DECLARATIONcees.mak.ac.ug/sites/default/files/publications/ENYASU.docx · Web viewAccording to Arens, Elder & Beasley, (2003), the auditor should produce clear, constructive and concise

MAKERERE UNIVERSITY

INSTITUTE OF ADULT AND CONTINUING EDUCATION

INTERNAL AUDITING AND TRANSPARENCY IN PUBLIC FINANCES

A CASE STUDY OF TORORO DISTRICT LOCAL GOVERNMENT

BY

ENYASU GODFREY

07/U/4818/EXT

SUPERVISOR:

MS. MBATUDDE SHEILA

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN PARTIAL

FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF A BACHELORS

DEGREE IN COMMERCE

JULY, 2011

DECLARATION

I Enyasu Godfrey declare that this research report is original and as a result of my own efforts, it

has never been presented by any student.

SIGNATURE: …………………………………………………………………….

ENYASU GODFREY

DATE: ……………………………………………………………………………

i

APPROVAL

This is to certify that this work has been submitted for approval.

SIGNATURE: …………………………………………………………………..

MS. MBATUDDE SHEILA (SUPERVISOR)

DATE: …………………………………………………………………………

ii

DEDICATION

I dedicate this work to my parents Enyasu Michael and Dometila Nyaruwa for the endless and

tireless support they have rendered me throughout my life.

iii

ACKNOWLEDGEMENT

This research has been made successful due to the efforts of a number of people. I therefore

would like to thank my Supervisor Madam Mbatudde Sheila for the tireless guidance she

rendered me.

I would like to thank my bosses who helped me a lot through my studies by giving me time to

study, the personnel at Tororo district local government for their participation by providing data

which made this research a success.

Special thanks also go to my course mates who helped me in compiling this research and during

the entire course notably Fortunate, Amon and Damba. I also want to thank Komuhangi Dorcus

for her the continued encouragement she has always offered me.

May the almighty lord bless you all abundantly.

iv

TABLE OF CONTENTS

DECLARATION..............................................................................................................................i

APPROVAL....................................................................................................................................ii

DEDICATION...............................................................................................................................iii

ACKNOWLEDGEMENT..............................................................................................................iv

TABLE OF CONTENTS................................................................................................................v

LIST OF ACRONYMS...................................................................................................................x

ABSTRACT...................................................................................................................................xi

CHAPTER ONE............................................................................................................................1

1.0 Introduction...........................................................................................................................1

1.1 Background of the study.......................................................................................................1

1.2 Problem statement................................................................................................................3

1.3 Purpose of the study..............................................................................................................4

1.4 Objectives of the study.........................................................................................................4

1.5 Research questions................................................................................................................4

1.6 Scope of the study.................................................................................................................4

1.7 Significance of the study......................................................................................................5

CHAPTER TWO...........................................................................................................................6

LITERATURE REVIEW.............................................................................................................6

2.0 Introduction...........................................................................................................................6

2.1 Internal auditing....................................................................................................................6

2.1.1 Internal controls................................................................................................................7

2.1.2 Audit risk...........................................................................................................................7

2.1.3 Audit evidence..................................................................................................................8

2.2 Principles governing internal auditing..................................................................................9

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2.2.1 Integrity.............................................................................................................................9

2.2.2 Objectivity.......................................................................................................................10

2.2.3 Competence and Due Care..............................................................................................11

2.2.4 Confidentiality................................................................................................................12

2.3 Internal audit process..........................................................................................................13

2.3.1 Planning..........................................................................................................................13

2.3.2 Fieldwork........................................................................................................................14

2.3.3 Reporting.........................................................................................................................15

2.3.4 Follow-Up.......................................................................................................................16

2.4 Transparency in public finances.........................................................................................17

2.4.1 Code of Good Practices and Fiscal Transparency..........................................................18

2.4.2 Factors that may lead to Lack of Transparency..............................................................19

2.4.2.1 Weak accountability system........................................................................................19

2.4.2.2 Inaccessibility to information......................................................................................20

2.4.2.3 Lack of capacity and monitoring.................................................................................20

2.4.2.4 Unclear rules, laws and processes...............................................................................21

2.5 The effect of internal auditing on transparency in public finances....................................22

2.5.1 Lack of funding...............................................................................................................23

2.5.2 Incompetent staff.............................................................................................................24

2.5.3 Errors in books of accounts.............................................................................................24

2.5.4 Conceptual restrictions....................................................................................................25

2.5.5 Delayed technique of internal auditing...........................................................................25

2.6 Conclusion..........................................................................................................................26

CHAPTER THREE.....................................................................................................................27

METHODOLOGY......................................................................................................................27

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3.0 Introduction.........................................................................................................................27

3.1 Research design..................................................................................................................27

3.2 Survey population...............................................................................................................27

3.3 Sampling design..................................................................................................................27

3.4 Sample size.........................................................................................................................28

3.5 Data sources........................................................................................................................28

3.6 Data collection tools...........................................................................................................29

3.7 Data collection procedures.................................................................................................29

3.8 Data management...............................................................................................................30

3.9 Data analysis.......................................................................................................................30

3.10 Limitations of the study......................................................................................................30

CHAPTER FOUR.......................................................................................................................31

PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS............31

4.1 Bio data...............................................................................................................................31

4.1.1 Gender of respondents....................................................................................................31

4.1.2 Age bracket of the respondents.......................................................................................31

4.1.3 Level of education of the respondents............................................................................32

4.1.4 Departments of the respondents......................................................................................33

4.1.5 Length of service.............................................................................................................33

4.2 Findings on principles of internal auditing.........................................................................34

4.2.1 Integrity...........................................................................................................................34

4.2.2 Objectivity.......................................................................................................................35

4.2.3 Competence and due care...............................................................................................36

4.2.4 Confidentiality................................................................................................................38

4.3 Findings on the process of internal auditing.......................................................................38

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4.3.1 Planning..........................................................................................................................39

4.3.2 Field work.......................................................................................................................40

4.3.3 Reporting.........................................................................................................................41

4.3.4 Follow up........................................................................................................................41

4.4 Findings on the transparency in public finances.................................................................42

4.4.1 Accountability system.....................................................................................................42

4.4.2 Accessibility to information............................................................................................43

4.4.3 Capacity and monitoring.................................................................................................45

4.4.4 Unclear rules, laws and processes...................................................................................45

4.5 Relationship between internal Auditing and transparency in public Finances...................46

CHAPTER FIVE.........................................................................................................................48

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS..................48

5.1 Introduction.........................................................................................................................48

5.2 Summary of the findings....................................................................................................48

5.2.1 Summary of findings on principles and process of internal auditing.............................48

5.2.2 Summary of findings on Transparency in public finances.............................................50

5.2.3 Summary of findings on Relationship between internal auditing and transparency in public Finances..............................................................................................................................51

5.3 Conclusions.........................................................................................................................51

5.4 Recommendations...............................................................................................................52

5.4 Areas suggested for further research..................................................................................52

REFRENCES.................................................................................................................................53

APPENDIX 1: QUESTIONNAIRE..............................................................................................57

APPENDIX 2: BUDGET ESTIMATES.......................................................................................60

APPENDIX 3: TIME SCHEDULE...............................................................................................61

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LIST OF TABLES

Table 1: Table of respondents......................................................................................................................28

Table 2: Findings on the gender of the respondents....................................................................................31

Table 3: Age distribution of respondents.....................................................................................................32

Table 4: Academic levels.............................................................................................................................32

Table 5: Department of respondents............................................................................................................33

Table 6: Length of service...........................................................................................................................34

Table 7: Findings on integrity......................................................................................................................35

Table 8: Findings on objectivity..................................................................................................................36

Table 9: Competence and due care..............................................................................................................37

Table 10: Findings on confidentiality..........................................................................................................38

Table 11: Findings on planning...................................................................................................................39

Table 12: Findings on field work.................................................................................................................40

Table 13: Findings on reporting...................................................................................................................41

Table 14: Findings on follow up..................................................................................................................42

Table 15: Findings on accountability systems.............................................................................................43

Table 16: Findings on Accessibility to information....................................................................................44

Table 17: Findings on capacity and monitoring..........................................................................................45

Table 18: Findings on unclear rules, laws and processes............................................................................46

Table 19: Correlations between internal audit and transparency.................................................................46

ix

LIST OF ACRONYMS

IIA………………………………...…Institute of Internal Auditors

IMF…………………………………..International Monetary Fund

MoFPED……………………………..Ministry of Finance, Planning and Economic Development

NAADS……………………………....National Agricultural Advisory Services

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ABSTRACT

The study was carried on internal auditing and transparency in public transparency in Tororo

district local government basing on the following objectives; to establish whether the principles

and process of internal auditing are followed in the public sector, to find out whether there is

transparency in public finances, to find out the extent to which internal auditing has influenced

transparency in public finances.

In carrying out the study, the researcher used both descriptive and correlatonal design research

designs to establish the relationship between internal auditing and transparency in public finance

in Tororo district local government. A total of 46 respondents were sampled using stratified

random sampling method. Questionnaires were used to gather views from the respondents. The

data was then analyzed using Statistical Packages for Social Sciences (SPSS).

Findings revealed that there is a weak positive relationship between internal auditing and

transparency in public finances at Pearson correlation coefficient r = 0.342 (*). The significance

of the correlation is 0.05. This implies that a big change in the way of handling internal auditing

would bring about a small change of transparency in public finances by 11% in Tororo district

local government. It was therefore concluded that despite being weak, there is a relationship

between internal auditing and transparency.

