Int. J. Monetary Economics and Finance, Vol. 11, No.

3, 2018 179

Factors affecting internal audit function effectivity

(internal auditor competence and objectivity,
management support and organisation culture)
at local government

Rindu Rika Gamayuni

Accounting Department,
Economic and Business Faculty,
Lampung University,
Sumantri Brojonegoro Street No. 1,
Lampung Province, 35145, Indonesia
Email: [email protected]

Abstract: Internal audit function is important at the central and local

government, but is still weak, and it needs to be improved. Therefore, this
research aims to examine the effect of the internal auditor competence and
objectivity, management support and organisation culture on the effectiveness
of the internal audit function. This research uses survey method with
description verification approach, and it is conducted on local government in
Lampung Province, Indonesia. Primary data are statistically tested by using
SEM partial least square (PLS). This research has shown that the internal
auditor competence and objectivity, and organisation culture has significant
influence to the effectiveness of internal audit function, but management
support does not.

Keywords: internal auditor competence; objectivity; management support;

organisation culture; internal audit function effectivity.

Reference to this paper should be made as follows: Gamayuni, R.R. (2018)

‘Factors affecting internal audit function effectivity (internal auditor
competence and objectivity, management support and organisation culture)
at local government’, Int. J. Monetary Economics and Finance, Vol. 11, No. 3,
pp.179–191.

Biographical notes: Rindu Rika Gamayuni is a Lecturer in the Economic and

Business Faculty, Lampung University, Indonesia. She has been teaching
public sector accounting, accounting theory, cost accounting, etc., since 2001.
Her research interest includes public sector accounting, management
accounting, and financial accounting. She received her PhD in Accounting
from the Padjadjaran University, West Java, Indonesia. She has published
articles in reputed national as well as international journals and presented
papers in national and international conferences.

Copyright © 2018 Inderscience Enterprises Ltd.

180 R.R. Gamayuni

1 Introduction

There are a number of weaknesses of the internal control system and non-compliance
with the law and rule in the examination of local government financial report in
2010–2015, resulting in an indication of loss, potential loss and the shortfall (The
Indonesian Supreme Audit Agency/BPK-RI, 2015). This phenomenon indicates that
internal audit function still needs to improve. Institute of Internal Auditors (2012) stated
that the internal audit competences that are well organised with staff trained could do
more effective internal audit. This is supported by the results of previous research which
had shown that the competence and objectivity of the internal auditors affect the
effectiveness of the internal audit function (Messier and Schneider, 1988; Maletta, 1993;
Krishnamoorthy, 2002; Desai et al., 2006; Soh and Bennie, 2010). This study provides
four dimensions for internal competence: the knowledge, skills, expertise and behaviour
(Pickett, 2010; The IIA Research Foundation’s Common Body of Knowledge/CBOK
Study, 2010; Cheng et al., 2002). Internal auditor objectivity in this study used three
dimensions as follows:
• impartial attitude
• unbiased attitude
• avoid any conflict of interest (Pickett, 2010; IIA, 2012; Brandon, 2010).
According to Mihret and Yismaw (2007), the effectiveness of the internal audit function
is measured from the internal auditor’s ability to present findings and recommendations.
On the basis of data of The Indonesian Supreme Audit Agency (BPK-RI)’s inspection
results in year 2010–2015 in Indonesia, most of the cases have not been followed
up by government, meaning that these cases have less support and commitment from the
government (The Indonesian Supreme Audit Agency, 2015). The management
commitment to follow up the audit recommendations and management support to
strengthen the internal audit is very important for the effectiveness of the internal audit
(Sawyer, 1995). The management support for the internal audit function is provision of
resources (people, equipment/technology, budget), follow-up the findings or audit
recommendations (Mathis and Jackson, 2003; Cohen and Sayag, 2010; Mihret and
Yismau, 2007). Organisational effectiveness can be improved by creating a strong
culture, which can be used to achieve organisational goals (Robbins, 1996). On the basis
of the phenomenon, theory and previous research that have been described, the authors
are interested in researching whether the competence and objectivity of the internal
auditors, management support and organisational culture can affect the effectiveness of
the internal audit function.

