RRA operates is summarized below:

Table 5.1 : RRA SWOT SUMMARY

STRENGTHS

1. Existence of trained, experienced and

committed staff;

2. Establishment of RRA Tax Training

Institute that will enhance skills;

3. Existence of a One Stop Centre to house

all RRA departments;

4. Decentralized operations through district

offices;

5. A fully functioning e-document system that

minimizes costs and increase efficiency;

WEAKNESSES

1. Uncompetitive staff remuneration

package;

2. Weak performance management systems

particularly performance appraisal system;

3. Inadequate supervisory skills by some

managers;

4. Weak research and operational policy

functions;

5. Inadequate skills in ICT among staff and

limited number of ICT literate staff;

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6. computerization of core functions and

availability of basic IT infrastructure;

7. Simplified and predictable legal

framework;

8. Quasi autonomous status and flexibility in

decision making;

9. Strong and capable tax education and

public relations structures;

10. Flexible and Dynamic Senior Management

Team;

6. Absence of a taxpayer master file and

updated taxpayer’s account;

7. Limited interface between RRA systems

and with key stakeholders;

8. Negligence behavior and corrupt

tendencies amongst some officers;

9. The culture of some managers that tend

to be passive to avoid confrontation;

10. Limited skills in new and specialized areas

like Negotiation of DTA’s, control of

counterfeit goods and so forth;

OPPORTUNITIES

1. Good political support from the

Government;

2. Flexible and targeted donor support

especially from DFID;

3. Enabling environment to fight against

corruption;

4. Smooth cooperation with other revenue

bodies as well as other national and

international bodies;

5. A healthy macro-economic environment;

6. Growth of ICT infrastructure countrywide;

THREATS

1. Political instabilities in some neighboring

countries and weak tax administrations;

2. Limited literacy levels of the tax paying

public that limit its compliance capacity;

3. Inadequate financial and capital

resources;

4. Growth of regional integration,

globalization and Internet trade and the

associated tax planning practices;

5. Decline in power supply that affects

national output;

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7. Stable political environment;

8. Privatization of public enterprises;

9. Growth in trade as the private sector gets

more organized;

10. Promulgation of the law regarding the

Licensing tax practitioners;

6. Inadequate use of ICT by taxpayers and

other stakeholders;

7. High revenue targets that are frequently

revised upwards;

8. High transaction costs associated with the

transfer to the new building and

associated transitional adjustments;

5.2.4 STRATEGIC DIRECTION: 2006 – 2008

In its desire to achieve both its Vision and Mission, the organization has set for itself

the following strategic goals for the next three years, and these are enshrined in the

organization’s corporate statements. The under listed major strategic objectives are

central to the achievement of our goals and will significantly guide our focus:

5.2.4.1 Maximization of the Flow of Revenue

Maximize the flow of tax and non tax revenues to the Government through

effective identification of taxpayers, assessment and collection of revenues in

accordance with the revenue laws in force;

Deter, detect and prosecute evasion, smuggling and other breaches of tax and

customs legislation, and other specified legal instruments to minimize revenue

leakage;

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Ensure proper revenues accountability through increased use of commercial

banks in revenue collection and effective revenue reconciliations;

5.2.4.2 Maintaining Effective Financial Management Systems

Ensure effective mobilization of RRA resources through effective reconciliation

of tax revenues and non tax revenues transferred to the Central Bank and the

amount retained by RRA as well as effective collection of replacement fees;

Manage RRA resources efficiently though the development of efficient and

effective systems and procedures to control costs;

Maintain proper records and accountability through keeping standard books of

accounts and preparing financial statements in accordance with the financial

regulations and accounts manual;

5.2.4.3 Maintaining Sound Internal Business Process

Implement flexible and adaptable organizational structures and processes to

support our strategies;

Effectively implement the business systems and procedures and keep them

updated with a view to achieve the RRA's strategic objectives.

5.2.4.4 Developing a Capable and Effective Organization

Develop and enhance Human Resources capacity, and policies;

Improve motivation and efficiency in staff performance;

Development and improvement of infrastructure facilities;

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5.2.4.5 Satisfying Customer and Stakeholder’s Requirements

Foster voluntary compliance through the delivery of enhanced program of

taxpayer education and high quality customer services;

Provide quality input to the development of revenue laws by regularly reviewing

the impact of revenue laws on economic performance;

To provide stakeholders across the Government of Rwanda with the

information and services that they require to contribute to national planning and

development;

Develop and enhance cooperation with relevant international and regional

bodies in tax matters;

5.2.5 REVENUE AND FINANCIAL PLAN

5.2.5.1 Revenue Projections

The revenue targets for 2006 including non-tax revenues amount to Rwandan francs

(Rwf) 176.2 billions. The revenue targets for 2005 amount to Rwf 166.9 billions

including non-tax revenues. This is 5.6% growth in 2006 compared to the targets of

2005. Revenue projections for 2006 and subsequent period to 2008 are shown

hereunder:

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Table 5.2 : RRA Revenue collections 2002-2005 and Projections 2006-2008

Rwanda: Revenue

(in billions of Rwf) 2002 2003 2004 2005 2006

2007

2008

Proj Proj Proj

Total Revenue 94.1 117.0 138.1 166.9 176.2 188.8 214.2

Total Tax Revenue 94.1 114.9 134.6 159.7 170.5 185.3 210.7

Direct Taxes 30.3 35.2 38.1 49.1 51.0 55.0 65.2

Taxes on Goods and

Services 47.4 57.6 70.2 82.0 89.2

97.4

108.2

Taxes on International

Trade 16.4 22.1 26.3 28.6 30.3 32.9

37.3

Non Tax Revenue - 2.1 3.5 7.2 5.7 3.5 3.5

5.2.5.2 Budgetary Considerations

The Government formally approved a 2.6% of the total collected revenue as retention

to finance the RRA’s expenditure budget. Although this approach allows timely

availability of funds to the RRA, experience has shown that this ratio is below the

RRA requirements to meet the ever increasing demands.

The RRA total recurrent expenditure as a percentage of revenue collected from 2000

to 2004 has been respectively 3.8%, 3.4%, 3.7%, 3.3% and 3.2%. The RRA will try to

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negotiate for an increase in the ratio to the range of between 3 and 5%. In the mean

time, RRA will try to confine its total recurrent expenditure to the approved levels. On

the basis of the approved levels, the RRA’s medium term expenditure forecast is

illustrated in the table below on the presumption that retention rate remains at 2.6%.

Table 5.3 : RRA Projected revenue retention from revenue collections 2006- 2008

2006 2007 2008

Total Revenue Projections

Rwf 176.2 billions

Rwf 188.8 billions

Rwf 214.2 billions

RRA total recurrent expenditure

Rwf 4.58 billions

Rwf 4.91 billions

Rwf 5.60 billions

While the Government will continue to be at the forefront in financing RRA activities,

the Authority shall in addition seek to ensure that it has necessary financial resources

needed to enable it achieve all of its objectives in the most efficient and effective way.

In this regard, the Authority shall continue to work very closely with its key strategic

partners like UK DFID (Department for International Development) in closing resource

gaps identified.

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5.2.6 MONITORING AND EVALUATION ARRANGEMENTS

5.2.6.1 Monitoring and Evaluation Mechanism

Monitoring, evaluation and review mechanisms are critical if the corporate plan is to

be used effectively. It allows for the evaluation and monitoring of performance

against the targets that are set for the RRA as a whole. It is through this process that

one understands how well the RRA is performing during the plan period and where

necessary, makes appropriate adjustments so as to effectively deliver the stated

objectives.

The Department of Research and Planning will be responsible for coordinating

Corporate Plan monitoring arrangements. Every end of the week, departments will be

producing flash reports indicating progress towards achieving monthly targets. Flash

reports will be submitted to the Office of the Commissioner General and copied to the

Department for Research and Planning for follow up. At the end of every month, the

Department shall produce a Corporate Plan monitoring report on the basis of monthly

performance reports from departments. Departments shall regularly submit their

monthly performance reports to the department of Research and Planning using a

prior agreed format that will be approved by the Senior Management Committee.

On a departmental level, business plans shall be considered by their management

team on a quarterly basis. Quarterly progress reports on implementation of

departmental business plans shall thereafter be presented to the Senior Management

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Team through a consolidated report that will be prepared by the department of

Research and Planning.

5.2.6.2 Caveat

The main determinants of any underlying growth in tax revenues will be economic

growth, together with the framework of tax policy and tax legislation that is set by the

Government and these are not factors, which the RRA itself controls. The resources

that are made available to the RRA through the budgetary process are another critical

factor. If the RRA is not adequately funded, it will not be able to achieve all of the

improvements in its operations that would otherwise be possible and achievement of

the revenue maximization target will be put at risk. That includes achievement of

some of the specific objects and targets set out in its Corporate Plan. Adequacy of

funding for essential capital expenditure is seen by the RRA as being particularly

important in this context.

Subject to these limitations and constraints, however, the RRA is determined to bring

about a progressive, substantial and sustained improvement in the efficiency and

effectiveness of all of its operations over the short to medium term, building on the

measures that have already been taken (RRA Corporate plan 2006-2008).

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5.2.7 Quality Assurance Department

The research has been performed in the whole organization especially in one of the

Quality Assurance department’s divisions, that is, the Internal Audit Division.

The Quality Assurance Department is on of the six departments of the RRA. The

quality assurance department main objective is to ensure and provide assurance to

the Ministry of Finance and Economic Planning, the RRA Board of Directors and the

Senior Management of the efficiency and effectiveness of the operating internal

control system as well as promoting staff integrity. It is also responsible for providing

assurance that tax service is delivered to taxpayers in as cost effective and painless

manner as possible with maximum satisfaction and durability to the user or recipient.

All activities undertaken by the Quality Assurance Department should contribute to

achieving this mission. It is the responsibility of every member of the department to

ensure that they utilize their time efficiently and effectively in pursuit of this aim.

The department is headed by the Commissioner of Quality Assurance. It is composed

of two divisions and one section called Quality Assurance Unit, these are:

Internal affairs division

Quality assurance unit

Internal audit division

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Internal affairs division

The role of internal affairs division is to investigate corruption, theft and other serious

staff malpractice and obtain evidence to enable offenders to be punished, thus

creating an effective deterrent. The internal affairs division seeks to achieve this

objective by identifying and investigating corruption, theft and other serious staff

malpractice within the RRA; participating in disciplinary committee hearings; advising

departments about weaknesses in their systems and procedures that facilitate

corruption and malpractice and; making recommendations to departments as to how

weaknesses can be rectified. The long-term aim of the division is to completely stamp

out corruption within the RRA.

The division is comprised of two sections and headed by the principal internal affairs.

As at 1st of April 2004, the internal affairs division is composed of five officers: the

principal internal affairs officer, two senior internal affairs officers and two internal

affairs officers. The two sections are headed by senior internal affairs officers. Each

section has its own area of investigation. One section is charged with identifying,

detecting and investigating staff malpractice in customs and RPD operations and

another section is charged with identifying, detecting and investigating staff

malpractice in larger taxpayers, internal revenue departments and other support

departments.

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Quality assurance unit (QAU)

This section provides a summary of the role and responsibilities of quality auditors

and objectives of quality assurance and how it interacts with customers involved in

quality management to support the work of the RRA. Based on the below definition

the scope and parameters of the quality assurance function are defined. Currently,

the QAU is headed by a quality assurance team leader who reports to the

Commissioner for Quality Assurance Department. The unit is responsible for

providing assurance on quality of service delivery and evaluates standards of

conformance.

Internal Audit Division (IAD)

The role of IAD is to give assurance to the Minister of Finance and Economic

Planning, the Board of Directors, the Senior Management, that the internal control

systems put in place within the RRA are implemented economically, effectively and

efficiently. The IAD is responsible for carrying out audits of systems and procedures

throughout the RRA to ensure that they are both appropriate, being applied correctly

and to give recommendations.

