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MAKERERE UNIVERSITY
THE CONTRIBUTION OF INTERNAL AUDITING TOWARDS
ORGANIZATIONAL GROWTH.
BY
MAGALA JOB
07/U/10046/EXT
SUPERVISOR:
DR. KAMUKAMA NIXON.
A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY
IN PARTIAL FULFILLMENT FOR THE AWARD OF
A BACHELOR DEGREE IN COMMERCE
JUNE 2011
DECLARATION
I MAGALA JOB, declare that the work presented is my original work and all its
contents compiled and produced out of my efforts under the guidance of my supervisor,
DR. KAMUKAMA NIXON. It has never been presented in any university/ institution
and where the work of other authors has been consulted, due acknowledgement has been
made.
Signature ………………………………………………….
MAGALA JOB
07/U/10046/EXT
(STUDENT)
Date …………………………………………………………..
i
APPROVAL
This is to certify that this report has been under my supervision and is now ready for
submission to Makerere University with my approval as a partial requirement for the
award of a Bachelor of Commerce degree.
Signature……………………………………………………………
DR. KAMUKAMA NIXON
(SUPERVISOR)
Date ……………………………………………………………….
ii
DEDICATION
To my family and friends: my inspiration.
iii
ACKNOWLEDGEMENTS
The completion of this paper has been an enormous task and therefore could not have
been accomplished by the author alone. On this note, I thank the Almighty God for the
grace he has given me to complete this research report. I also hereby acknowledge my
indebtedness to the following people for their contribution towards the success of this
study; Henry, Flavia, Joannie. Thank you for your support.
I wish to extend my gratitude to my supervisor, DR. Kamukama Nixon for his help and
patience, my lecturers and classmates for all they have contributed to my success.
I could also like to appreciate the clients and the staff of Standard Chartered Bank,
Speke Road, where and with whom this research was carried out for the help they
rendered to me.
Last but not least, I would like to thank you Pr. Stephen Kimbowa, for all your support.
May God richly bless you.
iv
TABLE OF CONTENTS
DECLARATION..................................................................................................................i
APPROVAL........................................................................................................................ii
DEDICATION...................................................................................................................iii
ACKNOWLEDGEMENTS................................................................................................iv
TABLE OF CONTENTS....................................................................................................v
LIST OF ABBREVIATIONS............................................................................................ix
ABSTRACT........................................................................................................................x
CHAPTER ONE................................................................................................................1
1.0 Background to the study................................................................................................1
1.1 Introduction....................................................................................................................1
1.2 Statement of the problem...............................................................................................3
1.3 Purpose of the study.......................................................................................................3
1.4 Objectives of the study..................................................................................................3
1.5 Research questions.........................................................................................................4
1.6 Significance of the study...............................................................................................4
CHAPTER TWO...............................................................................................................5
2.0 LITERATURE REVIEW..............................................................................................5
2.1 The contribution of internal auditing towards organizational growth...........................5
2.2 Internal Auditing............................................................................................................5
2.2.1 Roles of internal auditing............................................................................................6
2.2.1.1 Internal auditing as a risk management mechanism................................................6
2.2.1.2 Internal auditing as a control mechanism................................................................6
2.2.1.3 Internal audit as an internal governance mechanism...............................................7
2.2.1.4 Reviewing the accounting system...........................................................................8
2.2.2 Internal and external audit relationship......................................................................8
2.2.3 Responsibility of internal auditing..............................................................................9
2.2.4 Professional competence............................................................................................9
2.2.4.1 Approaches to competence....................................................................................10
2.3 Organizational growth and financial performance......................................................10
2.3.1 Financial performance measurement........................................................................11
v
2.3.1.1 Profitability measurement......................................................................................11
2.3.1.2 Economy, Efficiency and Effectiveness................................................................12
2.3.2 Benchmarking...........................................................................................................13
2.4 Relationship between internal auditing and organizational growths...........................14
2.5 Conclusion...................................................................................................................15
CHAPTER THREE.........................................................................................................16
3.0 METHODOLOGY...................................................................................................16
3.1 Introduction..................................................................................................................16
3.2 Research design...........................................................................................................16
3.3 Survey population........................................................................................................16
3.4 Sampling......................................................................................................................16
3.4.1 Sample design...........................................................................................................16
3.4.2 Sample size...............................................................................................................17
3.5 Sources of data and collection methods.......................................................................17
3.5.1 Primary data..............................................................................................................17
3.5.2 Secondary data..........................................................................................................17
3.6 Data processing and analysis.......................................................................................17
3.7 Data presentation.........................................................................................................18
3.8 Problems encounted during the study..........................................................................18
3.9 Solutions to the problems............................................................................................18
CHAPTER FOUR...........................................................................................................19
4.0 ANALYSIS, PRESENTATION AND INTERPRITATION OF THE RESEARCH
FINDINGS.........................................................................................................................19
4.1 Findings on the demographic characteristics of respondents...................................19
4.1.1 Findings on the sex of respondents...........................................................................19
4.1.2 Findings on the age of respondents..........................................................................19
4.1.3 Findings on the level of education of the respondents.............................................20
4.1.4 Findings on the respondents experience with the organization................................20
4.1.5 Findings on the marital status of the respondents.....................................................21
4.2. Findings on the importance of internal auditing......................................................22
4.2.1 Findings on fraud detection......................................................................................22
vi
4.2.2 Findings on the organizations profitability..............................................................22
4.2.3 Findings on organizational competence...................................................................23
4.2.4 Findings on the banks record keeping......................................................................23
4.2.5 Findings on competitive advantage to the organization...........................................24
4.3 Findings on organizational growth..........................................................................24
4.3.1 Findings on the organizations financial performance..............................................24
4.3.2 Findings on organizations competence.....................................................................25
