FACTIORS AFFECTING INTERNAL AUDIT EFFECTIVENESS: IN THE

CASE OF FEDERAL PUBLIC INSTITUTIONS IN DIRE DAWA

ADMINISTRATION

A RESEARCH PROPOSAL SUBMITTED TO THE POST GRADUATE

OFFICE INPARTIAL FULFILLMENT FOR THE REQUIREMENT OF
MASTERS DEGREE OF SCIENCE IN ACCOUNTING AND FINANCE

BY: YONAS TERFASSA.

ADVISOR: MEKA F. (Ass. Pro)

DIRE DAWA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
SCHOOL OF GRADUATE STUDIES

March 2023

Dire Dawa, Ethiopia

ABSTRACT
This study will mainly try to investigate factors affecting internal audit effectiveness of Federal
public institutions in Dire Dawa City Administration. The study will use explanatory research
design, and primary data will be the main source of data for this study. A total of 93 structured
questionnaires will be distributed to sample respondents from federal public sectors selected
purposively. The research will use five independent variables names management support,
auditor competency, auditor independence, resource and size of audit department, and existence
of audit committee to determine their effect on internal audit effectiveness. Finally, the collected
data will be run through SPPS and the outcome will be presented in the form of tables and
percentages.

Key Words: Internal Audit; Public sector offices; internal audit effectiveness; factors affecting
internal audit effectiveness

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Contents
ABSTRACT................................................................................................................................................2

CHAPTER ONE..........................................................................................................................................5

1. INTRODUCTION...............................................................................................................................5

1.1. Background of the Study.............................................................................................................5

1.2. Statement of the Problem.............................................................................................................7

1.3. Objectives of the study................................................................................................................9

1.3.1. General objective.....................................................................................................................9

1.3.2. Specific objectives...................................................................................................................9

1.4. Research Hypothesis....................................................................................................................9

1.5. Significance of the study............................................................................................................10

1.6. Scope of the Study.....................................................................................................................10

1.7. Organization of the study...........................................................................................................10

CHAPTER TWO.......................................................................................................................................11

2. LITERATURE REVIEW..................................................................................................................11

2.1. Introduction...............................................................................................................................11

2.2. Theoretical Review........................................................................................................................12

2.3. Internal Audit and Related Literature.........................................................................................12

2.2.2. Types of Audits Performed by Internal Auditors...................................................................14

2.2.3. Internal Audit Effectiveness...................................................................................................15

2.3. Empirical Review of Factors Affecting Internal Audit Effectiveness............................................16

2.4. Conceptual Framework..................................................................................................................22

CHAPTER THREE...................................................................................................................................23

3. Research Methodology..........................................................................................................................23

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3.1. Introduction....................................................................................................................................23

3.2. Research Design.............................................................................................................................23

3.3. Research Approach....................................................................................................................23

3.4. Population and Sampling of the Study.......................................................................................23

3.5. Source and Method of Data Collection......................................................................................24

3.7. Definition of the Variables.........................................................................................................25

3.7.1. Dependent Variable...............................................................................................................25

3.7.2. Independent Variables...........................................................................................................26

3.8. Model Specification...................................................................................................................26

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 CHAPTER ONE

1. INTRODUCTION
1.1. Background of the Study

Public sector offices are part of the public body which is partly or wholly financed by
government budget and concerned with providing basic government services to the whole
society (Ministry of Finance and Economic Development (MoFED, 2004). The compositions of
the public sectors are varied by their function and purposes, but in most cases, they are designed
in order to enable the public sectors to achieve their goals. They provide services such as
banking service, financing, education, communication service, healthcare, police, transportation,
electric services, security and so on, which benefit all of the society and encourage equal
opportunity to benefit from those services provided (Mihret and Yismaw, 2007).

Internal Auditing is one of the globe‘s fastest-growing but most misunderstood professions.
There are several definitions of the profession. For the (IIA, 2002) "Internal Auditing is integrity,
independent, objective assurance and consulting activity designed to add value and improve an
organization's operations. It helps an organization to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes. The objective of Internal Auditing is to assist members of the
organization in the effective discharge of their responsibilities. Thus, they review the reliability
and integrity of financial and operating information; plans, procedures, laws, and regulations; the
means of safeguarding assets; the economy and efficiency with which resources are employed,
and ascertain whether results of operations or programs are carried out as planned. Hence, the
definition equally serves both the private and the public sectors (Stern, 1994); (Nagy & Cenker,
2002); (Goodwin, 2004).

Moreover, Internal audit function helps government organization to ensure accountability and
integrity, improves the execution of government programs and develops a sense of trust and

1
confidence among citizens and the various stakeholders in the public interest (Baharud-din et al,
2014).
Previously, internal auditors were seen just as an assistant of accountant’s but recently internal
audit is certainly is considered an independent profession, which is playing a significant role in
the management of organizations. For instance, the role of internal auditing is to assess the
effectiveness of the internal control system and to find out whether the system is functioning as
intended (Fadzil, Haron & Jantan, 2008). The Institute of Internal Auditors defines Internal Audit
as follows: Internal auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control and governance processes (IIA Inc - January
2011).

