The Effect of the Internal Auditing on Financial Performance

Bachelor Thesis, 2013

66 Pages


Table of Contents



1 Chapter One Proposal contents
1.1 Introduction:
1.2 Statement of the problem:
1.3 Objectives:
1.3.1 Main objective
1.3.2 Specific objectives:
1.4 Significance of the project:
1.5 Scope and limitations of the project:
1.6 Research Methodology:
1.7 Related work:
1.8 Time table:

2 Chapter Two Introduction to
2.1 Section one: Introduction to Internal Audit
2.1.1 Introduction:
2.1.2 Internal audit definition:
2.1.3 The development of internal auditing:
2.1.4 The internal auditing as an independent job:
2.1.5 The types of the internal auditing:
2.1.6 The difference between internal and external audit :
2.1.7 Outsourcing to do an internal audit function:
2.2 Section two: The importance and the role of the internal audit
2.2.1 Benefits of Internal Audit
2.2.2 The importance of internal audit in adding value:
2.2.3 Objectives and scope of internal audit:
2.2.4 Internal audit quality:

3 Chapter Three The role of internal audit in performance tuning
3.1 Section one: The role of internal auditor in designing and testing internal control:
3.1.1 Internal Control:
3.1.2 Fraud Detection by Internal Auditor:
3.2 Section Two: Risk management and internal auditing
3.2.1 The concept of risk and management techniques:
3.2.2 The role of internal audit in risk management:
3.3 Section Three: The relationship between internal auditing and evaluation of efficiency and effectiveness:
3.3.1 The concept of measuring efficiency and effectiveness:
3.3.2 The role of the internal auditor in the measurement of efficiency and effectiveness:

4 Chapter Four Case Study
4.1 Introduction:
4.2 About Bank of Palestine:
4.3 Interview details :
4.4 Bank of Palestine Audit Committee :
4.4.1 Introduction:

Chapter Five Results & Recommendations
5.1 Section one: Results
5.2 Section two: Recommendations
5.3 Section three: Suggestions for future research:



We start this research with many hands our hands, we suffer a lot to make this research with the best picture , and here we are this day thanks for god we turn the pages of all nights of wakefulness and days of hard work in this modest work .

To the beacon of science, to our master, to the illiterate who taught all learners, to our holy prophet Mohammed Peace upon him.

To the fountain that does not tire tender, to the ones who made our happiness of woven from their hearts , to our dear great mothers.

To the ones who seek and suffer for us to stay happy and comfortable , who did not sting to lead us forward the road of success to our dear strong fathers . To our lovely brothers and sisters.

To the ones who teach us golden latter's , and expressions of the highest and most expensive words in science , to the ones who state their science , their knowledge in few words for us , and from their thoughts they made a beacon that light our science and success life , to our honored teachers.


The internal auditing function is one of the most important among the companies as it has several functions that mean to enhance the controlling and monitoring in these companies as it has a major and significant role in designing and developing the internal control system and support the corporate governance. It contributes in measuring and evaluating the risks surrounding the work environments.

In addition to that it helps in measuring and evaluating competence and efficiency performance and it maximizes the companies capacity to employ the best methods to use the available resources to the get the most possible quality and so that the entity's goals are met.

For this importance this study aims to identify the role of the internal audit in controlling the financial and managerial performance in the Palestinian corporations taking in considerations all the aspects that would limit this purpose of the internal audit department.

These factors would be the business environment, the qualification of the auditor, the laws and regulation, the extent to which the corporation are committed to these laws and other factors that will be discussed in details throughout this research to highlight the current situation and any amendments needed to be undertaken in the coming period so that the internal audit function of controlling the performance on both sides the managerial and the financial will be effective.

1 Chapter One

Proposal contents

1.1 Introduction:

It was clear from the recent financial scandals and fraud law suits in the international and regional firms that the internal control in general isn't as strong as should and that there are some weaknesses that led to this outcome and that why we are interested to investigate the internal control and the internal observation systems in the listed Palestinian corporations to put the lights on the real reasons and causes for such problem.

Many researchers and observers believe that one of the main reasons for such problem is the insufficient reliance on the function of the internal auditor and not assigning this function with its real importance in the companies, especially if we consider how significant is this function becomes as the companies are getting larger and the operations are extending to be more in terms of the volume and the complexity and more importantly the competition is getting tougher among the companies.

The internal audit is consider to be a type of the observational procedures that can be used to assess the effectiveness of the other observational and audit procedures and that is why many researchers consider it as the core of concentration in the audit hierarchy that supplement the other tools in ensuring these tools ability to safeguard the companies' assets, make sure about the fairness of the financial data and encourage the commitment in the managerial policies.