4.3.3 Findings on risk levels in the organization...............................................................25
4.3.4 Findings on economic performance, effectiveness and efficiency of the
organization.......................................................................................................................26
4.3.5 Findings on profitability measurement in the organization......................................26
4.3.6 Findings on fraud detection in the organization.......................................................27
4.4 Findings on the relationship between internal auditing and organizational growth..27
4.4.1 Findings on early symptoms of fraud.......................................................................27
4.4.2 Findings on material misstatements in financial statements.....................................28
4.4.3 Findings on internal controls and ethical behavior...................................................28
4.4.4 Findings on competitive advantage to the organization...........................................29
4.4.5 Findings on risk management in the organization....................................................29
4.4.6 Findings on internal auditing and organizational growth.........................................30
CHAPTER FIVE.............................................................................................................31
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS................................31
5.1 Introduction..................................................................................................................31
5.2 Summary......................................................................................................................31
5.3 Conclusion...................................................................................................................31
5.4 Recommendations........................................................................................................32
REFERENCES..................................................................................................................33
Appendix I: SURVEY QUESTIONNAIRES....................................................................35
Appendix II: BUDGET......................................................................................................39
Appendix III: TIME FRAME............................................................................................40
vii
LIST OF TABLES
Table 1: Sex of respondents. .............................................................................................. 19
Table 2: Age of respondents. ............................................................................................. 19
Table 3: Respondents level of education. .......................................................................... 20
Table 4: Respondents experience. ..................................................................................... 20
Table 5: Respondents marital status. ................................................................................. 21
Table 6: Detection of fraud in the organization. ................................................................ 22
Table 7: Organizations profitability. .................................................................................. 22
Table 8: Organizations competence. .................................................................................. 23
Table 9: Record keeping in the bank. ................................................................................ 23
Table 10: Organizations competitive edge. ....................................................................... 24
Table 11: Organizations financial performance. ............................................................... 24
Table 12: Organizations competence. ................................................................................ 25
Table 13: Risk in the organization. .................................................................................... 25
Table 14: organizations economic performance, effectiveness and efficiency. ................ 26
Table 15: Ways of measuring profitability in the organization. ........................................ 26
Table 16: Fraud detection in the organization. .................................................................. 27
Table 17: Symptoms of fraud. ........................................................................................... 27
Table 18: Material misstatements in the organization. ...................................................... 28
Table 19: Internal controls and ethical behavior. .............................................................. 28
Table 20: Organizations competitive advantage. ............................................................... 29
Table 21: Risk management. ............................................................................................. 29
Table 22: Correlations ....................................................................................................... 30
viii
LIST OF ABBREVIATIONS
IIA INSTITUTE OF INTERNAL AUDITING
SOA SARBANES OXLEY ACT
CCR COORDINATING COMMITTEE ON REMUNERATION
ix
ABSTRACT
The topic of the study was the contribution of internal auditing towards organizational
growth and Standard Chartered bank, Speke road was used as a case study. It was
conducted by guidance of the objectives namely: establish the contribution of internal
auditing towards the growth of Standard Chartered bank, investigate how internal
auditing affects the financial performance of the organization and to examine the
relationship between internal auditing and organizational growth.
The study was carried out using descriptive, cross-sectional and correlation research
design based on 30 respondents who were selected using random sampling and stratified
sampling methods. Questionnaires were the main instruments of the study and data was
analyzed using SPSS method and presented in tables showing their rankings, frequencies
and percentages.
Findings on the scope of internal auditing revealed that the services of IIA have been
very well disbursed and that many of the clients find them accessible and very useful in
investment and economic development and growth. The findings on organizational
growth show that fraud is one of the major causes the low levels of organizational growth
in the economy and that the fraudulent reduction tools implemented have been well
executed although a lot is still needed in order to realize tangible reduction in fraudulent
levels. According to Pearson correlation, the result is positive r=0.810 which implies a
strong relation ship between the internal auditing and organizational growth in the
economy. IIA have helped reduce fraudulent levels in organizations in the economy and
so, each organization should have an internal auditing department set up to continue the
campaign.
The recommendation on the internal auditing services was that they should endeavor to
extend services to empower and improve the internal audit function and ensure effective
performance. Recommendation in fraudulent reduction was that in order to reduce fraud
effectively, the audit commit should be given regular access to the organizations records
when ever need arises and that staff should be constantly monitored. The internal audit
should also be independent and be seen as independent from the organization.
x
CHAPTER ONE
1.0 Background to the study.
1.1 Introduction.
Internal auditing is an independent, objective assurance and consultancy activity
systematically designed to add value and improve an organizations operations,
performance, efficiency and effectiveness. It helps the organization to achieve its
objectives and goals by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of governance, risk control, planning and management control
(IIA Report, 1999).
In the past, auditors complained of fraud and theft as an objective of auditing and it was
the auditors duty to report to shareholders of all the dishonest acts that were observed and
had affected the propriety of the contents of the financial statements and by early 1930’s,
it was recognized that the auditing objective was for the verification of accounts (Carey,
P., 2000).
For the development of a true professional status of internal auditing, the institution of
internal auditors became the outgrowth for organizational development. Although the
roots are in accountancy, its key purpose lies in the area of management control. It
comprises a complete intracompany financial and operational review (Robert, B.M.,
1945). The internal audit function became responsible for careful collection and
interpretation of selected business facts to enable management to keep track of significant
business developments, activities and results from diverse and voluminous transactions
(Mautz, 1964).
By 1993, the statement of responsibilities of internal auditing noted that internal auditing
encompasses the examination and evaluation of the effectiveness of organizations system
of internal control and the quality of performance in carrying out assigned responsibilities
1
(IIA Report, 2002). It led to reduction in corruption cases in many organizations that was
uncovered and had a big impact on the company’s sales and profitability. Auditors had to
explain to the shareholders what those effects would have on the organizations growth
(www.deloitte.com).
Many organizations have now employed the use of internal auditing since it is today’s
major factor in establishing the quality of the organizations internal control system.
Organizations are also struggling to implement more effective governance structures and
processes. In such s climate, it is no surprise that the internal audit function is viewed as
the most qualified group of professionals to help with such experimentation with
improved governance as well as support key governance processes for monitoring the
controls over and for evaluating the operational effectiveness of these management
strategies and initiatives.