It is recommended that internal auditors be given regular training to ensure that they keep up to

date with changes in auditing standards so as to enhance the effectiveness of the internal audit

function. And avenues for questioning those in charge should be increased since these will act as

checks which allow people in charge to be brought to account, thus improving transparency in

public finances.

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CHAPTER ONE

1.0 Introduction.

This chapter covers the background, statement of the problem, purpose of the study, objectives

of the study, research questions, scope of the study, and significance of the study.

1.1 Background of the study.

Internal audit is a continuous and systematic process of examination and reporting the operations

and records of concern by its employees selected specifically for this purpose. Such audit is an

independent appraisal activity within an organization for review of the operations and for

measuring and evaluating the effectiveness of other controls (D.P. Jain, 1999).

Internal audit is a key pillar of good governance. It is concerned with the adequacy of risk

management and internal control systems, efficiency and effectiveness of operations, asset

safeguarding and regulatory compliance. It provides an organisation’s audit committee and

executive management with an independent view on whether the organisation has an appropriate

risk and internal control environment and acts as a catalyst for a strong risk and compliance

culture within an organization (Pickett, 2006). According to Frigo and Mark (2002), in early

auditing (voucher audit), internal auditing was supposed to prove a true and fair view of the

company’s financial affairs by reviewing all transactions, and comparing them with financial

statements. This was possible since companies’ transactions were few. However, this later

developed into modern audits (system based audits). Under this, internal auditing relies on the

presence and strength of internal control systems to apply tests on a sample of entries drawn

from a population of entries and the results of the sample are taken to represent those of the

1

organization. Increasingly, internal auditors are called upon to act as internal control, risk and

corporate governance consultants within the organization

Internal Auditing is concerned with all aspects of the organization both financial and non

financial. It also involves detection and prevention of fraud in any form, hence transparency in

finances. Some organizations however still fail to do Internal Auditing for various reasons for

example; lack of resources to support internal audits, lack of manpower with the skill to handle

internal audits, lack of accurate statistics, and the top management in some cases does not

prioritize internal auditing.

Transparency means that institutions, processes, and decisions are made accessible to the public

at large or to representatives of the public, so that processes and decisions can be monitored,

reviewed, commented upon and influenced by the stakeholders. It is important to create

transparency at the beginning. This means full public access to information. This will also bring

about awareness (Sandra Zwart, 2003).

To achieve transparency, managers and accountants are under obligation to show evidence of

good financial management in an organization and this is achieved through production of

accountability of money received and spent. This takes the form of production of documents as

evidence of money received and well spent; these include receipts( showing evidence of money

received), Invoices (demand payments of goods and services provided on credit),

Vouchers(show details and support payments).

However, transparency in public finances is increasingly declining. This is shown by the

frequent media reports and publications on corruption and embezzlement of funds. For example;

2

In Wakiso eleven Wakiso district health staff were charged with misappropriating over

300million shillings meant for health services (Ssempogo, 2011).

The common practices that lead to lack of transparency range from misappropriation of assets,

bribery, bid rigging, improper disclosure, improper expense reimbursement to false

representation of financial reports

Therefore as an instrument to monitor, control and evaluate performance, internal controls play a

major role in fostering, ensuring and promoting standardized, uniformity and consistency in the

implementation of government financial policies and programs for improved service delivery. In

order for transparency to be achieved in an organisation, fraud and corruption must be curbed by

putting in place controls. This will ensure that processes are adhered to by providing

accountability and openness in the way organisation’s matters are carried out.

If policies are adhered to and finances properly accounted for then an organization is likely to

achieve its objectives.

1.2 Problem statement.

Indications in Uganda today have shown that the problem of lack of transparency is on the rise.

This can be seen by the corruption that seems to be getting out of hand. Reference is made to the

local dailies which have always reported on corruption for example the 80 Billion shillings

NAADS money swindled, Parliament questioning a minister over ghost pensioners, the 900

million shillings stolen from the National Forest Authority’s boss’s bedroom (Kabanda, 2009).

This clearly shows a problem of mismanagement and misappropriation of funds in both central

and local governments in Uganda. The researcher conducted the study based on the above

information to establish whether the lack of transparency in the public finances could have been

as a result of ineffective internal auditing.

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1.3 Purpose of the study.

The researcher was driven to find out whether internal auditing can lead to transparency in public

finances vis-à-vis other factors.

1.4 Objectives of the study.

To establish whether the principles and process of internal auditing are followed in the

public sector.

To find out whether there is transparency in public finances.

To find out the extent to which internal auditing has influenced transparency in public

finances.

1.5 Research questions.

Are the principles and process of internal auditing, followed in the public sector?

Is there transparency in public finances?

To what extent has internal auditing influenced transparency in public finances?

1.6 Scope of the study.

Conceptual scope

Focus was on the impact of internal auditing on transparency in public finances.

Geographical scope

The study was undertaken in Tororo district local government.

4

Time scope

The study involved the review of financial and non – financial transactions of Tororo district

local government for the period 2000 – 2010.

1.7 Significance of the study.

The study can be of significance in the following ways as shown below;

The government, the study can enhance improvement in internal auditing techniques

hence minimizing misuse of public finances, thus availing the government with enough

funds to run its activities such as construction of schools, and hospitals.

The public, since the improved internal audit techniques can minimize misuse of public

finances, they can then be put to their appropriate use such as disaster management,

health care management, which will be beneficial to the public.

Other researchers, the study can inspire other researchers to research more on the topic to

discover other aspects that may not have been discovered with the help of the already

existing research.

The management of government organizations, since it provides information regarding

different aspects of internal auditing. This will enable them improve on the effectiveness

of internal auditors by engaging them in seminars, workshops and training to improve

their skills and effectiveness.

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CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction.

This chapter presents the literature review of different scholars and authors in relation to internal

auditing and transparency in public finances.

2.1 Internal auditing.

Internal auditing is an appraisal or monitoring activity established by management and directors

for the review of the accounting and internal control systems as a service to the entity. It

functions by, amongst other things, examining, evaluating and reporting to management and

directors on the adequacy and effectiveness of components of the accounting and internal control

systems (Phil Griffiths, 2004).

According to D.P Jain, (1999), such audit is an independent appraisal activity within an

organization for review of the operations and for measuring and evaluating the effectiveness of

other controls. The scope and objectives may be stated as below;

To study and evaluate the adequacy and effectiveness of accounting, financial and

operating controls.

To ascertain the degree of compliance with pre determined policies, plans and

procedures.

To ascertain the extent to which business assets are accounted for and safeguarded from

losses.

6

To ascertain the authority of accounting and other data complied within the organization.

To evaluate the quality of performance in carrying out assigned responsibilities.

To furnish the members of management with objective analysis, comments and

recommendation as regards the activities of the business so as to help them in efficient

and effective discharge of their responsibilities.

2.1.1 Internal controls.

Internal controls are a system consisting of specific policies and procedures designed to provide

management with reasonable assurance that the goals and objectives it believes important to the

entity will be met (Kathleen T. McNeely, 2009). Internal auditing relies on the existence and

strength of internal control systems to apply tests on a sample of entries drawn from a population

of entries and the results of the sample taken to represent those of the entire organization (Paul

Sobel, 2004).

In a broader sense, internal controls extend beyond the mere allocation of clerical duties to

include the quality of management supervision itself (Emile Woolf, 1997).

2.1.2 Audit risk.

According to Sobel (2004), audit risk refers to the possibility that auditors may unknowingly fail

to appropriately modify their opinion of financial statements that are materially misstated. In

other words it is risk that the auditors will issue an unqualified opinion on financial statements

that contain a material departure from generally accepted accounting principles. Audit risks can

be reduced by gathering more evidence. Therefore the more competent evidence that is gathered,

the less audit risk assumed (Shore and Wright, 2000).

7

For each financial statement account, audit risk consists of the possibility that;

i. A material misstatement in an assertion about the account has occurred, and

ii. The auditors do not detect the misstatement. The first risk, the risk of occurrence of

material misstatement may be separated into inherent risk and control risk. The risk that

auditors will not detect the misstatement is called detection risk.

2.1.3 Audit evidence.

Evidential matter is any information that corroborates or refutes an assertion. Audit evidence is

therefore that information that is obtained by the auditor in arriving at the conclusion on which

he bases his opinion (Whittington and Pany, 2004).

Internal auditors are often required to express an opinion on the adequacy and effectiveness of

internal control. For this they must gather evidence to support their opinion. They can do this in

various ways and follow the audit program. A good audit program will indicate what tests need

to be carried out, by who, how this will be done, when and how long they will take. As a

planning tool, it will guide auditors on the sufficiency of evidence to be gathered (Robert R.

Moeller, 2004).

Audit evidence can be gathered by observation, inspection, interviews or questioning, analytical

reviews, computation and recomputations, confirmation and comparisons (Pickett, 2004).

According to Institute of Internal Auditors - Practice Advisory 2310-1, the auditor should obtain,

relevant, reliable, sufficient and useful evidence to enable him draw reasonable conclusions there

from.

8

2.2 Principles governing internal auditing.

It is imperative that the internal audit staff observe the following fundamental principles:

2.2.1 Integrity.

An auditor should be straightforward and honest in performing professional services. Auditors

have a duty to adhere to the highest standards of behavior (for example honesty and candidness)

in the course of their work and in their relationships with the staff of audited entities. In order to

sustain public confidence, the conduct of auditors should be above suspicion and reproach

(Power, 1997).

