role of internal auditing in an organisation

Theories and Issues in Accounting and Finance Coursework
Determinants of Internal Audit Effectiveness
in Italy, Israel, Saudi Arabia and Greece
(2009-2015)
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1. INTRODUCTION
The role of internal auditing in an organisation has become increasingly important, it acts
as an internal control, involves in governance processes and risk-management. Thus, it is necessary
to improve the effectiveness of IA by identifying the factors that are associated with it and making
the practical changes based on those factors. This paper aims to discuss and critically review four
published articles found on the Association of Business Schools (ABS) list focusing on the topic of
the effectiveness of internal auditing, factors associated with it and the perceptions of the internal
auditor and other parties towards it. The four published articles are as follows:
1. Arena, M. and Azzone, G. (2009) Identifying organisational drivers of internal audit
effectiveness. International Journal of Auditing, 13, pp. 43-60.
2. Cohen, A. and Sayag, G. (2010) The effectiveness of internal auditing: an empirical
examination of its determinants in Israeli organisations, Australian Accounting Review, 20
(3), pp. 296-307.
3. Alzeban, A. and Gwilliam, D. (2014) Factors affecting the internal audit effectiveness: a
survey of the Saudi public sector, Journal of International Accounting, Auditing and
Taxation, 23, pp. 74-86.
4. Drogalas, G., Karagiorgos, T. and Arampatzis, K. (2015) Factors associated with internal
audit effectiveness: evidence from Greece, Journal of Accounting and Taxation, 7 (7), pp.
113-122.
Structure of literature review?
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2. ANSWERS TO QUESTIONS
This section covers critical discussions of nine issues on the selected four published articles
regarding the effectiveness of internal auditing.
2.1 Why are the articles interesting or important?
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The first article by Arena and Azzone (2009) provides an insight into how the
effectiveness of Internal Auditing (IA) should be improved by focusing on the
“organisational drivers”. The authors claimed that the subject has not been widely explored
hence they attempted to answer this question by conducting their study focusing on Italy.
In the second article by Cohen and Sayag (2010), Internal Audit Effectiveness
(IAE) was measured by “developing and validating a scale”. They argued that only a few
authors of earlier studies used valid scales to measure IAE as well as the factors that
determine it. Furthermore, they claimed that “the psychometric properties” of the scales
that they developed could serve as the foundation for scales that could be “replicated” or
“revised” in future research.
The third article by Alzeban and Gwilliam (2014) provides an investigation of
factors that may affect IAE in Saudi Arabian public sector organisations. The authors
claimed that other previous studies in this area used perceptions of either external auditors
or chief audit executives (CAE) to evaluate IAE, without including the views of other
interested parties. This research on the other hand, provides “a broadened approach” to
perceptions of different parties as evaluators, e.g. managers of audited units.
Lastly, the fourth article by Drogalas et al. (2015) identifies factors associated with
IAE within the Greek business environment, which the authors claimed had never been
conducted before. This study offers practical concepts for regulators and internal auditors
specifically in Greece, to improve IAE by focusing on the particular factors identified in
this study, such as quality, competence and independence of internal audit team.
2.2 What are the research problems or questions and the corresponding hypotheses?
Research question in the first article by Arena and Azzone (2009) is what are the
organisational drivers that are related to improving the value of IAE in Italy? The sub
questions (SQ) and hypotheses (H) are explained below:
SQ1 – How does the size of IA team influence IAE?
H1 – The larger the IA team, the more effective IA is.
SQ2 – How does the competency of an internal auditor influence IAE?
H2 – The higher the competency of an internal auditor, the more effective IA is.
SQ3 – In what way does the involvement of internal auditors in risk management influence
IAE?

H3 – The more the involvement of internal auditors in risk management, the more
effective IA is.

SQ4 – How does a close link between the IA team and the audit committee (AC) influence
IAE?
H4 – The closer the link between IA team and AC, the more effective IA is.
3
Cohen and Sayag’s (2010) main focus is to answer a research question which
identifies what the main factors are that affect internal audit effectiveness in Israeli
organisations. The sub questions and hypotheses are as follows:
SQ1 – How does the type of sector organisation (private and public) affect IAE?
H1 – IA is more effective in private organisations.
SQ2 – How does the professional qualification of internal auditors affect IAE?

H2 – IA is more effective if the internal auditors have higher professional proficiency.