The internal audit function affects other parties outside and inside the business organization for example the external auditor relies in different levels on the work that has been done by the internal auditor especially when the external auditor comes to the decision of the sample size as this sample will increase or decrease in accordance with how much the external auditor believes that the internal auditing function has been done appropriately.

In the recent years a lot of improvements have appeared on the function of the internal auditing with respect to the extent of the work or the independency of the internal auditor especially after the emerging of the auditing committee and its responsibility in front of the board of directors and the shareholders that make this function worth investigating and researching.

The first agency for the internal auditors was established in the united states in 1947 that became international after that and now it has 150 branches all over the globe and more than 100,000 members, this agency sets the standards of the internal auditing and defines clearly the morals of this position.

This agency defined in 1999 the internal auditing in a clear manner as:

An independent, objective assurance and consulting activity designed to add value and improve the companies' operations. It helps an entity in achieving its goals by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of the risk management, control and governance processes.

This definition that will be used throughout our research refers to the improvements on the internal auditing and the responsibilities inherited with it and the important role it has on control the performance as mentioned on the managerial and financial sides. Recently New York exchange market started to make it mandatory on the companies to have internal auditing department to enlist it on the stock market as it believes that will enhance the performance and will make the information provided to the investors and other related parties more reliable and trustful.

1.2 Statement of the problem:

The problem that this research discusses is the improvement of the internal auditing function in the listed companies in the stock market in response to the improvement on the academic and vocational sides globally in respect to the following of clear standards, and the availability of clear goals that can be used as a basis to audit the managerial and financial performance and that raise many questions in this regard.

The main question of this research is: does the internal auditing department in the listed companies in Palestine exchange marker do its role to monitor the financial and managerial performance?

From this general question we can draw sub-questions which are:

1) In the listed companies is there a separate department for the internal auditing and are these companies providing this department with the sufficient resources?
2) Can the internal auditor in the listed companies do his / her duty in controlling the administrative and financial performance according to the standards, and how much is that important for the management, the auditing committee, the shareholders and the external auditor?
3) Is there a sufficient degree of independency from the management that enables him / her to achieve the work away from the pressure of the related parties?
4) Are the qualifications, knowledge and experience of the internal auditor sufficient enough to let him / her work in proper manner?
5) Is there a need to establish a standards for the internal auditing and generalize it on organizations in Palestine?
6) Is the extent of the internal auditing in the Palestinian firms competent with the improvements happening globally?

1.3 Objectives:

1.3.1 Main objective

The objective of this research is to recognize the importance of internal audit to assess the efficiency and effectiveness of management as input to expand the transparency , responsibility and accountability, disclosure and evaluation of management performance ,and its role in control of the administrative and financial operation in Palestinian listed companies.

In order to reach the following specific objectives::

1.3.2 Specific objectives:

The specific objectives of the project are:

Objective 1. Identify the role of internal audit in the assessment and evaluation of the internal control system and the importance of it in adjust the administrative and financial functioning of the Palestinian listed companies. Objective 2. Identify the role of internal audit in the managing and supporting of risk management systems and the importance of it in adjust the administrative and financial performance of the Palestinian listed companies. Objective 3. Identify the degree of independency granted to the Internal Audit and the importance of this in increasing Administrative and financial performance in Palestine.

Objective the clear image of internal auditor to the community and to the business environment and change the bad image of them as error catcher.

1.4 Significance of the project:

This study will help in increasing the role and image of internal auditing in BOP Ltd to make it more effective and professional. The subject is worthy of attention because internal auditors are important, even crucial, in an economy that relies upon independently produced information (Van Peursem 2005). Indeed, IA has become an indispensable management tool for achieving effective control in both public and private organizations (Eden and Moriah1996). Significance of the study comes from these points:

A. This topic is significant for business management, shareholder and the overall financial community because of the best use of assets comes from internal auditing from its responsibilities especially after financial crisis 2008 all over the world that makes internal auditing significant in monitoring and evaluation of management performance.

B. This study keeps track of developments and trends in the field of internal audit Whether in the field of professional standards or practices and modern methods and try to apply this Development in Palestine.

C. This topic has not been studied in detail and separate from the control system Interior in the private sector in Palestine and constitute the first attempt, in this context, the extent Science researcher.

1.5 Scope and limitations of the project:

Our scope of the research will be affected by several factors such as: Spatial borders: the study was applied for listed companies.

Time limits: research deals with the reality of internal audit and its impact in increasing financial performance, and the researchers collect data as they can because the available period was too short (two months only) and they want to applied this research for joint stock companies also in west bank but because they can't.