Integrity can be measured in terms of what is right and just. Integrity requires auditors to observe

both the form and the spirit of auditing and ethical standards.

Integrity also requires auditors to observe the principles of independence and objectivity,

maintain irreproachable standards of professional conduct, make decisions with the public

interest in mind, and apply absolute honesty in carrying out their work and in handling the

resources of the audit (Aidan Dunlea and Naill Maclochlainn, 1998).

The integrity of internal auditors thus establishes trust and thus provides the basis for reliance on

their judgment (Chartered Institute of Internal Auditors).

Rules of Conduct.

According to the Chartered institute of internal auditors, Internal auditors:

Shall perform their work with honesty, diligence and responsibility.

Shall observe the law and make disclosures expected by the law and the profession.

Shall not knowingly be a party to any illegal activity, or engage in acts that are

discreditable to the profession of internal auditing or to the organisation.

Shall respect and contribute to the legitimate and ethical objectives of the organisation.

9

2.2.2 Objectivity.

There is a need for objectivity and impartiality in all work conducted by auditors, particularly in

their reports, which should be accurate and objective. Conclusions in opinions and reports

should, therefore, be based exclusively on evidence obtained and assembled in accordance with

audit guidelines, audit charter, and auditing Standards (Anders Jansson, 2009). Audit work

should be based on evidences and should be done impartially (D.P. Jain, 1999)

Arens, Elder & Beasley, (2003), say auditors should make use of information brought forward by

the audited entity and other parties. This information is to be taken into account in the opinions

expressed by the auditors in an impartial way. The auditor should also gather information about

the views of the audited entity and other parties. However, the auditors' own conclusions should

not be affected by such views.

According to the Chartered institute of internal auditors, internal auditors exhibit the highest

level of professional objectivity in gathering, evaluating, and communicating information about

the activity or process being examined. Internal auditors make a balanced assessment of all the

relevant circumstances and are not unduly influenced by their own interests or by others in

forming judgements.

Rules of Conduct

According to the IIA, Internal auditors:

Shall not participate in any activity or relationship that may impair or be presumed to

impair their unbiased assessment. This participation includes those activities or

relationships that may be in conflict with the interests of the organisation.

10

Shall not accept anything that may impair or be presumed to impair their professional

judgement.

Shall disclose all material facts known to them that, if not disclosed, may distort the

reporting of activities under review.

2.2.3 Competence and Due Care.According to the code of ethics for government of Uganda

internal auditors issued by MoFPED, (2009) an Internal Auditor should perform professional

services with due care, competence and diligence and has a continuing duty to maintain

professional knowledge and skill at a level required to ensure that a client or employer receives

the advantage of competent professional service based on up-to-date developments in practice,

legislation and techniques.

Internal auditors must not undertake work they are not competent to perform. Internal auditors

should know and follow applicable auditing, accounting, and financial management standards,

policies, procedures and practices (Quarles, R. 1994). Likewise, they must also possess a good

understanding of the constitutional, legal and institutional principles and standards governing the

operations of the auditee (MoFPED, 2009).

Internal auditors should apply the knowledge, skills and experience needed in the performance of

internal auditing services (IIA).

Rules of Conduct


Shall engage only in those services for which they have the necessary knowledge, skills

and experience.

11

Shall perform internal auditing services in accordance with the International Standards

for the Professional Practice of Internal Auditing.

Shall continually improve their proficiency and the effectiveness and quality of their

services.

2.2.4 Confidentiality.

An auditor should respect the confidentiality of information acquired during the course of

performing professional services and should not use or disclose any such information without

proper and specific authority or unless there is a legal or professional right or duty to disclose

(Power, 1997). Internal auditors should not disclose information received in the performance of

their duties to third parties, either orally or in writing, except for the purposes of meeting the

internal audit's statutory or other identified responsibilities as part of the internal audit's normal

procedures or in accordance with relevant laws (MoFPED, 2009).

Internal auditors should also not use information received in the performance of their duties as a

means of securing personal benefit for themselves or for others. Neither should they divulge

information that would provide unfair or unreasonable advantage to other individuals or

organisations, nor should they use such information as a means for harming others (MoFPED,

2009).

According to IIA, Principle Internal auditors respect the value and ownership of information they

receive and do not disclose information without appropriate authority unless there is a legal or

professional obligation to do so.

12

Rules of Conduct


Shall be prudent in the use and protection of information acquired in the course of their

duties.

Shall not use information for any personal gain or in any manner that would be contrary

to the law or detrimental to the legitimate and ethical objectives of the organisation.

2.3 Internal audit process

Every successful audit is based on sound planning and an atmosphere of constructive

involvement and communication between the client and the Internal Auditor. The objective is to

involve client management throughout each stage of the audit. Management’s participation

results in both a better understanding of unit operations and a more effective implementation of

recommendations (POB, 2000). The majority of internal audits performed go through four major

phases: Planning, Field Work, Report Writing, and Follow-up. These phases are discussed in the

following paragraphs:-

2.3.1 Planning

According to Jefferson Wells (2004), audit work should be planned, controlled and recorded in

order to determine priorities, establish and achieve objectives, and ensure the effective and

efficient use of audit resources. The main purposes of audit planning are:-

a) To determine priorities and to establish the most cost-effective means of

achieving audit objectives.

b) To assist in the direction and control of audit work.

13

c) To help ensure that attention is devoted to critical aspects of audit work.

d) To help ensure that work is completed in accordance with pre-determined

targets.

The process of planning and audit would include activities ranging from making arrangements

for securing the data to reviewed, to designing procedures, to be followed in examining

them. There should be a written plan containing exact details with regard to the conduct of a

particular audit (D.P. Jain, 1999). Work plans should be prepared for each audit assignment as it

is arranged covering; Objective and scope of the audit, time budget and staff allocation, and

methods, procedures and reporting arrangements, including supervision and allocation of

responsibilities (Shore & Wright, 2000).

All internal audit plans should be sufficiently flexible to respond to changing priorities (D.P.

Jain, 1999)

2.3.2 Fieldwork.

During the fieldwork phase, auditors gather sufficient, relevant and reliable evidence of actual

performance and compare this against expected performance. The intent of internal auditing is to

identify gaps between actual and expected performance. While all differences are noted, only

significant ones are identified in the reporting phase (Pickett, 2004). For example if the expected

performance is that sensitive documents are kept in a locked safe and the actual performance,

based upon fieldwork, shows that sensitive documents are kept in an unlocked desk drawer, the

auditor would note this difference.

Pei and Davis, (1989) stated that in determining the significance of the difference between actual

and expected performance, the internal auditor will consider a number of factors. In drawing a

14

conclusion, the internal auditor will rely upon their independence from the process being audited,

their objectivity as a person disinterested in the outcome of the audit and on their professional

judgment gained through training and experience. Auditors may conduct interviews, surveys, run

focus groups, review documentation, analyze reports, prepare calculations, consult experts and

employ any number of other techniques that help them to obtain sufficient, relevant and reliable

information process (John Dunn, 1996).

The conclusions reached by Corporate Internal Audit Services are their professional opinions,

based on the evidence collected and the analysis performed, as to how closely actual

performance compares to expected performance. (Pickett, 2004).

2.3.3 Reporting.

Audit reports provide a formal means of communicating to management the results arising from

audits undertaken. Such reports should include audit findings, recommendations and conclusions

relating to the adequacy of and compliance with the system of internal control and the efficiency,

effectiveness and economy of operations in the area covered by the audit. From the point of view

of completeness, management response to the audit findings should preferably also be included

in the report (Emile Woolf, 1997).

Phil Griffith, (2004) mentions that reporting arrangement, including the format and distribution

of internal audit reports, should be agreed with management. The head of internal audit should

ensure that reports are sent to managers who have a direct responsibility for the unit or function

being audited and who have the authority to take action on the internal audit recommendations.

15

Internal audit reports are confidential documents and their distribution should be restricted to

those managers who need to know and other appropriate persons on a need to be informed basis.

According to Arens, Elder & Beasley, (2003), the auditor should produce clear, constructive and

concise written reports based on sufficient, relevant and reliable evidence which should:-

State the scope, purpose, extent and conclusions of the internal audit assignment.

Make recommendations which are appropriate and relevant, and which flow from the

conclusions; and

Acknowledge the action taken, or proposed by management.

The internal auditor should meet with management to discuss the audit findings at the

completion of field work for each internal audit assignment and the formal written report should

be presented to management as soon as possible thereafter. Before issuing the final report, the

internal auditor should discuss the contents with the appropriate levels of management, and may

submit a draft report to them, for confirmation of factual accuracy. If the internal auditor and

management disagree about the relevance of the factual content of the draft audit report, the

internal auditor should consider whether reference should be made to this in the final report

(John Dunn, 1996).

2.3.4 Follow-Up.

The Institute of Internal Auditors defines a follow-up as a process by which the internal auditors

determine the adequacy, effectiveness and timeliness of actions taken by management on

reported audit findings.