SQ3 – How does the quality of auditing work affect IAE?
H3 – The better the quality of auditing work, the more effective IA is.

SQ4 – How does organisational independence affect IAE?
H4 – IA is more effective if the IA team have a greater organisational independency.
SQ5 – How does the career path in organisation affect IAE?
H5 – The more career opportunities for internal auditors, the more effective IA is.
SQ6 – How does top management’s support affect IAE?
H6 – IA is more effective if it is supported by top management.
Focused on Saudi Arabia public sector, the second article identifies five research
questions with the main question is: what are the factors that are associated with internal
audit effectiveness? The sub questions and hypotheses are as follows:
SQ1 – Does the competency of internal auditor influence IAE?
H1 – The higher the competency of internal auditor, the higher the perception of IAE.
SQ2 – Does the size of audit department influence IAE?
H2 – The larger the IA department, the higher the perception of IAE.
SQ3 – Does the relationship between internal and external auditors influence internal audit
effectiveness?

H3 – The closer the relationship between internal and external auditors, the higher the
perception of IAE.

SQ4 – Does the support from management influence IAE?
H4 – The high perception of IAE is related to the great support from management.
SQ5 – Does the independency of IA department influence IAE?
H5 – The high perception of IAE is related to the independency of IA department.
Drogalas et al. (2015) examined whether four factors, which are Internal Audit
Quality, Competence of Internal Audit, Independence of Internal Audit and Support from
Top Management, are associated with IAE. Thus, they attempted to answer four sub
questions and formed four hypotheses below:
SQ1 – How is internal audit quality associated with IAE?
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H1 – The quality of internal audit is positively associated with IAE.
SQ2 – How is competence of internal auditors associated with IAE?
H2 – The competency of internal auditors is positively associated with IAE.
SQ3 – How is independence of internal audit associated with IAE?
H3 – The independency of IA department is positively associated with IAE.
SQ4 – How is senior management’s support associated with IAE?
H4 – Support from senior management is positively associated with IAE.
2.3 What theory or theoretical framework underpins the research?
In the first article, Arena and Azzone (2009) obtains the organisational drivers of
IAE from relevant previous research which is the theoretical framework of their article. It
defines the link between IAE and three main organisational drivers: resources and
competencies of an IA team, processes and activities, and organisational role.
The theoretical framework that support the second article is from an approach by
Ransan (1955) and Albrecht et al. (1988) who argued that IA effectiveness is based upon
“subjective evaluations” and its achievement could only be assessed towards the
expectations of involved shareholders. Furthermore, they suggested that the approach needs
valid scales to measure the effectiveness of the internal audit.
Alzeban and Gwilliam (2014) acquires the determinant factors that influence IA
effectiveness from an analysis of prior literatures concerning the function of internal
auditing. The compliance with International Standards for the Professional Practice of
Internal Auditing Standards (ISPPIA), is also taken into consideration to measure IAE.
The theory underpinning the fourth article is derived from the International
Professional Practice Framework (IPPF), which acts as a framework created by IIA. The
authors identified three variables (internal audit quality, competence and independence of
internal audit) from the Attribute Standards of IPPF. The other two variables examined in
the article (top management’s support and internal audit effectiveness) were derived from
Performance Standards of IPPF.
2.4 What are the key motivating literatures on which the study depends?
One of the key motivating literatures used in article one is by Mat Zain et al. (2006)
which evaluates the contribution of internal auditors to the financial statement and its link
to the audit committee and IA characteristics. Another key motivating literature is by
Goodwin-Stewart and Kent (2006) that examine IA utilisation by firms in Australia.
The primary motivating literature used by Cohen and Sayag (2010) in their article,
is from Eden and Moriah (1996) which studied the impact of IA on branch bank
performance in Israel. The secondary motivating literature is by Coram et al. (2008) which
examined whether the IA function in organisations encourages the likelihood of fraud selfreporting.
5
Alzeban and Gwilliam (2014) use the article by Arena and Azzone (2009) and
Mihret and Yismaw (2007) as their key motivating literatures. Both of the articles
examined the factors that influence IAE, where the former focuses on Italy and the latter
focuses on Ethiopia.
The fourth article by Drogalas et al. (2015) depends on two motivating literatures.
Similar to Alzeban and Gwilliam (2014) the first literature is an article by Arena and
Azzone (2009) which is discussed in this paper, the second one is an article by Endaya and
Hanefah (2013) which discussed a viewpoint of developing the IAE conceptual theory.