The division is comprised of three sections and headed by the principal internal

auditor. As at 1st of April 2004, the IAD is composed of ten officers, the principal

internal auditor, three senior internal auditors and six internal auditors. The three

sections are headed by seniors’ internal auditors. Each section has its own area of

carrying out internal auditing. One section is charged with carrying out audits in

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customs department, the other is charged with carrying out audit in large taxpayers

department and lastly the third one is charged with carrying out audit in internal

revenue and RPD departments. Following other support departments, the above-

mentioned sections carry out audits basing on operational plan (RRA Quality

Assurance Department: Processes and Procedures).

Figure 5.2: Organization structure of Quality Assurance Department

Adapted from RRA Quality Assurance Department: Processes and Procedures (July 2004)

5.3 RELIABILITY AND VALIDITY

It’s important that the measuring instruments used ensure some measures of

reliability and validity. According to Welman and Kruger (2001:38), “the validity of a

measuring instrument is reflected in the extent to which it measures what it is

intended to measure”.

Commissioner

Secretary Quality Assurance Unit

Internal Audit Division

Internal Affairs Division

Internal Auditor Team Leader



Internal Affairs Team Leader

Internal Affairs Team Leader

Internal Auditors Internal Auditors

Internal Auditors

Internal Affairs Officers

Internal Affairs Officers

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Sapsford and Jupp (2006:23; 121) pointed out that “Validity is the extent to which the

research conclusions can plausibly be taken to represent a state of affairs in the wider

world”.

Population validity: the extent to which a sample may be taken as representing or

typical of the population from which it is drawn.

Validity of measurement: the extent to which we are assured that the

measurements in the research do indeed represent what the researcher says they

represent and are not produced by the research process itself.

“Reliability is the stability of a measure; the extent to which scores do not change over

a relatively short time.”

To ensure that the concept of validity and reliability is adhered to in this study,

questionnaires were distributed to all the managers and internal auditors selected as

targeted population. The entering of data on a computer was validated and all

calculations were done on a spreadsheet and statistical packages (Excel and SAS

System) and could therefore be compared to eliminate errors. The data set was also

checked in order to minimize mistakes. This was done with the support of the

Statistical Service Division of the Directorate of Research and Development at

Tshwane University of Technology.

Methods are used to ensure validity and reliability of data. The following measures

were used to ensure the reliability and validity of the questionnaire:

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The researcher distributed the questionnaires to the selected population to ensure

that the recipients understood the instructions, in order to avoid spoiled or

incomplete questionnaires

Appropriate statistical techniques were used to analyze the information collected.

5.4 ANALYSIS OF RESPONSES

A structured questionnaire was compiled for this study in order to gather the required

data. Three separate questionnaires were distributed to a population of 50 employees

by the researcher with the assistance of Internal Audit Division. One questionnaire

was distributed to a population of ten senior managers, hereinafter referred to as

questionnaire A. The second questionnaire was distributed to a population of ten

internal auditors, hereinafter referred to as questionnaire B. The third questionnaire

was distributed to a population of thirty middle managers, hereinafter referred to as

questionnaire C.

The purpose of the questionnaires was to assess the contribution of internal audit in

improving organizational performance. The researcher collected the completed

questionnaire from the respondents. The questionnaires are attached as appendices

A, B and C. The feedback on the questionnaire represented 86% of the targeted

population for this research. There were no spoiled questionnaires. The results

obtained from the questionnaires are analyzed and discussed in this chapter.

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The questionnaires consisted of 113 questions (see Appendix A, B and C). Two

categories of questions are used: Close-ended and open-ended questions. For the

close-ended questions, the respondents were requiring to assign a rating on a scale

that was provided to each item. Wilkinson and Birmingham (2003:12) echoed that this

type of questionnaire asks the respondents to tick one area on the rating scale. The

respondent was provided with a scale of possible responses (usually five) to the

questions, ranging from attitude measure “excellently” to the opposite measure of “not

at all”.

Various types of measurement scales were used in the close-ended questions. The

questions that used multiple choice single-response yielded nominal data. The only

type of statistical analysis that can be performed on nominal data is frequency

calculations. Then, when reporting the results of these questions, frequency tables

and column chart are used.

In this study the researcher used “excellently” to “not at all” and for this category of

responses, the results are presented by means of column chart. There were

questions to be responded by “yes” or “no” and for other questions, the respondents

had an option to select the option that is relevant for their opinion by putting a cross or

circling the appropriate option in the space provided. If none of the options accurately

describes their option, they used the “other” option and typed in brief details.

An “other” category was added to the list to ensure exhaustiveness and was

accompanied by a space where details could be provided. It was therefore decided

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to calculate how many times each option was selected – in other words frequencies.

For the open-ended questions, the respondents had to state their opinion.

The questionnaires consisted of the following sections:

For managers (Senior and middle):

A. Section relative to internal auditor’s image

B. Section relative to management satisfaction survey

C. Section relative to performance management

For internal auditors:

A. Section relative to internal audit management

B. Section relative to independence of the audit function

C. Section relative to internal audit scope of work

D. Section relative to internal audit professionalism

E. Section relative to internal control system

F. Section relative to performance audits

G. Section relative to performance measurement

It is intended that the findings of the research survey should add value to the

knowledge and studies already conducted on the importance of internal audit within

an organization and how can contribute in improving organizational performance.

Working in partnership with management, internal auditors provide the board, the

audit committee and executive management assurance that risks are held at bay and

that the organization’s corporate governance is strong and effective. If this study

concludes that little is being contributed by internal auditors to improve organizational

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performance, measures should be taken by the RRA in order to help and assist them

to achieve their objectives.

Feedback on the questionnaire represented 86% of the target population for this

study. It should be noted that the researcher decided not to disclose the results of the

questions that show a highly positive response towards the research objectives.

The responses from the similar questions of questionnaire A (QA) and C (QC) relating

to managers (senior and middle managers) are analyzed together.

5.4.1 Managers

5.4.1.1 Analysis of section A: Internal auditor’s image

This section consists of 10 questions relating to internal auditor’s image. It was to

know how the respondents think about of internal auditors. Are they really needed?

How relevant are their reporting and recommendations; who is appointed to follow up

the accepted recommendations and to what extent internal auditors add value to the

organization.

5.4.1.1.1: What managers think about internal auditor?

The questions QA1 and QC93 aimed to determine what respondents think about

internal auditor.

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Table 5.4: Question 1 and 93

QA1 & QC93 Frequency Percent Cumulative

Frequency

Cumulative

Percent

2 1 3.03 1 3.03

3 4 12.12 5 15.15

4 17 51.52 22 66.67

6 7 21.21 29 87.88

7 4 12.12 33 100.00

Table 5.4 indicates that all respondents don’t see the internal auditor in the same way

as indicated below:

3.03% of respondents think that internal auditor is a spy of the manager;

12.12% think that internal auditor is an ordinary collaborator;

21.21% think that internal auditor is like a physician who examines a patient,

detects a disease and prescribes him/her a medication;

51.52% say that internal auditor is an indispensable guide; and

12.12% have other options.

Venables and Impey (1991:68-69) argued that auditees tend to regard auditors as

controllers or inspectors, while the auditor regards advice provided as being of an

educational and supportive nature, facilitating the resolution of a particular problem.

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Indeed, at one extreme the auditee perceives the audit role as that of the policeman,

while the auditor perceives the same situation as being that of a friendly adviser

giving a positive solution to particular problems examined: advice which may be either

accepted, or with good raison, rejected.

A possible solution with regard to the conflict in perceptions of the audit role lies with

the chief internal auditor. Selective recruitment which gains those temperamentally

are mostly suitable for internal audit, together with the active support of senior

management for a positive approach to internal audit will help to promote a fairer

perception of the role.

5.4.1.1.2 The role of internal audit

All the respondents asserted that the role of internal audit is to appreciate the control

of all organizational operations.

Fadzil (2005:847) pointed out that in the revised statement of responsibilities of

internal auditing issued by the Institute of Internal Auditors (IIA) (2000) as part of the

standards framework, the section on objectives states:

“The objective of internal auditing is to assist all members of management in the

effective discharge of their responsibilities by furnishing them with analyses,

appraisals, recommendations and pertinent comments concerning the activities

reviewed. The internal auditor is concerned with any phase of business activity where

he can be of service to management. This involves going beyond accounting and

financial records to obtain a full understanding of the operations under review.”

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Sawyer and Vinten (1996), quoted by Fadzil (2005:847), noted four benefits

managers have gained from internal auditing assistance. These benefits were

providing managers with the bases for judgment and action, helping managers by

reporting weaknesses in control and performance and in recommending

improvements, providing counsel to managers and boards of directors on the

solutions of business problems, and supplying information that is timely, reliable and

useful to all levels of management.

5.4.1.1.3 Frequency of internal audit

The question QC92 was asked to know really how middle managers would like to be

audited by internal auditors. Different responses are given but most of the

respondents agreed to be audited periodically. Even when there are no deficiencies

found during an audit, the fact that members of the organization know that their

activities are likely to be audited periodically often motivates improved performance

and better internal control.

Askey and Dale (1994:4) pointed out that this is supplemented by the ISO 9000

guidelines (ISO 9004 (1990)) which state that:

“The timing and frequency of audits varies depending on the importance of a

particular part of the system but should be predetermined and recorded. The audits

should be carried out by responsible persons independent of the activity being

audited. It is useful to have and audit program spanning a set period.”

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The frequency of audit can be determined by performance of the previous audits and

importance of the function to the company concerned.

5.4.1.1.4 Audit reports, recommendations and follow up

The questions QC94, 95, 96, 97, 98, 99 and 100 were addressed to the middle

managers. All these questions are close-ended questions. In question 94,

respondents had to indicate what do the RRA internal auditors before writing down

their auditing reports. 70.37% of the respondents said that before writing down their

auditing reports, RRA internal auditors discuss with each auditee on the problem

found in his department.

Question 95 was about knowing to whom the internal auditors report. 55.56%

indicated that at the end of their work, the internal auditors from RRA send the report

to the general management and the head of audited department. As we know top

executives frequently sit on boards of directors and are often in control of those

boards. In such cases it makes little difference whether the internal auditors report to

the board or to executive management, since the two are effectively the same. When

there are some outside directors, auditor independence is easier to establish and

maintain.

The question 96 was asked in order to know if the recommendations are pertinent or

reserved and the majority, that is, 96.16%, answered that recommendations are

pertinent. The internal auditor has to make sure that an important factor is to ensure

that recommendations are simple and concise statement of only the pertinent facts.

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The recipient can then learn what he needs to know without having significant

information obscured by excessive detail.

Question 97 was related to the time after which the recommendations reach the

heads of department. 74.07% of the respondents specified that at the end of the

internal audit work, the recommendations reach the heads of department without

delay. Ridley and Chambers (1998:253) emphasized that audit reports are action

documents which are time-critical and they lose they impact if they are delayed. The

delay may also be invalidate their conclusions and thereby discredit the internal

auditing unit.

In question 98, respondents were requested to specify who makes the follow up of

how auditees comply with the recommendations done by internal auditors. Different

responses are given, but the majority, 62.96%, answered that the follow up over

corrections and improvement from the recommendations of internal auditors is done

by the general management and internal auditors. The internal auditor may, therefore,

conduct a follow-up audit of the implementation of such corrective action.

The question 99 was asked in order to know when the follow up takes end. 61.54 per

cent of the respondents indicated that the follow up ends after making sure that all

recommendations have been put in place and 34.62% answered that it stops after a

period of time fixed by the general management. These responses are both accepted

by the researcher because in the interview with the head of department, it was

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specified that the recommendations are assumed to be set up within three months

after they are accepted by the management.

Question 100 was asked in order to know how internal audit add value to the

organization. 92.59% of the respondents agreed that internal audit adds value to the

organization, while 7.41% said barely and no one said no.