Humanity borders: was limited on the staff in the joint stock companies who have the relationship because of the well-known restrictions imposed by the occupation and that we couldn’t get the other side of the west bank to generalize our work on all the companies so our work will be focused on a sample (bank of Palestine) of the companies located in Gaza strip.

1.6 Research Methodology:

The researchers will use the analytical descriptive methodology due to the nature of the research, also the researchers searched for a previous work in the area of internal auditing by surfing the internet specially the specialized sites that contain articles and other forms related to the topic of the research, another source was quoting a paragraphs of some books that address this area of interest.

The researchers will depend on materials that will be took from the internal auditing departments and other related departments in addition to organizing an interview with internal auditors for the targeted company.

1.7 Related work:

1-(Arena, et. Al,2006)

Title "Internal audit in Italian organizations: A multiple case study ". They described the main characteristics of the departments of the internal audit in six Italian companies and to explore and analyze the impact instructions enacting them and through a comparative study between the departments of internal audit in these companies six and through interviews with the directors of internal audit in these companies and see samples of the internal audit reports and public documents and internal instructions relating to governance, the study found great diversity in the main characteristics of Internal audit departments, as well as the study highlighted the institutional pressures faced by internal auditors.

The interviews showed in this case that the factors affecting the evolution of the performance of the internal audit departments in addition to institutional pressures can be the following:

1- Training and culture as the advisory role of internal auditors, forcing them to the knowledge of all phases of work in the company.
2- Personal and leadership capabilities which make the internal auditor was able to convince all levels of the company, in turn, strengthen and assign activity. 3- Management's cooperation and responsiveness as this cooperation is very important for the role of the internal auditor. Noted that this study addressed the internal audit of the door of the main characteristics of the internal audit departments did not address adequately to assess the role of these sections in Performed the tasks and achieving the objectives assigned to it.

2-(Sarens, et. Al,2006)

Title “Internal auditors' perception about their role in risk management - A comparison between US and Belgian companies”. Which aimed to clarify and describe the role of internal auditors in the risk management process and to make a comparison between the understanding of internal auditors in both the United States and Belgium for their role in the risk management process,

To achieve this goal, the researchers conducted interviews with ten internal audit managers in both countries, and concluded The study that in the case of Belgium, the internal auditors are focusing their attention on the correct any flaws in the risk management system for their companies and are playing a pivotal role in raising awareness and perception and the formulation of an appropriate system for risk management in their companies, but in the case of America was estimated merits of Internal Auditors and their views on risk management an essential part of the requirements of a modern outlook for the internal audit requirements. Sarbanes-Oxley act.

2-(Jantan, et. Al, 2008)

This study determine the extent of the commitment of listed Companies in the Malaysian financial market standards issued by The Institute of Internal Auditors .As well as determine whether compliance with these standards affect (IIA) on internal control systems in these companies has researchers to achieve this yen goals using the first two questionnaires to examine adherence to professional practice standards for internal audit, and second to examine the impact of this commitment on the internal control system and use descriptive method .In this study, analytical study has concluded that the professional versatility and thematic sections Internal audit in companies listed on the Malaysian market for securities affect Significantly on the efficiency of internal control systems, and the scope of the internal audit and professional performance in the internal audit departments impact on the characteristics of Communication and Information Internal control system and features a system of internal control environment, as this study concluded that process management of the Internal Audit department and the performance of audit work and the internal audit plan and report For internal audit work significantly affect the risk assessment attributes system control as well as internal control activities.

2-( AL-Muhtadi, et. Al, 2012)

This research study the relationship between the quality of internal audit activities and earnings management in joint stock companies in order to test whether the quality of internal audit activities have an adverse effect on earnings management practices.

The results of statistical analysis Indicated to (1) Existence an inverse relationship with a significant effect between the quality of internal audit and earnings management in joint stock companies, (2) the size of the internal audit work associated with the process of preparing and presentation of financial reports is the only variable which has an inverse relationship with a significant effect on earnings management.

The researcher advise to make a lot of researcher which took about earnings management activities in joint stock companies in Gaza strip to know how can applied earnings management activities in Gaza strip comparing with economics environments in other companies.

1.8 Time table:

The research has a time limit; it should be done in 7 weeks. The following chart describes the way we will spent the research time.

