Chapter One

Introduction

The purpose of this chapter is to provide background information of the study. The chapter is
organized under seven sections. The first section presents background of the study. The
statement of the problem, Objective, scope, limitation and significance of the study is discussed
from section two to six respectively, and finally, organization of the paper is presented in section
seven.

1.1 Back ground of the study

Prior to 1941, internal auditing was essentially a clerical function. Because much of the record
keeping at that time was performed manually, auditors were needed to check the accounting
records after it was completed in order to locate errors. The old concept of internal auditing can
be compared to a form of insurance; the major objective was to discover fraud (fault finder)
(Spencer, et al 2010).

The Institute of Internal Auditor’s (IIA) define internal auditing is as 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 (Spencer, et al 2010).

According to auditing principle and practice book, internal auditing is an in repellent appraisal
activity within on organizing for review of the accounting, financial and other operation as a
basis for protective and constructive service to the management (Desalegn et al, 2002).

Management of internal audit department, professional proficiency, objectivity and review

significantly influence the monitoring aspects of the internal control system. Scope of work
significantly influences the information and communication aspects of the internal control
system while performance of audit work, audit program and audit reporting significantly
influences the risk assessment aspects of internal control system (Foudigiah et al, 2005).

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Internal audit effective is strongly influenced by internal control quality and management
support. Whereas organizational setting and auditee attributes do not have a strong impact on
audit effectiveness (Desalegn et al, 2002).

In view of existing literature, this study aims to assess the internal audit control of finance and
economic development of Samara branch. Different studies which assess the internal audit
control are investigated in different study area. For example (Spencer, et al, 2010), (Desalegn et
al, 2002), (Foudigiah et al, 2005),etc.

Generally, an internal audit quality assist a firm able to achieve its objectives, review and
evaluates economic performance of the firm, increases the reliability of financial information and
reduces earnings management. With this regard, professional internal audit standards enlarge the
role of internal audit function in financial reporting process (IIA, 2010; SAS No 65, 2007). They
highly vigor the responsibility of internal auditor in value add role, consulting and assuring the
entities operations. An increase in internal audit function would therefore, in part substitute for
external auditor in that it can minimize control risk.

Despite the internal audit control is highly important issue in sectors, up to the researcher’s
knowledge there is no research conducted in this area. In attempt to fill this gap, this study aims
to investigate the internal audit control of finance and economic development of Samara branch.

1.2. Statement of the problem

Companies employ their own internal auditors to do both financial and operational auditing.
Internal auditors of one company may focus exclusively on documenting and testing controls.
Internal auditors of other company may serve primarily as consultants, focusing on
recommendations that improve organizational performance. Not only may internal auditors focus
on different areas, but the extent of internal auditing may vary from one company to another
(Arens et al, 2012).
In recent years, researchers and practitioners have widely discussed the need for internal auditors
of adding more value to their companies’ operations, and contributing to the achievement of
corporate objectives. But they did not address to assess the effectiveness of internal auditing
qualitatively in finance and economic development of Samara city. Thus, this new perspective

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has focused increasing attention on issues such as performance evaluation and effectiveness of
internal auditing.

The purposed study will attempt to seek answer for the following questions:-
1. What are the internal audit qualities of the organization?
2. What is the management supports on internal audit of the organization?
3. What are the causes for the problem of the internal control system of the organization?
4. Do organizational settings have an effect on internal control of finance and economic
development of Samara branch?

1.3. Objective of the study

1.3.1. General objective

The general objective of the study was assessment of internal audit effectiveness in OFED of
Samara city.

1.3.2. Specific objective

Specifically, the study attempted to address the following issues:
 To examine the internal audit quality of the organization.
 To scrutinize the support of management on internal audit of the organization.
 To assess the effect of organizational setting on internal audit control.
 To investigate the problem of internal control system of the organization.

1.4. Scope of the study

The study is conducted only in internal auditing practice. Beside, due to time and cost reason,
the study target population narrowed to OFED of Samara city. More over this study conducted
qualitatively, because the number of the employees in internal auditing department is too small
and the work of audit needs more qualitatively related evaluation rather than showing the figure
of the work. Finally this study is conducted by taking information and related data from 2009 up
to 2012 G.C of the audit department.