Figure 5.3: Question 100

The adding of value is a new concept that deserves more explanation. What is value

add? Pickett (2004:13-14) point out that rather than describe the services that fall

under the value-add banner, it is more helpful to establish a basic policy that covers

the concept of value-add. The policy could include the following key features:

a value-add service (VAS) is based on getting the most impact from budget

allocated to the audit shop;

VAS means supporting the board in meeting its obligation to ensure it is in control

of their organization;

Question 100

11.11%

51.85%

29.63%

7.41%0%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

Excellently Very Adequately Barely Not at all

Series1

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VAS focuses on business managers’ understanding of value in the sense of

anything that helps them get the job done and be able to demonstrate how they

performed;

VAS forms the key platform on which the audit committee can base its oversight

strategy and ensures committee members have a source of reliable advice;

VAS relates to what is important in terms of current trends and directions;

VAS means different things to different companies in different industries and

different environments. Valuable activities will vary between performance and

conformance stances depending on the level of confidence in global stock

markets and whether the economy is growing or contracting;

Audit shops that have not identified their approach to delivering VAS will run the

risk of failing to succeed.

The movement in attitude, approach, and value from their internal audit process has

developed rapidly over the yeas – from low – level checking to high – level

consultancy and assurance work, from reviewing the petty cash to assessing risk,

from strategic alliance, from enforcing rules to being management adviser. The

problem, however, is that not all audit shops have moved at the same pace, and also,

old reputation can be difficult to shake off. Newly appointed internal audit staff are

well advised to focus on the new-look audit role and move this forward, and watch out

for those who are still too immersed in old way of thinking and behaving.

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Pickett (2005:149-150) talked about creating the audit image; audit needs to

formulate and maintain an appropriate image and one auditor who breaches

professional behavior may tarnish the reputation of the whole department. The audit

image is based around the standards set out in the audit manual and auditor code of

conduct.

Pickett further added the following features of the internal auditor:

Politeness, having regard to the need to respect fellow officers at whatever grade;

Being positive by building constructive working relations with management;

Sensitivity to management’s need;

Respect for confidentiality with an understanding of the damage that idle gossip

can do;

A team-based audit approach working with and alongside management;

A hard-working attitude with a constant mission to encourage management to

promote good controls;

A desire to explain the role of audit and promote the audit service wherever

possible.

It may be an idea to organize a series of seminars (or a slot at the corporate annual

conference) and deliver the new-look internal audit approach.

5.4.1.2 Analysis of section B: Management satisfaction survey

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This section of the questionnaire aimed to determine the opinion of the respondents

on how they are satisfied with the internal auditors work.

5.4.1.2.1 Usefulness of internal audit

Figure 5.4: Questions 3 & 101

On the question how internal audit is useful, hundred per cent of the respondents

agreed that internal audit is very useful to the organization. In chapter 2, the

importance of internal audit is discussed but as stated by Pickett (2004:3), the internal

auditor’s role which is that of assisting managers and their teams, while also of

working for the corporate body of the organization and often reporting to an

independent audit committee.

Questions 3 & 101

36.37%

45.45%

15.15%

0.00%3.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


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5.4.1.2.2 Objectives and scope of internal audit’s work


On the question to know how appropriate have been the objectives and scope of

internal audit’s work, all the respondents indicated that objectives and scope of

internal audit’s work have been very appropriate.

As confirmed by Askey (1994:6), accurate definition of the scope and objectives is a

critical stage in the planning of any audit. If the audit team does not have a clear goal,

the audit will lose focus and time will be wasted. Performance Standard 2220:

Engagement Scope: cited that the establishment of the scope should be sufficient to

satisfy the objectives of the engagement and the Implementation Standard 2220.A1

(Assurance Engagements): take it further by emphasizing that the scope of the

engagement should include consideration of relevant systems, records, personnel,

and physical properties, including those under the control of third parties

(www.theiia.org).

Questions 4 & 102

6.06%

54.55%

36.36%

0.00% 3.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


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5.4.1.2.3 Usefulness of discussions at the commencement of the audit


In these questions the respondents were asked to determine how useful have been

discussions with audit at the commencement, 96.97% said very useful and 3.03%

answered barely useful.

At the commencement of the audit, the internal auditor explains to the auditee

manager the purpose of internal auditing and his or her approach to the audit that will

be performed. The auditor would explore the objectives, goals, and standards of the

operations and its inherent risks. In the discussions with managers and supervisors,

the internal auditor would seek to gain an insight into the style of management

exercised (Sawyer, 1996:136).

Ratliff et al. (1996:192) echoed that courtesy as well as good business practice

suggest that auditors notify the auditee and selected others that an audit is about to

begin. Such communication allows the auditee to make necessary preparations to

accommodate the auditor’s requirement for access to records, facilities, selected

Questions 5 & 103

15.15%

45.45%

36.37%

3.03%0.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


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148

employees, materials, and so forth. On the other hand, it is necessary that the auditee

also may be asked to prepare and supply certain schedules and other information for

the auditors when they arrive. Usually, management to whom the auditee reports,

inclusive of the audit committee, are notified of the upcoming audit.

The audit team leader usually makes a personal contact with the auditee’s

management, and discusses briefly the purpose of the audit and the adjustments to

the timing, the scope of work, and the preparations may be negotiated at this time.

After the personnel contact, the team leader will draft a memorandum or letter

outlining the preliminary information pertaining to the upcoming audit.

5.4.1.2.4 Usefulness of discussions during the audit


The questions were asked to know how useful have been the discussions with

internal audit during the audit. 96.97% of the respondents agreed that the discussions

were very useful, while 3.03% said that the discussions were barely useful. The

internal auditors can see how best to communicate major findings during the audit,

Questions 6 & 104

6.06%

48.48%42.43%

3.03% 0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


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149

before the final report, so the auditee can begin correcting observed problems sooner

rather than later.

5.4.1.2.5 Opening and communication with auditees


The question was about to know how open and communicative were the auditors with

auditees and 96.97% of the respondents agreed that auditors were very open and

communicative during the audit, while 3.03% answered barely. The spirit of openness

will be fostered by allowing the auditee’s representative to see exactly what is being

recorded at each occurrence. Communication conveys meaning and understanding.

To achieve it requires a sharing and a mutual understanding of ideas, facts, and

courses of actions. For it to take action, people must interact. The internal auditor

must know that communication resides in the recipient and that it is composed of

perceptions and expectations. The best fieldwork and the most brilliant analyses will

remain moldering in the working papers until they are communicated.

Questions 7 & 105

9.09%

51.52%

36.36%

3.03% 0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


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As stated by Venables and Impey (1991:71), where the auditor is seen to be not only

unhelpful but also ineffective, this can only damage the relationship between auditor

and auditee, management, external auditor or other departments. It is through

effective communication that internal audit exists, by disseminating information,

evaluating performance and reporting on work undertaken.

5.4.1.2.6 Timing of the audit fieldwork


In these questions, the researcher wanted to investigate how satisfactory was the

timing of the audit fieldwork. 90.91% of the respondents agreed that the timing of the

audit fieldwork was adequately satisfactory and 9.09% said barely satisfactory. The

internal auditor should cooperate with auditee to permit the audit objectives to be

achieved. The internal auditor should attempt to comply with the auditee. This entails

compliance with working hours, observance of lunch hours and other requirements.

He should always attempt to blend into the environment in which he is making his

investigation.

Questions 8 & 106

12.12%

27.27%

51.52%

9.09%

0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


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5.4.1.2.7 Duration of the audit


The respondents were asked to indicate how satisfactory the auditees with the audit

duration were. 84.85% of the respondents said adequately satisfactory and 15.15%

answered barely satisfactory. The amount of detail required to audit an entity and the

number of available audit hours impose constraints on the auditing function, limiting

the total amount of work that can be performed in any given period. As a result of the

limitations caused by this combination of demand for detail and limited auditing staff

resources, auditors often define the auditees so that an audit can be completed within

a specified time. Typically, these audits are estimated in terms of total hours needed

for the audit (Ratliff et al., 1996:244).

Questions 9 & 107

3.03%

36.36%

45.46%

15.15%

0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


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5.4.1.2.8 The time it took to issue an agreed audit report


The questions were to know how satisfied were the auditees with the time it took for

internal audit to issue an agreed audit report. 87.88% of the respondents agreed to be

adequately satisfied, 9.09% said barely satisfied and 3.03% responded not all. After

the audit work, the final report is issued. After the audit report is delivered and

presented to the auditee, and the auditee has had an opportunity to make an

appropriate response to the report, the auditing process may appear to be complete.

However, all of the activities related to an individual audit are not completed at that

time. First, there is the follow-up to the audit.

Questions 10 & 108

15.15%

33.33%39.40%

9.09%3.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


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5.4.1.2.9 Fairness and balance of the audit report

Questions 11 & 109

6.06%

60.61%

21.21%

9.09%3.03%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%


Series1


In answer to the question how fair and balanced have been the audit report, 87.88%

of the respondents agreed that the audit report was very fair and balanced, 9.09%

indicated it to be barely fair and balanced and 3.03% said not at all.

According to Ridley and Chambers (1998:254-256), it is very easy for an audit report

to give the wrong overall impression but the internal auditing unit should not

encourage their reports to be misinterpreted and misused. Balance in an audit report

is essential – not in the number of words, but in the emphasis of the audit report. To

sum up, balance is achieved through:

Providing a balanced conclusion “up front”;

Giving due credit to line staff and management in the report;

Being positive: focusing on the advantages of change rather than on the risks of

making no changes.

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5.4.1.2.10 Consultancy on matters included in the audit report


The questions were asked to identify how fully consulted were auditees on matters

which were included within the audit report. 81.82% of the respondents agreed to be

adequately fully consulted and 18.18% answered to be barely fully consulted on

matters included in the audit report.

Ridley and Chambers (1998:249) argued that as part of the internal auditor’s

discussions with the auditee, the internal auditor should try to obtain agreement on

the results of the audit and on a plan of action to improve operations, as needed. If

the internal auditor and auditee disagree about the audit results, the audit report may

state both positions and the reasons for the disagreement. The auditee’s written

comments may be included as an appendix to the audit report. Alternatively, the

auditee’s views may be presented in the body of the report or in a cover letter.

Questions 12 & 110

15.15%

30.30%

36.36%

18.18%

0%0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%


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5.4.1.2.11 Usefulness of audit report


The questions were asked in order to know how useful found the audit report. 93.94%

of the respondents agreed that the audit report was found to be very useful, while

6.06% found it barely useful.

Ridley and Chambers (1998:191) echoed that the written audit report is a valuable

“means to an end” but it is not the end product of an internal audit. The “end product”

is reassurance to management that their systems of internal control are sound, or

persuasive advice to management which will have the effect of making their systems

of control sound. The audit report is a valuable way of achieving the end product of

internal auditing. A close-out meeting at the conclusion of the audit fieldwork

provides the audit team with the opportunity to ensure that line management is fully

appraised with all the audit findings and proposed recommendations and ensures that

the audit team receives management’s response to their audit findings and

recommendations. The final written audit report should be issued as soon as possible

after the end of the audit fieldwork.

Questions 13 & 111

21.21%

42.43%

30.30%

6.06%0%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


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5.4.1.3 Analysis of section C: Performance management

The aim of this section was to determine whether there is performance measurement,

expertise to measure and evaluate performance and if they have target goals

established for each performance measure in their scorecard.

5.4.1.3.1 Measuring performance

For the questions 15; 16; 17 and 18 of the questionnaire A, 83.33% of the

respondents answered yes and 16.67% indicated no. Measuring performance is

something that all organizations do. Performance measurement is an important aid to

making judgments and to making decisions. RRA is a new institution and doesn’t

have effective performance measurement systems which incorporate non-financial

measures.

As stated by Medori and Steeple (2000:521), non-financial measures overcome the

limitations of just using non-financial measures: the measures are more timely than

financial ones; the measures are very measurable and precise; the measures are

meaningful to the workforce so aiding continual improvement; the measures are

consistent with company goals and strategies; and, no-financial measures change

and vary over time as market needs change, and so tend to be flexible. A

disadvantage, however, is that there is a huge range in terms of number of non-

financial measures that can be used by companies. A problem arises in knowing

which measures from a huge variety a company should use.

157

According to Najmi, Rigas and Fan (2005:114-115), it is now widely accepted that the

use of appropriately defined measures can ensure the strategic alignment of the

organization and communication of the strategy throughout the business.

Consequently, the need emerged for developing a way of sustaining and maintaining

these successful performance measurement system implementations. It became

obvious that there is a need to review these systems effectively.