However, internal auditors face many challenges from the organization they work. Some of the
challenges identified by the Ministry of Finance and Economic Development (2004), in their
internal audit manual are lack of management respect, lack of independence, assigned of internal
auditors to many tasks and being ignored (conflict of interest) and lack of professional
development and lack of IT resources. So, it is important to have effective internal audit unit as
part of modern governance system in public sector offices. And also, as internal auditors are key
employee of public offices, they are expected to work independently and objectively to enhance
high quality of public services, achieve good internal control system, avoid corruption, ensure
good corporate governance system, promote accountability and greater transparency (Coram et
al, 2008; Van Peursem 2005; Belay, 2007).

Therefore, it is important to have effective internal audit unit as part of modern governance
system in public sector offices. In corporate governance internal audit (IA) issue has received
increasing attention in recent years, due to different reasons. To mention some of them, internal
audit links to the internal control-risk management system; improve organizational efficiency
and effectiveness through providing constructive criticism and recommendations about
organizations status; reduce information asymmetry during decision making; serves as an
important internal assurance in the business and financial reporting process of corporations (Soh
and Bennie, 2011; Cohen and Sayag, 2010; Mihret and Yismaw, 2007).

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Many studies were conducted on the above issues while putting focus on the underlying factors
on the effectiveness of internal audit especially in public sector has been lacking and no research
has focused on factors that influence internal audit effectiveness in federal public sectors
operating in Eastern Ethiopia which includes Dire Dawa and Harar City Administration.

Masood and Lodhi (2015) conducted study on factors affecting success of government audit and
concluded that the success of government audit affected by different factors like massive
corruption, conservative auditing methods, lack of cooperation from auditee, low morale of
auditors, lack of financial independence, lack of power to take action against malpractices, lack
of financial, technological and human resources, lack of qualified trainers and ineffective
training institutes are cause of ineffective audits which ultimately make it difficult to bring
transparency and accountability in the public sector.

Therefore, the main aim of this study is to assess and identify those factors affecting the
effectiveness of internal audit by considering federal public sectors operating in Dire Dawa City
and Harar City Administration as a case study.

Public sector offices are part of the public body which is partly or wholly financed by
government budget and concerned with providing basic government services to the whole
society (Ministry of Finance and Economic Development (MoFED, 2004). The compositions of
the public sectors are varied by their function and purposes, but in most cases, they are designed
in order to enable the public sectors to achieve their goals. They provide services such as
banking service, financing, education, communication service, healthcare, police, transportation,
electric services, security and so on, which benefit all of the society and encourage equal
opportunity to benefit from those services provided (Mihret and Yismaw, 2007).

Internal auditors which are the focus of this study and also the key employee of public offices,
are expected to work independently and objectively to enhance high quality of public services,
achieve good internal control system, avoid corruption, ensure good corporate governance

3
system, promote accountability and greater transparency (Coram et al, 2008; Van Peursem 2005;
Belay, 2007).

Therefore, it is important to have effective internal audit unit as part of modern governance
system in public sector offices. In corporate governance internal audit (IA) issue has received
increasing attention in recent years, due to different reasons. To mention some of them, internal
audit links to the internal control-risk management system; improve organizational efficiency
and effectiveness through providing constructive criticism and recommendations about
organizations status; reduce information asymmetry during decision making; serves as an
important internal assurance in the business and financial reporting process of corporations (Soh
and Bennie, 2011; Cohen and Sayag, 2010; Mihret and Yismaw, 2007).

Additionally, in the accounting profession, audits play an important role in serving the public
interest by increasing the accountability of managers and reinforcing trust and confidence in
financial process and they serve as an important link in the business and financial reporting
process of corporations and not for profit providers at organizational level (Reynolds, 2009). In
connection with this, internal audit identifies weak links in the system as well as creates potential
opportunities for improvement and act as a feedback mechanism for the top management. Hence,
organizations seeking a suitable and effective quality management system need to conduct
internal audits to ensure that the system functions as intended (Lindow and Race, 2002).

The Institute of Internal Audit’s (IIA, 2001), board of directors defined internal audit as: “An
independent, objective assurance and consulting activity designed to add and improve an
organization’s operations. It helps an organization to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes”.

The above definition gives us a broad clue about the importance and contribution of internal
audit functions in the organizations. For example, internal auditing is involved in consulting
activities, and value added contributions for the evaluation and improvement of the effectiveness
of risk management and governance process (IIA, 2001). This shows the roles of internal
auditing is moving away from the narrow scope of measuring and evaluating the effectiveness of

4
internal controls towards a broader scope of activities that creates opportunities for the internal
auditing profession and to receive more attention in corporate governances.

Even though, the internal auditors have many roles and contributions to the organization and the
public interest, it also faces many challenges from the organization they work for and the
environment too. Some of the challenges identified by the Ministry of Finance and Economic
Development (2004), in their internal audit manual are lack of management respect, lack of
independence, assigned of internal auditors to many tasks and being ignored (conflict of interest)
and lack of professional development.

Therefore, the main aim of this study is to assess and identify those factors affecting the
effectiveness of internal audit by considering federal public sectors operating in Dire Dawa City
Administration as a case study.

1.2. Statement of the Problem

An effective internal audit function is a significant player in two basic governance activities;
monitoring of risks and providing assurance regarding controls. Furthermore, internal audit
function plays a key role in compliance work and may also spend considerable time on
consulting or operational-oriented work, with the objective of enhancing the organizations
effectiveness and efficiency; and all these elements map directly in to organizational governance
(Hermanson and Rittenberg, 2003).