1.5. Limitation of the study

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At the time of conducting this study, the researcher faced the following problems: getting
relevant data may be the most challenging one. Shortage of time, finance and luck of experience
in doing research will also hinder the researcher to make the study more effective.

1.6. Significance of the study

This research paper intended assessment of the role of internal auditing in yielding
efficient and effective performance of Samara city’s OFED. The result of this study
believed to have different importance. Among these:
 It might enable the researcher to be familiar with the practical aspect of internal
auditing
 The finding and suggestion in this study might enable the OFED of Samara city to
know its effectiveness and provide suggestion about its practice.
 It might be used as a source of reference in undertaking related research works

1.7. Organization of the paper

The study organized to give coherent flow of ideas to the basic findings. This study divided in to
five chapters each with brief description. The first chapter deals with the overall identification of
the problem, objective of the study, the extent to which the study had undertaken, and the
method used to attain the findings. In the second chapter the concern is about review of related
literature. In chapter three research methodologies are specified. Chapter four of the study is
analyzed and interpreted to reach a conclusion, to forward recommendations and to make
suggestion. Finally, the fifth chapter gives conclusion and recommendation.

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 Chapter three

Research methodology

Methodology is the core of scientific research as it is the way through which findings are to be
achieved. The purpose of this chapter is to provide the method of conducting the research paper.
The chapter is organized under five sections namely description of the study area, research
design, sampling technique, method of data collection, and method of data analysis are presented
from section one to five respectively.

3.1. Description of the study area

OFED of Samara city is located in North Easter part of Ethiopia. Under the supervision of OFED
of Samara city, there are money sectors that provide social service to the society. For instance,
there are money schools, hospitals (health centers), water supply, and construction of roads, and
others which gives social utility.

VISION

The vision of OFED of Samara city is to utilize a society possessed on improved leading
condition, high standards of utilities and other based on public participation.

MISSION

The mission of OFED of Samara city is to honor the economic and social rights ensured by the
constitution via changing the human and natural resource of the region to promote social welfare
(OFED of Samara city).

3.2. Research design

The study has descriptive method of data analysis. The response from the questionnaires would
be analyzed and examined qualitatively throughout the study. Because focusing on a limited
number of informants; their in-depth information will give optimal insight about internal audit
control.

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3.3. Sampling techniques

To obtain relevant information for the study, the researcher took all the employees of finance and
internal audit department of the organization. Hence the whole employees of finance and internal
audit department were used as a sample which is called census survey. The number of the
employees is 6.

3.4. Data collection instruments

The research focused both on primary and secondary sources while conducting the study.
Primary data was collected via distributing open ended and close ended questionnaire to the
employees of the organization and secondary data were collected by reviewing audit manuals
and audit reports of three years and related books.

3.5. Method of data analysis

The researcher interpreted the collected data by using descriptive analysis which indicates the
transformation of raw data into a form that would make in term easy to understand and interpret
it. Thus, to interpret the identified data, it is presented in the form of tabulation to facilitate the
analyzed and interpreted by using qualitative method; includes table, percentage and ratio.

Chapter four

Data analysis and interpretation

4.1 Introduction

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This chapter deals on the brief description of office of finance and economic development of
Samara city’s internal audit practice. The analysis and interpretation is based on the data
collected from both primary and secondary sources by distributing questionnaires to the
employees of the organization and through reviewing audit reports and manuals of the office
respectively.

4.2 Questionnaire result

Questionnaires were distributed to all 6 employees of finance and economic development of

Samara city that have direct work relation to finance and auditing. However, Questionnaire filed
and returned is 4. Thus, the method used to collect the data enable the researcher to get reliable
information on the study area even if it was not possible to get the required information from the
expected respondents. Therefore, the researcher analyzed and interpreted the questionnaire in
this section of the study qualitatively via tables and percentages that could be a base for
conclusion and forwarding professional judgment.