5.4.1.3.2 The outcome related to organization’s primary goals

Question 19

66.66%

16.67% 16.67%

0.00% 0.00%0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%


Series1

Figure 5.15: Questions 19

In question 19 respondents were asked to indicate how the outcome of the program

relates to the organization’s primary goals. All the respondents asserted that the

outcome of the program relates well to the organization’s primary goals. Written goals

and objectives are important for both the organization as a whole and the individual

departments. If employees are unaware of the goals and objectives, there is danger

that various departments will not all be oriented toward the same final objectives.

Written goals and objectives help ensure that there is unit, continuity, and consistency

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within an organization. There should be a periodic follow-up to determine whether

established goals and objectives are being met.

5.4.1.3.3 Achieving targets

In Questions QA20 and QC112 (open-ended questions), respondents were asked to

precise how they can - or anyone else - know whether or not they have achieved their

targets and most of them indicated the actual performance against the set objectives

through the evaluation. According to Sawyer (1996:954), the chief objectives of staff

evaluations is to advise employees as to the status of their work and to identify

weaknesses and opportunities for them so as to improve their overall contribution to

the department and to keep them informed of their strong points, their weak points,

and their progress.

5.4.1.3.4 Training

The question 113 (an open-ended question) was asked to know if a further training in

any aspect of their work is needed. All of the respondents expressed that they need

further training so that they can fulfill their duties and perform as expected of them by

top management.

5.4.2 Internal Auditors

5.4.2.1 Analysis of section A: Internal audit management

The focus of this section was to determine whether the internal audit is well managed

so that it can add value to organization and contribute to improve the organizational

159

performance. This section has many questions asked to clarify the current internal

audit situation in the RRA. Unfortunately it is not possible to discuss every question in

detail. Thus, only the most significant responses are discussed.

5.4.2.1.1 The current situation of internal audit department

Internal audit department has the newest documentation on methodology or other

resources as indicated by all the respondents, but it is not in partnership with an audit

firm and it doesn’t have specific software for audit. There is a professional code of

ethics and manual for internal auditors and they use professional norms for internal

audit as conceived by Institute of Internal Auditors. Those norms fit well to the

specificities of RRA and are mastered by internal auditors. Although all the

respondents confirmed that human resources are sufficient, the researcher identified

that there is no one among internal auditors who can audit Information technology (IT)

whilst almost all operations are IT records. According to the Performance Standard

2030, the chief audit executive should ensure that internal audit resources are

appropriate, sufficient, and effectively deployed to achieve the approved plan.

As confirmed by Sawyer (1996:559), for internal auditor to make a significant

contribution to the organization, they must be able to use the computer and

understand the risks associated with its use. Achieving this understanding requires

technical education and hands-on use. Internal auditors must be comfortable with

information technology (IT) terminology, concepts, and practical applications. Those

who neglect this education will be relegated to trivial applications within the

organization. Auditing “around the computer” becomes a meaningless term when

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nearly all records, transactions, and processing decisions are automated. To maintain

their independence, internal auditors must be able to deal with these systems.

The internal auditors of RRA need a permanent training system because none of

them has education in audit but also because of change of environment. The training

could help them to perform their duties and contribute to organizational effectiveness.

Training is an important aspect of developing internal auditors, and has to be carefully

planned in line with a career development. Sawyer (1996:938-939) argued that while

an orientation program is designed to make a trained internal auditor productive as

soon as possible, the constantly expanding scope of internal auditing requires training

programs as well. The field is advancing far too quickly to let internal auditors rest on

their laurels.

The internal auditors’ evaluation is done periodically by the head of internal audit

division as said by all the respondents. Sawyer (1996:954) emphasized the

importance of staff evaluations (see section 5.4.1.3.3).

Since the existence of the internal audit department, the respondents indicated that

there is no audit for that department and this is why it is difficulty to know whether or

not it performs well.

Chambers, Selim and Vinten (1987:256-257) voiced that every auditor knows that

control depends in part upon audit. It ill-behooves an internal auditing department to

resist a review of its performance, and the Standards for the Professional Practice of

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Internal Auditing are unequivocally clear on this subject. Valuable reviews require

methods of measurement. Although there are difficulties in developing measures of

internal auditing performance, there is a need for such measures if internal auditing

performance is to be controlled.

Control over internal auditing is partly the responsibility of internal auditors and

internal auditing management themselves; and it is partly the responsibility of the

management to whom the head of internal auditing reports. The control process

should make use of appropriate performance measures but the process itself is much

wider than that, involving, among others, audit plans and budgets, activity reports and

supervision. The audit of the internal auditing department is part of overall control of

that department – just as general internal auditing is seen by management, and by

the external auditors, as being part of management’s overall arrangements for

internal control. It therefore seems reasonable that to preserve audit muscle tone it

too should be audited.

“Total accountability, social, ethical, technical etc. only exists if there is some way of

“auditing” performance”. “Internal reviews (and) external reviews of the internal

auditing department should be performed to appraise the quality of the department’s

operations”.

It is specified by respondents that the auditee puts in place the recommendations, the

follow up is made by internal auditors according to 60% of the respondents and 40%

answered that it is internal auditors and the general management. According to Ridley

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and chambers (1998:383), audit follow-up is a responsibility shared between internal

audit and those to whom internal audit reports are addressed. 50% of the

respondents indicated that the follow up on recommendations ends when all of them

are put in place and 50% said that it is after a period of time. It’s generally after three

months that all recommendations accepted are put in place.

All of the respondents confirmed that internal auditors are well supported by top

managers. Ridley and Chambers (1998:38) pointed out that to be effective, “internal

auditors must have the acknowledge support of top management and the board of

directors through its audit committee. The company should set forth the scope of

responsibilities for the internal audit function. The scope of responsibilities as well as

any change in role or function should be the subject of review by the audit committee.

The optimal size of the internal audit function and the composition of its staff depend

on the company’s size and nature and the scope of responsibilities assigned to the

function. The education, experience, and professionalism of the internal auditors help

determine the effectiveness of the internal audit function. The company should

encourage the development of its internal auditors by providing continuing

professional education programs and offering attractive career paths”.

For the question of measuring the quality of internal audit work, an open-ended

question, one of the respondents gave proper response. He answered that the

measurement of the quality of internal auditors is based on the recommendations

raised and accepted by auditees and the ratio between the number of

recommendations raised and those put into action. It is based also on the standards

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and internal procedures. The quality of internal audit work finds also its expression in

terms of the value added for each report or recommendations which is hard to

measure. Internal auditors are knowledge workers whose output is not always

tangible.

Concerning the question to know if the internal audit has agreed and established

goals, all the respondents answered. According to Ridley and Chambers (1998:382),

the goals of the internal auditing unit should be capable of being established within

specified operating plans and budgets and, to the extent possible, should be

measurable and accompanied by measurement criteria and targeted dates of

accomplishment.

RRA doesn’t have an audit committee as confirmed by 90% of the respondents and

we know its importance relating to the audit function independence. As stated by

Moeller (2005:171-172), an important step in organizing an effective audit function is

to obtain authorization and approval by the organization’s audit committee of the

board of directors. The audit committee provides this board authorization for an

internal audit function through a formal audit charter document. An audit committee

also approves internal audit’s overall plans for continuing activities through the current

period and beyond. As one of the several operating committees established by the

board, the audit committee has a rather unique role compared to other board

committees.

164

It consists of only outside directors who understand, monitor, coordinate, and interpret

the internal control and related financial activities for the entire board. In order to fulfill

its responsibilities to the overall board of directors, to the stockholders, and to the

public, an audit committee needs an internal audit function to become an independent

set of “eyes and ears” inside of the organization, providing assessments of internal

controls and other matters.

5.4.2.1.2 Planning and re-sourcing of internal audit work

Question 63

0.00%

70.00%

30.00%

0.00% 0.00%0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%


Series1


On the question how well internal audit work is planned and resourced to ensure

achievement of goals, all respondents agreed that internal audit work is well planned

and resourced. Internal audit resources should be applied to the different activities of

the business in proportion to audit risk.

According to Palmes (2005:1-2), the 2000 revision of the ISO 9001 standard places a

great deal of emphasis on planning in an effort to guide the organization away from

rushing into action without considering all the issues. Planning is not only good quality

165

practice, it’s also good business practice. If an organization plans well and acts

accordingly, the odds of success are quite good.

5.4.2.1.3 Achievement of defined goals

Question 64

20.00%

60.00%

20.00%

0.00% 0.00%0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%


Series1


In this question, respondents were asked to determine how well internal audit achieve

its defined goals and all of them agreed that internal audit achieve well its defined

goals. The importance of the goals identified for audit is that these should underpin an

organization’s overall aims and objectives, so that audit’s achievements aid the

development of the organization as a whole.

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5.4.2.1.4 Contribution to the attainment of the organizational objectives

Question 65

0.00%

90.00%

10.00%0.00% 0.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


Series1


Question 65 was a follow up question to question 64. The respondents had to indicate

how well the achievement of these goals contributes to the attainment of the

organizational objectives, that is, establishment and maintaining internal controls. A

good correlation was found, in that all the respondents agreed that these goals

contribute well to the attainment of the organizational objectives.

Reviewing and evaluating the adequacy and effectiveness of an organization’s

internal control system and the quality of performance in carrying out assigned

responsibilities is representative of several primary core activities of internal audit

work (Fadzil, Haron & Jantan, 2005:847).

Blackmore (2004:130) echoed that auditing is seen as a tool to aid effective decision-

making as well as a source of information for managers. The purpose of quality audit

is to determine whether quality assurance activities and related results comply with

the planned arrangements, i.e. that the company is doing what it says it is doing, and

167

whether these arrangements are implemented effectively and are suitable to achieve

objectives (fitness for purpose).

5.4.2.1.5 Reasons and Expectation for Auditing the Internal Auditing

Department The questions 66 and 67 (open – ended questions) were about to know if the

respondents think fit to reasons and expectations for auditing the internal audit

department. Responses to those questions were obtained from 9 of the 10

respondents. The vast majority (90%) of the respondents felt that it is important to

audit the internal audit department. They indicated that it can allow assessing whether

internal audit achieves set objectives, ascertaining whether practices and techniques

of internal audit comply with international standards. The expectation is the

performance of internal audit function and the contribution to the improvement of the

overall performance of the organization.

Palmes (2005:11) pointed out that auditors are chosen so as not to audit their own

work. The results of all audits are brought to the attention of top management and

findings are addressed through the non conformance process.

The purpose of the review of the adequacy of the internal auditing is to ascertain

whether the established system provides reasonable assurance that the

organization’s objectives and goals will be met efficiently and economically (Fadzil,

Haron & Jantan, 2005:847).

168

One of three areas to which internal auditing is besieged is effectiveness. Yet we do

not often determine whether the internal auditing function is itself operating

effectively. We must identify the basic objective of internal auditing, define the goals

to be accomplished, establish measures relative to achieving those goals, and finally

evaluate the overall internal auditing process. We must separate the usual measures

of output from the overall measures of outcome to determine cost effectiveness and

operational improvement aspects of the internal audit process. The former, the time-

honored internal audit output measures must be supplanted by internal audit

effectiveness achievements (Dittenhofer, 2001:443).

Fadzil, Haron and Jantan (2005: 852; 862-864) stated that independence and

objectivity is seen as an important attribute to the quality of internal audit function. If

internal auditors are not independent and objective, they are of little value to those

who demand their service. The internal audit department must be granted the license

to carry out its responsibilities freely and objectively and also their judgments reached

must be unbiased. Most internal audit professionals argue that an effective internal

audit function unequivocally correlates with an organization’s success in meeting

management objectives and whether the internal control system is functioning as

intended.

Ridley and Chambers (1998:36) stated that internal audit requires good management

skills, both to develop all its products and services and to carry out its appraisal

activities, at the right levels of measured quality and assurance: as such, it is an

excellent training ground for future operational managers. Internal audit should be

169

managed and promoted as a proactive service, anticipating required levels of control

across all supply chains and process needed, to provide superior practices and

services for all its organization’s customers and protect all its stakeholders. An

effective internal audit service will provide committee and management assurance,

aid decision-making, improve business performance and reduce the risk of

undetected fraud. All internal audit activities will be measured for their quality and

client satisfaction.