2.5 Which research methods have been chosen?
The research method used in the first article is an ordinal logit regression model.
The dependant variable is IA effectiveness and the independent variables are IA units’ size,
IA proficiency, the participation of IA in risk management and the relationship between IA
and the audit committee. The regression model used in the article is shown below:
The authors in the second article used correlation analysis first to establish the
interrelationships between the variables and to test the possible multicollinearity. The next
step was to test the hypotheses using regression analysis. The independent variables in this
research are sector (private and public), professional competency, IA quality, independence
of IA, career path and support from top management whilst the dependant variable is the
effectiveness of internal auditing. The regression model in this article has not been
provided.
In the third article, Ordinary Least Square (OLS) multiple regression is used to
assess the level of independent variables that affect the dependent variable. The dependant
variable is IAE and the independent variables are level of competency, IA units’ size, link
between internal and external auditors, support from management and IA independency.
The OLS model in this article is outlined below:
The authors use factor analysis as the first step for all questions except the
demographic concern. To simplify the interpretation of the results, the authors use varimax
%IMPi = b0i + b1lnNIASi + b2RATIOi + b3CERT_IIAi + b4CERT_CPAi + b5IIAi +
b6lnRMi + b7CRSAi + b8FREQACi + b9FSCACi + b10lnSALEi + b11INDi +
b12LISTi + ei
IAE = b0 + biCOMP + b2SIZE + b3RELEX + b4MSUP + b5IND + ei
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orthogonal rotation. Lastly, the authors use ordinary least squares (OLS) regression model
to examine dependent and independent variables. Similar to the three articles above, the
dependant variable is IAE and the independent variables are quality of IA, competency,
independence and management support. The OLS model used by the authors is shown
below:
2.6 How has the sample been selected?
The article by Arena and Azzone (2009) collected questionnaires from both listed
and unlisted organisations in Italy. The population represents the largest companies in Italy
and the sample size was 364 organisations in various industries e.g. finance, manufacture,
utilities, etc. However, in the end the total usable questionnaires were only 153 due to the
inexistence of IA departments in some of the organisations, unanswered questionnaires and
questions. The sampling method was not mentioned in the article. Population size?
In the second article, the author’s target population is managers and internal
auditors who organise internal audits in Israeli organisations. The sample size was 292
where each organisation was sent two questionnaires, for manager and internal auditor. In
the end, the total responded organisations was only 108 organisations (75 in public sector
and 33 in private sector). The sampling method was not explained in the article. Population
size?
The population in the third article represented managers of audited departments and
internal auditors in 79 public sector organisations in Saudi Arabia that are audited by GAB
(General Audit Bureau). The population size in the beginning was 223 managers and 396
internal auditors. However, the authors received 203 answered questionnaires from
managers and 239 answered questionnaires from internal auditors. There was no sampling
size sample size is given? and sampling method mentioned in the article.
Similar to the three articles explained above, the fourth article by Drogalas et al.
(2015) also used questionnaires to collect data. The population was 240 companies that are
listed on the Athens Stock Exchange. Furthermore, companies that are suspended, deleted,
or under surveillance and low dispersion, were not included. This leads to 140 companies
that were sent questionnaires and it subsequently resulted in only 40 valid responses
received. The sample size sample size is given? and method are also not explained in the
article.
2.7 How have questions of validity been addressed for qualitative research?
Arena and Azzone (2009) used sensitivity analysis to “verify the reliability of the
regression model”. The sensitivity analysis was performed in five steps. Firstly, the highly
correlated variables were removed one at a time before the regression was performed. It
aims to examine each variable’s influence towards the other variables in the model.
IAE = a + b1QIA + b2CIAT + b3IIA + b4MS + ei
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Secondly, the variables that are highly correlated to each other were combined using factor
analysis. Thirdly, the regression model was performed with an additional “early/late
respondent variable” to examine the bias in responses. Furthermore, the authors added
“outsourcing” to test if it had influence between the IAE and the size of IA department.
Lastly, the variable “AGE” was added to indicate the IA experience based on the age of the
IA department.
Cohen and Sayeg (2010) developed their own scale in order to measure IAE as the
dependant variable. They adopted 84 IAE items by Ziegenfuss (2000) and interviewed 10
top managers in Israeli public sector companies. The result led them to 37 items that then
tested using exploratory factor analysis. Three factors were found to be appropriate to
interpret the variances and were tested using Cronbach’s Alpha to verify their reliability.
