DOI: 10.7763/IPEDR. 2014. V70. 24
Factors that Contribute to the Effectiveness of Internal Audit in
Public Sector
Zulkifli Baharud-din1, Alagan Shokiyah2, and Mohd Serjana Ibrahim3
1, 2
Administrative Science & Policy Studies Universiti Teknologi MARA Shah Alam Selangor, Malaysia
3
Internal Audit Division Ministry of Science, Technology & Innovation Malaysia
Abstract. The establishment of IA function is important as an essential internal assurance mechanism in
public financial controls and as a tool for monitoring and evaluating financial management activities in
government agencies. In addition it will assist government organizations to achieve accountability and
integrity, improve the implementation of government programs and develop confidence among citizens and
stakeholders as well as to cater any risk of mismanagement of public fund. This study investigates the factors
that contribute to the effectiveness of internal audit in the Malaysian public sector. It is to determine the
auditors’ perception toward the effectiveness of internal audit work, influenced by the quality of audit work
in order to perform in an effective manner as control instrument in public financial management. It also aims
to determine the relationship between factors that contribute to the effectiveness of IA works in promoting
better transparency and integrity of public management. The scope of this study covers the internal auditors
that work in the ministries in Putrajaya. This study employs a cross sectional survey to investigate the
effectiveness of internal audit. Several statistical techniques such as the descriptive statistic, correlation and
regression analysis were used to analyse the data from the survey. The result of the study showed that there
were significant positive relationships among the factors analyzed in this study such as auditor competency,
auditors’ independence and objectivity and management support to the effectiveness of internal audit. Thus,
the effectiveness of internal audit will depend strongly to the attributes of the factors analysed in this study.
Keywords: Internal Audit, Quality of Audit Work, Public Financial Management, Competency,
Independence, Objectivity, Management Support and Effectiveness of Internal Audit.
1. Introduction
There is general concern among the Malaysian public over the effective and transparent Public Financial
Management (PFM) regarding the use of public money. Every year government has involved in collecting
and spending hundreds of billion ringgits of public money through the various ministries and agencies for
government program and activities. This revenue and expenditure may constitute the main factor for
economic growth stimulation of the country. Due to this huge money involved, government need efficient
and effective financial management machinery to functioning with accountability and due diligent
conforming to the stipulated rules and regulation and other instruction pertaining to financial management.
So, all government ministries, departments and agencies are supposed to maintain the accuracy and
reliability accounting record for the purpose of auditing and future use. All transactions should be properly
authorized, executed and recorded. Funds are expended for legitimate purposes in appropriate ways, and
financial record reflect true and fair organisation’s financial condition. In addition, the sound financial
management control should be in place which includes allocation of the fund according to stipulated
objectives, clear rules of responsibilities, ensuring the expenditure according to the set budget and
procedures.
The government is aware that high quality of financial management will lead to the success of
government programs and activities. Therefore, to further enhance the credibility of PFM, the government
has established the Internal Audit (IA) Unit in many government departments and agencies by the virtue of
issuance of Federal Treasury circular no 9/2004. This circular indicates the requirement of the establishment
of IA unit and governing the tasks and responsibilities of internal auditing in the public sector and as an
internal control mechanism in government agencies to look into the financial management integrity and

Corresponding author. Tel.: + 603-55435839; fax: + 603-55444131.
E-mail address: [email protected]; [email protected]; [email protected].
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value for money expenditure to the government program and activities. Irregularities in spending public
money have been highlighted by the Auditor General (AG) in his annual report Amrin Buang [3]. Some of
these weaknesses and irregularities involve serious violation of established financial management guidelines
and procedures such as poor planning of procurement, equipments supplied, work done and services
rendered not in accordance with the original specification, cost overrun due to delays in project completion,
improper payment made for equipments not supplied, work not done and services not rendered, equipment
and good procured at a much higher cost than market value, procurement not done according to established
regulations. Thus the role of IA unit is to determine that internal control is in place by reviewing policies and
practices in the organization in order to avoid loss of financial resources, noncompliance and also to provide
reasonable assurance that public money has been spent in an efficient and effective manner. Based on the
government emphasize on IA function, audit services can no longer move out of their customary ways of
thinking and common work. Audit services also can help organization for the success of better financial
management in public service by playing the effective and efficient roles to promote better governance in
managing public money.