However, to take advantage of this tremendous surge in the demand for their services,
not only do internal auditors need a considerably enhanced repertoire of skills, attributes
and competencies but they also need to commensurately raise their organizational status
and profile and align themselves appropriately within their respective organizations
(Stone, M., 2000)
Internal auditing group was to monitor compliance with the policies and standards and
the effectiveness of the internal control structure across the organization. There work was
focused on the areas of great risk as determined by the risk assessment approach (CCR,
2008).
Organizations today still face many problems despite the presence of internal auditing
teams. Companies are seen to have poor management of resources, mainly funds due to
the high levels of fraud. The findings of audit were meant to be used by management to
ensure that the organization grows but management seems to be so reluctant to take
immediate actions hence hindering organizational competitiveness and effectiveness.
2
1.2 Statement of the problem.
Majority of organizations today have created the internal audit department to examine the
fraud issues, financial reporting and misappropriation of the organizations assets by
ensuring accuracy, objectivity and consistency of the financial statements as a
prerequisite in monitoring proper organizational financial performance (Author, 2005).
This has led to the seen developments in organizations such as improved financial
records keeping, restricted access to financial records by unauthorized persons, fraudulent
detection and improved management of funds. This has led to faster organizational
growth. However, despite the establishment of the internal auditing department in
organizations and all the above advantages, the goals are not attained at the expected
level. The organizations today still have poor book keeping methods, lots of fraudulent
behavior by mostly the top officials and hence the poor performance and so it’s against
the above background that the researcher was compelled to evaluate the contribution of
internal auditing to organizational growth.
1.3 Purpose of the study.
The purpose of the study was to find out the contribution of the internal auditing
department towards the growth of Standard Chartered bank.
1.4 Objectives of the study.
The objective of the study was to;
i) Establish the contribution of internal auditing towards the growth of Standard
Chartered bank.
ii) Investigate how internal auditing affects the financial performance of the
organization
iii) Examine the relationship between internal auditing and organizational growth.
3
1.5 Research questions.
i) What is the contribution of internal auditing towards the growth of the
organization?
ii) How will internal auditing affect the financial performance and viability of
the organization?
iii) What is the relationship between internal auditing and organizational growth?
1.6 Significance of the study.
The study was carried out to attain the following;
i) To make organizations aware of the roles of internal auditors to effective and
efficient organizational growth.
ii) To avail more data on organizational development, this will help future policy
makers.
iii) To avail more analytical techniques, this could b used by future researchers.
4
CHAPTER TWO
2.0 LITERATURE REVIEW.
2.1 The contribution of internal auditing towards organizational growth.
On the basis of the available literature, this chapter points out some of the contributions
of internal auditing towards organizational growth. This literature provides a critical
review of the issues and concepts that have been written, sited and explored by different
authors, researchers and scholars. It is meant to give the reader an understanding of the
contribution of internal auditing; internal and external audit relationship, the
responsibility of internal auditing and organizational growth as well as organizational
performance.
2.2 Internal Auditing.
Internal auditing is an independent appraisal function established by management for the
review of internal control systems as a service to the organization and it is also defined as
an independent, objective and consulting activity designed to add value and improve the
organizations operations (IIA, 1999). It helps an organization to accomplish its objectives
by bringing a systematic, displined approach to evaluate and improve the effectiveness of
risk management, control and governance processes. This definition is designed to
embrace the expanding role of internal audit which in recent years has evolved from a
narrow focus on control to include risk management and corporate governance (Walker et
al., 2003; Brody & Lawrence, 2000). This definition is used as a framework to develop
hypotheses concerning the characteristics of companies that use internal audit (Colbert,
2002). Internal auditing is a profession that has evolved steadily with the progress of
management science after World War II (SOA, 2002).
5
2.2.1 Roles of internal auditing.
2.2.1.1 Internal auditing as a risk management mechanism.
Internal auditing professional standards require the function to monitor and evaluate the
effectiveness of the organization’s risk management process. This relates to how the
organization sets its objectives, identifies, analyses and responds to those risks that could
potentially impact its ability to release its objective (www.us.kpmg.com). Internal
auditors add value to the entity by providing assurance that its risk exposures are properly
understood and managed (Walker et al., 2003). Internal audit plays a major role in
monitoring a company’s risk profile as well as identifying key areas to improve the risk
management processes (Race, 2002). Curtis C, Verschoor, et al. (2001) explain that
internal auditing helps organizations to identify and evaluate risks, moving the profession
into the front line of risk management. Fred, F. & Simon, K. (1999) state that a strong
organizational commitment to managing risks requires the development of a risk-based
culture within the company.
2.2.1.2 Internal auditing as a control mechanism.
Internal control is the process adopted by the directors and management of an entity to
provide reasonable assurance that the objective of the entity are achieved with regard to
operations, financial reporting and compliance with regulations (Brody, R.G & Lowe,
D.J., 2000). External auditing standards recognize that an effective internal auditing
function can significantly strengthen the control environment by reviewing the internal
control structure (Kirschencheiter, M., 2000).
As a result of the asymmetry of information between senior managers and division
managers (Brody, R.G & Lowe, D.J., 2000), senior managers lose their ability to tightly
control operations. This is compounded by the existence of internal agency costs that
arise because of difference in incentives between top managers and those at the operating
level. Therefore, it is important to have in place a strong system of internal control, which
includes the use of internal audit as a review and monitoring mechanism (Wright, A., &
Rajeswarn, 2004). In this way, senior management delegates their responsibilities with
6
respect to internal control to the internal audit function (Davidson, R., & Kentie, P.,
2005).
2.2.1.3 Internal audit as an internal governance mechanism.
The internal auditing process is important in a corporation’s governance mechanism
because it evaluates the corporate activities, controls or procedures and ensures that they
are adequate and in compliance with senior and human resources guidelines (Marquis, C.
