INTERNAL AUDITING PRACTICES AND PERFORMANCE .internal auditing practices and performance of internal

  • View
    221

  • Download
    1

Embed Size (px)

Text of INTERNAL AUDITING PRACTICES AND PERFORMANCE .internal auditing practices and performance of internal

  • INTERNAL AUDITING PRACTICES AND PERFORMANCE OF INTERNAL AUDIT DEPARTMENT

    FAUDZIAH HANIM BT HJ. FADZIL

    UNIVERSITI SAINS MALAYSIA

    2003

    Research report in partial fulfillment of the requirements for the degree of Doctor of Business Administration

  • INTERNAL AUDITING PRACTICES AND PERFORMANCE OF INTERNAL AUDIT DEPARTMENT

    FAUDZIAH HANIM BT HJ. FADZIL

    UNIVERSITI SAINS MALAYSIA

    2003

  • ACKNOWLEDGEMENT

    In the name of Allah, Most Beneficent and Most Merciful. Praise and thanks to Allah,

    first and last, Lord and Cherisher of the all the words who taught humankind everything

    they knew not. May His blessings and His mercy is upon the Holy Prophet Muhammad

    S.A.W., the best of mankind.

    I am very grateful to my main supervisor, Associate Professor Dr. Hasnah Haron and co-

    supervisor, Professor Dr. Muhamad Jantan for their guidance, patience, understanding,

    insight, knowledge, attention, kindness and encouragement throughout my Doctor of

    Business Administration program in Universiti Sains Malaysia. Words alone cannot

    express my greatest appreciation and gratitude to them. InsyaAllah, Allah will reward

    both of them abundantly.

    My sincere appreciation and thanks also goes to members of staff of the School of

    Management, Universiti Sains Malaysia especially Professor Dato Dr. Daing Nasir

    Ibrahim, Associate Professor Dr. Zainal Abidin Ahmad, Dr. Yuserrie Zainuddin,

    Professor Dr. Mahfooz, Associate Professor Dr. Ishak Ismail, Associate Professor Dr.

    Fauziah Md Taib, Dr. Nabihah and Mr. T. Ramayah.

    My thanks of appreciation also go to all the students of the Doctor of Business

    Administration program and my colleagues who always give me support and

    encouragement during my study. I also wish to express my appreciation to the

    respondents who participated in this study. Without their assistance and data provided,

    this study obviously could not been performed.

    i

  • My deepest gratitude also goes to Universiti Utara Malaysia for the financial scholarship

    and the Dean of Faculty of Accountancy, Universiti Utara Malaysia for his consent to

    pursue my study.

    Last but not least, my very deepest gratitude and appreciation to my husband, Syed

    Soffian Syed Ismail, who is very patient and supported me all the way, my daughters

    Sharifah Saffinas and Sharifah Sakinah and my mother, Hajjah Rohani Darus. Their

    love, understanding and encouragement were certainly very important input in

    completing this study.

    ii

  • TABLE OF CONTENTS

    Page ACKNOWLEDGMENT i TABLE OF CONTENTS iii LIST OF TABLES vi LIST OF FIGURES vii LIST OF ABBREVIATIONS Viii LIST OF APPENDICES ix ABSTRAK (MALAY) ABSTRACT

    x xii

    Chapter 1 INTRODUCTION 1.0 Introduction 1 1.1 Background of The Study 1 1.2 Problem Statement 6 1.3 Research Questions 7 1.4 Research Objectives 8 1.5 Research Significance 9 1.6 Definitions of Terms 10 1.7 Organisation of the Study 13 Chapter 2 LITERATURE REVIEW 2.0 Introduction 15 2.1 Overview of Internal Auditing 15 2.2 The History and Evolution of Internal Auditing 18 2.3 The Roles Of Internal Auditors 20 2.4 The Roles Of Audit Committee 2.5 Development of Standards for The Professional Practice of Internal

    Auditing

    25 28

    2.6 Agency Theory and the Internal Audit 29 2.7 Previous Literatures on Internal Auditing Practices 31 2.7.1 Internal External Auditor Relationships 31 2.7.2 Perception of the Importance of the Internal Audit Department 32 2.7.3 The Extent of Compliance of SPPIA 35 2.7.4 Measure of Effectiveness of Internal Audit Department 35 2.8 Elements of SPPIA 40 2.8.1 Independence and Objectivity 40 2.8.2 Professional Proficiency 45 2.8.3 Scope of Work 47 2.8.4 Performance of Audit Work 49 2.8.5 Management of the Internal Auditing Department 49 2.9 Internal Control System 50 2.9.1 Risk Assessment 2.9.2 Control Environment

    52 53

    2.9.3 Control Activities 2.9.4 Information and Communication 2.9.5 Monitoring 2.10 Performance of Internal Audit Department 2.10.1 External Audit Fees

    54 54 56 56 57

    iii

  • 2.11 Chapter Summary

    58

    Chapter 3 RESEARCH FRAMEWORK AND METHODOLOGY 3.0 Introduction 60 3.1 Research Framework 60 3.2 Hypotheses 61