The reliability of independent variables is also verified using Cronbach’s Alpha.
The third article used Cronbach’s Alpha test to verify the reliability of the
independent variables e.g. competency, relationship between internal and external auditors,
support from management and IA independence in measuring the dependent variable (the
effectiveness of internal auditing).
To verify the reliability of the variables in the third article, the authors also used
Cronbach’s Alpha. They suggested that the result of “0.70 or more is considered significant
and highly reliable” (Drogalas et al. 2015, p.118).
2.8 How have the results been analysed and what are the findings?
In the first article, the authors analysed the variables using statistical analysis and
regression analysis. The analyses show contrasting results for each of the variables. The
first hypothesis is supported by statistical analysis, which shows that IAE is positively
related to the size of the IA department. However, the regression analysis did not fully
support the hypotheses. The second hypothesis, which is a relation between IAE and
internal auditor’s competency, is partially supported by regression analysis. Hypothesis
three was also supported by statistical analysis which shows a positive relation between
IAE and the involvement of IA in risk management, but the data analysis did not support
this hypothesis. Lastly, the fourth hypothesis was supported by the statistical and data
analysis, which shows that IAE is positively related to the relationship between the audit
committee and internal auditors.
Correlation analysis was performed in the second article to test the correlations
between the independent variables. The findings support hypotheses 1, 3, 4, and 6, and
reject hypotheses 2 and 5. On the other hand, the findings from regression analysis shows
partial support for hypothesis 1 which means that audit quality and contribution in the
private sector is stronger than in public sector. The regression analysis also supports
hypothesis 4 which shows that the greater independence in the IA department increases the
IAE. Hypothesis 6 is strongly supported by the regression analysis which shows that
support from management is the most significant variable affecting IAE. Hypotheses 2, 3
and 5 were rejected because the regression analysis did not support them.
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The third article also performed the correlation analysis and the results show
positive and significant correlation between IAE and the five independent variables.
Furthermore, the regression analysis also shows the results that support five hypotheses.
The results show a positive and significant relation between competency and IAE, the size
of the IA department and IAE, management support and IAE. These findings support
hypotheses 1, 2 and 4 with hypothesis 4 as the strongest supported hypothesis. In addition,
hypotheses 3 and 5 are also supported by the regression analysis but “not at the same level
as for the other hypotheses” (Alzeban and Gwilliam 2014, p. 83).
Drogalas et al. (2015) analysed the results using factor analysis and regression
analysis. The results show significant and positive correlation between each independent
variable and dependant variable. The regression analysis also supports the four hypotheses,
suggesting strong support to hypothesis 1 (the quality of internal audit is positively
connected to IAE), hypothesis 3 (independence of IA is positively associated with IAE) and
hypothesis 4 (support from management is positively related to IAE). Hypothesis 2 on the
other hand, is supported by the regression analysis but at a lower level in comparison to the
other hypotheses.
2.9 What are the conclusions and recommendations, are they consistent with the findings?
Arena and Azzone (2009) conclude the research with three main points. First, they
suggest that the effectiveness of internal auditing is affected by whether or not the IA
department have sufficient resources. Hence, this point should be considered by companies
when making future decisions regarding IA budgeting and staffing. Second, a close link
between internal auditors and the audit committee is also positively associated with IAE.
They suggest that the involvement of the audit committee in IA’s activities leads to an
increase in commitment of the organisation to its auditing process. Moreover, they also
suggest that IA has the opportunity to become involved in the risk management process
which may increase the value of the work in this area. Third, the authors highlight the
properly-designed IA competencies. They suggest that personal certification mainly focuses
on “traditional skills” and does not necessarily provide improvements on “new
competencies”. Furthermore, they recommend for future studies to further delve into the
topic using intensive research methods, to have a clear framework in order to obtain a better
understanding of IA’s role in risk management activities, and to analyse the specific
internal auditor’s competencies that are “theoretically required”.
Cohen and Sayag (2010) conclude that support from top management is the most
important determinant of IAE regardless of the sectors where organisations are rooted in
(private or public). They also suggest that the top management’s support may be derived by
other factors of IAE e.g. employing competent internal auditors, providing a career path of
internal auditors and providing independence of the IA department. Moreover, they
recommend for future research to further develop this possibility and to also consider other
significant determinants (e.g. organisational independence and the quality of audit work).