Table 1.1: Time table

illustration not visible in this excerpt

Chapter Two 2 Introduction to Internal Auditing

2.1 Section one: Introduction to Internal Audit

2.1.1 Introduction:

According to Pickett (2005b, p1), auditing is an important aspect of managing an organization, and all employees should have a good understanding of the audit concept and how it can help organizations become and remain successful. Auditing should be considered by all managers as a powerful tool for reviewing the adequacy of their governance, risk management and internal control arrangements. The development of internal auditing was appeared after Arthur Andersen, Enron scandal and Italian corporations such as Parmalat. (Arena, et al 2006, p275).

With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the profession's exposure and value was enhanced, as many internal auditors possessed the skills required to help companies meet the requirements of the law. However, the focus by internal audit departments of publicly traded companies on SOX related financial policy and procedures derailed progress made by the profession in the late 20th century (Moller, 2004, P 13). Auditing is a formal process for examining key issues with a view to establishing accountabilities and securing an improved position. So, in this chapter the concept of internal audit will be described in details.

In this chapter will highlight the most important points in the field of internal control in terms of its definition and its elements and stages of development and its importance, and so on.

2.1.2 Internal audit definition:

Courtemanche (1986) states that, “there were two basic conceptions of internal auditing: the traditional and the modern. The traditional conception of internal auditing views accounting as its true discipline, accounting control as its true concern and the board's audit committee as its true client. The modern conception of internal auditing does not reject the substance of the traditional conception, but seeks to extend it beyond its narrow confines. Modern internal auditing claims an unlimited scope, reserves the freedom to borrow from many disciplines and recognizes senior management as additional clients more or less distinct from the board's audit committee”

( Courtemanche,1986,p4)

While some of the audit technique underlying internal auditing is derived from management consulting and public accounting professions, the theory of internal auditing was conceived primarily by Lawrence Sawyer (1911-2002), often referred to as "the father of modern internal auditing".

According to Gleim (2004), “internal auditing is a management-oriented discipline that has evolved rapidly since the Second World War. Once a function primarily concerned with financial and accounting matters, internal auditing now address3KOIes the entire range of operating activities and performs a correspondingly wide variety of assurance and consulting services. The development of internal auditing was fostered by the increased size and decentralization of organizations, the greater complexity and technological sophistication of their operations, and the resulting need for an independent, objective means of evaluating and improving their risk management, control and governance processes”( Gleim,2004,p2).

The IIA defined internal auditing 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, 2004)

Several common elements appear in this definition particularly the elements of assurance, risk, and control. The internal auditor’s risk-driven efforts provide critical inputs to other governance participants, including the audit committee and management. In fact, some now describe the IAF as the “eyes and ears” of the audit committee.

Moreover, this definition makes a clear view of the role of internal auditing as assurance and consultancy activities that add value to the organization and increasing financial and administrative performance.

illustration not visible in this excerpt

Figure 1.1: Consulting and assurance activities of internal auditing

(Hermanson and Rittenberg ,2003 ,P 59)

From researchers point of view, all previous definitions of internal auditing makes a clear picture that IA function is not only financial function but also administrative functions. Also the existence of IA is considered as a support to other control system within an organization.

2.1.3 The development of internal auditing:

According to the Pickett (2005) opinion state that “internal auditing is now a fully developed profession. An individual employed in internal audit ten years ago would find an unrecognizable situation in terms of internal audit’s role, the services provided and the approach followed. For full appreciation of internal auditing, it is necessary to trace these developments back and extend trends into the future. It is important to understand the roots of internal auditing and the way it has developed over the years. Internal auditing developed as an extension of the external auditing role in testing the reliability of accounting records that contribute to published financial statements”( Pickett, et. Al, 2005,p.3).

Cascarino and Van Esch (2005)state that “the profession of internal auditing, as many other professions, has its roots in the Industrial Revolution of the nineteenth century. The enormous growth of the business sector found existing professionals scrambling to keep up. Specialists appeared, coping with such innovations as corporate law, banking provisions and bankruptcies. This led to the formation of a plethora of organizations and associations that, over a period of time, amalgamated into the British Institute of Chartered Accountants ICA and the American Certified Public Accounts ACPA in their respective countries” (Cascarino & Van Esch , 2005,p.3-4).

The main difference between the two bodies at that time was the method of achieving professionalism in the bodies. The American body adopted a style that combined the academic and business worlds, and produced professionals that were a hybrid of both. The British institute took the more traditional English path of a trade .


Excerpt out of 66 pages


The Effect of the Internal Auditing on Financial Performance
Faculty of Commerce - Department of Accounting
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ISBN (Book)
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internal, auditing, financial, performance
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Shakir Al-ghalayini (Author)Mohammed A. Keshta (Author)Thabet M. Hassan (Author), 2013, The Effect of the Internal Auditing on Financial Performance, Munich, GRIN Verlag,


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