The Effect of Internal Audit On Organizational Performance: An Empirical Exploration of Selected Jordanian Banks

Research Journal of Finance and Accounting www.iiste.
org
ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online)
Vol.9, No.14, 2018
The Effect of Internal Audit on Organizational Performance: An

Empirical Exploration of Selected Jordanian Banks
Dr. Borhan Omar Ahmad
Abstract
Internal audit is a systematic and independent examination of data, financial statements, accounts records,
operations and performances of an enterprise for the purpose of verifying their authenticity and fairness. It is a
broad term which means a number of checks and controls exercised in a business to ensure efficient working in
the organization. It is regarded as indicating the whole system of controls through vigilance and direction
established by the management in the conduct of business. It has become an indispensable management tool for
achieving effective control by detecting the weaknesses in management operations in all industry especially
banking industry. Taking this into cognizance, this study examines the effect of internal auditing on the
organizational performance of major Jordanian banks. A sample of 364 employees has been selected for the
study. Data have been collected through self administered questionnaires and analyzed with the help of multiple
regression. Internal audit is used as the independent variable whereas organizational performance is the
dependent variable. The analysis of data revealed that there is a significant impact of internal audit on the
organizational performance in all banks except Arab Bank.
Keywords: internal auditing, organization, performance, banks, multiple regression.
INTRODUCTION
Internal auditing is a systematic and independent examination of data, financial statements, accounts records,
operations and performances both financial and otherwise, of an enterprise for the purpose of verifying their
authenticity and fairness (Butcher, Harrison, and Ross, 2013). It is an independent, objective assurance and
consulting activity designed to add value and improve an organization’s operations (Gramling, 2004). It
comprises the plan of the organization and all methods and measures adopted within a business to safeguard
operational efficiency, and encourage adherence to prescribed managerial policies. It is a pre-requisite for the
efficient and smooth working of an organization (Farouk & Hassan, 2014). The organization must establish and
maintain adequate systems of internal control appropriate to the size and nature of business of the entity. The
auditor perceives and recognizes the proposition before him for examination, collects evidence, evaluates the
same and formulates his judgment. Thereafter, judgment is communicated through the Audit Report which is the
end result of auditing (Ravinder & Virender, 2005). The insiders and outsiders of the organizations are solely
guided by the audit report whether the financial accounts and statements present a fair and true picture of the
performance of the organization. The report is of particular interest to shareholders, creditors, investors,
employees, and government i.e. who have a financial stake in the success or failure of the business enterprise
(Daniel, 2013).
Internal audit control ensuring the orderly and efficient conduct of its business, including adherence to
management policies, the safeguarding of assets, prevention and detection of fraud and error, the accuracy and
completeness of account records, and the timely preparation of reliable financial information (Abidin and Ismail,
2009). The system of internal control extends beyond those matters which relate directly to the functions of
accounting system. Moreover, internal auditing has become an indispensable management tool for achieving
effective control by detecting the weaknesses in management operations in all industry especially banking
industry (Nyakundi, Nyamita, & Tinega, 2014). It provides a basis for correcting deficiencies that have eluded
the first line of defense before these deficiencies become uncontrollable or are exposed in the external auditor’s
report (Goodwin and Yeo, 2001). It is a system of instituting checks on the day-to-day transactions which
operate continuously as part of the routine system whereby the work of one person is proved independently or is