5.4.2.2 Analysis of section B: Independence of audit function

The focus of this section was to determine whether or not the internal audit function is

independent. For question 70 relative to the consistence of the recognized scope of

internal audit with the resources allocated to it, all the respondents agreed that the

scope is very consistent and it desirable to obtain the approval of senior management

and the board to the basis that internal audit will use to determine how it will allocate

its audit resources between audits.

For question 71, all respondents said that there are no operational areas or levels

which are precluded from internal audit review. In question 72, the respondents were

asked to state if internal audit has unrestricted access to personnel and information.

60% of the respondents answered yes and 40% answered no. In the interview the

researcher had with some of them, they indicated that they didn’t have access to

personnel and information at hundred percent.

170

To fulfill well their duties, internal auditors should have unrestricted access to any

area or level within the organization. So it remains important for instance that auditors

should have unrestricted access to information and personnel, that they should have

the authority to conduct audits at times of their choosing and of a scope determined

by them, that they should have the right to refer matters of audit concern where

necessary to top levels of line management and to the audit committee of the board –

and so on (Ridley & Chambers, 1998:188).

In the question 73, respondents were asked to state if the head of internal audit have

direct access to the chairperson of the board or the executive manager. Fifty per cent

answered yes and fifty per cent said no. But what it is true is that the head of internal

audit have direct access to the executive manager only, not to the chairperson of the

board. An organization should ensure that its internal audit function has unrestricted

access to the audit committee of the board (if any).

Shun (1997:249) pointed out that independence is the essence of auditing. An

internal auditor must be independent of both the personnel and operational activities

of an organization. Otherwise, the integrity of the auditor’s opinions, conclusions and

recommendations would be suspect. So, independence is necessary for the effective

achievement of the function and objective of internal audit. This independence is

obtained mainly from two characteristics – organizational status and objectivity.

Internal auditing objectivity and independence are its most important assets.

171

5.4.2.3 Analysis of section C: Internal audit scope of work

This section was about assessing senior management activities and if internal

auditors are able to assess risk. The vast majority (90%) of respondents agreed that

senior management activities are not reviewed by internal auditors and hundred per

cent confirmed that internal auditors are able to assess risk. We can argue that

auditing top managers’ strategic management activities is one way that an auditor can

add value and contribute to improving organizational performance. Auditing top

managers’ activities is a hot issue facing the internal auditing profession today.

Barlow et al. (1995:43-44) voiced that auditors have the potential to work at all levels

in an organization. Why shouldn’t there be an audit of the activities of the chief

executive’s office or the board of directors, as opposed to an audit of petty cash

management activities? Strategic planning is a control of top managers to improve


However, it isn’t easy for auditors to convince top managers that they too should fall

under the scrutiny of the auditing function. This is particularly where the auditing

functions reports to a top manager. And this is the case of the RRA. This underlines

the need for auditing to be independent of managers. Auditing is a control over

managers. Ideally, it should provide assurance to stakeholders that managers at all

levels are performing well.

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The above author further added that auditors can perhaps overcome top managers’

resistance to being audited by making them more aware of their corporate

governance responsibilities and selling the benefits of auditing their own control

systems. But auditors must show top managers they can work effectively at this level

and add value. Building credibility among top managers won’t be easy and it won’t

come overnight. Furthermore, to have any hope of success, auditors must have the

right skills and knowledge. The task isn’t an easy one, no matter whether they’ve a

mandate from the audit committee to audit top managers. Despite the obstacles

facing auditors in getting access to top managers, auditors are likely to find working at

this level very rewarding. In this regard, auditors need to work more closely with top

managers.

For assessing risk, Colbert and Alderman (1995:44) argue that the internal auditor

should consider the risks pertinent to the particular auditee when planning the

engagement. It is perhaps easier to employ similar procedures on each audit or to

utilize the prior audit program when developing the current program. However, a

procedures-driven approach does not necessarily address the riskiest areas of the

engagement.

Ridley and Chambers (1998:34) voiced that the scope of internal auditing should

encompass:

Examination and evaluation of the adequacy and effectiveness of all the

organization’s system of internal control;

Quality of performance in carrying out assigned responsibilities.

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5.4.2.4 Analysis of section D: Internal audit professionalism

The section focused on the levels and competencies of internal audit and how well

internal auditors are specialized in auditing and/or in internal control.

5.4.2.4.1 Levels and competencies of internal audit

Question 76

20.00%

70.00%

10.00%0.00% 0.00%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%


Series1


The question was asked to know how established levels and competencies of internal

audit are, and all the respondents answered those levels and competencies of

internal audit are well established.

Due to the fact that Internal Audit reviews activities of the entire organization, it is

important to have a variety of skills set available to ensure that the overall

competency of the department is suitable to audit the activities it is charged to do.

The IIA s International Standards for the Professional Practice of Internal Auditing

require that internal auditors possess the knowledge, skills, and other competencies

needed to perform their individual responsibilities (Scherer, 2004:3).

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5.4.2.4.2 Specialization in auditing and/or in internal control

Question 77

0.00%

40.00%

60.00%

0.00% 0.00%0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%


Series1


This question was asked to identify how well specialized in auditing and/or in internal

control are RRA’s internal auditors. All the respondents answered that they are

adequately specialized in internal auditing and/or in internal control.

According to Ridley and Chambers (1998:32), “all internal audit staff should have a

commitment to continuously improve their professional knowledge and experience,

act with integrity and be competent in the performance of their work, in all their

organization’s risks and controls.”

Fadzil, Haron and Jantan (2005:846-847) voiced that the internal control system plays

an important role in the internal auditing practices since the internal auditors might be

considered as being specialists in management control.

5.4.2.5 Analysis of section E: Internal control system

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The aim of this section was to investigate if the scope of internal audit extends to all

operations of a business not just those which are accounting and financial and if the

scope of internal audit extends legitimately to commenting on all aspects of the

management process within a particular activity which is the subject of an audit. It

aimed also to identify how high up the organization does the remit of internal audit

reach.

5.4.2.5.1 The scope of internal audit

On the question 78 whether the scope of internal audit extends to all operations of a

business not just those which are accounting and financial, all the respondents

answered yes. In the question 79, all the respondents agreed that the scope of

internal audit extends legitimately to commenting on all aspects of the management

process within a particular activity which is the subject of an audit.

5.4.2.5.2 The reach of the remit of internal audit

Question 80

20.00%

40.00%

30.00%

10.00%

0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%


Series1


176

The researcher wanted to ascertain how high up the organization does the remit of

internal audit reach. Almost all the respondents (90%) agreed that the remit of internal

audit is very high up in the organization and according to Vinten (1999:410), the

critical condition for effective internal audit is adequate status and independence

within the organization and the widest possible remit.

Chambers (1992:44-45; 50) stressed that these issues have a bearing on the process

of audit needs assessment in identifying the total population of potential audits and

the scope of each of those potential audits. The nub of the problem is in the meaning

given to the expression “internal control” – for internal audit has long been defined as

an independent appraisal of the effectiveness of internal control: “internal audit is a

control which functions by examining and evaluating the adequacy and effectiveness

of other controls”.

5.4.2.6 Analysis of section F: Performance audits

The focus of this section was to determine whether internal audit performs as

expected by top managers, that is, effective control, efficiency of prescribed policies,

adding value to the organization and contribution to organization performance.

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5.4.2.6.1Activity conducted

Question 81

30.00%

60.00%

10.00%0.00% 0.00%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%


Series1


In reply to the question as to whether the activity is being conducted as intended by

top managers, all of the respondents agreed that activity is conducted as intended by

top managers.

Fadzil, Haron and Jantan (2005:844-845) argues that one issue that has emerged

related to the internal auditing practices is; “what is a proper and sound measurement

of the internal auditing practices?” Barrett (1986) notes, “effectiveness (of internal

audit) can be described, but it is difficult to quantify and in the final analysis,

effectiveness is determined by the perception of auditees”.

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5.4.2.6.2 The prescribed policies

Question 82

0.00%

90.00%

10.00%0.00% 0.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


Series1


The question was asked to know how efficient are prescribed policies being followed.

All the respondents felt that the prescribed policies followed by internal audit are very

efficient. Internal auditors with prescribed policies, help run a company more

efficiently and effectively to increase the shareholders’ value.

5.4.2.6.3 Function performed

Question 83

0.00%

90.00%

10.00%0.00% 0.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


Series1


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The question was asked to know how necessary is the function being performed. All

the respondents answered that the function is well performed.

“The role of internal auditing in the review of effectiveness of the system of internal

control is to ascertain whether the system is functioning as intended. Effective control

is present when the administrative management directs the system in such as way as

to provide reasonable assurance that the organization’s objectives and goals will be

achieved. The purpose of the review for quality of performance is to ascertain

whether the organization’s objectives and goals have been achieved. The internal

auditors role is to determine whether the systems designed by management are

adequate and effective and whether the activities audited are complying with the

appropriate requirements” (Fadzil, Haron & Jantan, 2005:848).

5.4.2.6.4 Administrative and financial controls

Question 84

20.00%

70.00%

10.00%0.00% 0.00%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%


Series1


In question 84, respondents had to indicate how effective administrative and financial

controls are. All the respondents agreed that administrative and financial controls are

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very effective. According to Fadzil (2005:848), the primary objectives of an

organization’s system of internal control are to provide administrative management

with reasonable assurance that financial information is accurate and reliable; the

organization complies with policies, plans, procedures, laws, regulations and

contracts; assets are safeguarded against loss and theft; resources are used

economically and efficiently; and established objectives and goals for operations or

programs can be met. Internal auditing focuses on an evaluation of this system or

framework of internal control.

5.4.2.6.5 Internal auditors’ performance

Question 85

20.00%

80.00%

0.00% 0.00% 0.00%0.00%

20.00%

40.00%

60.00%

80.00%

100.00%


Series1


The question investigated whether internal auditors are performing as was expected

of them and all the respondents answered that internal auditors are very performing

as expected by top managers.

According to Ratliff et al. (1996:758), performance audits generally focus on efficiency

and effectiveness, and they require that performance criteria be established. These

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audits depend on the availability of a set of accepted objectives and goals against

which performance can be evaluated.

5.4.2.6.6 Contribution to organizational performance

Question 86

60.00%

30.00%

10.00%0.00% 0.00%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%


Series1


In question 86 respondents were asked to indicate how internal audit contributes to

organizational performance. In this question, all respondents agreed that internal

audit contributes a lot to organizational performance. An auditing function needs to

manage effectively and efficiently, both strategically and operationally, if the function

is to make a valuable contribution to improving the organizational performance.

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5.4.2.6.7 Add value to the organization

Question 87

40.00%

50.00%

10.00%

0.00% 0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%


Series1


In answer to the question whether auditing adds value to the organization, hundred

per cent of the respondents conformed that internal audit add value to the

organization. The traditional view of internal audit could be seen as the embodiment

of management distrust. Internal auditors have acted as monitors – even policemen –

checking, on behalf of management, employees’ compliance with internal control

procedures. They have long sought to throw off this image, to assert their

professionalism and to present themselves as consultants. Alongside this aspiration,

commercial pressures have required the internal audit function to demonstrate added

value (Skinner & Spira, 2003:31).

5.4.2.7Analysis of section G: Performance measurement

The aim of this section was to determine whether there is regularly measurement of

performance when an audit is conducted, whether the organization assess the

relevance of performance measures during an audit, whether the existing

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performance measures are not found relevant or complete during an audit, if it

attempt to determine better or additional measures and obtain data to assess

performance, and whether the organization conducts surveys that assess customer

satisfaction or perceptions. All the respondents answered yes for all those questions

except the question of customer satisfaction assessment where 60% of the

respondents answered yes, while 40% answered no. To assess customer satisfaction

or perceptions is very important because it helps to identify whether organization is

meeting customer requirements; unless it measures, how does it know that it is

providing the services/products that its customers require.

What has been found from the research and is inescapable however, is that RRA

needs a structured method or a framework to audit existing performance

measurement systems. The developed framework can identify the validity of existing

measurement systems, and is a proven method to enhance current measurement

systems so improving competitive advantage.