2010). Marquis, (2010) adds that internal auditing helps the firm to adhere with the
regulatory standards and industry policies. From an agency perspective, the importance
of strong governance stems from the need to align the interests of management with other
stakeholders in the firm in order to reduce agency costs (Cohen et al., 2004). Various
corporate governance mechanisms can be used to monitor management’s behavior and
these include independent directors on the board, an independent board chair, an effective
audit committee and both external and internal audit (Carcello et al., 2005). Cohen et al.,
(2004) describe the complex interaction between these governance mechanisms as the
“corporate governance mosaic”. Davidson, R., (2005) argues that internal audit is a
substitute mechanism for monitoring by directors. However, information asymmetry
problems between executive and independent directors suggest that internal audit is more
likely to be a complementary mechanism. This is supported by research evidence
examining the relationship between internal audit and audit committees (Carcello, et al.,
2005; Goodwin, 2003 and Raghunandan et al., 2001) and this is also consistent with the
IIA view that internal auditing helps an organization to evaluate and improve other
governance processes (IIA, 1999, 2004). Hence, there should be a positive association
between the use of internal audit and both an independent board chair and the proportion
of independent directors on he board plus a positive association between the internal
audit function and a strong audit committee because the goal of both are “closely
intertwined” (Reed, S.A., 2002).
7
2.2.1.4 Reviewing the accounting system.
The accounting system is mainly made up of the accounting information systems and this
is the total suite of components that together comprises of the inputs, storage transactions
processes and collecting and reporting of financial transaction data (Goodwin, J., 2003).
The objectives of this system are to collect and store data about accounting transactions
in order to generate meaningful output for decision making (Nkundabanyanga, 2004).
The internal auditing department must ensure that the transactions in the accounting
system are following the laid down procedures and that there is no manipulation of the
accounting information.
Accounting system controls consist of basic controls and dispute over basic controls
which the internal auditor should constantly review. Basic controls are the ones that are
necessary for the compliments and accuracy of the accounting records and they can
include custody controls that is to say, adequate arrangements for custody of accounting
records in that there is separation of related record keeping and physical arrangements
that prevent unauthorized access to accounting records.
2.2.2 Internal and external audit relationship.
The value internal audit can add to the organization is affected by the corporation and co-
ordination between the internal and external audit (Cenker, W.J., 2002). Although the
primary purpose of internal audit differs from that of the external audit, there are
common interests that provide the basis for co-operation between them (Moeller and
Witt, 1999). Not only is the internal audit function an important part of the internal
control system, but the reliance by external audit on the work of internal audit is likely to
result in less external audit work being performed and external audit cost savings (Felix
et al., 1998 & Gramling, 1999).
If the internal audit department consists of quality internal audit staff in terms of their
competence, objectivity and work performance then they are likely to be capable of
contributing to an effective external audit (Morrill, et al., 2003). Barton, (2003) argues
8
that if there are doubts about the internal auditor’s objectivity and competence, then
reliance on their work by the external auditor may reduce the quality of the external audit.
The external auditors may choose to rely on substantive tests or tests relating to the
application of internal controls performed by the internal audit department, which may
alter the type, quality and timing of external audit work (Morril, J., 2003). However,
Nagy & Cenker (2002) question whether the external auditor can rely on the newly
defined internal audit function in terms of its movement away from a traditional
assurance approach to a value added and consulting approach to internal audit
(IIA, 2000).
2.2.3 Responsibility of internal auditing.
Internal auditing is performed by internal auditors who are appointed by the management
to ensure the correctness in accounting data and detection of frauds (Maletta, M.J., 2001).
So, the internal auditors are answerable to management and the board of directors which
discharges their duties and responsibilities.
Internal auditors are required to have broad based interpersonal and analytical skills to
ensure that the accounting system is efficient and also provide with accurate and material
information through detection of errors and frauds as emphasized by Ramaswamy,
(2004).
According to Kirschencheiter, M.(2000), internal auditors are given some degree of
independence in order to enable them perform their duties. They report to the board of
directors and management on whether the policies and plans of activities prescribed by
management have been implemented. That is whether the internal controls established are
adequate or whether the actual results vary from the estimated ones.
2.2.4 Professional competence.
Mclure, (2000) defines professional competence as the ability to perform to recognize
standards. To them, a person described as competence in a profession is considered to
9
have repertoire of skill, knowledge and understanding which he or she can apply in a
range of contexts in organization.
2.2.4.1 Approaches to competence.
In distinguishing between the different approaches to competence, Mclure (2000)
highlighted four categories on which competence can be based. These include
competence based on description of action, behavior or outcome in the form that is
capable of demonstration, observation and assessment; competence which can be seen as
a broad cluster of ability linked together conceptually; competence as a deep cognitive
structure of general, which is not fixed but has potential to develop and competence that
is determined by actors in any given situation, that is to say, that which is situational
specific.
The question for an individual profession is to identify a level which is accepted in terms
of a minimum requirement to be professionally recognized and developing a system for
ensuring that individuals maintain their level of competence and achieve recognition for
development beyond the minimum requirement.
2.3 Organizational growth and financial performance.
This is a subjective measure of how well a firm can use assets from its primary mode of
business and generate revenues (Dess, G. & Robinson, R., 2004). This term is also used
as a general measure of a firms overall financial viability over a given period of time, and
can be used to compare similar firms across the same industry or to compare industries or
sectors in aggregation (Durand, R., 2004).
The most common way through which managers know whether the organization is
performing well financially is by use of ratio analysis. A financial ratio is used as a
benchmark for evaluating the financial performance of an organization (Pandey, 1999).
10
2.3.1 Financial performance measurement.
Financial performance measurement is an integral part of planning and control cycle
(Robinson, R., 2003). A measure of past performance is valuable not only to the current
control activities but also to provide data for future plans which can not be made realistic
without assessment of what happened in the past.
There are many different ways to measure financial performance, but all measures should
be taken in aggregation (Dall, T., 2004). Line items such revenue from operations,
operating income or cash flow from operations can be used, as well as total unit sales.
Furthermore, the analyst or investor may wish to look deeper into financial statements
and seek out margin growth rates or any declining debt (Pandey, 2002).