2 Literature review

Competence is defined as the ability to adequately perform a task, duty or role, which
integrates knowledge, behavioural skills and technical skills, capabilities, personal values
and attitudes (The IIA Research Foundation’s Common Body of Knowledge/CBOK
Study, 2010). According to Pickett (2010, p.387) internal auditor must possess the
knowledge, skill and other competencies needed to perform their individual
 Factors affecting internal audit function effectivity 181

responsibilities. Cheng et al. (2002) suggested that the competence of auditors is

composed of two factors, namely knowledge and behaviour. Public accounting firms
need to prepare their auditors with good negotiation skills when dealing with the
management (Angela and Husnatarina, 2015). According to Arens and Loebbecke (1997,
p.796) independence is achieved through:
• the status of the organisation
• internal auditor objectivity.
Objectivity is an unbiased mental attitude that allows internal auditors to perform the
assignment in a way that they believe the results of their work and believe there is no
compromise (Pickett, 2010, p.340; Institute of Internal Auditors (IIA), 2012). Objectivity
is the mental attitude of internal auditors in carrying out the inspection, so that they will
truly believe the results of its work and will make quality result (Colbert, 1993).
Objectivity has three dimensions as follows:
• impartial
• unbiased attitude
• avoid any conflict of interest (Pickett, 2010, p.387; Institute of Internal Auditors
(IIA), 2012; Brandon, 2010).
Management support is what is given and determined by the company to support the
work processes, among others: training and development, performance standards,
equipment and technology (Mathis and Jackson, 2003, p.114). According to Cohen and
Sayag (2010), top management support includes the provision of support required by the
internal audit, the good ratio between the number of internal auditors and audit work that
has been planned and should be completed, the budget given to the internal audit
department, which is sufficient to support the training and development for internal audit
staff. Management support for the internal audit includes: responses to audit findings,
the commitment to strengthen the internal audit and resources for the internal audit
department (Alzeban and Gwilliam, 2012; Mihret and Yismau, 2007). This study
measures management support by indicator such as resources provided by management,
management’s commitment to use the audit recommendations and to strengthen the
internal audit (Mathis and Jackson, 2003; Cohen and Sayag, 2010; Mihret and Yismaw,
2007).
Organisational culture consists of comprehension and principal assumptions of an
organisation. This study measures organisational cultures referring to McShane and
Von Glinow (2015, p.419), Robbins and Coulter (2013, p.80) and Robbins and Judge
(2013, p.552) are as follows:
• Innovation and risk taking, indicate how many employees are encouraged to be
innovative and to take or risk. The characteristics dimensions of innovation and risk
taking consist of experiment, opportunity seeking and risk taking.
• Aggressiveness, indicates how many employees are aggressive and competitive. The
characteristic dimension of aggressiveness consists of competitive, low emphasis on
social responsibility.
182 R.R. Gamayuni

• Stability, the dimensions of organisational culture that shows how many organisation
activities that emphasise the maintenance of the status quo as opposed to the
emphasis on growth. The characteristic dimension of stability consists of
predictability, security and the rule oriented.
• Attention to detail, indicates the analysis accuracy of employee and the
organisation’s attention. The characteristics of this dimension consists of precise
and analytical.
• Outcome orientation, indicates how many man focusing on results (outcomes) rather
than on the techniques and processes used to achieve the objectives, the
characteristics dimensions that are action oriented, high expectation and result
oriented.
• People oriented, indicates how many management decisions that incorporate
considerations influence the results (outcomes) of the employees in the organisation.
Characteristic of this dimension consists of fairness and tolerance,
• Team oriented, shows how many work activities organised in teams rather than
individual. The characteristic dimension is collaboration.
The internal audit function will be effective if it can achieve the desired objectives
(Cohen and Sayag, 2010), whether the internal audit objective is to improve the
efficiency and effectiveness of the organisation (Eden and Moriah, 1996). Moeller (2005,
p.269) and the Institute of Internal Auditors (IIA) (2012) both are saying that effective
internal audit function has the following six dimensions:
• planning
• communication and approval
• management resources
• policies and procedures
• coordination
• reporting to the board and senior management.
Furthermore, the Indonesian Governmental Internal Controlling Apparatus Code of
Ethics (2008) adds two dimensions for an effective internal audit function, namely
• quality control and development program
• public complaints follow up.

3 Hypothesis development

Moeller (2009, p.294) states that the internal auditor must have competences in
performing job duties in order to be an effective internal audit function. The internal
auditor will be effective if they are competent and well trained (Arens and Loebbecke,
1997, p.788). Maletta (1993) and Krishnamoorthy (2002) found that the importance of
these three factors (objectivity, performance and competence of internal auditors) is
 Factors affecting internal audit function effectivity 183