“One of the scope areas of internal auditing is the determination of the efficiency with

which the organization is functioning. This scope area requires that there be

performance standards that can be used for comparison with actual performance and

thus be used to advise management as to operational efficiency. Normally, it would

be assumed that operating management, the auditee, is using these standards.

However, if they are not available or relevant, the auditor must, with the auditee,

preferably, develop or otherwise obtain appropriate standards so that the reporting to

top management can be meaningful” (Dittenhofer, 2001:465).

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Medori and Steeple (2000:532) shown that a useful method to allow companies to

assess their existing performance measurement systems it is a framework. The

framework has been used without any external consultation and ultimately determines

whether a company’s existing measurement system is totally complete and up to

date, measuring issues appropriate to that company.

5.5 SUMMARY

In this chapter the data collected from the questionnaire survey and interview were

presented and analysed. Analysis of the data that was done in this chapter is the

basis for the findings of the study. The managers selected provided the information

relating to their satisfaction with the internal audit function and almost all of them

recognized the important role played by internal audit within the organisation. Internal

auditors provided also the information on the performance of their work and problems

linked to their assignments. The analysis and interpretations form the bases on which

conclusions are drawn and recommendations are made in chapter six.

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Chapter 6: Summary and Conclusion

6.1 Introduction

As an aid to the reader, this final chapter of the dissertation restates the research

problem and review the major methods used in the study. It contains also the

summary of the findings, conclusions drawn from the preceding research and based

on what the study wishes to accomplish, namely the main aims; and

recommendations that are made on the basis of the interpretation of the data. It

relates the limitations of this study.

6.2 Restate the problem and review the methodology

Restate the problem

We know that an organization cannot afford to operate ineffectively in a competitive

environment. It is crucial for the RRA to be aware of all the factors that influence its

business strategy. And one of the ways is to have an effective internal auditing which

can play an important role in contributing to organizational performance.

It is rare indeed to find an enterprise of any size, which does not have an internal

auditing function. In many cases, internal auditing has now eclipsed other

management services to become management’s primary source of advice on

efficiency, effectiveness, and economy. Accompanying its status within organization,

internal auditing is now much more strongly established professionally (Chambers,

1997: vii).

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However, in Rwandan enterprises seldom have an internal auditing function. One of

the causes of business failure in Rwandan organizations is the absence of an internal

auditing function. Also not all internal auditing departments function at their full

potential because internal auditing is a relatively new profession in the Rwandan

business environment. A number of internal auditing functions are in the process of

either being established or of being upgraded.

Being part of the structure in many organizations, the internal auditing function is

actually operational in few of them. Sometimes, organizations resort to external audit

exercised by national as well as international private auditing agencies to carry out

the audit function. This shows that the internal audit function is neglected and

considered as useless in most of Rwandan organizations.

Having the above in mind, one can wonder why this important function is neglected in

Rwandan organizations.

- This is because managers of organizations are not aware of its usefulness?

- Do managers confuse the mission and role of internal audit with that of

external audit?

- Why is it necessary to set up internal auditing function in the organization on

top of control organs or mechanisms already established?

Our attention was particularly focused on one of those organizations called Rwanda

Revenue Authority (RRA). RRA is one of the rare organizations that have an internal

auditing function.

187

It is in this viewpoint that the present research is guided by inquisitiveness to answer

the following major question: Is internal audit contributing to the improvement of

the organizational performance of the Rwanda Revenue Authority?

The following sub-questions seemed to be relevant in explaining more clearly the

main question above in the following way:

What type of competent and skillful personnel the RRA have?

How does this service enjoy a good hierarchical position for the guarantee of its

independence?

What type of mission does it necessary and adequately has to achieve its

objectives?

The aim of the research was:

To understand the importance and advantages of the internal audit function within

an organization;

To explain how internal audit can contribute to organizational performance;


organizational performance;

To evaluate the extent to which internal audit, in the Rwanda Revenue Authority,

is contributing to the improvement of organizational performance;

To propose measures to increase organizational performance through an effective

internal audit service.

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This study aimed to prove that internal auditing has a role in improving organizational

performance, and that internal auditors, as management consultants, should advice

management on how to achieve the organization’s objectives.

According to Barlow et al. (1995:28), auditing purpose is to improve organizational

performance. But aren’t managers primarily responsible for improving the

performance? Yes most certainly. So, how can the auditing function improve

organizational performance? It can do so by addressing a fundamental need of

owners and top managers that the system of control in place in the organization is

operating as intended. It can also provide value-adding consulting work for managers.

The purpose of this study was focused on how auditors can contribute to the Rwanda

Revenue Authority’s performance. To do this, auditors must have a thorough

knowledge of the business. If the auditor doesn’t understand the business, he may

focus on the wrong area or fail to provide meaningful recommendations for

improvement to organizational performance. It aimed also at diagnosing the service of

internal auditing of the RRA. Our research should allow decision-maker to understand

the internal auditing role in the organizational performance and opportunity criteria for

the establishment of internal auditing service in the organization.

Review the methodology

A survey was used to address the knowledge of and the role played by internal audit

regarding the organizational performance. Qualitative methods were used to describe

internal audit’s role in improving organizational performance, to identify performance

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of managers and auditors and to link them to the organizational performance.

Furthermore, the mechanisms were used to find out factors leading to the

improvement of organizational performance and internal audit’s contribution in

improving organizational performance.

Survey questionnaires were administered to three categories of employees in the

targeted population. The first category of respondents ranged from first-level

supervisors to departmental heads. The second category concerned the internal

auditors and the third category concerned the division heads. The questionnaires

were distributed, with the assistance of the internal audit division, to all senior

managers, middle managers and internal auditors. The researcher collected the

completed questionnaires from the respondents. These actions (the efforts of the

researcher and internal audit division) increased the validity of the study. The

feedback on the questionnaire represented 86% of the target population for this

research.


below:

- Documentary sources;

- A survey questionnaire;



compensating for the eventual shortcomings of the questionnaires.

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The main source of data was annual reports of the Internal Audit Division. Data

collected from reports were used to examine the realizations of internal audit function

within the organization and the functions of the internal auditors. Corporate annual

reports were used because it is seen to be the main form of company communication

and also they were widely available. The first step of data analysis was about

organizing raw qualitative data by using a coding technique. In other instances,

however, the raw data must be manually keyed into the database using a PC

(Personal Computer). Most popular software, for example SPSS, includes a data

editor that looks like a spreadsheet that can be used to enter, edit, and view the

contents of the database.

6.3 Summary of the findings

As it was observed in the previous chapters, there exist some indicators which are

used to assess the performance of audit function of an organization. In the RRA, the

list is not exhaustive and the research focused on those that are appropriate

specifically for that company. For the purpose of objectivity, the research took into

accounts of indicators regarding the activities of the RRA, quality of the work which is

done and the cost involved when performing the audit work. The analysis conducted

had as objective to demonstrate the role of the internal audit function in the

organizational performance of the RRA. First and foremost, the research measured

the performance of the internal audit function in terms of activities done against the

activities planned. To achieve this, some data were processed and analyzed and this

showed that internal audit division within RRA operated effectively.

191

These achievements are a part of the outputs realized following the working

environment and also due to the functional systems of this division since it has

constantly applied international audit standards as guidelines to the performance

measurements.

According the interview conducted by the researcher, the results showed that while it

is necessary to make a better planning process, there are always unpredictable cases

that result in conducting special assignments which are not neither in the strategic nor

in the operational plan. The study conducted led us to conclude that in the RRA

internal audit division, the planning process is efficient since the total number of

special audit assignments if compared to those that are planned for the whole year is

negligible. It is worth noting that, the planning process of the internal audit is with no

doubt efficient since it complies with international audit standards and it endeavors to

keep this practice for a long run of the organization.

It is also very important to know whether the internal audit recommendations are

appreciated by auditees. The study showed that these recommendations are at a

hundred per cent appreciated by different stakeholders since in the current practice,

internal auditors raise recommendations after they have been discussed and agreed

with auditees. All recommendations were accepted and implemented and this shows

the quality of internal audit work.

This study showed the relative importance of the internal audit functions in the

running of an organization and their magnitude and potential impact to the

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performance of that organization. Internal audit function is meant to ensure the

existence of strong internal control and also to ascertain whether there is a

compliance of the operations against the rules and regulations. It is therefore very

essential to choose an audit strategy that will achieve both a preventive and detective

effect.

The RRA total revenue collections from different types of taxes have been growing

since this institution was introduced. Every year, revenue targets were always met

and sometimes actual revenue collection used to be greater than the targets

(corporate plan 2006-2008). On top of that, the internal audit function came to ensure

the existence, the sufficient of the management tools and their compliance to the

objectives and intentions. To achieve this, internal auditors have to review all the

systems and procedures that have been designed and therefore, to give assurance to

the management that these systems were properly designed and in some cases they

are requested to give advice on how they can be improved. Thus, in the absence of

the internal audit function, whatever good things management can do, there is a little

hope of meeting the effectiveness and efficiency of the organization.

Internal audit function played a major role in cost minimization. It is worth noting

however, that as the revenue collections were increasing on one side, general

expenditures have been increasing on the other side, this in the conformity with the

RRA overall mission. To achieve this, the RRA adopted policies of expenditure cutting

measures like reducing general expenses and that decision was taken following the

internal audit recommendations that were raised in the previous periods showing that

193

it is spending a lot of money where there is no need. On the issue of whether systems

operate effectively, efficiently and economically, the respondents agreed that systems

that are regularly reviewed by internal auditors have a big chance of being properly

designed and always up to date. Organizations without internal audit function could

failure not only because they don’t perform well but due to the absence of the organ

which has the responsibility of informing management areas of good practice and

those for improvement. Thus, internal audit function plays an important role in

improving the organizational performance.

6.4 Conclusions

RRA like any other organization is interested in improving performance through

productivity and using the financial, human and capital resources at its disposal

rationally and effectively. In this respect, it needs to enhance systems that measure

progress and growth. Ultimately, the authority endeavors to deliver tax service to

taxpayers in as cost effective and painless a manner as possible with the objective of

eliciting the highest level of tax compliance and at the same time delivering as much

revenue for government as possible. This serious challenge to tax administration calls

for continuous reviews of design process, management control systems and

corrective and preventive action that deliver taxation and its proceeds to taxpayers

and government.

In an effective tax administration, a high level of customer satisfaction is essential.

This is achieved by a number of means, such as leadership and strategic planning,

194

customer focus, information and analysis, human resources focus, process

management, business results and so on.

For the RRA, to achieve what said above, it is necessary to have an effective internal

control. According to Barlow et al. (1995:16-17), auditing is control that the governing

board, through the audit committee, can use to get assurance that managers will

achieve their performance objectives. Auditing then is a control over managers. This

is why some auditors call it a control over other controls. Furthermore, it supports the

argument that the function must be independent of managers. Also, it tells us that,

ideally, the auditor should also audit top managers’ activities. But in RRA, top

managers aren’t audited by internal audit. Pickett (1997:9) voiced that the scope of

internal audits encompasses the examination and evaluation of the adequacy and

effectiveness of the organization’s systems of internal control and the quality of

performance in carrying out assigned responsibilities.

Whereas Stearn and Impey (1990) as quoted by Ridley and Chambers (1998:54)

listed four key criteria for assessing the effectiveness of control systems:

Objectives The objectives of each control system should be readily recognizable

as contributing to the objectives of the organization as a whole.

Effectiveness The system should be seen to be accomplishing the management

purposes for which it was designed and implemented.

Efficiency The resources used in the process of operating the system should be

applied efficiently in pursuit of the objectives.

195

Security The arrangements for operating the system should ensure the quality and

accuracy of the work done and the security of assets, information and other

resources.

The RRA internal audit function is not totally independent and objective because of

the reporting line. Internal auditors should be independent of the activities they audit.

Audit reporting is at the heart of effective audit independence and objectivity.