complementary to the work of another, the object being the prevention and early detection of errors or fraud
(Shahnawaz, 2016).
Internal auditing is a broad term which means a number of checks and controls exercised in a business to ensure
efficient and economic working (Chopra, 2012). It is best regarded as indicating the whole system of controls,
financial and otherwise, established by the management in the conduct of business, including internal check,
internal audit and other forms of control (Abu Bakar, 2009). It involves a sort of vigilance and direction over
important matters like budget and finance, purchases and sales and internal administration by the management;
for example, in case of proprietary concern, such a control would be exercised by the proprietor while the case of
a joint stock company, it would come from the directors. Thus, it may be stated that internal audit provides a
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Vol.9, No.14, 2018
measure for the management to obtain information, protection, and control which is quite important for the
successful working of a business organization (Rajwanshi, 2015).
REVIEW OF LITERATURE
Ahmad (2007) recommended that there should be more attention by auditors and institutions regulating the audit
profession in Jordan towards compliance with audit standards, especially those concerning internal audit and
imposing on auditor’s responsibility to detect fraud in financial transactions and statements at the appropriate
stage. Hung & Han (2010) found that management’s attitude, controller’s attitude, the probability of internal
auditors’ promotion, the implementation of performance evaluation, the establishment of the job description, and
the training and professional abilities of the internal auditor were the factors that affect management’s perceiving
effectiveness. Obert & Munyunguma (2014) evaluated the factors causing negative perceptions of internal
audit and the impact on the performance of the internal audit function. Data was collected through questionnaires
which were distributed to managers, section heads, supervisors and clerical staff. The research used exploratory
and qualitative techniques. The causes of negative perceptions were; auditors failure to meet expectation gap, the
bad reputation of an auditor, the quality of audit staff, level of professional competence and the absence of
independence and objectivity in internal audits. However, the research suggested that internal audit needs to
adopt a new mindset in view of the changes taking place in the business environment, to correct the errors of
financial scandals, intense focus on corporate governance. The study revealed that internal audit can be improved
by getting adequate support from management, recruiting qualified and professional auditors. Dahir & Omar
(2016) examined the role of internal audit practice on organizational performance of Somalian companies. The
sample size was 200 respondents and data was collected through questionnaires set on Likert scale. The findings
highlighted that there was a significant positive relationship between internal audit and organizational
performance of the companies under study. Albkour & Chaudhary (2017) investigated the impact of internal
audit on organizational performance of selected Jordanian banks with the sample size of 145 employees. The
study revealed that there is a significant impact of internal audit on organizational performance of selected
banks. Alflahat (2017) in the study titled, “The Impact Of Internal Audit On Organizational Performance Of
Selected Jordanian Companies” examined the impact of internal audit on the organizational performance of
Jordan Electric Power, Jordan Telecom, and National Petroleum. The sample size of the study was 290
employees. Data was collected through questionnaires. Multiple linear regression was used as the statistical tool
for analysis. Internal audit was the independent variable and organizational performance was used as the
dependent variable. Professional competence, internal controls, internal audit standards, independence of internal
audit were used as the proxy measures of internal audit. The analysis of data revealed that there is a significant
impact of internal audit on the organizational performance in companies under study.
OBJECTIVES OF THE STUDY