16

According to Jefferson Wells (2004), after a reasonable period of time, the audit client is

contacted to request a status report on the corrective action taken to date. The auditors evaluate

the effectiveness of the corrective action taken and advise the client on alternatives that they can

employ to achieve the desired improvements. Hermanson and Rittenberg ,(2003)stressed out that

in larger, more complex audit situations follow up may be repeated several times as additional

changes are initiated. Additional on-site visits and reviews may be performed to ensure adequate

implementation of recommendations.

As required by the IIA's Standards for the Professional Practice of Internal Auditing

(Performance Standard #2500), internal auditors should establish a follow-up process to ensure

that management actions have been effectively implemented or that senior management has

accepted the risk of not taking action (Pickett, 2004). The end result should be a brief summary

of the status of every action plan agreed upon. The final summary is reviewed with the person

responsible for clearing the audit report before the follow-up report is issued.

2.4 Transparency in public finances.

Transparency means that institutions, processes, and decisions are made accessible to the public

at large or to representatives of the public, so that processes and decisions can be monitored,

reviewed, commented upon and influenced by the stakeholders. It is important to create

transparency at the beginning. This means full public access to information. This will also bring

about awareness (Sandra Zwart, 2003).

In recent years, the term "financial transparency" has generally been applied to developing and

emerging countries' monetary and fiscal policies (Beattie, 2000) and efforts by the IMF and

17

other international financial institutions to encourage clear financial reporting internationally

(Hanson, 2003).To achieve transparency emphasis should first be placed on openness and

availability of information, then on standardization and comparability (Blanchet, 2002).

2.4.1 Code of Good Practices and Fiscal Transparency.

According to Michael Schaeffer (2002), in the context of the architecture of the international

financial system, the IMF in 1998 developed a Code of Good Practices on Fiscal Transparency

aimed at increasing transparency in fiscal policy.

The IMF code contains a number of principles that could be followed by countries to increase

fiscal transparency. In effect, the application of these principles would make fiscal policy more

transparent and enhance public sector governance. Among the principles are the following:

1. The government sector should be clearly distinguished from the rest of the economy,

and policy and management roles within government should be well defined.

2. There should be a clear legal and administrative framework for fiscal management.

3. The public should be provided with full information on the past, current, and

projected activity of government.

4. A public commitment should be made regarding the timely publication of fiscal

information.

5. Budget documentation should specify fiscal policy objectives, the macroeconomic

framework, the policy basis for the budget, and identifiable major fiscal risks.

6. Budget data should be classified and presented in a way that facilitates policy analysis

and promotes accountability.

18

7. Procedures for the execution and monitoring of approved expenditures should be

clearly specified.

8. The integrity of fiscal information should be subject to public and independent

scrutiny.

2.4.2 Factors that may lead to Lack of Transparency.

It is evident that Transparency is still lacking in the management of public finances for example,

A Government of Uganda payroll cleaning exercise in August 2005 revealed major leakages in

the payroll system, including the existence of many ghost workers. The integrity of the payroll is

significantly undermined by inconsistencies between personnel records and the personnel

database (Auditor general’s report, 2008). Special audit reports on the payrolls of the Ministry of

Works and Police in 2006/07 revealed loopholes in data integrity. There is no regular

reconciliation of teacher records (kept by local governments) or civil servants’ records (kept by

Ministry Department and Agencies) with personnel records (kept by Ministry of Public Service)

and the payroll. The Lack of transparency may be caused by the following factors.

2.4.2.1 Weak accountability system.

One of the factors that have lead to lack of transparency in the public finances is; Weak

Accounting System. According to Uganda Debt Network there is still a matter of a weak

accounting system. A weak accounting system has often been used as an excuse for not being

able to account for public funds. Very often taxes deducted from payments to contractors of

government jobs are never remitted to the Uganda Revenue Authority.

19

Lack of transparency creates opportunities for public officials to abuse their office for private

gain. This closely relates to accountability, and weak accountability mechanisms tend to

facilitate corruption. Where there is a lack of transparency and accountability corruption will

flourish. Once corrupt bureaucrats realize that they can take advantage of regulations, they will

produce more regulations and run the risk of becoming less transparent (Tanzi, Vito , 1998).

2.4.2.2 Inaccessibility to information.

Transparency describes when there is free access by citizens to public information. When the

rules, procedures, and objectives of the government are not available to the public, there is not

budgetary and administrative oversight to balance the power of government officials,

transparency is lacking and corruption can be bred. Without oversight and transparency of

budget and rules, national resources may be plundered and power may be abused in favor of the

corrupt official only (Kaufmann and Bellver, 2005).

Further, when there are not public sector mechanisms that channel social preferences and

specific complaints of the population to the agencies involved in those complaints, people of

power will not serve their purpose of representing the populace, but have free reign to do as they

please in the public sector (Olken, 2004).

2.4.2.3 Lack of capacity and monitoring.

According to Sandra Zwart (2003), cases of non transparency in local governments can be

brought back to procurement, financial management and human capacity. Non transparency can

thrive in local governments especially in relation to procurement and distribution of funds, due to

lack of capacity and monitoring. Especially the Chief Administrative Officer plays a big role

20

with regard to corruption issues. In theory every anti-corruption institution that is present at the

central level, is present at the local level. The reason why it is stated “in theory” is because most

of the institutions at a local level have even less capacity and infrastructure than at the central

level. The issues that need to be targeted within local government are, amongst others, public

awareness raising in relation to transfer of recourses to the districts, capacity building with

regard to several management committees and local government officials, and the system of

appointing members to the Local Government Tender Board needs to be changed.

2.4.2.4 Unclear rules, laws and processes.

According to Michael Schaeffer, (2002), in many countries, the lack of transparency in rules,

laws, and process creates abundant areas for corruption. Rules dealing with government

procurement process, financial management and accounting are often confusing. Even if an

individual exercises some initiative and tries to understand the rules, the documents specifying

these rules may not be publicly available. Furthermore, many organizational rules may be

changed without public announcements to that effect.

In many instances, regulations and laws are written so that only trained lawyers can understand

their true impact. Many laws are often conceptually opaque, thus leaving grounds for different

interpretation. In many developing countries, the processes are not as efficient. This may lead to

additional corruption with respect to trying to obtain an effective interpretation of the regulation

or law (Stratherna, 2008).

21

According to Mauro, 1997 one of the ways to reduce the corruption inherent in opaque

regulations and laws is to establish more efficient regulation processes. The establishment of

independent regulatory agencies, both at the national and local government level can be effective

in promoting efficiency and limiting opportunities for corruption. These regulatory institutions

however, must operate with transparency (hold public meetings), simplicity (rules-based

principles), and accountability (election of regulators or term based regulators).

2.5 The effect of internal auditing on transparency in public finances.

Internal auditors have a responsibility to plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement.

Reasonable assurance is achieved when audit risk, the risk that the auditor may unknowingly

appropriately modify the opinion of financial statements that are materially misstated is reduced

to an appropriately low level by an auditing activity which identifies the various cases of the

misstatements such as errors, fraud ,excreta (Dunlea and Maclochlainn, 1998), thus enhancing


Internal auditing involves appraising the economy effectiveness and efficiency of the use of the

resources are purchased in their best use. This eliminates fraud, enhancing transparency in public

finances

Internal auditing undertakes the review of the reliability and integrity of financial and operating

information. This ensures that all this information is accurate without any element of bias and

fraud (Dunlea and Maclochlainn, 1998), thus promoting transparency in public finances, since all

information regarding expenditure and income are accurately reported.

22

According to Robert R. Moeller (2004), minority stake holders with no executive contact with

the company are particularly vulnerable to the consequences of the directors’ fiduciary duties

such as related party transactions from which the directors derive a personal benefit. Such

stakeholders are bound to rely heavily on internal auditors to bring such matters to their attention

so that appropriate action can be taken, thus enhancing transparency in public finances.

Internal auditing involves the segregation of duties. This ensures that organizational activities are

performed by various individuals and not one person to prevent fraud and minimize the risk of

intentional manipulation of records as well as promote the element of inter checking since

activities are handled from one person to another (Phil Griffith, 2004), thereby promoting


Internal auditing also involves management control which includes reviews of management

accounts, comparison of actual performance with budgets and any other special review of

Procedures performed by management there by leading to transparency in public finances.

As seen above Internal auditing can be used to curb the problem of lack of transparency however

it does have some limitations that may present a hindrances to internal auditing in curbing


2.5.1 Lack of funding.

One potential obstacle to internal audit quality is a relative lack of funding (Jefferson Wells

2004). As internal audit departments are usually cost centers, internal audit departments must

perform their duties within a prespecified budget. Budgetary constraints represent three

potentials threats to internal audit quality. First, budget shortfalls can result in reduced testing of

23

controls, reduced geographic audit coverage (Public Oversight Board 2000). Second, the failure

to ensure the requisite budgetary resources may reduce the attractiveness of internal audit as a

career within the company, leading to turnover of highly-skilled and competent individuals

(Hermanson 2002). Third, budget constraints may prevent internal auditors from receiving the

necessary training to remain current with new echnological, accounting and auditing issues

(Jefferson Wells 2004). The lack of training may lead to under qualified personnel performing

tests of controls. These, may hinder the achievement of transparency. It is no wonder, the IIA has

repeatedly recommended that the audit committee review internal audit’s budget to ensure

adequate internal audit scope, maintain the career attractiveness of internal audit and provide the

necessary training to develop in-house talent (IIA 2003).

2.5.2 Incompetent staff.

According to Power (1994), staff may be incompetent. The purpose of internal audit fails to help

the management. There may be lack of experience and training on the part of internal audit staff.