Internal audit should be required and openly encouraged to be objective in all the

services and recommendations it provides (Ridley & Chambers, 1998:31):

“Independent reporting lines should be clearly established in the organization

structure in which it works, to establish and maintain this objectivity. Internal audit

should be accountable for its services in an organization to the full board or governing

body. Internal audit should report to an appropriate level of management and be

sufficiently professional in its work and independent of its organization’s day-to-day

operating structure, process and systems, to be able to provide objective advice,

assurance and review of the organization’s controls and help to achieve the strategic

goals and safeguard the interests of the organization. The appropriate levels should

be an executive director or equivalent”.

According to Birkett et al. (1999: 85), an effective internal auditing department should:

Be independent and objective;

196

Have an in-depth knowledge and understanding of the organization’s business

and industry sector;

Have access to the skills and knowledge necessary to assess risk and internal

control;

Have no restrictions placed on the scope of its work and complete access to all

aspects of the business;

Have the backing of the board.

In addition, an effective internal audit department must have:

A clearly defined organization, properly resourced with well trained people,

money, and technology;

A leader of quality, competence, and stature, appropriately qualified and

experienced.

Internal auditing must be as part of the management control framework as stated by

Ridley and Chambers (1998:79). Ridley and Chambers (1998:79) elaborated further

that management value internal audit which is under unrestricted scope of work in

their current control framework; yet, many do not see internal audit currently adding

value to all aspects of governance and the objectives of all control activities.

Many see a growing value from internal audit contributions in the assessment and

reporting of control status. The contribution internal audit can make to reliability and

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integrity of external reports and statements should be seen by management as one of

its highest values.

The RRA doesn’t have an audit committee and this is a problem for internal audit to

be objective and independent. Ridley and Chambers (1998:117) state the importance

of audit committee. Audit committees are now well established, across all sectors,

and in their organizations are usually one of the sources of approval for internal audit

responsibilities and work. Where audit committees exist there are reporting

relationships with internal audit.

The Institute of Internal Auditors’ policy is to recommend that businesses should have

audit committees of the board. Where there are not present it is difficult to provide an

adequate substitute in order to preserve audit independence. An internal audit

committee, comprising the most senior executives of the business, can go some way

to meeting the same need and in some businesses it exists alongside the audit

committee of independent directors (Chambers, 1992:15).

The same author on page 50 argues that a wise audit committee of the board will see

internal audit as providing a service to that committee and would find it intolerable if

the scope of internal audit were restricted to the audit of levels of management

activity which did not include those of the most senior executives, including executive

directors.

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The RRA doesn’t have a specific charter for internal audit function. The charter

should be restricted to setting out clearly and concisely the distinctive rights and

obligations of the audit function. These need to be set out so that they can more

readily be understood since they are different to the general rights and obligations of

those who work for the enterprise in other functions.

Ridley and Chambers (1998:119) emphasized also the importance of internal audit

charter based on professional standards. The IIA standards require an internal audit

unit to have a statement of purpose, authority and responsibility. How this statement

is prepared and communicated is left to the organization. Many, but not all, internal

audit units use an internal audit charter to communicate their internal audit scope and

responsibilities. Despite the importance of this communication not all organizations

take the opportunity of using it to sell all the values of their services in a visionary or

promotional style.

Even though the RRA internal audit function perform well according to the

respondents, it is still not easy to rely on this because since the existence of this

function there is no audit or evaluation made in order to measure its performance.

Ridley and Chambers (1998:230) voiced that it is no longer sufficient for audit to

review the historic reasons for its establishment as justification for its continued

existence. Audit must and should be prepared to provide proof of its worth and value

for money to the organization as part of the organization’s continued growth.

199

This research has sought to place internal audit in its broader economic context as a

necessary prerequisite to the selection of appropriate methods to measure internal

audit effectiveness. Internal auditing Standards contain helpful advice on assessing

the quality of internal audit. We have shown that there are various categories of

internal auditing performance measures, each of which has its place – input

measures, process measures, and output measures. Measurement of internal audit

performance are, however, only data to be interpreted with care – and then to be

used to lead to better internal auditing performance.

To achieve its performance, internal audit must be resourced and it is now generally

accepted that audit resources should be allocated to review a business activity in

proportion to the degree of audit risk associated with that activity and methods are

adopted to achieve this.

According to Ratliff et al. (1996:758), performance audits generally focus on efficiency

and effectiveness, and they require that performance criteria be established. These

audits depend on the availability of a set of accepted objectives and goals against

which performance can be evaluated.

We don’t have to look only the internal audit performance but the performance of

organization as a whole and to measure it. According to Robson (2004:510),

measurement has become such an accepted approach within organizations that

considerable effort is expended in trying to identify “what” can be measured and

“how” to measure it.

200

Santos, Belton and Howick (2002:1246) stated that the design, implementation and

use of adequate performance measurement and management frameworks can play

an important role if organizations are to succeed in an increasingly complex,

interdependent and changing world. Yet, despite widespread recognition of the

importance of performance assessment, there some issues that require further study

if measurement systems are to be effective in the process of management through

monitoring and decision making.

“The internal auditor may use existing performance measures to assess performance.

However, when existing performance information is found inadequate during an audit,

or when the internal auditor is examining issues not adequately covered by current

measures, the internal auditor follows auditing standards issued by an appropriate

authority to determine what performance information is needed, obtains the required

data, and issues a performance audit report that reflects performance as measured

by the internal auditor. Standards used, may be those issued by the IIA” (Epstein,

Grifel & Morgan, 2004:3-4).

Effective Internal audit has then an important role to play in improving organizational

performance but one can ask what makes effective internal audit. Vinten (1999:410)

echoed that the critical condition for effective internal audit is adequate status and

independence within the organization and the widest possible remit.

201

6.5 Recommendations

A strong auditing function will take advantage of on its strengths, address its

weakness, and adapt to change in the business environment. If it does these things, it

should have a brilliant future. The chief internal auditor has to measure internal

auditing performance and takes corrective action to improve performance.

Internal auditors have to provide combination of benefits, from quality in the

performance of internal auditing work and linked other services, to contributions to the

achievement of organization objectives; from experience, training and development

gained by internal auditors, to future contribution to their organization’s management

and specialist careers.

To support managers in improving organizational performance, the internal auditor

must consider all performance objectives that make an organization effective.

Furthermore, he must ensure that all aspects of the business that could have a

significant impact on organizational performance are covered.

To get better performance, one needs clear-defined, measurable performance

objectives. Similarly, if his performance objectives don’t support the organization’s

performance objectives, he misdirects his efforts, no matter whether his controls are

good or bad. Auditors must inquire whether organization has the correct performance

objectives, before they evaluate its controls.

202

The auditors must have standards against which current operations can be compared

and evaluated. Auditors, therefore, can add value to the organization by improving the

performance of its activities and the quality of its managers.

The simple process of measuring is, in its own right, insufficient. It is only by

comparison to an appropriate standard that you can judge whether actual

performance is effective and efficient.

An internal auditor must appreciate that all services contribute to organizational

performance. When developing audit objectives and plans, always consider all

aspects of internal control, from reliability and integrity, through compliance and

safeguarding to economy, efficiency and effectiveness.

The essentially internal audit is management control designed to examine and

evaluate the efficiency and effectiveness of other management controls as a basis for

improving managerial performance.

Documentation of internal auditing procedures is an essential part of quality control in

an internal audit unit. A manual provides both instruction and advice for internal audit

staff, and all those who are involved with their work, the audit committee,

management and external audit.

Information technology means much more than the present- day use of computer to

process information. Many of the cases consider the relationship between audit

203

needs and maintaining appropriate trained staff resources, emphasizing that best

internal audit performance needs best trained and qualified staff.

It is benefit for the RRA internal audit function to have:

An audit committee for the objectivity and independence of internal audit;

The specific audit charter for internal audit function;

The sufficient documentation for internal auditors;

Specific software for audit function;

Adherence to the Institute of Internal Auditors and other institutions related to

audit, accounting and finance;

Permanent training system for internal auditors.

6.6 Limitations of the study

Like most other studies, this study has encountered some shortcomings that affected

the importance of its findings. The limitations of this study are derived from the

inaccessibility of certain data and overlooked appointments. Some documents and

annual reports requested were not consulted because either these reports were not

available or the person appointed to provide them was busy with other occupations.

In fact, some respondents postponed their fixed appointments until the time allowed

for data collection was expired.

204

6.7 Conclusion

The present study was an experimental assessment of the role of internal audit to


The research investigated the performance of the internal audit function within the

organization and its contribution in organizational performance. To achieve this, we

emphasized on the performance in terms of activities done against the activities

planned and some data were processed and analyzed.

While the results in this study are by no means conclusive, it is hope that this study

has contributed to the research done in the extent of the internal auditing practices.

This study has also provided some evidence on the extent of the internal auditing

practices and the influence it has on the internal control system.

6.8 Recommendations for further studies

Word of encouragement for future research is to aid the internal auditing function in

identifying and assessing effective risk assessment methods and techniques. It is

evident that much further research into the compatibility and ultimate integration of

the two evaluations procedures needs to be undertaken.

205

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WHITTINGTON, O. R. & PANY, K. 2006. Principles of auditing and other assurance

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ANNEXE A : QUESTIONNAIRE A

2

QUESTIONNAIRE A (Questionnaire for Senior Managers)

We would be grateful if you could take a few minutes to respond to this survey.

Please select the option that is relevant to your opinion by putting a cross or circling the

appropriate option in the space provided. If none of the options accurately describes your

option, please use the “other” option and type in brief details.

With a score 1-5 on the following scale:

1= not at all; 2= barely; 3= adequately; 4=very; 5= excellently

With 1= yes or 2= no

For the open-ended questions, please give your response

A. SECTION RELATIVE TO INTERNAL AUDITOR’S IMAGE For office use only

1. What do you think of an internal auditor? V1 1

A policeman

A spy of the manager

An ordinary collaborator

An indispensable guide

A spectator

A physician, who examines a patient, detects

a disease and prescribes him/her a medication

Other (Specify)

2

3

4

7

1

5

6

3

Use a score 1-5 on the following scale: 1= not at all; 2= barely; 3= adequately; 4=very; 5= excellently Use 1= yes or 2= no For the open-ended questions, please give your response

For office use only

2. According to you, what is the role of an internal audit ? V2 2

To keep watch over the general management

To help the general management to watch over

the financial management of the RRA

To detect theft and embezzlement of RRA’s assets

To appreciate the control of all organizational operations

Other (Specify)

B. SECTION RELATIVE TO MANAGEMENT SATISFACTION SURVEY

1. How useful do you find internal audit? V3 3

2. How appropriate have been the objectives and V4 4

scope of internal audit’s work?

3. How useful have been your discussions with audit V5 5

at the commencement of the audit?

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1

3

5

2

4

4


For office use only 4. How useful have been your discussions with V6 6

internal audit during the audit?

1 2 3 4 5

5. How open and communicative were the auditors V7 7

with you and your staff?

1 2 3 4 5

6. How satisfactory was the timing of the audit fieldwork? V8 8

1 2 3 4 5

7. How satisfactory was the duration of the internal audit? V9 9

8. How satisfied were you with the time it took for internal audit V10 10

to issue an agreed audit report?

1 2 3 4 5

1 2 3 4 5

5


For office use only

9. How fair and balanced do you consider the audit report to have been? V11 11

1 2 3 4 5

10. How fully do you consider you were consulted on matters which were V12 12

included within the audit report?

11. How useful did you find the audit report? V13 13

1 2 3 4 5

12. How satisfied were you with the observations quality and recommendations V14 14

of your internal auditors?

1 2 3 4 5

1 2 3 4 5

6

Use a score 1-5 on the following scale: 1= not at all; 2= barely; 3= adequately; 4=very; 5= excellently Use 1= yes or 2= no For the open-ended questions, please give your response For office use only

C. SECTION RELATIVE TO PERFORMANCE MANAGEMENT

1. Would measurement of the outcomes of organisation identify V15 15

program success and pinpoint problems?

Yes

No

2. Do you have the expertise to clarify how well you are performing V16 16

and to identify barriers to performance in reaching your goals?

Yes

No

3. Do you have a performance measurement scorecard that V17 17

you use for managing performance?

Yes

No

4. Do you have target goals established for each performance V18 18

measure in your scorecard?