a) To examine the impact of internal auditing on the organizational performance of Bank of Jordan.
b) To investigate the impact of internal auditing on the organizational performance of Cairo Amman Bank.
c) To evaluate the impact of internal auditing on the performance of Jordan Kuwait Bank.
d) To examine the impact of internal auditing on the organizational performance of Arab Bank.
HYPOTHESES OF THE STUDY

Ho1: There is no significant impact of internal auditing on the organizational performance of Bank of Jordan.
Ha1: There is a significant impact of internal auditing on the organizational performance of Bank of Jordan.
Ho2: There is no significant impact of internal auditing on the organizational performance of Cairo Amman
Bank.
Ha2: There is a significant impact of internal auditing on the organizational performance of Cairo Amman Bank.
Ho3: There is no significant impact of internal auditing on the organizational performance of Jordan Kuwait
Bank.
Ha3: There is a significant impact of internal auditing on the organizational performance of Jordan Kuwait Bank.
Ho4: There is no significant impact of internal auditing on the organizational performance of Arab Bank.
Ha4: There is a significant impact of internal auditing on the organizational performance of Arab Bank.
RESEARCH METHODOLOGY
A self-administered questionnaire was used to collect primary data. Self-administered questionnaire is the
survey in which respondents take responsibility for reading and answering the questions. It is considered as a
superior mode for minimizing bias and improving response rates. The questionnaire consists of five variables
wherein organizational performance was dependent variable and internal auditing was the independent variable.
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Vol.9, No.14, 2018
Figure 1 highlights the framework of the present research. The effects of independent variables on the
dependable variable were assessed by the 5-point Likert attitude scale. The questionnaire was pre-tested several
times. A total of 500 questionnaires were distributed among the employees working in selected banks wherein
364 questionnaires were considered valid for data analysis. Table 1 shows the questionnaires distributed,
rejected, and accepted. The data collection period was six months since September, 2017 to February, 2018.
Secondary information was gathered from different sources such as books, magazines, journals, newspapers and
online databases via internet etc. Sample survey or cross-sectional survey was the main method to explore
attitudes of patients’ satisfaction with private hospitals. This is a method of primary data collection in which
information is based on communication with a representative sample of target population at a point in time.
Simple linear regression was used to analyze the results through Statistical Package for the Social Science
(SPSS) 20 version.
Analysis of Data
Data collected from primary as well as secondary sources was analyzed and interpreted and on the basis of
which conclusions were drawn. For analyzing the data, multiple linear regression analysis was used and
hypotheses have been tested at confidence level of 95%.
Table 1: Sample Size of the Study

Selected Banks Questionnaires
Distributed Rejected Accepted
Bank of Jordan 100 31 69
Cairo Amman Bank 100 24 76
Jordan Kuwait Bank 150 44 106
Arab Bank 150 37 113
Total 500 136 364
Source: Primary Data
Fig.1:Research Model
Internal Controls
Professional
Competence Organizational
Internal Audit Performance
Standards
Independence of
internal audit
Variables of Internal
Audit
Source: Researcher’s Own Compilation
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Vol.9, No.14, 2018
Fig.2: Questionnaires distributed, rejected, and accepted

160
140
120
100
80
60
40
20
0
Bank of Jordan Cairo Amman Bank Jordan Kuwait Bank Arab Bank
Distributed Accepted Rejected
CORRELATION STATISTICS OF STUDY VARIABLES

Table 2 highlights the correlation matrix of the study variables. There exists significant positive correlation
between internal audit variables and organizational performance.
Table 2: Correlation Matrix
Dependent Independent Variables
Variable
IC PC AS IIA OP
OP 0.804** 0.867** 0.699** 0.718** 1
Note: IC: Internal Control; PC; Professional Competence; AS: Internal audit standards; IIA: Independence of
internal audit; OP: Organizational Performance
**
Correlation is significant at the 0.05 level (2-tailed)
Source: Output of SPSS_20
HYPOTHESIS TESTING
Ho1: There is no significant impact of internal auditing on the organizational performance of Bank of
Jordan.
Ha1: There is a significant impact of internal auditing on the organizational performance of Bank of
Jordan.
Table 3: Multiple Regression Analysis [Bank of Jordan]
Model 1 Variables Regression T Value P Value
Coefficients
X1 Internal control 0.554 11.521 0.000

X2 Professional competence 0.629 2.698 0.003
X3 Internal audit standards 0.337 -4.577 0.008
X4 Independence of internal audit 0.228 26.685 0.006
R 0.856
R Square 0.732
Adjusted R Square 0.726
Standard Error 1.254
ANOVA (Model Fitness) F Value: 62.967; P Value: 0.005*
Dependent Variable: Organizational Performance
* Significant at 5% level
Multiple linear regression has been used to check the impact of internal auditing (independent variable) on the
organizational performance (dependent variable). Table 3 shows the regression model of Bank of Jordan. The
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value of adjusted R square is 0.726 which means 72.6 percent variation in organizational performance is
explained by the internal audit and the rest of the variation (1-R2) is an unexplained variation. Furthermore,
ANOVA shows the model significance. The F value is 62.967 and the p value corresponding to it is 0005
(P<0.05) meaning thereby all the variables fulfilled the criteria of model accuracy.
The regression coefficient gives a measure of the contribution of each variable to the model. A larger value
indicates that a unit change in the predictor variable has a larger impact on the criterion variable. The value of
regression coefficient on the variable professional competence is 0.629 which is an indication of the positive
impact of professional competence on organizational performance. The significant value of this variable is 0.003
which is less than 0.05 at 95 percent confidence interval. However, the value of beta coefficient on internal
controls is 0.554 and the significant value corresponding to this variable is 0.000. Moreover, the values of
regression coefficients on the variables internal audit standards and independence of internal audit are 0.337 and
0.228 respectively. The significant value under each variable is less than 0.05 at 95 percent confidence interval.
Therefore, the null hypothesis is rejected and it can be said that there is a significant impact of internal audit on
the organizational performance in Bank of Jordan.
Ho2: There is no significant impact of internal auditing on the organizational performance of Cairo
Amman Bank.
Ha2: There is a significant impact of internal auditing on the organizational performance of Cairo Amman
Bank.
Table 4: Multiple Regression Analysis [Cairo Amman Bank]