The research examined on what factors that contribute to the effectiveness of IA in order to perform their
duties effectively and indirectly can assist the public sector in managing the public resources efficiently.
Factors such competency of the auditors, independence and objectivity of Internal auditors and management
support may be the causes that affect the effectiveness of IA function.
2. Literature Review
Auditing is originally a financial management concerned with assessing practice for the internal financial
status of the organization and the evaluations of the financial performance of the organization [13]. After the
revolution and beginning the 20th century the reporting practice of auditors, which involved submitting
reports of their duties and findings, was standardized as the Independent Auditor's Report [13]. Since then,
the auditing practices have evolved over the years and develop into the broader aspects to become into a field
of fraud detection and financial accountability. It also provides feedback on organization financial
information and reporting. It also becomes a tool for an analysis of any fraudulent activity, potential and
actual within the organization. In Malaysia, IA profession has became into the main business after the
formation of the Institute of Internal Audit (IIA) Malaysia. IIA Malaysia was established in 1977 as a
Chapter of The Institute of Internal Auditors Inc, USA and elevated to the status of a National Institute in
1988.
There are a number of researches had been done in the area of the IA in private and public sector. The
fact that effective IA can contribute to the significant impact to the quality of management has raised the
interest for researchers to explore into this matter. Effectiveness of IA will contribute to the effectiveness of
the client and the organization as a whole [7]. The IA findings and recommendations are clearly crucial to
the management of public office to follow through and immediately rectify the problems in the organisation.
Mihret & Yismaw [12] suggested public sector organizations are required to have an internal audit function
to support effective management in managing public funds. So many findings from the research done linked
the effectiveness of the internal auditor contribution to effective management and internal control of the
agency. According to Okafor & Ibadin [14] that the internal audit exercises a critical role in improving
corporate governance in organizations. In terms of accountability and management relationship, Saren and
De Beelde [15] found that Internal Auditors are playing a pioneering role in the creation of a higher level of
risk and control awareness in managing risk in the management system. Internal audit is a ‘comfort provider’
to the Audit Committee especially in its assurance role and its involvement in improving internal control [15].
Barry J. Cooper, Philomena Leung and Clive M.H. Mathews [5] on their study on Benchmarking- a
comparison of IA in Australia, Malaysia and Hong Kong found that 51.7 % of Malaysian CEOs and 50.5%
Hong Kong CEOs were more assertive in their opinions about IA being an independent evaluation function
on the effectiveness of management. Furthermore, Australian research study on Financial Reporting and
Auditing Bridging the Expectation Gap suggested that apart from management, internal auditing is the centre
of integrated activities within organization, and it is the best suited for the new roles as agent of change.
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2.1. Auditors competency
Competency can be relate to the ability of an individual to perform a job or task properly base on the
educational level, professional experience and the effort of the staffs for continuing professional
development. Auditors’ competency determines the effective auditing in the organization. It contributes to
the ability of the auditors to perform the systematic and discipline audit approach to improve the
effectiveness of IA. Mihret & Yismaw [12] concluded in their study that IA office constantly face the
problem of low technical staff proficiency and high staff turnover, which would limit it capacity to provide
effective service to management. Whereby Angus Okechukwa Unegbu, Mohamad Isa Kida [4] found in their
study that, IA can effectively carry out their duty in the public sector if there are enough IA personnel with
required competencies. Competency of auditors determines the quality of the audit work performed in an
organization. Competency is measured in terms of academic level, experience, skill and the effort of the
staffs for continuing professional development. Competency determines the efficiency of the auditor in
setting a systematic and disciplined approach to evaluate and improve the effectiveness of the organization’s
activities and financial management as well as governance processes.
2.2. Independence /objectivity of internal auditors
The other factor that may contribute to the effective government audit activities is the need of
organizational independence and objectivity which can allow the audit activity to conduct work without
interference by any party for the audit task. The independence and objectivity of internal auditing is with
respect to both assurance services and consulting for the organization. Independence and objectivity are
closely related where the freedom from conditions that may threaten objectivity and no significant quality
compromises are made during rendering the audit service [8]. In fact, the audit activity should have sufficient
independence from those it is required to audit so that it can both conduct its work without interference and
be seen to be able to do so [9]. This is very crucial element in conducting audit because the auditors can
access to any document relating to the audit work without favour and fear. This will make the auditors
provide the objective report and reliable professional judgement on the auditing work to achieve the mandate
given to them with integrity. Independence of auditors would not be considered to be impaired if the auditors
do not appear to act in a capacity equivalent to a member of client management or as an employee [6]. In
certain extent there is a confusion of the role of IA as internal auditors are part of the management team and
at the same time to independently evaluate management’s effectiveness and efficiency. However, in more
recent years, there has been heightened interest in issues associated with the independence and objectivity of
internal audit. This could affect the effectiveness of internal auditing as even though internal auditor are
charged with upholding the best interests of their employer, they may be reluctant to counter management,
regardless of consequences [15].