Table 4.1: Personal information of the respondents

Item Characteristic No. of respondents %

Female 3 75
Sex Male 1 25
Total 4 100
MA 0 0
BA 2 50
Educational status Diploma 2 50
Other 0 0
Total 4 100
Below 5 2 50
5-10 1 25
Year of experience
Above 10 1 25
Total 4 100
Source: Questionnaire results, 2014

The above personal information of the respondents’ table shows that the employees of OFED are
75% females and 25%males. 50% of the employees have a BA degree and 50% of them have a
diploma status.
The distribution of service year of the respondents is also concerned. 50% of employees have an
experience of below 5 years, 25% of them have an experience fall between 5 and 10 years, and

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the remaining 25% of the employees have an experience of more than 10 years. Therefore, most
employees have knowledge about internal audit practice in OFED of Samara city since most of
the employees are permanent and have an experience of more than 5 years. This experience of
employees improves the effectiveness of internal auditing.

4.2.1 Evaluation of internal audit practice

Table 4.2: Qualification of internal auditors

Description Respondents
Response
Do you think that the No. %
Yes 3 75
internal auditors are
No 1 25
qualified? Total 4 100
Source: Questionnaire results, 2014

According to the respondents response shown in the above table 75% replay that the auditors are
qualified for their position and the rest 25% give negative response to this. Thus, majority of the
auditors possess the knowledge and skill to perform their responsibilities in case they are
qualified. Therefore, this is good to the organization’s effectiveness of internal audit practice and
can add value to the organization because staff expertise is one of the audit qualities and affects
effectiveness of internal audit practice to add value as indicated in the study of Mihret and
Woldeyohannis (2008).

Table 4.3: Audit planning

Description Respondents
Response
Does the internal No. %
audit office prepare Yes 4 100

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 No 0 0
audit planning?
Total 4 100

Source: questionnaire results, 2014

As illustrated in the table, 100% of the respondents signify that the internal audit department
prepares audit plan. As a result, the organization has good internal auditing quality since audit
plan is vital audit activity for effectiveness of internal auditing practice which can add value to
the organization (Mihret and Yismaw, 2007).

Table 4.4: Segregation of duties

Description Respondents
Response
No. %
Is it possible to say that there is
Yes 3 75
proper segregation of duties?
No 1 25

Total 4 100

Source: Questionnaire results, 2014

As shown in table above, 75% of the respondents replay that there is proper segregation of
duties. But 25% of the respondents answers there is no proper segregation of duties. As a result,
the internal control of the organization is good since the respondents signify that there is proper
segregation of duties i.e. no one can handle all aspects of a transaction from the beginning to end,
and in case the practice of internal audit of the organization is good hence it has good internal
control (Arens et al, 2012).

Table 4.5: Implementation of recommendations

Description Respondents
Response
Does the internal audit department follow up procedures to No. %

ensure whether corrective actions are taken as per the Yes 3 75

recommendation? No 1 25

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 Total 4 100

Source: Questionnaire results, 2014

In the table, 75% of the respondents clearly state that the internal audit department follow up
procedures to ensure whether corrective actions are taken as per the recommendation whereas
25% of them reveal that the department does not follow up procedures. Therefore, the majority
of the respondents signify that the internal audit office has formal follow up procedures that
could help to some extent to enhance the quality of audit. For this reason, the internal audit of the
organization is a good since it has to some extent good management support and this can
improve effectiveness of internal audit (Mihret and Yismaw, 2007).

Table 4.6: Internal control system of the organization

Description Respondents
Response
No. %
What do you think of the Strong 0 0
organization’s internal control system? Medium 3 75
Weak 1 25
Total 4 100
Source: Questionnaire results, 2014

From the respondent point of view shown in the above table 75% of employees and rest 25% of
them reveal that the internal control system is medium and weak respectively. As a result,
internal auditing practice of the organization is medium which is not effective since internal audit
practice significantly affects the organization’s system of internal control (Jantanet al, 2005).