Coefficients
X1 Internal Control 0.601 -2.551 0.001

X2 Professional Competence 0.599 19.525 0.000
X3 Internal audit standards 0.507 1.705 0.000
X4 Independence of internal audit 0.413 3.448 0.002
R 0.901
R Square 0.811
Multiple linear regression has been used to investigate the impact of internal auditing (independent variable) on
the organizational performance (dependent variable) of Cairo Amman Bank. Table 4 shows the regression
model. The value of adjusted R square is 0.804 which means 80.4 percent variation in organizational
performance is explained by the internal auditing and rest of the variation (1-R2) is an unexplained variation.
Furthermore, ANOVA shows the model significance. The F value is 159.587 and the p value corresponding to it
is 0.004 (P<0.05) meaning thereby all the variables fulfilled the criteria of model accuracy.
The regression coefficient gives a measure of the contribution of each variable to the model. A larger value
indicates that a unit change in the predictor variable has a larger impact on the criterion variable. The value of
regression coefficient on the variable professional competence is 0.599 which is an indication of the positive
impact of professional competence on organizational performance. The significant value of this variable is 0.000
which is less than 0.05 at 95 percent confidence interval. However, the value of beta coefficient on internal
controls is 0.554 and the significant value corresponding to this variable is 0.000. Moreover, the values of
regression coefficients on the variables internal audit standards and independence of internal audit are 0.507 and
0.413 respectively. The significant value under each variable is less than 0.05 at 95 percent confidence interval.
Therefore, the alternate hypothesis is accepted and it can be said that there is a significant impact of internal
audit on the organizational performance in Cairo Amman Bank.
Ho3: There is no significant impact of internal auditing on the organizational performance of Jordan
Kuwait Bank.
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Ha3: There is a significant impact of internal auditing on the organizational performance of Jordan
Kuwait Bank.
Table 5: Multiple Regression Analysis [Jordan Kuwait Bank]

Coefficients
X1 Internal Control 0.432 -5.509 0.000

X2 Professional Competence 0.397 15.228 0.000
X4 Independence of internal audit 0.511 -2.207 0.002
R 0.917
R Square 0.841
the organizational performance (dependent variable) of Jordan Kuwait Bank. Table 5 shows the regression
model. The value of adjusted R square is 0.841 which means 84.1 percent variation in organizational
performance is explained by the internal audit and the rest of the variation (1-R2) is an unexplained variation.
Furthermore, ANOVA shows the model significance. The F value is 96.684 and the p value corresponding to it
is 0.000 (P<0.05) meaning thereby all the variables fulfilled the criteria of model accuracy. The regression
coefficient on the variable internal control is 0.432 and its corresponding significant value is 0.000 (P<0.05).
However, the value of beta coefficient on professional competence is 0.397 and the significant value
corresponding to this variable is 0.000. Moreover, the values of regression coefficients on the variables internal
audit standards and independence of internal audit are 0.385 and 0.511 respectively. The significant value under
each variable is less than 0.05 at 95 percent confidence interval. Therefore, null hypothesis is rejected and it can
be said that there is a significant impact of internal audit on the organizational performance in Jordan Kuwait
Bank.
Ho4: There is no significant impact of internal auditing on the organizational performance of Arab Bank.
Ha4: There is a significant impact of internal auditing on the organizational performance of Arab Bank.
Table 6: Multiple Regression Analysis [Arab Bank]