The limitation of internal audit is staff shortage. There may be need of reasonable audit staff to

examine the record. The shortage of staff is hurdle to get the benefits of internal audit.

2.5.3 Errors in books of accounts.

According to Srinivasan (2004), it will be wastage of time and money to conduct internal audit if

there may be errors in the books of accounts. It depends upon the expertise of internal audit staff.

If audit staff is competent there is less chance of errors. In case of poor audit staff there is no

guarantee that audited accounts are free from errors. Besides the books of account, an auditor has

24

to depend on various personnel of the enterprise to seek additional information, classification and

explanation this information may not be reliable if the personnel providing it have themselves

been party to the manipulation of books of account (D.P. Jain, 1999).

Auditing can fail to disclose the correct information of what's happening. Background entries

may not be totally clear to audit staff and management may be vague on their clarifications.

Whether or not these things happen, an auditor still has to give his report (Gray, 2004).

2.5.4 Conceptual restrictions.

Auditing is conceptually confined to the techniques of checking vouchering, verification, totaling

etc. In modern business there are several vital aspects such as finances, management efficiency

and effectiveness, business ethics etc which are not covered by auditing (D.P. Jain, 1999). Hence

internal auditing may not play much in the restraining lack of transparency.

2.5.5 Delayed technique of internal auditing.

D.P Jain (1999), further mentions that auditing is a delayed technique the work of auditing

begins when the work of accountancy ends. The auditor may not be able to discover the

systematic manipulation in the books of accounts at the preparatory stage. This limits internal

auditors since the untransparent practices at the preparatory stage may not be discovered.

25

2.6 Conclusion.

A well configured internal audit function can play a vital role in the governance and

accountability process of public sector institutions through their assessments on the

effectiveness of key organisational controls, governance and risk management processes.

Governing bodies and senior management in the public sector need the services of

internal audit to be effective and efficient. At the same time the legitimacy of internal

audit activity and its mission should be understood and supported by senior management

of government entities to enhance its effectiveness in promoting good public sector

governance, control and risk management systems thus transparency.

Modern internal audit practice has transformed into a professional discipline of its own

and as a partner to governance bodies with strategic focus of contributing towards the

improvement of organisational governance and risk management strategies. Internal audit

has now found itself in the corporate spotlight and it is no longer seen as a less important.

26

CHAPTER THREE

METHODOLOGY

3.0 Introduction.

This chapter describes the methods and procedures the researcher used in the process of data

collection. It also shows the nature and pattern the researcher followed in collecting and

analyzing data.

3.1 Research design.

The research used a correlational design utilizing a case study strategy. The purpose of this

design was to correlate the independent variable that is internal auditing to dependent variables

(transparency in public finances). The researcher also used quantitative survey designs. This

helped the researcher to generate information and allowed the researcher to carry out analysis of

the various respondents’ opinions. The data that was collected was analyzed using descriptive

analysis.

3.2 Survey population.

The researcher collected data from the Tororo district local government departments namely:-

procurement department, accounting and finance department, internal auditing department and

senior management.

3.3 Sampling design.

The population sampled was heterogeneous in nature, definite and comprised of district

accountants, internal auditors, procurement officers and local government management.

27

Stratified random sampling method was also used since it was easier to develop the stratas

basing on the different departments that is to say the accounts department and internal auditing

department, Procurement department among and top management.

The respondents were then randomly selected from each stratum. That is, procurement

department, internal auditing department, accounting department, senior management.

3.4 Sample size

A representative sample of 46 respondents got from different departments of Tororo District

Local Government was used to provide information.

Table 1: Table of respondents.

Category of respondents Population Respondents

procurement department 11 11

Internal Audit department 16 16

Accounting and finance 16 16

Senior Management 3 3

Total 46 46

3.5 Data sources

The data was collected from two sources (Primary and secondary).

Primary data was collected from the accountants, internal auditors and senior management of

Tororo district local government using questionnaires.

28

Secondary data was sourced mainly from the Ministry of finance and Ministry of local

government. Other information was collected from the library (Makerere University), audit

reports, relevant journals, receipt and financial statements from the district local government

offices and from the internet.

3.6 Data collection tools.

The major tools used included;

Questionnaire

Self-administered Likert scale questionnaires (which examine how strongly respondents agree or

disagree with a statement) were given to respondents to fill and show their amount of agreement

and disagreement on the questions put forward. The researcher also used the cronbach coefficient

alpha to estimate the reliability of the questionnaire and the pretest design to find out the survey

question's validity by determining how well it measures the concept(s) it is intended to measure.

Observation.

Observation method was also used to be able to get accurate phenomenon as they occur. The

observation was done directly. This helped the researcher get reliable and accurate information

and make clarifications on the spot

3.7 Data collection procedures.

The researcher obtained a letter of recommendation from the Research Coordinator for

presentation to the chief administrative officer Tororo District Local Government, so as to be

allowed collect data from the selected respondents. After acquiring permission, questionnaires

were distributed to the respondents to fill.

29

3.8 Data management.

The data collected was checked and edited for completeness and accuracy. The data was then

coded, translating responses into numerical form.

3.9 Data analysis

The data was analyzed and presented in a descriptive manner, using of tables and means

determined. Data was also put together with the help of Statistical Package for the Social

Sciences.

3.10 Limitations of the study.

The following limitations were faced during the research.

Lack of enough time. Since the research was done concurrently with semester work, there

was limited time to conduct the research.

Financial constraints. The scholastic materials and equipment required for the research

were many and therefore costly.

Tedious, the research involved getting data from various offices and libraries and thus

tedious

There was difficulty in obtaining data especially in the field since most of the personnel

in Tororo district local government offices were busy and difficult to access.

30

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF RESEARCH FINDINGS

4.1 Bio data.

Findings on the bio information of respondents were considered and are shown below:

4.1.1 Gender of respondents.

Findings on the gender of respondents are shown in the table below:

Table 2: Findings on the gender of the respondents.

Frequency Percent Valid Percent Cumulative Percent

Valid Male 29 63.0 63.0 63.0

Female 17 37.0 37.0 100.0

Total 46 100.0 100.0

Source: Primary data

From the above table, 63.0% of the respondents were male while 37.0% of the respondents were

females. This shows that more males took part in the study as compared to the females.

4.1.2 Age bracket of the respondents.

The study captured the different age brackets of respondents in order to establish the most

prevalent group, the respondents were asked to state their age. The distribution was as in the

table below:

31

Table 3: Age distribution of respondents.


Valid 21-30 Years 22 47.8 47.8 47.8

31-40 Years 17 37.0 37.0 84.8

41-50 Years 6 13.0 13.0 97.8

51-55 Years 1 2.2 2.2 100.0

Total 46 100.0 100.0


From Table 3, above findings indicated that 47.8% of respondents were aged between 20 to30

years, 37.0% were between 31 to 40 years of age and 13.0% were aged between 41 to 50 years

while 2.2% were between 51and 55 years of age. This shows that the respondents were mature

enough to answer the questions in the questionnaires.

4.1.3 Level of education of the respondents.

The study also captured data on the level of education of respondents and is shown in the table

below:

Table 4: Academic levels.


ValidA level 1 2.2 2.2 2.2

Diploma 9 19.6 19.6 21.7

Bachelor's degree 29 63.0 63.0 84.8

Masters 7 15.2 15.2 100.0

Total 46 100.0 100.0


32

From table 4, 2.2% of the respondents are holders of A’ level of education, 19.6% Diploma

holders, 63.0% Bachelor’s degree holders, 15.2% Masters degree holders. This implies that the

data is sufficient since the respondents are knowlledgable.

4.1.4 Departments of the respondents.

The study also obtained departments under which respondents worked and the results are as in

the table below:

Table 5: Department of respondents.


Valid Procurement 11 23.9 23.9 23.9

Internal audit 16 34.8 34.8 58.7

Accounting and finance 16 34.8 34.8 93.5

Top Management 3 6.5 6.5 100.0

Total 46 100.0 100.0


From table 5, findings indicated that 23.9% of the respondents were employed in the

procurement department, 34.8% were employed in the department of internal Audit, 34.8% were

employed in Accounting and finance and 6.5% were in top management. This implies that

respondents who were involved in study were well vast with the topic under study.

4.1.5 Length of service.

Respondents were asked to state period for which they had worked and the results were as in the

table below:

33

Table 6: Length of service.


ValidBelow 1 year 1 2.2 2.2 2.2

1-2 Years 11 23.9 23.9 26.1

3-4 Years 18 39.1 39.1 65.2

Above 5 years 16 34.8 34.8 100.0

Total 46 100.0 100.0


Results of table 6, indicated that 2.2% of the respondents had been in service for a period less

than one year, 23.9 for a period between 1 to 2 years, 39.1 for a period between 3 to 4 years and

34.8% for a period above 5 years. This implies that respondents were knowledgeable enough and

had enough experience.

4.2 Findings on principles of internal auditing.

Findings on principles of internal auditing were considered and the information below was

obtained:

4.2.1 Integrity.

Knowledge of the respondents about integrity was obtained and the results were as in the table

below:

34

Table 7: Findings on integrity.