Table 4.7: Scope of service of internal auditors

Description Respondents
Response
No. %
1. In what type of audit the Financial 0 0
Compliance 0 0
organization is involved? Operational 2 50
All 2 50
Total 4 100
2. Do internal auditors involved in Yes 3 75
consulting activity for the auditee? No 1 25
Total 4 100

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Source: Questionnaire results, 2014

Questionnaire results in the table above indicate that the OFED of Samara city’s internal auditors
are involved in all types of audits. They perform operational audit with percentage of 50%. And
also the respondent’s answers 50% is all type of audit (Financial, Compliance and Operational)
is applied. In addition, internal auditors are involved in consulting for the auditee based on the
response of questionnaire depicted in the above table. Therefore, internal auditors of OFED of
Samara city are engaged in many activities. As a result, the internal audit practice of the
organization is good (Mihret and Yismaw, 2007).

Table 4.8: Compliance with Policies and procedure

Description Respondents
Response
No. %
Do the organization follows policies and
Yes 3 75
procedures those applying to the public sector?
No 1 25

Total 4 100

Source: Questionnaire results, 2014

As indicated in table, 75% of the respondents replay that OFED of Samara city follows policies
and procedures; on the other hand 25% of them reveal that it does not follow. Hence, the
organization performs its activities in compliance with policies and procedures; the activity and
setting of the organization is good because compliance of policies and procedures against which
the organizational practices make internal audit practice effective based on the findings of Mihret
and Yismaw in internal audit effectiveness in 2007 G.C in public sectors of Ethiopia.

Table 4.9: Independence and objectivity of internal auditors

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 Description Respondents
Response
Do you think that No. %
Yes 3 75
internal auditors are
independent and No 1 25
objective?
Total 4 100
Source: Questionnaire results, 2014

As shown in the above table, .75% of the employees response state that there is independence of
internal auditors whereas the rest 25% state that there is no independence of internal auditors.
Thus, the majority of employees reveal that there is independence and objectivity of internal
auditors and this is good to the organization since independence and objectivity of individual
auditors is essential to the effectiveness of internal audit function which adds value to the
organization (Stewart et al, 2010)
Table 4.10: Responsibilities of auditors to detect misstatements

Description Respondents
Response
Do internal auditors verify No. %
financial statement assertions Yes 4 100

when misstatements exist? No 0 0

Total 4 100
Source: Questionnaire results, 2014

From the table above, all the respondents 4 (100%) signify that internal auditors verify financial
statement assertions when there exists misstatements. Since the auditors are required to prepare
audit report and they are taking of responsibilities for the report they made, they verify financial
statement assertions by comparing the information on the received report to the purchase
journals, comparing recorded purchase transactions in the purchase journal to supporting
evidence such as invoices, paid checks and reconciling the general ledger account cash in bank
with the bank statement and this is good for OFED internal audit practice (Arens et al, 2012).

Table 4.11: Internal audit quality

Description Respondents
Response
What do you think No. %
Strong 1 25
about the internal
Medium 2 50

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 Weak 1 25
audit department’s
capability to provide
useful findings and Total 4 100
Source: Questionnaire results, 2014

According to the respondents, the internal audit quality is ranked as medium, strong, and weak
with their respective percentages of 50%, 25%, and 25%.Thus, the organization’s practice of
internal auditing is to some extent good since it has a medium capability to provide useful
findings and recommendation and to add value to the organization (Mihret and Woldeyoahnnis,
2008).

4.3 Analysis of secondary data

Secondary data were reviewed to conduct the study of internal audit practice in office of finance
and economic development of Samara city. These data were used by the researcher for the
purpose of gathering plenty of information that will help to corroborate the data obtained through
questionnaire and to reach on the conclusion and to forward recommendation. Thus, a review of
internal audit reports of 3 years and audit manual served as a source of secondary data to
strengthen the results of questionnaire which enable the researcher to get reliable information on
the study area. The researcher reviewed audit manual and audit reports of2009/2010, 2010/2011,
and three quarters of 2011/2012 and these are analyzed qualitatively.