Internal audit is effective if it meets the intended outcome it is supposed to bring about. Sawyer
(1995) states, “…internal auditor's job is not done until defects are corrected and remain
corrected.” Van Gansberghe (2005) explains that internal audit effectiveness in the public sector
should be evaluated by the extent to which it contributes to the demonstration of effective and
efficient service delivery, as this drives the demand for improved internal audit services. Based
on the results of a consultative forum that focused on improving public sector internal audit, Van
Gansberghe(2005) identified perceptions and ownership; organization and governance
framework; legislation; improved professionalism; conceptual framework; and also resources as
factors influencing internal audit effectiveness. Effective internal audit undertakes an

5
independent evaluation of financial and operating information and of systems and procedures, to
provide useful recommendations for improvements as necessary.

The effectiveness of internal audit greatly contributes to the effectiveness of each auditee in
particular and the organization at large (Dittenhofer, 2001). Dittenhofer (2001) has also observed
that if internal audit quality is maintained, it will contribute to the appropriateness of procedures
and operations of the auditee, and thereby internal audit contributes to effectiveness of the
auditee and the organization as a whole.

Many studies are conducted regarding factors contributing to the effectiveness of internal audit,
of which management support with resources and commitment to implement the internal audit
are the most essential. Also, the organizational setting in which internal audit operates, i.e. the
organizational status of the office, its internal organization and the policies and procedures
applying to each auditee, should enable smooth audits that lead to reaching useful audit findings.
Further, the capability, attitudes and level of cooperation of the auditors have impact on the
effectiveness of audits.

Many studies are conducted regarding factors contributing to the effectiveness of internal audit , of which
management support with resources and commitment to implement the internal audit are the
most essential. Also, the organizational setting in which internal audit operates, i.e. the
organizational status of the office, its internal organization and the policies and procedures
applying to each auditee, should enable smooth audits that lead to reaching useful audit findings.
Further, the capability, attitudes and level of cooperation of the auditee impact on the
effectiveness of audits.However, many of those literatures has either focused on the internal
audit's ability to plan, execute and objectively communicate useful findings (Spraakman, 1997;
Dittenhofer, 2001); or taken a broader view and included factors that transcend the boundary of a
single organization (Van Gansberghe, 2005).

To some extent, there are also studies done in Ethiopian context (Mihret and Yismaw, 2007;
Guruswamy, 2012; Mebratu, 2015; Mihret, 2010; Hailemariam, 2014). Specifically, Mihret and
Yisma (2010) in their case study on Ethiopian public Universities, they determined factors which
influence the internal audit effectiveness like internal audit quality, support of management,

6
organizational setting and attributes from auditee towards determining the internal audit
effectiveness and used Questionnaire, interview and documentation for research instrument and
finally found that internal audit effectiveness is strongly influenced by internal audit quality and
support from management, whereas organizational setting and attributes of the auditee do not
have any strong impact on audit effectiveness. As the literature reviews show, there are
positively relationships between the management support and audit quality with IA effectiveness
(Mihret, 2010; Hailemariam, 2014).

In addition, Wondesen Solomon (2019) in his research titled factors affecting internal audit
effectiveness in case of private commercial banks stated that there is significant positive
relationships between the factors (Independence andobjectivity of internal auditors, Competency
of internal audit staffs, Existence of audit committees) andinternal audit effectiveness. Whereas,
Organizational Setting and Management support have nosignificant effect on internal audit
effectiveness.

Therefore, this research will try to fill the above literature gap by trying to identify the factors
influencing internal auditor’s effectiveness in federal public sectors operating in Dire Dawa City
Administration. Moreover, the study will try to cover geographical gap to some extent by
considering federal public sectors operating in Eastern Ethiopia, Dire Dawa City.

1.3. Objectives of the study

1.3.1. General objective

The general objective of this study is to investigate factors affecting internal audit effectiveness
of Federal public sectors in Dire Dawa City Administration.

1.3.2. Specific objectives

Specifically, the researcher will try to achieve the following objectives;

 To examine the effect of Management support for IAE in public sectors.

 To examine the effect of Auditors competencyfor IAE in the public sectors.

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  To examine the effect of independence of internal auditors for IAE in public sectors.
 To examine the effect of resource and size of internal audit department for IAE in the
public sectors.
 To examine the effect of Audit committee existence for IAE in public sectors.

1.4. Research Hypothesis

After reviewing the related literatures, the researcher set to achieve the objective of the study by
developing the following hypothesis:
H1: The management support has positive and significant effect on internal audit effectiveness.
H2:Internal auditor’s competency has positive and significant effect on internal audit
effectiveness.
H3:Internal auditor’s independence has positive and significant effect on internal audit
effectiveness.
H4:Resource and size of internal audit department has positive and significant effect on internal
audit effectiveness.
H5:Existence of Audit committee has positive and significant effect on internal audit
effectiveness.

1.5. Significance of the study

The internal auditors are also essential to add or create value to the organizations, to avoid failure
and to save the operating and administration costs in accordance with the organization’s policies
and procedures.

Therefore, it is believed that this research will be very essential to show the effectiveness of the
internal auditors by assessing the factors which determines the public sectors internal audit
effectiveness. In addition this research is important for the empirical evidences for the public
sector offices to examine their policies and procedures, and for the future researchers also
important to develop a conceptual literature development.

