The effectiveness of internal auditing – Overview of measurement methods

In recent years, the Internal audit (IA) has experienced remarkable changes, in which the role

and function of internal audit in the new business environment have been highlighted. Internal

auditing has become an indispensable risks control mechanism in both public and private

organizations. However, so far there has been little researches on the effectiveness of IA. In

practice, the global economic crisis has created many difficulties for enterprises and required

them to improve their risk management capabilities as well as review the performance of internal

audit. This paper focuses on the effectiveness of internal audit and methods of measuring the

effectiveness of internal audit. Based on fundamental type of research, trying to make a review

of main approaches, ideas and opinions of high rated specialists regarding the internal audit’s

performance and analysis of the latest internal audit practices at leading international

companies, the main objective of the paper is to synthesize the most appropriate methods that

can be used to measure the effectiveness of the audit. From the international point of view, this

paper identifies the main trends that will affect the internal audit activities creating value for the


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nd a good reference for researchers. Also taking the second approach, Kwadwo Obeng (2016) measures the effectiveness of internal auditing across stakeholders' expectations: if independent auditors can take advantage of the IA’s work or not; if the internal auditor can achieve the objectives set by the management or not and if the recommendations of the internal auditor are related to the decision of the management board or not. In addition, the author examines the IA effectiveness through some of other statements, including: If the internal auditor may detect the risks associated with the financial statements in the auditee or not and if the internal auditors are assigned to this task or not. With the above questions, the author measured in binary scale: yes and no. Although it has developed a comprehensive scale of effectiveness, in this measurement method, on the detection of risk, the author only mentioned the risks associated with the financial statements, but not yet addressing risks in the course of operation or other business operations. Arena & Azzone (2009) view internal audits as a function of creating value for the organization, taking into account the recent changes of the internal auditing and its central role in corporate governance. The data used for this study were collected through a questionnaire, which was sent to 364 Italian companies, and a response rate of 47% was obtained. On the basis of data from 153 Italian companies, Arena & Azzone (2009) survey emphasizes that the effectiveness of internal auditing is influenced by factors like: • the characteristics of the internal audit team, • the audit processes and activities, and • the organizational links. It was observed an increasing of internal audit effectiveness, particulary, when: • the ratio between the number of internal auditors and employees grows, • the Chief Audit Executive is affiliated to the Institute of Internal Auditors, • the company adopts control risk self-assessment techniques, and • the audit committee is involved in the activities of the internal auditors. 3. Discussion and conclusion The new definition of Internal Auditing issued by the IIA in 2004 required the internal auditors to focus on consulting activity and the risk management function in order to add value to the organization rather than traditional functions of compliance audit. This shift has 629 required internal auditors to have new capabilities to fulfill the extended areas and required managers to have new measurement methods to evaluate the effectiveness of internal audit. However, the studies on methods of measuring the effectiveness of internal auditing have not been abundant. The effectiveness and efficiency of IA is the degree (including quality) to which IA achieves established objectives. The objectives of the organization have tended to be balanced among the stakeholder’s expectations, both internal and external stakeholders. Therefore, using a Balanced scorecard to set objectives and metrics to measure the effectiveness of internal auditing is becoming a trend in the enterprises around the world. Internal audit practices for evaluating the performance used by leading international companies are various among companies, ranging from simple to complex. This is quite reasonable due to the perception of managers about the importance of IA in those organizations is not the same and the objectives set by organizations are quite different. This implies that the learning and application of a set of metrics to assess the effectiveness of internal auditing is a voluntary and subjective decision from the management rather than compulsory obliged compliance, so the professional associations should provide entreprises with more supportive guidances, and regulators should not issue too detailed obligations for them. The researches on internal auditing in general and the effectiveness of internal auditing in particular are relatively scanty, in comparision with those on the external audit. In addition, the previous studies were mainly carried out in the developed countries. This also raises the need to study the performance of IA in the developing countries, the perception of auditors and managers about IA's new functions as well as its contribution to the organization's development. The paper presents an overview on the effectiveness of IA and the methods of measuring the effectiveness of IA. However, as mentioned above, the reviewed studies are mainly conducted in the developed countries and the data are collected from very big international companies. The results of the paper may not completely suitable to apply to the developing countries. This also implies a call for more new researches in this area to be conducted in the context of the developing countries. References Aaron Cohen & Gabriel Sayag (2010), “The Effectiveness of Internal Auditing: An Empirical Examination of its Determinants in Israeli Organisations”, Australian Accounting Review, 20, (3) 296-307. 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. Anderson, U. (1983), Quality Assurance for Internal Auditing, Institute of Internal Auditors, Altamonte Springs, FL. 630 Arena, M. and Azzone, G. (2009), “Identifying Organizational Drivers of Internal Audit Effectiveness”, International Journal of Auditing, Vol. 13, pp. 43-60. Bou-Raad, G. (2000), “Internal Auditors and a value- added approach: The new business regime”, Managerial Accounting Journal, Vol. 15 (4), pp. 182-186. Cohen, A & Sayag, G (2010), “The Effectiveness of Internal Auditing: An Empirical Examination of its Determinants in Israeli Organisations”, Australian Accounting Review, 20, (3) 296-307. Cristina Bota-Avram, Ioan POPA & Cristina Alexandrina Ştefănescu (2011), “Methods of measuring the performance of internal audit”, The Annals of The "Ştefan cel Mare" University of Suceava. Fascicle of The Faculty of Economics and Public Administration, Vol. 10, Special Number, 137-146. Dittenhofer, M. (2001), “Internal Auditing Effectiveness: An Expansion of Present Methods”, Managerial Auditing Journal, 16: 443–50. 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Hoag, D.A (1981), “Measuring Audit Effectiveness”, Internal Auditor, April: 70–8. Institute of Internal Auditors (2004), The Role of Internal Auditing in Enterprise- wideRisk Management, IIA-UK and Ireland. Institute of Internal Auditors (2008), International Standards for the Proffesional Practice of Internal Auditing, Octombrie available on-line at: Kwadwo Obeng (2016)Kwadwo Obeng (2016), “Effectiveness of Internal Audit in Micro Financial Institutions: Evidence from Selected Financial Institution in Ghana”, Research Journal of Finance and Accounting, Vol.7, No.12, 2016, 63-70. 631 OECD (2004), OECD Principles of Corporate Governance, Paris, France. Prawitt, D.F., (2003), “Managing the internal audit function”, The Institute of Internal Auditors Research Foundation, accesibil on-line la Protivi Knowleadgeleader, (2010), “Internal auditing around the world, Profiles of Technology-Enabled Internal Audit Functions at Leading International Companies”, Protivi Knowledgeleader, accessible on-line la, Vol. VI. Ransan, T.H. (1955), “Effectiveness of Internal Auditing”, a paper presented at the 14th Annual Conference of the IFA. Roth J. (2003) “How do internal auditors add value”, Internal Auditor, Vol. 60, No. 1, 33–37. Sawyer, L.B (1988), Sawyers’ Internal Auditing, Institute of Internal Auditors, Altamonte Springs, FL. Schneider, A. (1984), “Modeling External Auditors’ Evaluations of Internal Auditing”, Journal of Accounting Research, 22:657–78. The International Federation of Accountants (IFAC) (2006), Handbook of International Auditing, Assurance, and Ethics Pronouncements, IAASB, New York. 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