Yes

No 2

1

2

1

1

2

1

2

7

Use a score 1-5 on the following scale: 1= not at all; 2= barely; 3= adequately; 4=very; 5= excellently Use 1= yes or 2= no For the open-ended questions, please give your response For office use only

5. How does the outcome of your program relate to the organization’s V19 19

primary goals?

1 2 3 4 5

6. How will you – or anyone else – know whether or not you have V20 20

achieved your targets?

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

…………………………………………………………………………………………

Thank you for your willingness and time to complete this questionnaire

ANNEXE B : QUESTIONNAIRE B

2

Questionnaire B (Questionnaire for Internal Auditors)

We would be grateful if you could complete the following survey.







For the open-ended questions, please state your opinion.

A. SECTION RELATIVE TO INTERNAL AUDIT MANAGEMENT For office use only

1. Do you have the newest documentation on methodology or other V21 21

resources in the internal audit department?

Yes

No

If yes, does it have all the necessary information? V22 22

If not, how do you cope with the insufficiency? V23 23

We have a library subscription

We are connected to the internet and we communicate with

Other (Specify) 3

2

2

1

1

3


For office use only

2. Do you have specific software for audit? V24 24

Yes

No

If yes, Specify. V25 25

………………………………………………………………………………………….

3. How do you keep your audit files? V26 26

On floppy disks

As printed documents

The two of them

Under any other form (Specify)

4. Are you in partnership with an audit firm? V27 27

Yes

No

If yes, specify. V28 28

…………………………………………………………………………………..

What advantages have secured from the partnership? V29 29

………………………………………………………………………………….

………………………………………………………………………………….

1

2

3

2

2

4

1

1

4


For office use only

5. Your audits are they: V30 30

Periodical

Punctual and circumstantial

6. Have you got an internal audit plan? V31 31

Yes

No

Who approved your audit plan? V32 32

………………………………………………………………………………………..

7. Have you got a work schedule? V33 33

Yes

No

If yes, for how many years is it spread over? V34 34

Less than 1 year

2-4 years

5 years

More than 5 years

The schedule revision and renewal are they: V35 35

Periodical

Circumstantial

1

2

1

2

2

3

1

1

2

4

1

2

5


For office use only

8. Have you got a professional code of ethics for internal auditors? V36 36

Yes

No

9. Do you use professional norms for internal audit as conceived by V37 37

Institute of Internal Auditors (IIA)?

Yes

No

10. How well do they fit to the specificities of RRA? V38 38

1 2 3 4 5

11. How well do you think that you master those norms? V39 39

1 2 3 4 5

1

1

2

2

6


For office use only

12. Does your department have: V40 40

A charter or an internal audit guide

A manual for internal audit

The two of them

Other (Specify)

13. How sufficient are the human resources, finances and techniques of V41 41

the internal audit?

1 2 3 4 5

14. Is there a predetermined budget for the internal audit? V42 42

Yes

No

15. Do you come across financial problems in the course of your work? V43 43

Yes

No

3

1

2

2

4

2

1

1

7


For office use only

What could be the reasons behind them? V44 44

……………………………………………………………………………………………

…………………………………………………………………………………………..

…………………………………………………………………………………………..

16. According to you, how good are the level and quality of education of RRA V45 45

internal auditors adapted to their duties?

1 2 3 4 5

17. Is there a permanent training system for internal auditors at RRA? V46 46

Yes

No

18. How many times did you benefit for an internal auditing training? V47 47

…………………………………………………………………………………

19. What was the length of each training? V48 48

…………………………………………………………………………………

20. As an internal auditor, have you been evaluated? V49 49

Yes

No

1

2

2

1

8


For office use only

How many times? V50 50

………………………………………………………………………………...

21. Who does the evaluation of internal auditors at RRA? V51 51

…………………………………………………………………………………

22. Is the evaluation: V52 52

Periodical

Circumstantial

23. Who audit the internal audit department? V53 53

……………………………………………………………………………………..

24. Who puts in place your recommendations? V54 54

The general management

The auditee

Other (Specify)

25. Who follows up the recommendations of RRA internal auditors? V55 55

Internal auditors

The head of audited department


26. Other persons (Specify)

3

4

3

2

1

2

1

1

2

9


For office use only

26. For a given internal audit work, when does the follow up V56 56

on recommendations stop?

When all of them are put in place

After a period of time

Other (Specify)

27. How well are internal auditors supported by top managers? V57 57

1 2 3 4 5

28. How sufficiently quantitative are performance measures V58 58

for internal audit?

1 2 3 4 5

29. Is it the role of internal audit to contribute to external customer satisfaction V59 59

and protect all stakeholders’ interests?

Yes

No

How do you measure the quality of internal audit work? V60 60

…………………………………………………………………………………..

…………………………………………………………………………………..

1

2

3

2

1

10


For office use only

30. Does internal audit have agreed and established goals? V61 61

Yes

No

31. Does RRA have an audit committee? V62 62

Yes

No

32. How well is internal audit work planned and resourced as to ensure V63 63

achievement of goals?

1 2 3 4 5

33. How well does internal audit achieve its defined goals? V64 64

1 2 3 4 5

34. How well does the achievement of these goals contribute to the attainment V65 65

of the organisational objectives, i.e. establishment and maintaining

internal control?

1 2 3 4 5

1

2

2

1

11


For office use only

35. What are the reasons for auditing the internal auditing department? V66 66

………………………………………………………………………………….

………………………………………………………………………………….

36. What would you expect to achieve in such an audit? V67 67

……………………………………………………………………………………….

……………………………………………………………………………………….

……………………………………………………………………………………….

B. SECTION RELATIVE TO INDEPENDENCE OF THE AUDIT FUNCTION

1. Does internal audit derive its authority from the board? V68 68

Yes

No

Other (Specify)

2. Does the head of audit have direct access to the chief executive and V69 69

does the chief executive receive reports on audit assignments from the

head of audit?

Yes

No

Other (Specify)

3

2

1

1

2

3

12


For office use only

3. How consistent is the recognized scope of internal audit with the resources V70 70

allocated to it?

1 2 3 4 5

4. Are there no operational areas or levels which are precluded from internal V71 71

audit review?

Yes

No

5. Does internal audit have unrestricted access to personnel and V72 72

information?

Yes

No

6. Does the head of internal audit have direct access to the chairperson of V73 73

the board or the executive manager?

Yes

No

2

1

2

1

1

2

13


For office use only

C. SECTION RELATIVE TO INTERNAL AUDIT SCOPE OF WORK

1. Do Control assessments review all senior management activities? V74 74

Yes

No

2. How able are internal auditors to assess risk? V75 75

1 2 3 4 5

D. SECTION RELATIVE TO INTERNAL AUDIT PROFESSIONALISM

1. How are levels and competencies of internal audit established? V76 76

1 2 3 4 5

2. How well specialised in auditing and/or in internal control are RRA’s V77 77

internal auditors?

1 2 3 4 5

1

2

14


For office use only

E. SECTION RELATIVE TO INTERNAL CONTROL SYSTEM

1. Does the scope of internal audit extend to all operations of a business V78 78

not just those which are accounting and financial?

Yes

No

2. Does the scope of internal audit extend legitimately to commenting V79 79

on all aspects of the management process within a particular activity

which is the subject of an audit?

Yes

No

3. How high up the organisation does the remit of internal audit reach? V80 80

1 2 3 4 5

F. SECTION RELATIVE TO PERFORMANCE AUDITS

1. Is the activity being conducted as intended by top management? V81 81

1 2 3 4 5

1

2

1

2

15


For office use only

2. How efficient are prescribed policies being followed? V82 82

1 2 3 4 5

3. How necessary is the function being performed? V83 83

1 2 3 4 5

4. How effective are administrative and financial controls? V84 84

1 2 3 4 5

5. Are internal auditors performing as was expected of them? V85 85

1 2 3 4 5

6. How does internal auditing contribute to organizational performance? V86 86

1 2 3 4 5

7. How does auditing add value to the organisation? V87 87

1 2 3 4 5

16


For office use only

G. SECTION RELATIVE TO PERFORMANCE MEASUREMENT

1. Does your organisation regularly measure performance when V88 88

it conducts an audit?

Yes

No

2. Does your organisation assess the relevance of performance measures V89 89

during an audit?

Yes

No

3. If existing performance measures are not found relevant or complete V90 90

during an audit, does your organisation attempt to determine better

or additional measures and obtain data to assess performance?

Yes

No

4. Does your audit organisation conduct survey(s) that assess customer V91 91

satisfaction or perceptions?

Yes

No

Thank you for your willingness and time to complete this questionnaire

1

2

2

2

1

1

2

1

ANNEXE C : QUESTIONNAIRE C

2

QUESTIONNAIRE C (Questionnaire for Middle Managers)

We would be grateful if you could take a few minutes to respond to this survey.







For the open-ended questions, please state your opinion.

A. SECTION RELATIVE TO INTERNAL AUDITOR’S IMAGE For Office use only

1. Does it really matter that your department be audited by an internal auditor? V92 92

Yes, regularly

Yes, periodically

Yes, often depending on the circumstances

No

3

4

2

1

3


For office use only

2. What do you think of an internal auditor? V93 93

A policeman

A spy of the manager

An ordinary collaborator

An indispensable guide

A spectator

A physician, who examines a patient, detects a disease and prescribes

him/her a medication

Other (Specify)

3. Before writing down their auditing reports, RRA internal auditors: V94 94

Discuss with each head on the problem found in his department

Do not pinpoint a problem unless the head of department ask them to

Are reluctant to have any form of dialogue which might reveal the

problem within the department

Other (Specify)

2

3

4

5

6

7

1

2

1

3

4

4


For office use only

4. At the end of their work, the internal auditors from RRA send the report: V95 95

To the general management

To the head of audited department

To the general management and the head of audited department

Other (Specify)

5. The recommendation of RRA internal auditors to the different audited V96 96

department are they:

Pertinent

Reserved

6. At the end of the internal audit, do recommendations reach the heads of V97 97

department

On time

With delay

Other (Specify)

2

1

3

1

2

1

2

3

4

5


For office use only

7. The follow up over corrections and improvement from V98 98

the recommendations of internal auditors is done by:


The internal auditors

The general management and internal auditors

Other (Specify)

8. The follow up ends V99 99

After a period of time fixed by the general management

After a period of time fixed by the internal audit

When it’s certain that all recommendation have been put in place

Other (Specify)

9. How does auditing add value to the organisation? V100 100

1 2 3 4 5

B. SECTION RELATIVE TO MANAGEMENT SATISFACTION SURVEY

1. How useful do you find internal audit? V101 101

1 2 3 4 5

1

2

3

4

1

2

3

4

6


For office use only

2. How appropriate have been the objectives and scope of internal audit’s V102 102

work?

1 2 3 4 5

3. How useful have been your discussions with audit at the commencement V103 103

of the audit?

1 2 3 4 5

4. How useful have been your discussions with internal audit during the audit? V104 104

1 2 3 4 5

5. How open and communicative were the auditors with you and your staff? V105 105

1 2 3 4 5

6. How satisfactory was the timing of the audit fieldwork? V106 106

1 2 3 4 5

7. How satisfactory was the duration of the audit? V107 107

1 2 3 4 5

7


For office use only

8. How satisfied were you with the time it took for internal audit to issue V108 108

an agreed audit report?

1 2 3 4 5

9. How fair and balanced do you consider the audit report to have been? V109 109

1 2 3 4 5

10. How fully do you consider you were consulted on matters which were V110 110

included within the audit report?

1 2 3 4 5

11. How useful did you find the audit report? V111 111

1 2 3 4 5

8


For office use only

C. SECTION RELATIVE TO PERFORMANCE

1. How will you – or anyone else – know whether or not you have achieved V112 112

your targets? …………………………………………………………………..

……………………………………………………………………………………….

………………………………………………………………………………………..

………………………………………………………………………………………………………….

2. Do you think you need further training in any aspect of your work? V113 113

…………………………………………………………………………………………..

…………………………………………………………………………………………..

…………………………………………………………………………………………..

…………………………………………………………………………………………...

Thank you for your willingness and time to complete this questionnaire.

Key words: Internal audit, organizational performance and performance ...

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