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1.6. Scope of the Study
This study will mainly focus on assessing factors affecting internal audit effectiveness in federal
public sectors operating in Dire Dawa City Administration. Due to time and financial constraints,
the research will be restricted to cover 20 selected federal public sectors. In addition, the study
will try to investigate the effect of selected variables onIA effectiveness; such as management
support, auditor’s independence, competent internal audit staff, resource and size of internal
audit department, and Existence of audit committee.

1.7. Organization of the study

This research paper will have five chapters. The first chapter will includes introductory parts
incorporated introduction, statement of the problem, research objectives, research questions,
research hypotheses, significant of conducting the study, scope of the study. The second chapter
will describes the detail review of related literatures with regard to the internal audit
effectiveness and the variables that affect internal audit effectiveness. The third chapter will
presents about the research methodologies, and it includes information regarding the research
design to be employed, the sampling techniques to be used and data analysis tools to be used
while conducting the research. The fourth chapter will present the analysis, discussions and
presentation part of the research findings. Finally, the last chapter will describe the conclusions
and recommendations made by the researcher based on the finding of the study.

CHAPTER TWO

2. LITERATURE REVIEW
2.1. Introduction
Organizations have encountered rapid changes in economic complexity, expanded regulatory
requirements, and technological advancements in recent years. In addition to these changes the
current corporate scandals and the global financial crisis also pushed the public and regulatory
bodies to give unique position to internal audit in corporate governances for internal assurance
services (Soh and Bennie, 2011). These changes have given the IA a set of expanded
opportunities to support and advice management; evaluate risk exposures relating to the

9
organizations governance, operations and information systems, identify internal control system
efficiency and effectiveness, provide services to other organizational functions; and generate
direct reporting links to the audit committee and shareholders; safeguarding of assets; and
compliance with laws, regulations, and contracts (IIA, 2001; MoFED, 2004).

The Ethiopian ministry of finance first issues the audit directive in 1942, by focusing mainly on
the public sector utilization of funds, and it marked on the modernization of audit practice in the
country. By following this, the Office of the Audit General (O.A.G) is formulated in 1961 with
the necessary modifications with respect to the duties and responsibilities of the bureaus and the
auditors; and in 1987 and on wards there are significant developments in public sector auditing
systems in the country).

Moreover, Proclamation No. 13/1987 empowered the O.A.G to direct the internal auditors of
government offices and public enterprises in three aspects that are whether accounting records
are properly maintained and reliable, whether the assets of the ministries and enterprises are
adequately safeguarded and properly maintained; and whether policies and procedures laid down
by top management are complied with that implies less attention was given to operational audit
as a service to management(Kinfu, 1990; Lemma Argaw, 2000).

The public sector offices are the major vehicle for economic development due to their
engagement in various economic activities; such as in manufacturing industry, transport and
communication services, banking and financial service sectors, construction sector, hotel and
tourism industry, etc.

To become efficient and effective in each economic activity the performance of the management
should regularly measure and assessed to take corrective actions when bad performance is found.
Accordingly, the management of the public offices is responsible to follow up the
implementation of economic policy and procedure, and submit reports on the performance of the
economy (MoFED, 2004). Therefore, the effectiveness of IA should receive the greater attention
in research area to enhance the quality of its report. In line with this, the research had focused on
the determinants of IA effectiveness in selected public sector offices.

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Nevertheless, Internal Audit is subject to many problems that affect internal auditors’
effectiveness in different corporate governance (Cohen &Sayag, 2010; Arena &Azzone, 2009;
Belay, 2007; Mihret&Yismaw, 2007). Particularly the determinants of internal audit
effectiveness which are used to measure the improvement of public sectors through IA were the
focus of this case study. In this case study the literature review consists of the definition of
internal audit and the term effectiveness, the type of auditing activities performed by the internal
auditors and the internal audit effectiveness instrument of improving public sector management
such as the perceptions of the management, management support, organizational independence
of internal auditors, adequate and competent of IA staff and the presence of approved IA charter
by referring different books, reviewing and analyzing prior audit researches and journals.

2.2. Theoretical Review

2.3. Internal Audit and Related Literature
A simple and more traditional meaning of internal auditing is defined as: an independent
appraisal function established within an organization to examine and evaluate its activities as a
service to the organization.

Later on, the new Institute of Internal Audit (IIA, 2001), defined internal audit as:
An independent, objective assurance and consulting activity designed to add and improve an
organization’s operations. It helps an organization to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes.

According to this definition, the major scope of the internal auditors are making assurance to the
organization and giving consultant services to the overall managements of the corporate
governance. By providing the independent opinion and conclusions regarding the operation,
function, system and wellbeing of the organization the IA can provide assurance services; and by
giving the advisory service based on the specified requests of an engagement client the internal
auditor can give the consulting service to the organization.

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Internal audit are the mechanism through which information about the effectiveness of the
quality system is gathered by auditors selected from within the company but, who are
independence of the area, function or procedures being audited. Or the Internal Audit Function
(IAF) is the mechanism through which the operation of the quality management system is
formally monitored and in accordance with the documented quality system is assured (MoFED,
2004).

The Statement on Auditing Practice (SAP-6) of the Institute of Chartered Accountants of India
describes internal audit as “the plan of organization and all the methods and procedures adopted
by the management of an entity to assist in achieving management’s objective of insuring, as far
as possible, 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 accounting records and timely preparation of reliable financial information.