varied in determining the strength of the internal audit function. The research results
of Soh and Bennie (2010) proved that it is important to have the skills which appropriate
in carrying out the internal audit function. From the description, Hypothesis 1 can be
developed:
H1: Internal auditor competence affects the internal audit function effectivity.
Presenting findings objectively and in a timely manner by the internal auditor will
achieve an effective internal audit function (Dittenhofer, 2001). Soh and Bennie (2010)
explains that factors such as the independence, objectivity has been used as an indicator
of the quality of the internal audit function by some researchers (such as Messier and
Schneider, 1988; Krishnamoorthy, 2002; Suwaidan and Qasim, 2010). From the
description, Hypothesis 2 can be developed:
H2: Internal auditor objectivity affects the internal audit function effectivity.
Sawyer (2003) states that: “Management support for the internal audit function has long
been seen as critical to the success of that function”. This statement is reinforced by Hung
and Han (1995), which explains that one of the factors that influences the effectiveness
the internal audit function is management behaviour, namely management support. Some
research states that management support is a determinant key for internal audit function
effectivity (Cohen and Sayag, 2010; Hung and Han, 1995; Albrecht, 1988). From the
description, Hypothesis 3 can be developed:
H3: Management support affects the internal audit function effectivity.
Organisational effectiveness can be improved by creating a strong culture, which can be
used to achieve the organisation goal (Robbins, 1996). Kinicki and Kreitner (2007)
suggest that organisational culture is means to further enhance the quality of employees
in order to achieve the objectives of the company or organisation. Previous studies have
shown the influence of organisational culture to the effectiveness of the organisation
(Ostroff and Schmitt, 1993). From the description, Hypothesis 4 can be developed:
H4: Organisational culture affects the internal audit function effectivity.

4 Research method

This study uses primary data obtained through a questionnaire of 80 items.

Questionnaires were distributed to the analysis unit of this study that is local government
inspector working unit of the province/city/regency in Lampung, Indonesia. The data
were collected in year 2016 with cross-sectional study. The method used in this research
is survey research methods, with structural equation modelling (SEM) partial least square
(PLS) as analysis method. The dimension and indicator measurement showed in Table 1.
The target population in this study was all of local government inspectorate agencies
of the province/city/regency in Lampung, Indonesia. Lampung consists of 1 province and
15 cities/regencies. There were 225 samples selected using purposive sampling. The
respondents were team leaders, team members, technical controllers, inspectors and
quality control at each inspectorate.
184 R.R. Gamayuni

Table 1 Dimension and indicator of variable

Variable Dimension Indicator

Internal auditor Knowledge (X1.1) 1.1 Knowledge about internal audit,
competence (X1) internal control of government, local
Pickett (2010), financial information systems,
The IIA Research government accounting system
Foundation’s 1.2 Having functional Auditor
Common Body of certification
Knowledge 1.3 Knowledge about internal audit ethics
(CBOK) Study standards
(2010) and Cheng
et al. (2002) Skill (X1.2) 2.1 Skills to keep a secret
2.2 Skills to communicate orally and in
writing
Expertise (X1.3) 3.1 Expertise in auditing standards and
auditing practices
3.2 Expertise in the area of financial policies
and procedures
3.3 Expertise in environmental
governance unit audited
3.4 Expertise in the auditing of
information technology of financial local
government
3.5 Expertise in statistics and
sampling techniques
3.6 Expertise in detecting fraud
3.7 Expertise in risk analysis and control
assessment techniques
Internal auditor Behaviour (X1.4) 4.1 Uphold professional responsibility as an
competence (X1) examiner
Pickett (2010), 4.2 Communication, discussion, and good
The IIA Research cooperation with fellow examiner
Foundation’s 4.3 Be careful, thorough, and careful in
Common Body of carrying out its duties and powers
Knowledge
(CBOK) Study
(2010) and Cheng
et al. (2002)
Internal auditor 1 Unbiased attitude 1.1 Honest
objectivity (X2) (X2.1) 1.2 Disclose all material facts
Pickett (2010) and 1.3 Be careful in using and maintaining all
Brandon (2010) information obtained in the audit
1.4 Do not accept a bribe
2 Impartial attitude 2.1 Do not use the information for personal
(X2.2) gain
 Factors affecting internal audit function effectivity 185

Table 1 Dimension and indicator of variable (continued)