According to Kaplan (2006), the main areas to be analyzed when considering an
organizations growth are profitability, liquidity, efficiency and leverage levels as ratios
which can be used to predict an organizations performance.
2.3.1.1 Profitability measurement.
The firm manager has to continuously evaluate the effectiveness and efficiency of the
organization in terms of profits (Pandey, 1999). Profit is another generally accepted
measure to evaluate the business both internally and externally (Porth, 2003). Internal
users of financial information identify profit as the reward for the skills of being a
successful entrepreneur. Recent press coverage in the UK has indicated that this measure
is a major determinant of the reward system of managers of decentralized units. If they
meet certain qualified performance targets, they obtain the financial reward that
recognizes their entrepreneurial skills (Peter Druker, 1997).
External users of accounts recognize profit as a measure for identifying the successor
failure of the policies of the directors who, as stewards of the assets are entrusted with the
task of increasing the wealth of the shareholders (Kaplan, 2006).
11
An operating profit margin is calculated as the net income plus interest expense minus
family living and income taxes divided by gross revenues (Dess, G., 2003). According to
Walker, E (2001), the proportion of earnings or revenues is the operating profit and thus
available to compensate debt and equity capital which indicates the operating margins
and reflects ability to generate revenues and control costs in such a way as to generate a
profit.
2.3.1.2 Economy, Efficiency and Effectiveness.
Thomason (2004) says that organizational performance is mainly judged in term of
economy, efficiency and effectiveness.
Economy involves attaining the appropriate quantity and quality of physical, human and
financial resources at minimal cost. Economy therefore implies the principle of frugality.
Efficiency is the relationship between the goals and services produced and the resources
used to produce them with the objective of maximizing output and minimizing inputs.
Efficiency implies maximizing the output to input ratio (Kakuru, 2001).
The effectiveness of the organization as a performance measure focuses mainly on how
well the objectives are being achieved through the spending of the available resources.
However, Durand, (2004) argues that when evaluating the performance, most managers
like to distinguish between effectiveness and efficiency because these two are very hard
to separate. Effectiveness is the degree to which inputs are used in relation to the level of
output. Performance can be either efficient or effective but neither condition can occur
independently.
According to Kaplan (2006), the three measures can be in conflict with the other and may
have to sometimes compliment each other and therefore it may be so hard for one to be
ignored.
12
2.3.2 Benchmarking.
Bench marking is the practice of looking for those businesses that are the best at doing
something and learning how they do it in order to emulate that performance (Durand, R.,
2004). Financial benchmarking involves looking for actual performance data from firms
that are comparable to your own. Firm business managers have several alternatives
available for setting performance standards or benchmarks. Generally, it is important to
assess an organizations current performance relative to performance in prior years. This
can often lead to valuable insights into trends in business performance (Durand, R.,
2004). It is also important to try to control financial performance by projecting expected
values for the key performance measures for the organization. The organization can then
use these projections to systematically evaluate variations between planned performance
and actual performance.
Benchmarking enables the organization to learn about their own business practices and
the practices of others. It helps an organization to identify areas in which it is not
implementing the practices and to determine improvement programmes which will lead
to achievement of and upon current practices (Kakuru, 2001).
Benchmarking should focus on areas which are significant strategic importance to the
organization. It will also be useful to target areas where its envisaged significant
improvement can be made. This is likely to create a positive motivational influence on
the staff and improve their commitment to the benchmarking ethos (Peter, D., 1997).
Benchmarking may have one or more on focus. It may for example be internal in nature
where on one internal unit learns from another or external. It may focus on the best
practices of the competitors where this information can be obtained. Again, it may focus
on customers such as the performance with the expectations of the customers such as the
performance of faulty goods amongst those reaching the customers (Kaplan, 2006).
However, organizations always have to make an effort to know as much as possible about
the source of the benchmarks against which they plan to measure their firm’s
13
performance (Durand, R., 2004). Some benchmarks are highly variable in terms of what
constitutes top performance because organizations of different sizes operate different
economies of scale and also factors such as the type of firm commodities produced.
2.4 Relationship between internal auditing and organizational growths.
Internal auditing departments are set up with the aim of having a positive influence on
organizational growth. For an organization to run effectively and efficiently, internal
controls have to be put in place and hence calling for strong internal control function
within the organization (Reed, S.A., 2002).
If the internal auditing department is functioning well, then in most cases, profits will be
high and there will be the value for money in terms of economy, efficiency and
effectiveness. The value for money implies that efforts must be made to ensure that the
available funds are spent in the provision of goods and services in a way which
maximizes the benefits to the users of the services and goods. But if the internal audit
department is not functioning well, then in most cases, the profits will be low and there
will not be value for money (Reid et al, 1997; 2000).
Sufficient, relevant and reliable information is a pre- requisite for an effective and
efficient organizational growth and its internal auditors who review the reliability and
integrity of financial and operational information and the means to identify, measure,
classify and report such information (Flora, 2003). An organization is said to perform
well if it is having a good financial management (Pandely, 1999). This is all supported by
the internal audit function.
It can be noted that internal audit is intended to overcome the tendencies of corruption,
fraud, misappropriations and abuse of office in most organizational growth.
14
2.5 Conclusion.
The above literature has indicated how central and important the notions of roles
responsibility and competence are to the professional practice.
Various scholars and authors have written about the two variables by clearly bringing out
the role played by an effective internal on the organizational growth. Therefore, a strong
relationship exists between the two variables as discussed above.
15
CHAPTER THREE
3.0 METHODOLOGY
3.1 Introduction.
This chapter describes how the research was conducted for the purpose of this research
work. Specifically, it discusses the research designs used, population and sample size,
sampling procedure and design, methods of data collection, measurement and data
analysis. It also provides for the limitations to the study.
3.2 Research design.
The study was basically cross-sectional in nature and was conducted using questionnaires
for primary data, journals, financial reports and statements, internal audit reports and
textbooks for secondary data. The research was descriptive because it involved the use of
tabular presentations for organizing data gathered in a systematic and orderly manner
such as presentations.