On the other hand, internal audit is a critical appraisal of functioning of various operations of an
enterprise including the functioning of the system of internal check. Exceptions from normal
functioning of internal check system are exposed in internal audit. Accuracy, completeness,
reliability and timeliness of accounting information are tested and reported for remedial
action.Nom-accounting areas with the operational side of enterprise are critically studied,
analyzed and weakness of the system or practice with inefficiency, wastage and frauds are
brought to the notice of the management. Suggestions for increasing the effectiveness of the
system, for improving the productivity and profitability of business practices are offered. Internal
audit is the independent appraisal of activity within an organization for the review of accounting,
financial and other business practices as a protective and constructive arm of management. It is a
type of control which functions by measuring and evaluating the effectiveness of other types of
control (B.N. Tandon14thedition, p. 112-115).

Professor Walter B. Meigs of America says internal auditing consists of a continuous, critical
review of financial and operating activities by a staff of auditors functioning as full time salaried
employees. Internal audit implies an audit of the accounts by the employees of the business. The
work is done by a separate set of staff that may or may not have professional audit qualifications.

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The function of an internal auditor is practically the same as that of an auditor. In addition to that
an internal audit has to see that there is no wastage and the business is carried on efficiently and
effectively. Again if an internal auditor finds that as a result of the inefficiency of the
management, the management the concern has suffered a loss, it is his duty to report the fact.
The IA has to be reported to the management whether the policy and plans of activities
prescribed by them have been implemented, whether the internal controls and checks established
were adequate, whether the actual results obtained were varying from the estimates, etc. to
enable the management to achieve the objective of the company in the planned manner.

2.2.2. Types of Audits Performed by Internal Auditors

A variety of audits are performed in the review of campus programs and resources. These audits
include:
Operations Audits: These audits examine the use of resources to determine if resources are
being used in the most effective and efficient manner to fulfill the organization’s mission and
objectives.
Financial Audits: These audits review accounting and financial transactions to determine if
commitments, authorizations, and receipt and disbursement of funds are properly and accurately
recorded and reported. This type of audit also determines if there are sufficient controls over cash
and other assets and that adequate process controls exist over the acquisition and use of existing
resources.

Compliance Audits: These audits determine if entities are complying with applicable laws,
regulations, policies and procedures. Examples include federal and state laws, and Trustee
policies and regulations.
Information Systems Audits: These audits review the internal control environment of
automated information processing systems and how people use these systems. The audits usually
evaluate system input, output; processing controls; backup and recovery plans; system security;
and computer facilities.
Internal Control Reviews: These audits focus on the components of the major business
activities, such as payroll and benefits, cash handling, inventory and equipment, physical
security, grants and contracts, and financial reporting.
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2.2.3. Internal Audit Effectiveness
Different authors were defined the term “effectiveness” as follows; for instance, Arena and
Azzone (2009) defined effectiveness as “the capacity to obtain results that are consistent with
targets”. Dittenhofer (2001) “Effectiveness is the achievement of internal auditing goals and
objectives using the factor measures provided for determining such factors”. In Mihret and
Yismaw, (2007) internal audit effectiveness is defined as “the extent to which an internal audit
office meets its supposed objective or the extent to which it meets the intended outcome”.

All the three authors defined effectiveness in terms of achieving the IA goals and objectives,
though interpreted in different ways. Mihret and Yismaw (2007) described the characteristics of
effective internal audit unit from the internal audit point of view. Effective Internal Audit (IA):
 Undertakes an independent evaluation of financial and operating systems and procedures;
 Contributes to the achievement of organizational goals;
 Needs management’s commitment to implement recommendations;
 Provides useful recommendations for improvements as necessary;
 Affected negatively by lack of attention from management which in turn adversely
affects the auditee attributes; and
 Management support is a natural quid pro quo for effective internal audit.

While; Sarens and Beelde (2006) point out the contribution and roles of internal audit in
organizations or corporate governance from the senior management’s expectation point of view.
Senior management expects internal audit:
 To compensate for management’s loss of control resulting from increased organizational
complexity,
 To be the safeguard of corporate culture through personal contacts with people in the
field,
 To be a supportive functions in the monitoring and improvement of the risk management
and internal control system,
 To be laid a training ground for future managers, and

14
  To collaborate actively with the external auditors to increase total audit coverage.

This indicates that internal audit and management is the interdependent unit that should be
collaborated to achieve organizational goals. While doing their activities, there is some value that
internal audit unit seeks from management (such as management support, commitment,
expectation, etc.) and that the management wants from the internal audit like adding value in
decision making by providing sufficient information and reducing information asymmetry,
monitoring and improvement of the risk management and internal control system.

2.3. Empirical Review of Factors Affecting Internal Audit Effectiveness

As the main aim of this research is to assess the effectiveness of internal audit in federal public
sector offices, different authors and researcher’s idea and recommendations regarding the related
topic of internal audit are analyzed and presented. Although the prologue of internal audit in
Ethiopia are dated in the 1940s the time also the united states and most European countries are
adapted; the effectiveness of internal audit in the public sector are challenged because of the
factors that hinder the development of IA in Ethiopia. For the ease of presenting the literature
those studies regarding the main determinants/factors/ that influence the effectiveness of internal
audit in the public business enterprise sector; such as the perceptions of the management,
management support, organizational independence of internal auditors, adequate competent of
IA staff and the presence of IA charter reviewed from different researchers are included in these
literature.

