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MAKERERE UNIVERSITY

THE CONTRIBUTION OF INTERNAL AUDITING TOWARDS

ORGANIZATIONAL GROWTH.

BY

MAGALA JOB

07/U/10046/EXT

SUPERVISOR:

DR. KAMUKAMA NIXON.

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY

IN PARTIAL FULFILLMENT FOR THE AWARD OF

A BACHELOR DEGREE IN COMMERCE

JUNE 2011

DECLARATION

I MAGALA JOB, declare that the work presented is my original work and all its

contents compiled and produced out of my efforts under the guidance of my supervisor,

DR. KAMUKAMA NIXON. It has never been presented in any university/ institution

and where the work of other authors has been consulted, due acknowledgement has been

made.

Signature ………………………………………………….

MAGALA JOB

07/U/10046/EXT

(STUDENT)

Date …………………………………………………………..

i

APPROVAL

This is to certify that this report has been under my supervision and is now ready for

submission to Makerere University with my approval as a partial requirement for the

award of a Bachelor of Commerce degree.

Signature……………………………………………………………

DR. KAMUKAMA NIXON

(SUPERVISOR)

Date ……………………………………………………………….

ii

DEDICATION

To my family and friends: my inspiration.

iii

ACKNOWLEDGEMENTS

The completion of this paper has been an enormous task and therefore could not have

been accomplished by the author alone. On this note, I thank the Almighty God for the

grace he has given me to complete this research report. I also hereby acknowledge my

indebtedness to the following people for their contribution towards the success of this

study; Henry, Flavia, Joannie. Thank you for your support.

I wish to extend my gratitude to my supervisor, DR. Kamukama Nixon for his help and

patience, my lecturers and classmates for all they have contributed to my success.

I could also like to appreciate the clients and the staff of Standard Chartered Bank,

Speke Road, where and with whom this research was carried out for the help they

rendered to me.

Last but not least, I would like to thank you Pr. Stephen Kimbowa, for all your support.

May God richly bless you.

iv

TABLE OF CONTENTS

DECLARATION..................................................................................................................i

APPROVAL........................................................................................................................ii

DEDICATION...................................................................................................................iii

ACKNOWLEDGEMENTS................................................................................................iv

TABLE OF CONTENTS....................................................................................................v

LIST OF ABBREVIATIONS............................................................................................ix

ABSTRACT........................................................................................................................x

CHAPTER ONE................................................................................................................1

1.0 Background to the study................................................................................................1

1.1 Introduction....................................................................................................................1

1.2 Statement of the problem...............................................................................................3

1.3 Purpose of the study.......................................................................................................3

1.4 Objectives of the study..................................................................................................3

1.5 Research questions.........................................................................................................4

1.6 Significance of the study...............................................................................................4

CHAPTER TWO...............................................................................................................5

2.0 LITERATURE REVIEW..............................................................................................5

2.1 The contribution of internal auditing towards organizational growth...........................5

2.2 Internal Auditing............................................................................................................5

2.2.1 Roles of internal auditing............................................................................................6

2.2.1.1 Internal auditing as a risk management mechanism................................................6

2.2.1.2 Internal auditing as a control mechanism................................................................6

2.2.1.3 Internal audit as an internal governance mechanism...............................................7

2.2.1.4 Reviewing the accounting system...........................................................................8

2.2.2 Internal and external audit relationship......................................................................8

2.2.3 Responsibility of internal auditing..............................................................................9

2.2.4 Professional competence............................................................................................9

2.2.4.1 Approaches to competence....................................................................................10

2.3 Organizational growth and financial performance......................................................10

2.3.1 Financial performance measurement........................................................................11

v

2.3.1.1 Profitability measurement......................................................................................11

2.3.1.2 Economy, Efficiency and Effectiveness................................................................12

2.3.2 Benchmarking...........................................................................................................13

2.4 Relationship between internal auditing and organizational growths...........................14

2.5 Conclusion...................................................................................................................15

CHAPTER THREE.........................................................................................................16

3.0 METHODOLOGY...................................................................................................16

3.1 Introduction..................................................................................................................16

3.2 Research design...........................................................................................................16

3.3 Survey population........................................................................................................16

3.4 Sampling......................................................................................................................16

3.4.1 Sample design...........................................................................................................16

3.4.2 Sample size...............................................................................................................17

3.5 Sources of data and collection methods.......................................................................17

3.5.1 Primary data..............................................................................................................17

3.5.2 Secondary data..........................................................................................................17

3.6 Data processing and analysis.......................................................................................17

3.7 Data presentation.........................................................................................................18

3.8 Problems encounted during the study..........................................................................18

3.9 Solutions to the problems............................................................................................18

CHAPTER FOUR...........................................................................................................19

4.0 ANALYSIS, PRESENTATION AND INTERPRITATION OF THE RESEARCH

FINDINGS.........................................................................................................................19