3.3 Survey population.
The study mainly covered the employees of the internal audit department that is to say,
the head of audit, plus 30 internal auditors of Standard Chattered bank.
3.4 Sampling.
3.4.1 Sample design.
The research was based on purposive sampling and convenience sampling designs. These
methods were valuable when collecting data from the respondents.
16
3.4.2 Sample size
The researcher based on the sample size of 30 respondents and got enough information
and representation to make the analysis. This was intended to add more value to the
findings as it was convenient.
3.5 Sources of data and collection methods.
The sources of data were both primary and secondary, which assisted the researcher to
make a through analysis of the study problem at hand.
3.5.1 Primary data.
Primary data was collected from respondents through distribution questionnaires,
personal interview guides and observation to some extent of the staff.
3.5.2 Secondary data.
Secondary data was obtained from internet articles, business journals and textbooks plus,
Standard Chattered banks financial reports.
3.6 Data processing and analysis.
Data was edited, coded, classified and tabulated before it was entered into the computer
for analysis. The analysis was done using Microsoft word by making reference to the
available literature. After selecting the respondents, the researcher embarked on the field
research and collected both qualitative and quantitative data. The data was edited to
correct possible errors, omissions and contradictions and later was coded to attach value
to the data as the information was analyzed in form of tables.
17
3.7 Data presentation.
The data was presented in form of tables. The findings were presented in a report form
and were based on findings from the field that is, primary data and also available
literature authored by different scholars. Data was presented in both qualitative and
quantitative form.
3.8 Problems encountered during the study.
The following were the problems the researcher went through during the study.
i) The problem of funds to finance the research that were needed to collect data
from the field, printing, typing and binding.
ii) Time horizon allowed for the research was not sufficient.
iii) There was a delay by the respondents to the research tools especially the self-
administered questionnaires.
iv) Some websites were not easily accessible due to privacy, need for subscription
and passwords needed for full access.
3.9 Solutions to the problems.
The following were the solutions to over come the above problems.
i). More effort like extensive and timely research were invested to over come the
time horizon problem and made a complete study.
ii).The researcher kept on visiting the organization to remind the respondents of
the questionnaires.
iii).The supervisor helped in analyzing the researcher’s data and friends helped
type the work to finish in time.
18
CHAPTER FOUR
4.0 ANALYSIS, PRESENTATION AND INTERPRETATION OF THE RESEARCH
FINDINGS
4.1 Findings on the demographic characteristics of respondents.
4.1.1 Findings on the sex of respondents
Table 1: Sex of respondents.
Sex Frequency Percentage
Male 21 70.0
Female 9 30.0
Total 30 100.0
Source: primary data.
According to the above table, it can be seen that 70% of the respondents were male and
30% were female. This implies that the male are the most employed persons in Standard
Chattered bank, Speke road.
4.1.2 Findings on the age of respondents.
Table 2: Age of respondents.
Age Frequency Percentage
20-29 years 15 50.0
30-39 years 14 46.7
40-49 years 1 3.3
Total 30 100.0
Source: primary data.
19
The table shows that 50% of the respondents are of age between 20-29 years, 46.7% are
between 30-39 years, and 3.3%, 40-49 years. This implies that the bank employs mostly
those between 20-29 years.
4.1.3 Findings on the level of education of the respondents.
Table 3: Respondents level of education.
Education level. Frequency Percentage
Diploma 6 20.0
University degree 19 63.3
Masters 5 16.7
Total 30 100.0
Source: primary data.
From the table, 20% of the respondents are diploma holders, 63.3% are university degree
holders and 16.7% are master’s degree holders. This implies the internal auditors are well
educated and trained and most of them are university degree holders.
4.1.4 Findings on the respondents experience with the organization.
Table 4: Respondents experience.
Level of experience Frequency Percentage
1-3years 11 36.7
3-4years 11 36.7
4-5years 1 3.3
5years and above 7 23.3
Total 30 100.0
Source: primary data.
20
The table shows that 36.7% of the respondents have three years experience, 36.7% have a
four years experience, 3.3% have five years experience and 23.3% have more than five
years experience. This implies that the internal auditors have enough experience with the
subject of study
4.1.5 Findings on the marital status of the respondents.
Table 5: Respondents marital status.
Marital status Frequency Percentage
Married 13 43.3
Single 14 46.7
Divorced 2 6.7
Separated 1 3.3
Total 30 100.0
Source: primary data.
The table shows that 43.3% of the respondents are married, 46.7% single, 6.7% divorced
and 3.3% separated. This implies that most of the respondents are single committed to
performing their duties.
21
4.2. Findings on the importance of internal auditing.
4.2.1 Findings on fraud detection.
Table 6: Detection of fraud in the organization.
Response Frequency Percentage
Strongly agree 13 43.3
Agree 17 56.7
Total 30 100.0
Source: primary data.
The table shows that 43.3% of the respondents strongly agree and 56.7% agree. This
implies that surely, internal auditing helps in the detection of fraud in the bank which
improves its performance.
4.2.2 Findings on the organizations profitability.
Table 7: Organizations profitability.
Response Frequency Percentage
Agree 17 56.7
Disagree 13 43.3
Total 30 100.0
Source: primary data
The table indicates that 56.7% do agree and 43.3% disagree. This implies that the banks
profitability has come with the help of the internal auditing department as all financial
statements will be put into account.
22
4.2.3 Findings on organizational competence.
Table 8: Organizations competence.
Response Frequency Percentage
Agree 17 56.7
Disagree 13 43.3
Total 30 100.0
Source: primary data.
The table shows that 56.7% of the respondents agree and 43.3% of the respondents
disagree. This implies that internal auditing has helped to improve the banks competence
in relation to the others in the market through improved service delivery.
4.2.4 Findings on the banks record keeping.
Table 9: Record keeping in the bank.
Response Frequency Percentage
Strongly agree 12 40.0
Agree 17 56.7
Strongly disagree 1 3.3
Total 30 100.0
Source: primary data.