N Minimum Maximum Mean Std. Deviation

Internal Auditors are honest,

diligent and responsible46 2.00 5.00 4.1087 .8493

Internal Auditors observe the law 46 2.00 5.00 4.2391 .7940

Internal Auditors respect and

contribute to the legitimate and

ethical objectives

46 2.00 5.00 4.1522 .8156

Internal Auditors don’t involve

themselves in illegal activities or

acts that are descendible to their

profession or organization

46 1.00 5.00 3.7174 1.1287

Valid N 46


Table 7, results showed that, integrity required internal Auditors to observe the law

(Mean=4.2391), to respect and contribute to the legitimate and ethical objectives

(Mean=4.1522), to be honest, diligent and responsible (Mean=4.1087) and Auditors to avoid

involving themselves in illegal activities or acts that are descendible to their profession or

organization (Mean=3.7174).

4.2.2 Objectivity.

Knowledge of the respondents about Objectivity of was obtained, as the results in the table

below indicate.

35

Table 8: Findings on objectivity.


Internal auditors are unbiased. 46 1.00 5.00 3.5652 1.0884

Internal auditors don’t accept

gifts.46 1.00 5.00 3.3043 1.0928

Internal auditors disclose all

material facts known to them for

purposes of reporting activities

under review.

46 1.00 5.00 3.8043 1.0671

Internal auditors don’t have

conflict of interests.46 2.00 5.00 3.6957 .9158

Valid N 46

Source: primary data

Table 8, results showed that, internal auditors were objective, since they could disclose all

material facts known to them for purposes of reporting activities under review (Mean=3.8043),

had no conflict of interest (Mean=3.6957), were unbiased (Mean=3.5652) and they could not

accept gifts (Mean=3.3043).

4.2.3 Competence and due care

Knowledge of the respondents about competence and due care was obtained as tabulated below:

36

Table 9: Competence and due care


Internal auditors understand the

legal and institutional

principals and standards

governing the operations of the

organization.

46 3.00 5.00 4.2174 .5930

Internal auditors have

necessary knowledge, skills

and experience to conduct

audits.

46 3.00 5.00 4.3913 .5366

Internal auditors are given

necessary training to maintain

expertise needed to conduct

their assignments.

46 1.00 5.00 2.4348 1.3107

Internal standards for

professional practice or internal

auditing are followed during

audits.

46 2.00 5.00 4.0870 .7550

Valid N 46


Table 9, results showed that, internal Audit achieves competence and due care through, having

necessary knowledge, skills and experience to conduct audits (Mean=4.3913), understanding the

legal and institutional principals and standards governing the operations of the organization

(Mean=4.2174), internal standards for professional practice or following internal auditing during

audits (Mean=4.0870) and internal auditors being given necessary training to maintain expertise

needed to conduct their assignments (Mean=2.4348).

37

4.2.4 Confidentiality.

Knowledge of the respondents on Confidentiality was obtained as tabulated below:

Table 10: Findings on confidentiality.


Information acquired in the course of

auditing is protected.46 1.00 5.00 4.0870 .7839

Internal auditors do not use

information acquired in the course of

their work for personal use.

46 1.00 5.00 3.9783 .9065

Information received by internal

auditors is only disclosed if the law

requires.

46 1.00 5.00 3.9130 1.0072

Valid N 46


Table 10, results showed that, the internal Audit achieves Confidentiality through, ensuring that

information acquired in the course of the audit is protected (Mean=4.0870), ensuring that internal

auditors do not use information acquired in the course of their work for personal use

(Mean=3.9783) and also making sure that information received by internal auditors is only

disclosed if the law requires (Mean=3.9130).

4.3 Findings on the process of internal auditing.

Findings on the Process of internal auditing were considered and the information below was

obtained:

38

4.3.1 Planning.

Knowledge of the respondents about planning the audit was obtained and the results are as in the

table below:

Table 11: Findings on planning.


Your internal audit department has a

mission statement46 2.00 5.00 4.3478 .7369

Your internal audit department has a

formal strategy(e.g audit charter,

terms of reference)

46 3.00 5.00 4.1739 .6075

The internal audit department has

formally recognized objectives.46 2.00 5.00 4.0435 .7588

These objectives are reviewed

frequently46 2.00 5.00 3.8261 .9500

Budgets are prepared for purposes of

carrying out audits.46 1.00 5.00 3.7826 1.1138

Valid N 46


Table 11, results showed that, planning the internal Audit is achieved by ensuring that, the

internal audit department has a mission statement (Mean=4.3478), the internal audit department

has a formal strategy (e.g audit charter, terms of reference) (Mean=4.1739), the internal audit

department has formally recognized objectives (Mean=4.0435), objectives are reviewed

frequently (Mean=3.8261) and budgets are prepared for purposes of carrying out audits

(Mean=3.7826).

39

4.3.2 Field work.

Knowledge of the respondents about field work was obtained and the results were as in the table

below:

Table 12: Findings on field work.


Internal auditors use evidence of

actual performance to compare with

expected performance.

46 2.00 5.00 4.1304 .8329

Internal auditors summarize the

evidence indicating the fraud and

corruption.

46 3.00 5.00 4.1739 .5698

Internal auditors identify the possible

scenarios of fraud and corruption46 3.00 5.00 4.1522 .6313

Internal auditors identify the possible

extent of the fraud and corruption.46 2.00 5.00 4.2391 .6389

Internal auditors determine whether

compliance with the policies and

procedures is adequate.

46 2.00 5.00 4.1739 .6431

Valid N 46


According to Table 12, results on field work showed that, internal auditors identify the possible

extent of the fraud and corruption (Mean=4.2391), internal auditors summarize the evidence

indicating the fraud and corruption (Mean=4.1739), internal auditors determine whether

compliance with the policies and procedures is adequate (Mean=4.1739), internal auditors

identify the possible scenarios of fraud and corruption (Mean=4.1522) and evidence of actual

performance is compare with expected performance (Mean=4.1304).

40

4.3.3 Reporting.

Knowledge of the respondents about reporting of Audit findings was obtained, as the results in

the table below indicate:

Table 13: Findings on reporting.


Results of auditing are presented to

audit committees.46 2.00 5.00 4.2609 .7434

Copies of the audit report are availed

to stake holders.46 1.00 5.00 4.1304 .8058

Auditors discuss the audit findings to

management and obtain corrective

action.

46 3.00 5.00 4.0435 .5947

Valid N 46


Table 13 results showed that, internal Audit reporting is achieved by presenting the results of the

Audit to the audit committees (Mean=4.2609), availing copies of the audit report to stake holders

(Mean=4.1304) and Auditors discussing the audit findings to management and obtaining

corrective action (Mean=4.0435).

4.3.4 Follow up

Knowledge of the respondents about follow up of Audit findings was obtained, as tabulated

below:

41

Table 14: Findings on follow up


Audit recommendations are

categorized according to significance.46 3.00 5.00 4.1087 .6404

Audit recommendations are targeted

with dates for completion.46 2.00 5.00 4.1304 .7183

Audit recommendations are assigned

to individuals with responsibilities.46 2.00 5.00 4.1522 .7592

Implementation status of audit

recommendations is checked.46 2.00 5.00 4.0435 .6978

Implementation status of audit

recommendations is reported.46 1.00 5.00 4.0000 .8433

Valid N 46


According to Table 14, results on follow up showed that, Audit recommendations are assigned to

individuals with responsibilities (Mean=4.1522), Audit recommendations are targeted with dates

for completion (Mean=4.1304), Audit recommendations are categorized according to

significance (Mean=4.1087), implementation status of audit recommendations is checked

(Mean=4.0435) and implementation status of audit recommendations is reported (Mean=4.0000).

4.4 Findings on the transparency in public finances.

Findings on the transparency obtained are as shown below.

4.4.1 Accountability system.

Knowledge of the respondents about accountability system was obtained and the results were as

in the table below:

42

Table 15: Findings on accountability systems.


International standards of accounting

are used in your organization.46 2.00 5.00 4.4783 .6579

Assets in the organization are safe

guarded well46 2.00 5.00 4.3043 .7563

Accounting and record keeping are

properly done and kept in good

custody.

46 2.00 5.00 4.3696 .8527

Budgets/ financial plans do exist. 46 3.00 5.00 4.4783 .5865

A bank account has been opened to

record all incomes and expenditures

of all monies received.

46 3.00 5.00 4.3913 .6138

Valid N 46


Table 15 results showed that, accountability system involved ensuring that Budgets/ financial

plans do exist (Mean=4.4783), ensuring that international standards of accounting are used in the

organization (Mean=4.4783), ensuring that a bank account to be opened to record all incomes

and expenditures of all monies received (Mean=4.3913), Accounting and record keeping are

properly done and kept in good custody (Mean=4.3696),and ensuring that Assets in the

organization are safe guarded well (Mean=4.3043).

4.4.2 Accessibility to information.

Knowledge of the respondents about Accessibility to information was obtained and the results

were as in the table below:

43

Table 16: Findings on Accessibility to information.


The organization publishes annual

reports containing its account for the

year.

46 2.00 5.00 4.0870 .8648

Copies of the report are available to

stakeholders.46 2.00 5.00 4.1739 .7395

The rules and processes used in your

organization are accessible by stake

holders.

46 2.00 5.00 4.1739 .7088

There are opportunities to question

those in charge about their plans and

decisions.

46 1.00 5.00 4.1522 .8424

Information (fiscal) is easily

accessible for scrutiny by stake

holders.