The reports of audit reports reveal that OFED of Samara city’s internal auditor review and
evaluate the adequacy and effectiveness of organization’s internal control system and they are
involved in financial statement audit, operational audit, and in advisory service activities
intended to add value and improve an organization’s governance, risk management, and control
process. The examinations of documents also signify that the internal audit office of the
organization prepare audit plan and made report to the management monthly. The entire
operation of the organization is guided by set of policies and procedures through manual.

In addition, the results of the reports indicate that some recommendations of 2009/2010 are
repeated in 2010/2011 and 2011/2012 in a decreasing manner. Thus, there is some extent for an
improvement of internal audit effectiveness and incase enhances value added by internal audit

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since internal audit effectiveness serve as a measure of value added internal audit i.e. internal
audit effectiveness and value added internal audit are positively correlated (Mihret et al , 2008).

Chapter five

Summary of findings, conclusion and recommendation

5.1. Introduction

This study examined internal audit practice in the case of office of finance and economic
development of Samara city. The data were collected from both primary and secondary sources
via distributing questionnaire and reviewing of audit reports respectively. Thus, this section
discussed the summary of findings, conclusion, and recommendation.

5.2. Summary of findings

This section of the chapter summarizes the findings of the study. The internal audit office of the
organization has skilled employees who enhance effectiveness of internal audit. The internal
audit office prepare audit plan, the scope of internal audit department extended to financial
statement audit, operational audit, compliance audit, and consulting activities for the auditee;
internal auditors of the organization are independent in performing their activities and every
activity of the organization is performed in compliance with policies and procedures. Thus, the
organization can improve audit effectiveness by doing such as indicated in the findings of Mihret
and Yismaw (2007) on internal audit effectiveness; an Ethiopian public sector case study.

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The internal auditors of the organization detects for the existed misstatements via verification of
financial statement assertions and there is proper segregation of duties in performing every
activities from beginning to end which strengthen internal control , and in turn makes internal
audit practice good (Arens et al,2012).
In addition, the findings of the study indicate that the internal control system of the organization
is medium which has negative impact on the internal audit practice. The internal audit quality of
the organization is medium and there is no proper follow up of internal audit recommendation.
As a result, the effectiveness of internal audit in the organization will be minimized since internal
audit quality strongly affects internal audit effectiveness (Mihret and Yismaw, 2012).

5.2. Conclusion

This study investigated the internal audit practice of office of finance and economic development
of Samara city. As a result of findings of the study, the researcher came to the following
conclusion.
Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. Therefore, office of finance and economic
development of Samara city as an organization adds value by performing effective internal audit
in the areas of audit planning, scope of service, hiring employees; performing its activities in
compliance with policies and procedures; maintaining segregation of duties, and independence of
internal auditors.
In addition, the organization has medium internal control and audit quality and there is no proper
follow up (implementation) of audit recommendation. Thus, this can minimize the effectiveness
of internal audit practice that reduces the ability to add value to the organization and improve its
operations.
The organizational settings and auditee attribute do not have effect on internal control of OFED
samara branch.

The Samara city Finance and Economic Development management’s commitment to implement
audit recommendations are better and leads to improve their audit effectiveness.

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 5.3. Recommendation

This study was conducted to assess the practice of internal audit in OFED of Samara city. Based
on the findings of the study the researcher forward constructive suggestions and
recommendations in the hope that they would be alleviate and improve. The organization has
medium internal control which may create few holes for fraud. It has also medium internal audit
quality and there is no proper implementation of audit recommendations. These activities
minimizes effectiveness of internal audit incase reduces the ability to add value for the
organization. Therefore, the internal audit practice of the organization studied needs

an improvement in these areas for effective practice of internal auditing to add

value.

Organizational setting OFED Samara branch have good status of internal audit in the
organizational structure; the probity of internal audit offices internal organization;
budgetary status of the internal audit office; and the existence of sound established
criteria to evaluate audited practices. And the internal audit office has formal follow up
procedures that could help to some extent to enhance the quality of audit. For this reason, the
internal audit of the organization is a good since it has to some extent good management support
and this can improve effectiveness of internal audit
The researcher believed that future studies will be fruitful if they are
conducted in the areas of internal control system and quality of internal audit
in the organization as well as in other organization with the same topic.

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