    3.2.1 Internal Auditing Practices 3.2.2 Internal Control System and Performance of Internal Audit

    Department 3.2.3 Internal Auditing Practices and Performance of Internal Audit

    Department

    62 69 71

    3.3 Methodology 3.3.1 Research Design 3.3.2 Sample and Data Collection 3.3.3 Research Instrument 3.3.4 Operational Definition and Measurement of the variables 3.3.5 Method of Data Analysis 3.3.5.1 Descriptive Analysis 3.3.5.2 Inferential Analyses 3.4 Chapter Summary Chapter 4 ANALYSIS AND FINDINGS 4.0 Introduction 4.1 Responses 4.2 Goodness of Data 4.2.1 Factor Analysis

    4.2.1.1 Internal Auditing Practices 4.2.1.2 Quality of the Internal Control System

    4.3 Test of Reliability of the Instrument 4.3.1 Internal Auditing Practices 4.3.2 Quality of the Internal Control System 4.4 Descriptive Statistics 4.4.1 The Extent of Internal Auditing Practices 4.4.2 The Extent of Existence of the Quality of the Internal Control

    System 4.5 Diagnostic Test 4.5.1 Internal Auditing Practices 4.5.2 Quality of the Internal Control System 4.6 Hypotheses Testing 4.6.1 Hypothesis 1 4.6.2 Hypothesis 2 4.6.3 Hypothesis 3 4.6.3.1 Quality of the Internal Control System on Performance of

    Internal Audit Department 4.6.3.2 Internal Control Systems on Performance of Internal

    Audit Department 4.6.3.3 Internal Auditing Practices, Quality of the Internal Control

    System and Performance of the Internal Audit Department

    72 72 72 74 76 80 80 80 84

    86 86 91 91 91 97 101 101 102 103 103 107 111 111 113 114 115 127 129

    129 130

    130 132

    135

    iv

  • 4.7 Chapter Summary Chapter 5 DISCUSSIONS AND CONCLUSIONS 5.1 Introduction 5.2 Recapitulation of Major Findings 5.3 Discussion 5.3.1 The Extent of Internal Auditing Practices 5.3.2 Internal Auditing Practices and the Quality of the Internal

    Control System 5.3.3 The Quality of the Internal Control Systems and Performance

    of Internal Audit Department (External Audit Fees) 5.3.4 Internal Auditing Practices and Performance of Internal Audit

    Department 5.3.5 Mediating Effects 5.4 Implications of the Study 5.4.1 Theoretical Implications 5.4.2 Practical Implications 5.5 Limitations of the Study 5.6 Suggestions for Future Research 5.7 Concluding Remarks 5.8 Chapter Summary Bibliography Appendix A Questionnaire to Internal Auditors Appendix B Questionnaire to Audit Committees Appendix C Factor Analysis Appendix D Reliability Appendix E Regression Analysis Appendix F Graphs

    135 137 138 141

    145 145 146 147 147 147 150 151 153

    156 163 173

    v

  • LIST OF TABLES

    Table No. Title of Table Page 2.1 Summary of Research Concerning The Internal Audit

    Practices. 38

    4.1a Summary of Response Rates 87 4.1b Summary of Demographic Data on Respondents Internal

    Audit Department 88

    4.1c Summary of Demographic Data on Respondents Audit Committees

    90

    4.2a Principal-Components Analysis for Internal Auditing Practice

    92

    4.2b Factor Loading of Internal Auditing Practice 92 4.2c Principal-Components Analysis for the Quality of Internal

    Control System Initial Statistics 98

    4.2d Factor Loadings for the Quality of Internal Control System 98 4.3a Test of Reliability of Data Internal Auditing Practices 102 4.3b Test of Reliability of Data Internal Control System 102 4.4a Means Scores of the Extent of the Internal Auditing Practices

    (Internal Auditors Perspectives) 103

    4.4b

    4.4c

    4.4d

    Means Scores of the 35 Most Compliance Internal Auditing Practices (Internal Auditors Perspective) Means Scores of the Extent of Existence of the Internal Control Systems Means Scores of the Internal Control System Items

    104

    108

    108 4.5a Test for Goodness of the Model 112 4.5b Regression Coefficient and Test for Multicollinearity

    Coefficientsa 113

    4.5c Test for Goodness of the Model 114 4.5d Regression Coefficient and Test for Multicollinearity

    Coefficienta 114

    4.6a Results of Hypothesis 1a 117 4.6b Results of Hypothesis 1b 119 4.6c Results of Hypothesis 1c 122 4.6d Results of Hypothesis 1d 124 4.6e Results of Hypothesis 1e 127 4.6f 4.6h

    Results of Hypothesis 2 Results of Internal Auditing Practices, Quality of the Internal Control Systems on Performance of the Internal Audit Department

    128 131

    vi

  • LIST OF FIGURES

    Figure No. Title of Figure Page 2.1 Internal Auditors Role 25 3.1 Theoretical Framework 61

    vii

  • LIST OF ABBREVIATIONS

    Abb. Full Lists AICPA CAE CIA COSO IIA KLSE MACPA (MICPA) MIA PLCs SPPIA TRI

    American Institute of Certified Public Accountants Chief Audit Executives Certified Internal Auditor Committee of Sponsoring Organisations Institute of Internal Auditors Kuala Lumpur Stock Exchange Malaysian Association of Certified Public Accountant (Malaysian Institute of Certified Public Accountants