Similar to the second article, Azeban and Gwilliam (2014) also conclude that
support from top management is the key factor of IAE particularly in Saudi Arabian public
sector organisations. They suggest that the cultural and institutional factors may have an
effect on IAE in Saudi Arabia (for instance, religion, social attitudes and history), hence
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they suggest that there is an opportunity to explore these aspects for future research in
connection with IAE. They also recommend for future research, to investigate the
determinants of IAE in both developed and developing countries.
Finally, the fourth article concludes that the independence of IA is the most
significant factor that influences IAE. Moreover, the authors suggest that management
support, internal audit quality and the competency of internal auditors are also positively
and significantly influencing the IAE, however, at a lower level than independence of IA.
Lastly, they recommend for further study to undertake perceptions of other parties (e.g.
external auditors) and to collect data with other alternative methods (e.g. interviews).
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3. SUMMARY
The four articles that were reviewed in this paper show the importance of organisational
drivers in improving internal audit effectiveness. The findings among the articles are similar to
each other, which suggest that support from top management, independence of IA department, and
professional proficiency of internal auditors are the important determinants of IAE. However, there
are also discrepancies in the countries where the studies were conducted, population and sample
size in each article.
Moreover, the four articles show similarity regarding the source of theoretical perspectives.
None of the articles confirm the particular theory of internal audit effectiveness. The authors
derived the theoretical framework from previous literatures, where some of them combined it with
the guidance known as ISPPIA published by IIA. This led to a similar but not identical perspective
of determining independent variables in the four articles.
The research method is also similar in those four articles, all the authors conducted survey
(questionnaires) to collect data and use regression analysis to test the hypotheses. However, the
authors in the first article also used statistical analysis and comparing it with regression analysis.
This caused the contrasting results and therefore partially supported their hypotheses. On the other
hand, the following articles did not compare the statistical analysis, which may be due to
minimising the contrasting results.
Furthermore, the findings of the four articles show similar trends. Though, there are
differences among the articles in determining the most important factor of IAE. For instance,
Cohen and Sayag (2010) found that support from top management is the most important factor that
affects the IAE, which is supported by later research by Alzeban and Gwilliam (2014). On the
other hand, Drogalas et al. (2015) found that independence of internal audit is the most important
factor affecting IAE. In addition, the first article does not show the most important factor that
affects IAE, which may be as a result of the contrasting findings.
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4. CONCLUSION
Based on the articles that were reviewed above, three further scopes of future research
regarding the determinants of IAE can be researched. Firstly, exploring other countries’
determinants of IAE focus on the developing countries in Asia, where the economics and politics
are different from European and Middle-Eastern countries. Secondly, instead of targeting
population on the different business industries or organisations, future research can focus the study
on one particular business industry, such as the banking or manufacturing industry. Lastly, the
survey method can also be done using a structured interview in order to receive in depth
information from the sample. In addition, future research can also focus on the top manager,
external auditor or shareholder perceptions in order to investigate different views from other
parties. Any suggestions using quantitative analysis?
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BIBLIOGRAPHY
Albrecht, W.S., Howe, K. R., Schueler, D.R. and Stocks, K.D. (1988) Evaluating the effectiveness
of internal audit departments, Institute of Internal Auditors, Altamonte Springs, FL.
Alzeban, A. and Gwilliam, D. (2014) Factors affecting the internal audit effectiveness: a survey of
the Saudi public sector, Journal of International Accounting, Auditing and Taxation, 23, pp. 74-86.
[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 11 October 2018].
Arena, M. and Azzone, G. (2009) Identifying organisational drivers of internal audit effectiveness,
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https://eds.a.ebscohost.com [Accessed 22 October 2018].
Cohen, A. and Sayag, G. (2010) The effectiveness of internal auditing: an empirical examination of
its determinants in Israeli organisations, Australian Accounting Review, 20 (3), pp. 296-307.
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and the level of misappropriation of assets fraud, Accounting and Finance, 48, pp. 543-559.
[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 1 November 2018].
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effectiveness: evidence from Greece, Journal of Accounting and Taxation, 7 (7), pp. 113-122.
[Online]. Available from: EBSCOhost. https://eds.a.ebscohost.com [Accessed 6 October 2018].
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Eden, D. and Moriah, L. (1996) Impact of internal auditing on branch bank performance: a field
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