2.3. Management support to the roles of IA
The support and commitment of management also have the certain impact to make sure IA is functioning
effectively. The success of IA function will depend on the strength of management’s support for the auditing
process. They have to accept the fact that the IA process is just as critical and important activity as any other
process within the organization. Some study found that without management approval, support, and
encouragement, the IA audit process are likely to face failure and worse – time and money wasted. A Md Ali,
A Ahmi and MH Shahdan [1] on their study on IA in the state and local government of Malaysia found that,
the effectiveness of the IA function in State and Local Government appears to be directly related to the
management style of organization heads and their links, relationships and position in the social contract.
Some IA function appears to be doing well, the determining factors appear to be the attitude and leadership
qualities of the head of an organization and audit reports that are ignored by everyone [1].
Mihret & Yismaw [12] on their study also found that IA recommendations are not afforded enough
attention. Though the audit reports are generally well prepared, they do not separately highlight the status of
past audit results and they could be presented in a more consistent way. Besides, the audit evidence is
attached to the reports. This provides a bulky appearance of the audit reports and reduces readability. The
distribution of the audit reports is limited where copies are not provided to other senior management officers
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to which related to audit report. Their study also concluded that management supports to internal audit as a
determinant of internal audit effectiveness.
Auditors Competency
Internal Audit Effectiveness
Independence/Objectivity
of IA
Management Support
Fig. 1: Shows the research framework for this paper.
3. Methodology
Malaysian Government ministries had formally established their IA department by adopting the staffing
of the National Audit Department. The Strategic Financial Planning Division of Federal Treasury is
responsible for the monitoring and coordinating the operation of IA Department to all public agencies. From
the data given by this division, the total number of IA auditors in government agencies throughout of the
country has currently increased to 1,086 staffs compared to 640 in 2008. Out of this number 636 or 56 % of
them are seconded staff from National Audit Department. For the purpose of this study, only IA staffs that
are seconded from the National Audit Department are selected to answer the questionnaires as targeted
sample. The questionnaires were distributed randomly to the IA Department of ministries located in
Putrajaya through the IA head of the Department. Out of this number the total of 330 questionnaires were
distributed through the IA department head to the related ministries which constitute 51.56% of the total
population.
The questionnaires are divided into five sections which are demographic profiles of the respondents,
auditor competency, independence/objectivity of internal auditors and management support. The items asked
in the questionnaire are developed based on a previous study approach by Zeleke Belay [17] and Aaron
Cohen & Gabriel Sayag [2]. Certain modification has been made to the questionnaires accordingly as to
accommodate with this study objective. The independent variables were measured on a five-point Likert
scale of: Strongly disagree = 1, disagree = 2, neither agree nor disagree = 3, agree = 4, strongly agree = 5.
4. Results
The sample size was 330 IA auditors of which the returned response was 191 or (57.9%). Table 1 shows
the general demographic profile of the respondents. It depicts that most of the respondents were
females(57.1%). In addition majority of the respondents (65.0%) are at the age of below 39 years old.
(83.2%) of respondents are married. (94.3%) holds tertiary level education with either diploma, bachelor or
master degree.The table also shows that most respondents are at the grade of middle managers and below
(86.3%). On having any affliation to a professional body only (28.3%) were members to either national or
international body. Interm of auditing experience (57.6%) has experience 10 years and below. On income,
majority of the respondents (83.2%) were from the income group that earns less than RM5000 per month.
Table 2 shows the Chronbach’s Alpha for all variables, Kline [10] indicated that a value of 0.7
Cronbach’s Alpha or higher is considered acceptable. The statistics show that all variables exhibited values
ranging 0.722 to 0.835, which suggested that the data are reliable and consistent with acceptable research
standards.