Coefficients
X1 Internal Control 0.227 16.664 0.467

X2 Professional Competence 0.119 -2.229 0.294
X4 Independence of internal audit 0.078 -3.337 0.525
R 0.557
R Square 0.310
ANOVA (Model Fitness) F Value: 254.667; P Value: 0.668
the organizational performance (dependent variable) of Arab Bank. Table 6 shows the regression model. The
value of adjusted R square is 0.301 which means 30.1 percent variation in organizational performance is
explained by the internal auditing and the rest of the variation (1-R2) is an unexplained variation. Furthermore,
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Vol.9, No.14, 2018
ANOVA shows the model significance. The F value is 254.667 and the p value corresponding to it is 0.668
(P<0.05) meaning thereby all the variables do not fulfilled the criteria of model accuracy. Nevertheless, the
regression coefficients are not statistically significant because p value under each variable is more than 0.05 at
95 percent confidence interval. Therefore, the null hypothesis stands accepted and it can be said that there is
insignificant impact of internal audit on the organizational performance in Arab Bank.
Table 7: Summary of Hypotheses Tested

No. Hypotheses Results
H01 There is no significant impact of internal auditing on the organizational performance Rejected
of Bank of Jordan.
of Cairo Amman Bank.
of Jordan Kuwait Bank.
H04 There is no significant impact of internal auditing on the organizational performance Accepted
of Arab Bank.
CONCLUSION
Internal auditing is a systematic and independent examination of data, financial statements, accounts records,
operations and performances both financial and otherwise, of an enterprise for the purpose of verifying their
authenticity and fairness. It comprises the plan of organization and all methods and measures adopted within a
business to safeguard operational efficiency, encourage adherence to prescribed managerial policies, and helps in
achieving the objectives of the enterprise. In this study, an effort has been made to examine the effect of internal
audit on the organizational performance of the selected Jordanian Banks. The author collected data with the help
of self administered questionnaire set on a five point Likert-scale from the employees working in these banks.
The size of the sample is 364 employees and data has been analyzed with the application of multiple regression.
Internal audit is the independent variable and organizational performance is used as the dependent variable.
Professional competence, internal controls, internal audit standards, independence of internal audit are used as
the measures of internal audit. Three hypothesis have been rejected and one has been accepted. It means that
there is a significant impact of internal audit on the organizational performance of Bank of Jordan, Cairo Amman
Bank, and Jordan Kuwait Bank. However, insignificant impact of internal audit on the organizational
performance has been revealed in Arab Bank and hence it is recommended to take necessary steps in Arab Bank.
LIMITATIONS OF THE STUDY

i. The study examines the impact of internal auditing on the organizational performance of four
Jordanian banks. Therefore, the results cannot be generalized to other companies.
ii. The sample size of the research is 364.
iii. Only four variables of internal audit have been used in the study.
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Research Journal of Finance and Accounting www.iiste.

The Effect of Internal Audit on Organizational Performance: An

OBJECTIVES OF THE STUDY

HYPOTHESES OF THE STUDY

Table 1: Sample Size of the Study

Source: Researcher’s Own Compilation

Fig.2: Questionnaires distributed, rejected, and accepted

CORRELATION STATISTICS OF STUDY VARIABLES

OP 0.804 0.867 0.699 0.718 1

X1 Internal control 0.554 11.521 0.000

Table 4: Multiple Regression Analysis [Cairo Amman Bank]

X1 Internal Control 0.601 -2.551 0.001

Table 5: Multiple Regression Analysis [Jordan Kuwait Bank]

X1 Internal Control 0.432 -5.509 0.000

Table 6: Multiple Regression Analysis [Arab Bank]

X1 Internal Control 0.227 16.664 0.467

Table 7: Summary of Hypotheses Tested

LIMITATIONS OF THE STUDY

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