46 2.00 5.00 3.9348 .8001

Valid N 46


Table 16 results showed that, accessibility to information involved, accessibility to rules and

processes used in the organization by stake holders (Mean=4.1739), availing of copies of the

reports to stakeholders (Mean=4.1739), existence of opportunities to question those in charge

about their plans and decisions (Mean=4.1522), the organization publishing annual reports

containing its account for the year (Mean=4.087) and easy accessibility to information (fiscal)

for scrutiny by stake holders (Mean=3.9348).

44

4.4.3 Capacity and monitoring.

Knowledge of the respondents about Capacity and monitoring was obtained and the results were

as in the table below:

Table 17: Findings on capacity and monitoring.


Your organization has adequate

infrastructure to monitor its

activities.

46 2.00 5.00 3.8696 .9570

Monitoring of activities is done

frequently.46 2.00 5.00 3.8478 .8684

Management of corruption and

fraud done at the central level.46 1.00 5.00 3.5870 1.0236

Management of corruption and

fraud is decentralized.46 2.00 5.00 3.6304 1.0616

Valid N 46


Table 17 results showed that, there was adequate infrastructure to monitor activities

(Mean=3.8696), frequent monitoring of activities was done (Mean=3.8478), decentralizing

management of corruption and fraud (Mean=3.6304) and management of corruption and fraud

by doing it at the central level (Mean=3.5870).

4.4.4 Unclear rules, laws and processes.

Knowledge of the respondents about unclear rules, laws and processes was obtained and the

results were as in the table below:

45

Table 19: Correlations between internal audit and transparency.

1.000 .342*. .020

46 46.342 * 1.000.020 .

46 46

Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N

INTERNAL AUDITING

TRANSPARENCY

INTERNALAUDITING

TRANSPARENCY

Correlation is significant at the 0.05 level (2-tailed).*.

Table 18: Findings on unclear rules, laws and processes.


Rules governing Procurement

processes, financial management

accountability do exist.

46 3.00 5.00 4.2174 .6964

These rules are easily understandable

by stake holders.46 2.00 5.00 4.1304 .7777

The organization complies with legal

requirement in the course of its work.46 3.00 5.00 4.3478 .5664

Valid N 46


Table 18 results showed that, the organization complies with legal requirement in the course of

its work (Mean=4.3478), rules governing Procurement processes, financial management

accountability existed (Mean=4.2174), and rules, were easily understandable by stake holders

(Mean=4.1304).

4.5 Relationship between internal Auditing and transparency in public Finances.

46

From table 19 above, findings revealed that there is a weak positive relationship between internal

auditing and transparency in public finances at Pearson correlation coefficient r = 0.342 (*).The

significance of the correlation is 0.05. This implies that a big change in the way of handling

internal auditing would bring about a small change of transparency in public finances by 11%.

47

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction.

This Chapter gives precise summary of the major findings of the study, draws appropriate

conclusions as well as recommendations. The purpose of the study is to establish the relationship

between internal Audit and Transparency in public finance.

5.2 Summary of the findings.

5.2.1 Summary of findings on principles and process of internal auditing.

The findings showed that the principles governing internal auditing were found to be followed,

that is integrity, objectivity, confidentiality and competence. Integrity was attained through

observation of the law, respecting and contributing to the legitimate and ethical objectives, being

honest, diligent and responsible; auditors also avoided involving themselves in illegal activities

or acts that are descendible to their profession or organization which are in line with Power,

(1997 and Aidan Dunlea & Naill Maclochlainn, (1998).

Internal auditors were found to be objective, they disclose all material facts known to them for

purposes of reporting activities under review, have no conflict of interest, are unbiased and do

not accept gifts these are in conformity to D.P. Jain (1997).

Finding also showed that internal auditors are competent and perform their duty with due care

through, having necessary knowledge, skills and experience to conduct audits, understanding the

legal and institutional principals and standards governing the operations of the organization,

having internal standards for professional practice or following internal auditing during audits

48

which is in agreement with Quarles,(1994).However, internal auditors are not being given

necessary training to maintain expertise needed to conduct their assignments which is in

disagreement with D.P. Jain(1997).

Internal audits are also carried out with Confidentiality through, ensuring that information

acquired in the course of the audit is protected, ensuring that internal auditors do not use

information acquired in the course of their work for personal use, making sure that information

received by internal auditors is only disclosed if the law requires. These are in line with the

principles of internal auditing which are put down by Power, (1997)

Findings indicate that internal audits are planned which is achieved by ensuring that, the internal

audit department has a mission statement, has a formal strategy (for example audit charter, terms

of reference), internal audit department has formally recognized objectives, objectives are

reviewed frequently and budgets are prepared for purposes of carrying out audits.This is in

relation to Shore & Wright, (2000). Results on field work showed that, internal auditors identify

the possible extent of the fraud and corruption, internal auditors summarize the evidence

indicating the fraud and corruption, internal auditors determine whether compliance with the

policies and procedures is adequate, internal auditors identify the possible scenarios of fraud and

corruption, evidence of actual performance is compare with expected performance which

conform to the process of internal auditing as per Picket, 2004 and John Dunn, 1996, the findings

also showed that audit reports are achieved by presenting the results of the audit to the audit

committees, availing copies of the audit report to stake holders, and audit findings discussed the

audit with management to obtaining corrective action. This is in agreement with Pei and Davis,

(1989). Results on follow up showed that, audit recommendations are assigned to individuals

with responsibilities, are targeted with dates for completion, and are categorized according to

49

significance, implementation status of audit recommendations is checked and implementation

status of audit recommendations is reported which are in line with reporting as a procccess of

internal auditing according to Emile Woolf, (1997).

5.2.2 Summary of findings on Transparency in public finances.

Findings from the study on transparency showed that accountability system was done through

drawing of Budgets/ financial plans do exist, ensuring that international standards of accounting

are used in Tororo district local government, ensuring that a bank account is opened to record all

incomes and expenditures of all monies received accounting and record keeping are properly

done and kept in good custody, and ensuring that Assets in the organization are safe guarded

well which is in line to Tanzi, Vito, 1998 as regards achievement of transparency.

Findings on accessibility to information showed, accessibility to rules and processes used in the

organization by stake holders, availing of copies of the reports to stakeholders, existence of

opportunities to question those in charge about their plans and decisions, the organization

publishing annual reports containing its account for the year and easy accessibility to information

(fiscal) for scrutiny by stake holders which are in conformity to Olken, (2004) for transparency

to be achieved.

Findings on capacity and monitoring showed Tororo district local government having adequate

infrastructure to monitor activities, monitoring of activities frequent, decentralizing and

centralization of management of corruption and fraud. Tororo district local government complies

with legal requirement in the course of its work, rules governing Procurement processes,

50

financial management accountability exists, and rules, are easily understandable by stake

holders.

5.2.3 Summary of findings on Relationship between internal auditing and transparency

in public Finances.

From the study, internal auditing positively influences transparency in public finances. It was

found that internal auditing has improved transparency in public finances through the following

of the process and principles of auditing, proper funding of the internal audit department,

employment of competent internal auditors, which have led to the provision of checks, balance

and aiding the detection of errors and fraud which is in agreement with Dunlea and

Maclochlainn, (1998) thus improving use of public funds and enhancing accountability and


5.3 Conclusions.

Results showed that the principles of internal auditing that is; integrity, objectivity, competence

and due care, confidentiality and the process of internal auditing that is; planning, field work,

reporting and follow up are being followed when handling internal audits in public finances.

Results also showed that with the adoption of accountability systems like international standards

of accounting, increasing of accessibility to information, capacity and monitoring, increase and

streamlining of unclear rules, laws and processes transparency in public finances has been

achieved. This is attributed to the proper internal auditing practices being followed.

After review of the findings, it was concluded that internal auditing is related to transparency in

public finances. The findings revealed internal auditing having a small positive relationship of

51

11% with transparency thus making internal auditing not 100% effective, in effecting


However, it is very important for public organizations to carry out internal auditing to be in

position to assess the effectiveness of internal controls and other aspects in achieving

organizational goals.

5.4 Recommendations.

There should be regular training of internal auditors to ensure that they keep up to date

with changes in auditing standards so as to enhance the effectiveness of the internal audit

function in achieving transparency in public finances.

Avenues for questioning those in charge should be increased since these will act as

checks which allow people in charge to be brought to account, thus improving


5.4 Areas suggested for further research.

The following areas of study are recommended.

Internal controls and effective cash flow management.

Transparency in public finances and public sector performance.

52

REFRENCES

Arens, Elder and Beasley (2003). Auditing and assurance services, an integrated approach, 9th

edition, Prentice Hall international edition.

Aidan Dunlea and Naill Maclochlainn (1998). Auditing Standards, a quick reference, 2nd edition

Anders Jansson, (2009). Internal audit principles www.mapsec.com,

Auditor General (2008), Public Expenditure and Financial Accountability Lite. Report February,

2008.

Beattie, Alan. (2000, September 26). G24 coalition bristles at IMF demands for fiscal

transparency. Financial Times. p. 16.

Blanchet, Jeannot. (2002). Global standards offer opportunity. Financial Executive. pp. 28-30.

D.P. Jain(1999), Auditing, Main Vikas Marg, Delhi

Emile Wolf(1997), Auditing today. 6th edition, Pearson Education Ltd. Eninburg gate, Harlow,

England, Pearson Hall Europe.

Frigo, Mark L (2002) A Balanced Scorecard Framework for Internal Auditing Departments. IIA

Research Foundation. Altamonte Springs, FL.