Variable Dimension Indicator

Internal auditor 3 Avoid conflict of 3.1 Do not have a social relationship /
objectivity (X2) interest (X2.3) kinship with the auditee
Pickett (2010) and 3.2 The auditor who ever worked in the
Brandon (2010) auditee office should not be involved
in the examination
3.3 Do not participate in activities that may
lead to conflicts of interest
Management 1 Resources 1.1 Equipment and technology
support (X3) provided by 1.2 Comparison between the number of
Mathis and Jackson management internal auditors with the audit work that
(2003), Cohen and (X3.1) has been planned and should be
Sayag (2010) and completed
Mihret 1.3 The budget given to the internal audit
department
2 Management’s 2.1 Follow-up on audit findings and
commitment to use recommendations
the audit 2.2 Commitment to strengthen the internal
recommendations audit
and strengthen the
internal audit
(X3.2)
Organisation 1 Innovation and 1.1 Experimenting
culture (X4) risk taking (X4.1) 1.2 Opportunity seeking
Robbins and 1.3 Risk taking
Coulter (2013, p.80)
and Robbins and 2 Aggressivenes 2.1 Competitive
Judge (2013, p.552) (X4.2) 2.2 Low emphasis on social responsibility
3 Stability (X4.3) 3.1 Predictability
3.2 Security
3.3 Rule-oriented
4 Attention to detail 4.1 Prescise
(X4.4) 4.2 Analitic
5 Outcome 5.1 Action-oriented
orientation (X4.5) 5.2 High expectetion
5.3 Result-oriented
6 People oriented 6.1 Fairness
(X4.6) 6.2 Tolerance
7 Team oriented 7.1 Collaboration
(X4.7)
186 R.R. Gamayuni

Table 1 Dimension and indicator of variable (continued)

Variable Dimension Indicator

Internal audit 1 Innovation and 1.1 Considering activities that have the
function effectivity risk taking (Y1.1) greatest risk
(Y) 1.2 Consideration from the leader
Moeller (2005) 1.3 Identifying, analysing, evaluating and
documenting sufficient information to
achieve the objectives of the assignment
1.4 Planning about audit activities, resources
required, vision, mission, goals,
strategies, programs and activities of
auditors every five years
1.5 Arranging the plan based on the
principles of harmony, alignment,
avoiding overlapping and repetitive
examination and considering the
efficiency and effectiveness of
resource use
2 Communication 2.1 Communication about audit plan
and approval (Y1.2) 2.2 Communication about resources
3 Management of 3.1 Managing and utilising its resources
resources (Y1.3) economically, efficiently and effectively
Internal audit 4 Policies and 4.1 The contents of the policy and
function effectivity procedures of procedures of internal audit
(Y) internal audit 4.2 Review of policies and procedures
Moeller (2005) (Y1.4) continuously to be effective
5 Coordination 5.1 Coordination of monitoring plans and
(Y1.5) monitoring results, both with other
internal auditors and external auditors
6 The internal audit 6.1 The contents of the report: the realisation
reports to the CEO of the activities, problems, obstacles
(Y1.6) 6.2 The report submitted periodically to the
leadership
7 Development 7.1 Developing programs and controlling
program and audit quality which covering all aspects
quality control of audit activities in the Internal
(Y1.7) Supervisory Government Apparatus
(APIP)
8 Following the 8.1 Handling complaints with clearly
Public Complaints mechanisms and procedures, transparent
(Y1.8) and accountable based on the rule
 Factors affecting internal audit function effectivity 187

5 Results and discussion

5.1 Result
5.1.1 Model measurements (validity test)
This research used PLS as analysis method. On the basis of the result of validity test, all
of the variables have been valid, proven by the AVE with scores higher than 0.4. It means
that the information contained in all of the dimensions and indicators were represented in
the latent variables. Before that, we have been eliminated some indicators (see Table 1)
that are not valid (X1.1, X1.2, X2.3, X3.1, X4.1, X4.3, X4.4, X4.6, Y1.1, Y1.2, Y1.3,
Y1.8).
The composite reliability of the latent variable was higher than the recommended
score as much as 0.6 which means that all dimensions and indicators have consistency.
By using PLS analysis method, it was acquired a full model path diagram in Figure 1.

Figure 1 Coefficient standards of structural modelling

5.1.2 Structural model (hypothesis testing)

R2 of this research model is 0.163, meaning that the four variables (the competence of
internal auditors, the objectivity of the internal auditors, management support and
organisational culture) can explain the internal audit function effectivity by 16.3%.
Based on Table 2, there is significant influence of the internal auditor competence to the
effectiveness of the internal audit function at 10% level of significance, with path
coefficient of 0.118. Internal auditor objectivity influences the effectiveness of the
internal audit function at 5% level of significance, with path coefficient of 0.249. There is
no significant influence of management support to the effectiveness of the internal audit
function. However, organisational culture influences the effectiveness of the internal
audit function with path coefficient of 0.282 (see Table 2).
188 R.R. Gamayuni

Table 2 Effect of internal auditor competence (IAC) and internal auditor objectivity (IAO),
management support (MS), organisation culture (OC) on the internal audit function
effectivity (IAFE)

Influence Path coefficient t value P value Ha

IAC → IAFE 0.118 1.713 0.087** Accepted
IAO → IAFE 0.249 2.880 0.004* Accepted
MS → IAFE 0.085 1.003 0.316 Rejected
OC → IAFE 0.282 4.055 0.000* Accepted
*Significant at 5%.
**Significant at 10%.