2.3.1. Management Support

Internal auditors have a close relationship with organization’s management in their day to day
activities. They need good support and perception from their management to be more effective
and to achieve the audit objectives. Management support is expressed in terms of supporting the
auditing process by fulfilling the necessary resources, finance, transport if required, providing
training, introducing auditors with new technology and procedures, budgeting funds for
certification and other facilities that facilitate the internal auditing works.

15
Management support has a far-reaching consequence on IA effectiveness in organizations. For
example, Mihret and Yismaw (2007) in their case study of IA effectiveness on public sector
shows that the component of management support consists of the response to audit finding and
the commitment to strength internal audit which has significance influence on IA effectiveness.
Given the fact that internal audit activities are performed in dynamic management process and
more supportive environment, internal auditor expects senior management to take the first steps
to support the IA process. Because, Sarens and Beelde (2006) argue that the overall acceptance
and appreciation of IA within the company is strongly dependent upon the support they receive
from senior management. Internal audit actively seeks management support with resources,
commitment to promote and communicate their added value.

The management support is almost crucial to the operation and internal audit; because all other
determinants of IA effectiveness derive from the support of top management, given that hiring
proficient IA staff, developing career channels for IA staff, and providing organizational
independence for IA work are the results of decisions made by top management (Cohen &Sayag,
2010). This means it is the interest of management to maintain a strong internal audit department
(Adams, 1994; Mihret and Yismaw, 2007). In addition, implementation of audit
recommendations is highly relevant to IA effectiveness (Sarens and Beelde, 2006; van
Gansberghe, 2005) which is the component of management support (Mihret and Yismaw, 2007).
The management of an organization is viewed as the customer receiving IA services. As a result,
management’s commitment to use audit recommendations and its support in strengthening
internal audit is vital to IA effectiveness.

Therefore, audit finding and recommendations would not serve much purposely unless
management is committed to implement them. Furthermore, Belay, (2007) find that to curb
corruption and inefficiency in the public sector of Ethiopia, it is mandatory to have effective
internal audit function (IAF) that in turn needs appropriate governance structure, mobilizing
sufficient and appropriate resource and competent personnel.

2.3.2. Auditors Independence

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Independence has no single meaning and interpretation across the people; hence the concept is
subject to ambiguity and uncertainty (Wines, 2012). However, for the purpose of the case study
independent refers to the concept of being free from any management influence while internal
auditors perform audit activities and issue audit report (Ahmad & Taylor, 2009; Belay,
2007;MoFED, 2004). Independence is fundamental to the reliability of auditor’s reports. Those
reports would not be credible, and investors and creditors would have little confidence in them, if
auditors were not independent both in fact and appearance. The assurance services provided by
auditors derive their value and credibility from the fundamental assumptions of independence of
mind and independence in appearance (Wines, 2012; Stewart and Subramanian, 2010).

While the internal audit typically the whole management process, to maintain objectivity, to
increase the reliability of information, to be free from unacceptable risk of material bias, and to
issue reasonable and credible audit opinion, it is required to be independent (IIA,2001).
However, due to an often strong direct or indirect relationship between IA and the Chief
Executive Officer (CEO) and/or chief Finance Officer (CFO), it is reasonable to expect that
senior management is in a position to exert a significance influence over IA (Sarens and Beelde,
2006; Van Peursem, 2005).

Independence in fact exists when auditors are actually able to act with objectivity, integrity,
impartiality and free from any conflict of interest. While the concept of independence in
appearance is the auditor should be perceived by others (the public or other third party) to be
independent. In this case, conflict of interest will also exist when a reasonable person, with full
knowledge of all relevant facts and circumstances, would conclude that the auditor, or a
professional member of the audit team, is not capable of exercising objective and impartial
judgment in relation to the conduct of the audit of the audited body.Auditors should be
sufficiently independent from those they are required to audit in order to conduct their work
without interference. Coupled with objectivity, organizational independence contributes to the
accuracy of the auditor’s work and gives employers confidence that they can rely on the results
and the reports (Cohen &Sayag, 2010). However, Hellman N. (2011) suggested that CFOs seek
to influence audit planning, particularly with regard to internal controls and the selection and
scope of entities subject to audit; and this in return impairs the independence of internal auditors.

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In order to maintain their independence internal auditor’s organizational status and position is
also critical which is related to management perception. This is because it enables them to
exercise their tasks independently and act objectively. As Stewart and Subramaniam (2010)
review under organizational status the IAF should be given the appropriate status in the
organization to enable the function to exercise organizational independence and individual
internal auditors to act objectively since internal auditors found in a unique position as
employees of an organization with responsibility to asses and monitor decisions made by
management and also to the management.

Furthermore, many auditors have been argued that in order to achieve audit objectives and
become effective organizational independence is very important. For instance, the independence
of internal audit department and the level of authority to which the internal audit staff report are
the important criteria influencing the objectivity of its work, and added that organizational
independence is more crucial to the effectiveness of the internal auditors, as it protects the
auditor from pressure or intimidation, and increases the objectivity of the auditing work (Cohen
&Sayag, 2010; Van Peursem, 2005; Boa- Read, 2000).

2.3.3. Competent Internal Audit Staff

Adequate staffing is essential for a system to its full capability. Weakness in staffing can lead to
mismanagement, error and abuse, which can negate the effect of other controls (MoFED, 2004).
The size of IA staff and the competency of internal audit are the critical characteristics of IA
quality that can’t be separated. This means at the absence of one dimension the other cannot
contribute to the quality of internal auditors.