Gray, G.L (2004), Exploring the effects of the Sarbanes-Oxley Act on internal auditors. Working

paper. California State University, Northridge. CA.

Hanson, Margaret. (2003, January-March). The global promotion of transparency in emerging

markets. Global Governance, p. 63+.

Herbert Ssempogo, (2011, April 7). Eleven medics on theft charges: New vision. page 7

Hermanson, D.R( 2002), The growing stature of internal auditing. Altamonte Springs, FL

Hermanson, D.R. and L. Rittenberg (2003), Internal audit and organizational governance.

Research Opportunities in Internal Auditing. Institute of Internal Auditors Research

Foundation. Altamonte Springs, FL.

53

IIA (2003), Measuring Internal Audit Performance. GAIN Study-Knowledge Report September,

2003

Jefferson Wells (2004). Seven key principles for building an effective audit committee. Jefferson

Wells International. New York, NY.

John Dunn (1996), Auditing theory and practice, 2nd edition.

Spencer Pickett (2004). The internal auditor at work: a practical guide to everyday challenges,

Volume 1 of IIA (Institute of Internal Auditors) Series, John Wiley and Sons.

Spencer Pickett (2006), Audit Planning – A Risk Based Approach. The Institute of Internal

Auditors. Wiley. New Jersey

Kathleen T. McNeely (2009), Internal Controls, Indiana University

Kaufmann, and Bellver, (2005), Transparenting, Transparency – Initial Empirics and Policy

Applications, Presentation at the Pre-Conference on Institutional Change for Growth and

Poverty Reduction in Low-Income Countries at the International Monetary Fund,

Washington

Marilyn Stratherna (2008). The Tyranny of Transparency, a British Educational Research

Journal, Department of Social Anthropology, University of Cambridge.

Mauro, Paulo (1997), Why worry about corruption?, Washington D.C. International Monetary

Fund.

Michael Schaeffer (2002), Corruption and public finance, sectorial perspectives on corruption.

MSI, USAID,DCHA/DG

Ministry of finance, planning and economic development (2009), Code of ethics for government

of Uganda internal auditors.

54

Obed Kabanda, (2009, November 16).Corruption in Uganda-where are we headed?: New

vision.

Olken. B.A (2004), Monitoring Corruption: Evidence from a field experiment in Indonesia,

Washington D.C.: National

Paul Sobel (2004), Auditor’s Risk Management Guide, Integrated auditing, CCH, Pennsylvania

state university.

Pei, B.K. and F.G. Davis (1989), The implications of organizational structure on internal auditor

organizational-professional role stress. An exploration of linkages. A Journal of Practice

and Theory 8 (2): 101-115.

Pill Griffith (2004), Risk based Auditing, Gower

Power, M. (1994), The Audit Explosion .London, Demos.

Power, M. (1997) The Audit Society: rituals of verification. Oxford, Oxford University Press.

Public Oversight Board (2000), Panel on Audit Effectiveness: Report and Recommendations.

Stamford, CT: (POB).

Quarles, R (1994). An examination of promotion opportunities and evaluation criteria as

mechanisms for affecting internal auditor commitment, job satisfaction and turnover

intentions. Journal of Managerial Issues. Volume 2: 176-194.

Ray Whittington and Kurt Pany (2004), Principles of Auditing and other Assurance Services

Information. Arizona State University.

Robert R. Moeller (2004), Sarbanes-Oxley and the new internal auditing rules. John Wiley and

Sons.

55

Sandra Zwart (2003), Uganda: The fight against corruption, a case study on prevalence of

corruption in Uganda specifically in Local government, Education, Justice, Law & order

and Procurement

Shore, C. & Wright, S. (2000) Audit culture and anthropology : neo-liberalism in British Higher

Education, Journal of the Royal Anthropologica l Institute,

Srinivasan, S (2004), Consequences of financial reporting failures for outside directors:

Evidence from restatements. Journal of Accounting Research.

Tanzi, Vito. (1998). Corruption Around the World. IMF Staff Papers. Vol. 45, Number 4. IMF

Washington, D.C.

56

APPENDIX 1: QUESTIONNAIRE

Dear respondent,

I am a student of Makerere University carrying out a research study on “internal auditing and

Transparency in public finances”. The questions below are intended to facilitate the study. The

information requested for below, is purely for academic purposes and if provided will be treated

with strict confidentiality. Please kindly answer all parts of the questionnaire as honestly as

possible. Your positive response will be highly appreciated.

Instructions:

- Please tick in the most appropriate box.

- In Section B and C please indicate your degree of agreement or disagreement with the

statement using the rating below.

5=SA (Strongly agree), 4=A (Agree), 3=NS (Not sure), 2=D (Disagree), 1=SD (Strongly

disagree)

SECTION A: - Biography

1. Sex: Male Female

2. Age: Below 20 21-30 31-40

41-50 51-55 Above 55

3. Academic level: O’Level Bachelor’s degree

A’ Level Masters

Diploma Others (Specify) …....………

4. Which of the following departments are you currently working in?

Procurement Accounting and finance

Internal audit Top management

5. Length of service:

Below 1year 1-2years 3-4 years above 5 years

57

SECTION: B – The principles and process of internal auditing.

No Question SA A NS D SDPrinciples of internal auditingIntegrity- During the course of their work, auditors;6 Are honest, diligent and responsible.7 Observe the law.8 Respect and contribute to the legitimate and ethical objectives of the

organization.9 Do not involve themselves in illegal activities or acts that are descendible to the

profession of internal auditing or organsition.Objectivity- During the course of doing their work internal auditors;10 Are unbiased.11 Do not accept gifts.12 Disclose all material facts known to them for purposes of reporting activities

under review.13 Do not have conflict of interest.Competence and due care.14 Internal auditors understand the legal and institutional principles and standards

governing the operations of the organization.15 Internal auditors have the necessary knowledge, skills and experience to

conduct audits.16 Internal auditors are given the necessary training to maintain expertise needed

to conduct their assignments.17 International standards for professional practice or internal auditing are

followed during audits.Confidentiality.18 Information acquired in the course of auditing is protected.19 Internal auditors do not use the information acquired in the course of their work

for personal use.20 Information received by internal auditors is only disclosed if the law requires.Process of internal auditing.Planning.21 The internal audit department has a mission statement.22 Your internal audit department has a formal strategy (for example audit charter,

terms of reference).23 The internal audit department has formally recorgnised objectives.24 These objectives are reviewed frequently.25 Budgets are prepared for purposes of carrying out audits.Field work- During field work auditors;26 Use evidence of actual performance to compare with expected performance in

the course of carrying out the audits.27 Summerise the evidence indicating the fraud and corruption.28 Identify the possible scenario of fraud and corruption.29 Identify the possible extent of the fraud and corruption.

58

30 Determine whether compliance with policies and procedures is adequate.Reporting.31 Results of auditing are presented to audit committee.32 Copies of the audit report are availed to stakeholders.33 Auditors discuss the audit findings to management and obtain corrective action.Follow up- Audit recommendations are;34 Categorised according to significance.35 Targeted with dates for completion.36 Assigned to individuals with responsibilities.37 Implementation status of audit recommendations is checked.38 Implementation status of audit recommendations is reported.

SECTION C: - Transparency.

No.

Question. SA A NS D SD

Accountability system.39 International standards of accounting are used in your organization.40 Assets in the organisation are safeguarded well.41 Accounting and record keeping are properly done and kept in good custody.42 Budget/ financial plans do exist.43 A bank account has been opened to record all income and expenses of all

monies received.Accessibility to information.44 The organistion publishes annual reports containing its account for the year.45 Copies of the report are available to the stake holders.46 The rules and processes used in your organisation are accessible by stake

holders.47 There are opportunities to question those in charge about their plans and

decisions.48 Information (fiscal) is easily accessible for scrutiny by stake holders.Capacity and monitoring.49 The department in your organisation have adequate infrastructure.50 Monitoring of activities is done frequently.51 Management of corruption and fraud done at the central level.52 Management of corruption and fraud is decentralised.Unclear rules, laws and processes.53 Rules governing procurement processes, financial management accountability

do exist.54 These rules are easily understandable by the stake holders.55 The organisation complies with legal requirements in the course of its work.

Thanks for your time.

59

APPENDIX 2: BUDGET ESTIMATES

Budget estimates.

Item Quantity Unit cost (Ushs) Amount (Ushs)

Stationery 2 reams 9000 18000

Flash 1 30000 30000

Transport To and from

Tororo(5 times)

15000 per Journey 75000

Typing 70 page 500shs per page 35000

Photocopying 500 pages 50shs per pages 25000

Data analysis 46 questionnaires 1000shs per questionnaire

46000

Printing 210 page 100shs per pages 21000

Binding 3 copies 6000shs per book 18000

Miscellaneous 18000

Total 286000

60

APPENDIX 3: TIME SCHEDULE

Time schedule.

No. Month Year Activity

1 Feb 2011 Proposal writing

2 March 2011 Approval of the proposal

3 April 2011 Data collection

4 May 2011 Data analysis interpretation

5 June 2011 Discussion of findings recommendations and

conclusions, print first draft

6 July 2011 Printing final copy and presentation

61

Documents

DECLARATIONcees.mak.ac.ug/sites/default/files/publications/ENYASU.docx · Web viewAccording to Arens, Elder & Beasley, (2003), the auditor should produce clear, constructive and concise