6 Discussion

6.1 Effect of internal auditor competence to the internal audit function

effectivity
Internal auditor competence influences the effectiveness of the internal audit function.
This is consistent with Moeller (2009, p.294) and Arens and Loebbecke (1997, p.788)
stating that the internal auditor should have the competence to perform their job duties
that can be an effective internal audit function. The results are also consistent with
research conducted by Messier and Schneider (1988), Maletta (1993), Krishnamoorthy
(2002), Desai et al. (2006) and Soh and Bennie (2010), that the internal auditor
competence affects the effectiveness of the internal audit function. On the basis of this
study result, the internal auditor must have competences (good expertise and behaviour).
In this study result, knowledge and skill were not reflection of competence. It means that
for government internal auditor, having knowledge and skill are not enough, he or she
must be expert and well behaved in doing their job to get internal audit function
effectivity.

6.2 Effect of internal auditor objectivity to the internal audit function effectivity
There is significant influence of internal auditor objectivity to the effectiveness of the
internal audit function. Internal auditors are effective if they are independent (objective)
in the operating unit being evaluated (Arens dan Loebbecke, 1997, p.788). This is
consistent with the Desai et al. (2006), Soh and Bennie (2010), Messier and Schneider
(1988), Maletta (1993) and Krishnamoorthy (2002) that there is significant influence of
internal auditor objectivity to the effectiveness of the internal audit function. On the basis
of this study result, unbiased and impartial attitude is reflection of internal auditor
objectivity, and it influences internal auditor function effectivity, but avoid conflict of
interest is not reflection of internal auditor objectivity. This means that the government
internal auditor should have unbiased and impartial attitude in doing their job to get
internal audit function effectivity.
 Factors affecting internal audit function effectivity 189

6.3 Effect of management support to the internal audit function effectivity

There is no significant influence of management support to the internal audit function
effectivity. On the basis of this study result, resources provided by management
and management’s commitment to use the audit recommendations and strengthen the
internal audit, as dimension of management support cannot influence internal audit
function effectivity. This result study is not consistent with Cohen and Sayag (2010) who
stated that audit findings and recommendations will not work much without the support
and commitment from management to implement them. It is also not consistent with
Sawyer’s (2003) statement that management support for the internal audit function has
long been seen as critical to the success of that function. This result study does not
support the research conducted by Cohen and Sayag (2010), D’Aquila (1998), Alzeban
and Gwilliam (2012) and Mihret and Yismau (2007) stating that management support
affects the internal audit function effectivity. According to the previous study,
management support is important factor for creating the internal audit function
effectivity, but based on this study result, it could not affect the internal audit function
effectivity directly. Maybe management support should affect internal auditor
competence and objectivity first before affecting the internal audit function effectivity,
so this still needs further research.

6.4 Effect of organisation culture to the internal audit function effectivity

There is significant influence of organisational culture to the effectiveness of the internal
audit function. On the basis of this study result, organisational culture (aggressiveness,
outcome orientation and result oriented) has influenced internal auditor function
effectivity. This support (Kinicki and Kreitner, 2007) suggest that organisational culture
is means to further enhance the quality of employees in order to achieve the objectives of
the company or organisation. This result study is in line with the research of Ostroff and
Schmitt (1993). However, the others four dimensions of organisation culture, such as
innovation and risk taking, stability, attention to detail and people oriented, were not
reflection of organisation culture in this study result.

7 Conclusions and implication

• Auditor competence influences the effectiveness of the internal audit function

significantly. Having knowledge and skill is not enough, the internal auditor must be
expert and well behaved in doing their job to get internal audit function effectivity.
• The unbiased and impartial attitude is reflection of internal auditor objectivity,
and it does influence internal auditor function effectivity.
• Organisational culture (aggressiveness, outcome orientation and result oriented)
influences internal audit function effectivity.
• Management support does not affect the internal audit function effectivity. Resources
provided by management and management’s commitment to use the audit
recommendations and strengthen the internal audit, as dimension of management
support cannot directly create internal audit function effectivity.
190 R.R. Gamayuni

• Management support cannot directly affect the effectiveness of the internal audit
function. It could be reexamined in future studies that the internal auditor
competence and objectivity as mediating variable for the relationship between
management support and internal audit function effectivity.
• Since the R2 of this research model is low, it suggests the next research to use other
variables that might affect the internal audit function effectivity.

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