The empirical findings by Al-Twaijry et al. (2004), based on questionnaire and interview
responses from internal and external auditors, working in Saudi Arabia, suggests that the external
auditors believes that IAF size is an important indicator of its quality. In addition, large size of
IA staff has many benefits for internal operations of IA unit. For instant, larger sized functional
units, there will be more opportunity and flexibility to have a staff rotation schedule that can also
influence IA effectiveness by promoting a more healthy relationship and resulting in more

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objective audit investigations. Furthermore, Zain et al. (2006) argue that a larger size internal
audit is likely to be better resourced, including having a broader work scope, higher
organizational status and wider staff talent than a smaller unit. Likewise, the quality of IA work
is likely to be higher in internal audit units with a larger proportion of staff with audit experience
than those with a lower proportion of audit experience.

Appropriate staffing of an internal audit department and good management of that staff are keys
to the effective operation of an internal audit. An audit requires a professional staff that
collectively has the necessary education, training, experience and professional qualifications to
conduct the full range of audits required by its mandate (Al-Twaijry et al, 2004). Auditors must
comply with minimum continuing education requirements and professional standards published
by their relevant professional organizations (IIA, 2001).

2.3.4. Existence of Audit Committee

Internal auditors, as agents of the organization members, need their support. The existence of an
effective audit committee in the organization enhances internal audit independence and also,
reduces senior management interferences either in internal audit scope or its performance
(Endaya and Hanefah, 2013). The internal auditor’s risk-driven efforts provide critical inputs to
other governance participants, including the audit committee and management. In developed
countries, the audit committee has the role of a mediator between the management and internal
audit. This makes the role of management support less important than in developing countries,
where audit committees are new. This issue is controversial even in developed countries, the
executive management is directly in a position, or indirectly through the audit committee, and it
affects to a certain degree the nature of work of the internal audit. When the management
considers the internal audit function as positive, then the function is likely to be more effective
(Alzeban and Gwilliam, 2014). As reported by studies in the past, there is a linkage between
audit committee and the effectiveness of internal audit. For instance, can be seen in the study by
George et al., (2015) further studying the linkage between audit committees quality, Audit
committee is also examined in some studies as available associated with internal audit
effectiveness.

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Riham (2013) audit committees can be viewed as a key safeguard mechanism for internal
auditors in managing their professional objectivity. Winston and George (2016) the study
concluded that there was a significant statistical relationship between the organizational
independence of the audit committee and effectiveness of the internal audit. Seif (2017) The
result of the study confirmed the prior IA effectiveness research, the study found a strong
relationship between Audit Committee, and effectiveness of IA.

A number of researchers have provided studies regarding the effectiveness of internal audit with
specific emphasis on the effects of management support, independence of internal auditors,
management perceptions, competent internal audit staff and the availability of internal audit
charter. The fact that effective IA can contribute to the significant impact to the quality of
management has raised the interest for researchers to explore into this matter. The effectiveness
of internal audit greatly contributes to the effectiveness of each auditee in particular and the
organization at large. Therefore, this study attempts to determine the variables that are linked to
either attribute standards or performance standards that International Standards for the
Professional Practice of Internal Auditing (ISPPIA) has established (IIA, 2016). In particular,
ISPPIA has laid down the standards of attribute of Standard. The purpose, authority, and
responsibility of the internal audit activity must be formally defined in an internal audit charter;
the audit competence namely Standard 1200 as well as the internal audit Independence and
Objectivity namely Standard 1100, IPPF’s performance standards of internal audit effectiveness.

2.3.5. Resource and Size of Internal Audit Department

Internal audit department should have access to sufficient human resource and financial
resources needed to enable employees successfully meeting their responsibilities. The audit
activity must have sufficient resources relative to the size of its audit responsibilities. This
important variable should not be left under the control of the organization under audit, because
the budget affects the audit activity’s capacity to carry out its duties and responsibilities (IIA:
2006). Perhaps the most obvious benefit of sufficient resource is it allows internal audits to
effectively monitor its duties and responsibilities.

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This study will attempt to add the literature with its development of a conceptual understanding
of IA effectiveness in organizations aside from examining IA in terms of its determinants of
effectiveness. It is important that the factors impacting effectiveness of IA is understood because
it contributes to organization’s improved performance.

2.4. Conceptual Framework

Based on literature reviews of Mihret and Yismaw (2007); George, et al. (2015); Hella and
Mohamed (2016) and Seif (2017), the following conceptual framework is set by researcher to
assess the main five factors influencing the effectiveness of internal audit.

Independent Variables Dependent Variable

Management support

Internal Auditors Competency

Effectiveness of
Internal Auditors Independence
Internal Audit
Resource and Size of IA Department

Existence of Audit Committee

CHAPTER THREE

3. Research Methodology
3.1. Introduction
An important part of the research activity is to develop an effective research design which shows
the logical link between the data collected, the analysis and conclusions to be drawn. In this
chapter the research design, sampling type, research instrument, the dependent and independent
variables of the research and the model specifications that will be used in the study are described.

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3.2. Research Design
The study will be expected to investigate on factors affecting internal audit effectiveness in the
selected federal public sector offices. An explanatory study shows the causal relationship
between variables (Saunders, Lewis and Thornhill, 2009). Therefore, the researcher will use
Explanatory study to analyze the data collected from sample respondents. The main reason
behind selecting this type of research design is, it helps to explain and understand the
relationship between variables through statistical test. Moreover, a cross-sectional data will be
employed by the researcher and self-administered questionnaire will be conducted with sample
internal auditors.