As per the table readings, 40% of the respondents strongly agree, 56.7% agree and 3.3%
disagree with the subject. This implies that internal auditing improves the banks record
keeping system which improves access to the record whenever done comes in hence
saving time. This also helps in detection of fraud.
23
4.2.5 Findings on competitive advantage to the organization.
Table 10: Organizations competitive edge.
Response Frequency Percentage
Strongly agree 13 43.3
Agree 13 43.3
Not sure 4 13.3
Total 30 100.0
Source: primary data.
The table indicates that 43.3% of the respondents do strongly agree, 43.3% agree and
13.3% are not sure. This shows that internal auditing provides a competitive edge to the
organization although more effort is needed.
4.3 Findings on organizational growth.
4.3.1 Findings on the organizations financial performance.
Table 11: Organizations financial performance.
Response Frequency Percentage
Strongly agree 11 36.7
Agree 19 63.3
Total 30 100.0
Source: primary data
The table indicates that 36.7% of the respondents strongly agree and 63.3% agree. This
implies that internal auditors function helps to improve the organizations financial
performance.
24
4.3.2 Findings on organizations competence.
Table 12: Organizations competence.
Response Frequency Percentage
Strongly agree 12 40.0
Agree 18 60.0
Total 30 100.0
Source: primary data.
From the table, 40% of the respondents strongly agree and 60% agree with the question.
This implies that internal auditing is used as a competitive tool for the organization in
relation to others.
4.3.3 Findings on risk levels in the organization.
Table 13: Risk in the organization.
Response Frequency Percentage
Strongly agree 11 36.7
Agree 16 53.3
Disagree 3 10.0
Total 30 100.0
Source: primary data.
The table indicates that 36.7% of the respondents strongly agree, 53.3% agree and 10%
disagree. This implies that with the introduction of internal auditing in the bank, risk
levels have greatly reduced such as fraud, mismanagement of funds among others.
25
4.3.4 Findings on economic performance, effectiveness and efficiency of the
organization.
Table 14: organizations economic performance,
effectiveness and efficiency.
Response Frequency Percentage
Strongly agree 21 70.0
Agree 9 30.0
Total 30 100.0
Source: primary data.
The table shows that 70% of the respondents strongly agree and 30% agree. This implies
that the organizations performance has improved in comparison to others with the help of
internal auditing.
4.3.5 Findings on profitability measurement in the organization.
Table 15: Ways of measuring profitability in the
organization.
Response Frequency Percentage
Yes 23 76.7
No 7 23.3
Total 30 100.0
Source: secondary data.
The table shows that 76.7% of the respondents agree and 23.3% disagree.
This implies that the organization has ways of measuring its profitability levels. The bank
uses financial ratios mainly as a tool in measuring its profit. All such detailed
performances are with the help of internal auditing. Management should also consider
other methods of measuring its profitability.
26
4.3.6 Findings on fraud detection in the organization.
Table 16: Fraud detection in the organization.
Response Frequency Percentage
Yes 21 70.0
No 9 30.0
Total 30 100.0
Source: primary data.
The table shows that 70% of the respondents agree and 30% disagree.
With those percentages, it implies that there is a high level of fraud detection in the
organization although, more effort is needed to eradicate it all.
4.4 Findings on the relationship between internal auditing and organizational
growth.
4.4.1 Findings on early symptoms of fraud.
Table 17: Symptoms of fraud.
Response Frequency Percentage
Strongly agree 19 63.3
Agree 11 36.7
Total 30 100.0
Source: primary data.
The table shows that 63.3% of the respondents strongly agree and 36.7% agree. This
implies that internal auditing plays a crucial role in the detection of fraud in the
organization.
27
4.4.2 Findings on material misstatements in financial statements.
Table 18: Material misstatements in the organization.
Response Frequency Percentage
Agree 21 70.0
Disagree 9 30.0
Total 30 100.0
Source: primary data.
The table shows that 70% of the respondents agree and that 30% disagree. This implies
that internal auditing helps in the prevention of material misstatements although efforts
are needed for effective management.
4.4.3 Findings on internal controls and ethical behavior.
Table 19: Internal controls and ethical behavior.
Response Frequency Percentage
Agree 18 60.0
Disagree 12 40.0
Total 30 100.0
Source: primary data.
The table shows that 60% of the respondents agree and 40% disagree. This implies that
the internal controls are useful in the organization and that ethical behavior is observed
although some more effort is needed for better performance.
28
4.4.4 Findings on competitive advantage to the organization.
Table 20: Organizations competitive advantage.
Response Frequency Percentage
Agree 18 60.0
Disagree 12 40.0
Total 30 100.0
Source: primary data.
The table shows that 60% of the respondents agree and 40% disagree. This implies that
internal auditing provides a competitive advantage to the organization in comparison to
others although more efforts are needed to have fuller competence.
4.4.5 Findings on risk management in the organization.
Table 21: Risk management.
Response Frequency Percentage
Agree 19 63.3
Disagree 11 36.7
Total 30 100.0
Source: primary data.
The table shows that 63.3% of the respondents agree and 36.7% disagree. This implies
that internal auditing is a helpful tool in management of risks in the organization.
However, more efforts are required to have risks levels thoroughly reduced.
29
4.4.6 Findings on internal auditing and organizational growth.
Table 22: Correlations
Correlations.
Has internal auditing provided a competitive advantage to the organization?
Has internal auditing helped in identifying early symptoms of fraud?
Has internal auditing provided a competitive advantage to the organization?
Pearson Correlation 1 .810(**)
Sig. (1-tailed) .004 N 30 30Has internal auditing helped in identifying early symptoms of fraud?
Pearson Correlation .810(**) 1
Sig. (1-tailed) .004 N 30 30
** Correlation is significant at the 0.01 level (1-tailed).
Source: SPSS.
According to Pearson correlation co-efficient, the result is positive r=0.810 with a
significance at a level of 0.01 (1-tailed). This implies that there is a very strong
relationship between internal auditing and organizational growth. This strong relationship
is due to internal auditors full performance of there duties. Therefore, organizations
should set up internal auditing departments so as to improve this relationship for their
effective management and performance.