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Thereon, a bivariate correlation was undertaken between the independents and dependent variables. It
was hypothesized that a positive relationship would exist between auditors’ competency and Effectiveness of
IA and this is rightly evidenced where r = 0 .640. It was hypothesized also that the Independence/objectivity
of internal auditors has positive relationship with IA effectiveness and the result of Pearson Correlation
indicated that r = 0.602 (See Table 3).
Table 1: Respondents Demographic Profile
Gender
Age
Maritul Status
Education Level
Grade of Services
Member of
Professional
Body
Auditing Work
Experience
Income level
Frequency
82
109
49
75
37
30
28
159
4
11
84
89
7
129
36
24
2
21
33
137
69
41
36
16
29
74
85
30
2
Respondents’ profile
Male
Female
20 - 29
30 - 39
40 - 49
50 - 59
Single
Married
Others
Secondary
Diploma
Bachelor
Master
G27 – G36
G41 – G44
G48 – G54
JUSA C and above
MIA
IIAM
None
Less than 5 years
5 – 10 years
10 – 15 years
15 – 20 years
More than 20 years
RM 1000 – RM 3000
RM 3001 – RM 5000
RM 5001 – RM 10000
More than RM10000
%
42.9
57.1
25.7
39.3
19.4
15.7
14.7
83.2
2.1
5.8
44.0
46.6
3.7
67.5
18.8
12.6
1.1
11.0
17.3
71.7
36.1
21.5
18.8
8.4
15.2
38.7
44.5
15.8
1.0
Table 2: Reliability Analysis for Independent and Dependent Variable
Variable
No of Item
Cronbach’s
Alpha
Auditors Competency
6
0.722
Independence/Objectivity of IA
10
0.778
Management Support
10
0.835
Internal Audit Effectiveness
6
0.731
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Table 3: Pearson Correlation
N
Variables
Mean
SD
1
2
Auditor’s
Competency
4.1466
.4845
Independence/
Objectivity of
IA
4.0073
.4468
.662**
Management
Support
4.0471
.4601
.724**
.703**
Effectiveness
of IA
4.1291
.4328
.640**
.602**
3
.659**
** Correlation is significant at the 0.01 level (2-tailed)
5. Discussion, Conclusion and Recommendation
From the previous section, the result indicated lack of qualified, skill and experience of the auditors in
internal audit department may cause the delay in auditing work. From the profile of the respondents only
32.5% of the respondent are from professional group of service and the rest are from supporting group of
service. From the response only half of the respondents (50.3%) are poses the degree holder and above and
the rest are from diploma holder and below. Furthermore, most of the respondents (57.6%) do have less than
10 years experience in auditing. With all these fact, it can be assumed that internal auditors working in public
sector have relatively still lack of qualified, skill and experience of the auditors. This finding also support by
Zeleke Beley [17], that organizations have problems of human resource by not having sufficient staff, nonexistence qualified staff, insufficient of skill and experience, inflexible staffing strategy which contribute to
the set back to the effort of strengthening internal audit function in the organisation.
Pearson Correlation statistic found that there are significant positive correlation between auditor
competency , independence/objectivity of IA and management support to the effectiveness of IA. The
finding indicates the greater of IA effectiveness will depend to auditors’ competencyand management
support. As such any negative factor that affected to these factors will give a significant change in the
effectiveness of IA. Krisnamoorthy [1] concluded that it is futile to attempt a rank ordering of the three
factors of objectivity, work performance and competence are interrelated and no single factor can be used in
isolation to make an overall evaluation of the strength of IA function. Management support is the most
influencing factor among the factors that contribute to the variation of quality audit work and this obviously
crucial factor to the effective IA function. The finding is collaborate with Aaron Cohen & Gabriel Sayag [2]
who’s found that the support of management is almost crucial to the operation and success of IA. It may
even be that all the other determinants of IA effectiveness derive from the support of top management, given
that hiring proficient IA staff, developing career channels for IA staff, and providing organisational
independence for IA work are all results of decisions made by top management.However, not all of these
factors are under internal auditors’ control. Among controllable factors, the most relevant deal with
competence and professional proficiency of internal auditors. Some attributes beyond the control of public
internal auditors. As to conclude, the effectiveness of IA function was perceived to be quite high even when
there certain low agreement to the certain factors being analysed.
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131
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