3.3. Research Approach

To obtain the advantage of both the qualitative and quantitative research approach, this study
will use both mixed approach. Moreover, quantitative method will be used to test a theory by
examining the factors based on the previous studies, identifying the research relationships and
obtaining the findings.

3.4. Population and Sampling of the Study

3.4.1. Population of the study

To determine the proper sample size, it is better to define the population of the study. The target
population for this study will be the federal public sector offices which are found in Dire Dawa
city administration. Generally speaking, in Ethiopia there are around 72 public sectors in which
most of them have internal audit staff but some public sectors haven’t internal audit staffs,
(Ethiopian legal Brief, 2013). Therefore, due to time and cost constraints; the researcher will use
22 purposively selected public sector offices that are fully budgeted by federal government and
those sectors which have enough internal audit staffs. The name and list of these federal public
sectors are shown on Appendix 1.

3.4.2. Sample Size of the Study

From the researcher’s preliminary study, the total numbers of public sectors operating in Dire
Dawa City administration is around 25 offices. The total numbers of internal auditors are 122
which are chosen from the 22 federal public sectors. Respondents will be chosen through simple
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random sampling technique. If the population is small then the sample size can be reduced
slightly because a given sample size provides proportionately more information for a small
population than for a large population (Anderson, Sweeny & Williams, 2014).From the total
population of 122, the total sample size is identified by using Taro Yamane’s (1967:886)
statistical formula with 95% confidence level and 5% error. Hence, the total sample size (n) will
be 93 and it is determined using the equation as shown below.
N
n=
1+ N ( e ) 2

Whereas, n is the sample size, N is the total population size, and e is error with95% confidence
level set. Therefore, the sample size will be:
n = 122
1+122(0.05)2
n = 93

3.5. Source and Method of Data Collection

The primary data will be used to accomplish the study, and to collect the data from the
respondents. Structured questionnaires will be distributed to the internal auditors of the public
sector office.
The questionnaires will be prepared in the form of five item Likert-Scale type, where the lowest
scale represent strongly disagree and the highest scale represent strongly agree (Likert, 1932).
Then, the data collected using questionnaire will be converted to represent the variables in the
hypotheses. The questionnaires will have two parts; the first part comprises the demographic
features of the respondents, and the second part contains questions related to factors affecting the
effectiveness of Internal Audit.

3.6. Method of Data Analysis

After every necessary data were collected, the following activities will be done further. The raw
data will be converted into suitable form for analysis and interpretation. This will be achieved
through check the completeness, internal consistency and appropriateness of the answers to each

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of the questions. Statistical Package for Social Science (SPSS) software will be employed to run
the data through the statistical tools to be used for this study.

Finally, the descriptive results will be presented by tables, frequency distributions and
percentages to give a condensed picture of the data. Whereas, to determine the relationship
among the variables and to test the research hypothesis correlation and regression analysis
methods will be used by meeting the ordinary least square (OLS) assumptions of the linear
regression.

3.7. Definition of the Variables

3.7.1. Dependent Variable

The dependent variable for this research is the internal audit effectiveness. The internal audit
effectiveness will be measured in terms of internal auditors’ ability to identify non-compliance
activities with the offices procedures and policies, and the contributions added by IA to the
public offices. Compliance audit is a type of audit service that mostly performed by internal
auditors of then organization (Fadzil, F.H et al, 2005). Therefore, IA is responsible to regularly
assess and verify internal operations conformance with organization’s policies and procedures,
and then issue compliance report to the concerned body (MoFED, 2004). The added contribution
by IA to organizations can be measure in terms of value creation (e.g. its role in the avoidance of
corporate failures) and cost saving (Soh and Bennie, 2011; Cohen &Sayag, 2010).

3.7.2. Independent Variables

This study will mainly focus on five independent variables that might have an impact on the
internal audit effectiveness in the public sector offices. These variables includes: the
managements support for the IA activity, internal auditors competency, internal auditors
independence, resource and size of internal audit department, and existence of audit committee.
It should be noted that the data for the independent variables will be collected from the internal
auditors of the selected public sector offices. Therefore, the independent variables will represent
the perceptions of the internal auditors regarding these concepts. Similarly with the dependent
variable items, all of the independent variables items will be measured on a five point Likert-

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scale where the lowest scale represent strongly disagree and the highest scale represent strongly
agree (Likert, 1932).

3.8. Model Specification

By referring related literatures and theoretical concepts with the topic, the following model is
prepared to test the hypothesis set. Most of the independent variables included in the model are
extensively used in prior audit researchers (Mihret and Yismaw, 2007; Cohen &Sayag, 2010;
Arena and Azzone). So, the reliability and validity of the model is recognized and it will be used
in this research to analyze and interpret the result of the study.

IAE = α + β1MS + β2IAC + β3IAIN + β4RSAD + β5EAC + ei

Where;
IAE - The effectiveness of internal audit,
MS - The Managements Support,
IAC – Internal auditors Competency,
IAIN – Internal auditors Independence,
RSAD – Resource and size of internal audit department,
EAC - The existence of internal audit committee.
α- is a constant, represents the effectiveness of IA when every independent variables are zero.
Ei - Error term

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