30
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Introduction.
This chapter presents the conclusions and recommendations based on the findings of the
study. The chapter summarizes the findings of the study investigating on the role of an
effective internal audit towards organizational growth, focusing on Standard Chartered
Bank, Speke road.
The chapter also presents the conclusions based on the findings and the
recommendations.
5.2 Summary.
The study was carried out to investigate the role of an effective internal audit on
organizational growth. The findings from the study at Standard Chartered Bank revealed
a low positive correlation of 0.810 between an effective internal audit and organizational
growth.
The study further revealed that Risk management, internal control, internal governance
and the review of the accounting system are the core roles of internal auditors and so the
bank must invest financial resources to develop the status and empower their audit
departments to ensure that they carry out their roles effectively.
5.3 Conclusion.
The analysis of findings from quantitative and the qualitative data of the study reveal that
there was a low correlation of 0.810 and significance level of 0.01 between an effective
internal audit and organizational growth and financial performance of Standard Chartered
Bank. In essence, Standard Chartered Bank has a challenge to fully empower and monitor
its internal audit function in order for it to effectively perform its duties. The research
revealed that Risk management, internal control, internal governance and the review of
the accounting system are the core roles of internal auditors and therefore Standard
31
Chartered Bank, Speke road, must invest resources in the internal audit function so as to
enable it carry out its roles effectively and efficiently.
5.4 Recommendations.
Effective internal auditing is a critical factor on the financial performance and growth of
an organization and based on the findings and conclusions, the following
recommendations have to be made to empower and improve the internal audit function
and ensure its effective performance:
Standard Chartered Bank management should listen and act upon the advice of
the internal auditors and invest time, money and energy.
The objectives of internal audit should be agreed at the highest level in the bank
usually the main board or audit committee and should clearly be understood by all levels
of management.
Internal audit scope and the whole system of controls established by
management of the bank should applied to all activities, not just the controls over
financial accounting and reporting but all operations and management controls.
The internal audit should have access to people, systems, documents and
property as it considers necessary for proper fulfillment of its responsibilities.
The internal audit department should be competently managed in accordance
with professional standards and best practice and should be adequately staffed with
appropriately skilled persons.
Internal audit should be consulted about significant proposed changes in the
bank’s business, the internal control systems and the implementation of new systems.
The head of internal audit should have regular access to the chief executive of
the bank and the internal auditors should be independent and seen to be independent from
executive management of the bank. There should be no conflict of interest.
32
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Kirschencheiter, M., (2000). “Internal Audit Quality, Independence and Growth”.
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34
Appendix I
SURVEY QUESTIONNAIRES
Dear respondent,
I am Magala Job, a student of Makerere University pursuing a degree in commerce. This
is the survey questionnaire on the contribution of internal auditing towards organizational
growth and am requesting you to fill in to your best knowledge as this will help me to do
my research on this topic.
Please tick in the box par your response as appropriate.
SECTION 1. BIODATA.
1. Sex.
2. Age of respondent.
20-29years30-39years
40-49years
50-59years
Above 60years
3. Marital status.
4. Highest level of education.
35
MaleFemale
MarriedSingleDivorced
Separated
CertificateDiplomaUniversity degree
Masters degree
5. Experience within the organization.
SECTION II. IMPORTANCE OF INTERNAL AUDITING.
1. Internal auditing has helped in fraud detection.
Strongly agree Agree Not sure Disagree Strongly disagree
2. Internal auditing has led to higher profitability levels in the organization.
Strongly agree Agree Not sure Disagree Strongly disagree
3. Internal auditing system assists in monitoring of organizations activities.
Strongly agree Agree Not sure Disagree Strongly disagree
4. Internal auditing improves professional competence.
Strongly agree Agree Not sure Disagree Strongly disagree
5. Internal auditing assists in tracking of organizations records.
Strongly agree Agree Not sure Disagree Strongly agree
36
1-3years3-4years4-5years
Above 5years
6. Internal auditing provides a competitive edge to the organization
Strongly agree Agree Not sure Disagree Strongly disagree
SECTION III. MEASUREMENT OF ORGANIZATIONAL GROWTH.
1. The organizational financial performance has improved with internal auditing.
Strongly agree Agree Not sure Disagree Strongly disagree
2. Benchmarking has improved organizations competence.
Strongly agree Agree Not sure Disagree Strongly disagree
3. Risk levels have greatly reduced in the organization with internal auditing.
Strongly agree Agree Not sure Disagree Strongly disagree
4. Economic performance, effectiveness and efficiency have improved.
Yes
No
5. The organization has ways of measuring profitability levels.
Yes
Disagree
6. There is a good system of fraud detection in the organization.
Strongly agree Agree Not sure Disagree Strongly disagree
37
SECTION IV. RELATIONSHIP BETWEEN INTERNAL AUDITING AND
ORGANIZATIONAL GROWTH.
1. Assists in identifying early symptoms of fraud.
Strongly agree Agree Not sure Disagree Strongly disagree
2. Audits detect material misstatements in financial statements.
Strongly agree Agree Not sure Disagree Strongly disagree
3. Auditing improves internal controls and ethical behavior in the organization.
Strongly agree Agree Not sure Disagree Strongly disagree
4. Internal auditing provides a competitive advantage to the organization.
Strongly agree Agree Not sure Disagree Strongly disagree
5. Internal auditing improves risk management in the organization.
Strongly agree Agree Not sure Disagree Strongly disagree
38
Appendix II
BUDGET
Item Amount
Typing 50000
Printing 30000
Photocopying 18500
Binding 25000
Transport 30000
Lunch 10000
Airtime 20000
Total 183500
39
Appendix III
TIME FRAME
Month Activity
March. Proposal writing and presentation.
April. Proposal presentation and data collection.
May. Data collection.
June. Data procession, data analysis and presentation, printing draft
and final copy of presentation
40