4.1 Findings on the demographic characteristics of respondents...................................19

4.1.1 Findings on the sex of respondents...........................................................................19

4.1.2 Findings on the age of respondents..........................................................................19

4.1.3 Findings on the level of education of the respondents.............................................20

4.1.4 Findings on the respondents experience with the organization................................20

4.1.5 Findings on the marital status of the respondents.....................................................21

4.2. Findings on the importance of internal auditing......................................................22

4.2.1 Findings on fraud detection......................................................................................22

vi

4.2.2 Findings on the organizations profitability..............................................................22

4.2.3 Findings on organizational competence...................................................................23

4.2.4 Findings on the banks record keeping......................................................................23

4.2.5 Findings on competitive advantage to the organization...........................................24

4.3 Findings on organizational growth..........................................................................24

4.3.1 Findings on the organizations financial performance..............................................24

4.3.2 Findings on organizations competence.....................................................................25

4.3.3 Findings on risk levels in the organization...............................................................25

4.3.4 Findings on economic performance, effectiveness and efficiency of the

organization.......................................................................................................................26

4.3.5 Findings on profitability measurement in the organization......................................26

4.3.6 Findings on fraud detection in the organization.......................................................27

4.4 Findings on the relationship between internal auditing and organizational growth..27

4.4.1 Findings on early symptoms of fraud.......................................................................27

4.4.2 Findings on material misstatements in financial statements.....................................28

4.4.3 Findings on internal controls and ethical behavior...................................................28

4.4.4 Findings on competitive advantage to the organization...........................................29

4.4.5 Findings on risk management in the organization....................................................29

4.4.6 Findings on internal auditing and organizational growth.........................................30

CHAPTER FIVE.............................................................................................................31

5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS................................31

5.1 Introduction..................................................................................................................31

5.2 Summary......................................................................................................................31

5.3 Conclusion...................................................................................................................31

5.4 Recommendations........................................................................................................32

REFERENCES..................................................................................................................33

Appendix I: SURVEY QUESTIONNAIRES....................................................................35

Appendix II: BUDGET......................................................................................................39

Appendix III: TIME FRAME............................................................................................40

vii

LIST OF TABLES

Table 1: Sex of respondents. .............................................................................................. 19

Table 2: Age of respondents. ............................................................................................. 19

Table 3: Respondents level of education. .......................................................................... 20

Table 4: Respondents experience. ..................................................................................... 20

Table 5: Respondents marital status. ................................................................................. 21

Table 6: Detection of fraud in the organization. ................................................................ 22

Table 7: Organizations profitability. .................................................................................. 22

Table 8: Organizations competence. .................................................................................. 23

Table 9: Record keeping in the bank. ................................................................................ 23

Table 10: Organizations competitive edge. ....................................................................... 24

Table 11: Organizations financial performance. ............................................................... 24

Table 12: Organizations competence. ................................................................................ 25

Table 13: Risk in the organization. .................................................................................... 25

Table 14: organizations economic performance, effectiveness and efficiency. ................ 26

Table 15: Ways of measuring profitability in the organization. ........................................ 26

Table 16: Fraud detection in the organization. .................................................................. 27

Table 17: Symptoms of fraud. ........................................................................................... 27

Table 18: Material misstatements in the organization. ...................................................... 28

Table 19: Internal controls and ethical behavior. .............................................................. 28

Table 20: Organizations competitive advantage. ............................................................... 29

Table 21: Risk management. ............................................................................................. 29

Table 22: Correlations ....................................................................................................... 30

viii

LIST OF ABBREVIATIONS

IIA INSTITUTE OF INTERNAL AUDITING

SOA SARBANES OXLEY ACT

CCR COORDINATING COMMITTEE ON REMUNERATION

ix

ABSTRACT

The topic of the study was the contribution of internal auditing towards organizational

growth and Standard Chartered bank, Speke road was used as a case study. It was

conducted by guidance of the objectives namely: establish the contribution of internal

auditing towards the growth of Standard Chartered bank, investigate how internal

auditing affects the financial performance of the organization and to examine the

relationship between internal auditing and organizational growth.

The study was carried out using descriptive, cross-sectional and correlation research

design based on 30 respondents who were selected using random sampling and stratified

sampling methods. Questionnaires were the main instruments of the study and data was

analyzed using SPSS method and presented in tables showing their rankings, frequencies

and percentages.

Findings on the scope of internal auditing revealed that the services of IIA have been

very well disbursed and that many of the clients find them accessible and very useful in

investment and economic development and growth. The findings on organizational

growth show that fraud is one of the major causes the low levels of organizational growth

in the economy and that the fraudulent reduction tools implemented have been well

executed although a lot is still needed in order to realize tangible reduction in fraudulent

levels. According to Pearson correlation, the result is positive r=0.810 which implies a

strong relation ship between the internal auditing and organizational growth in the

economy. IIA have helped reduce fraudulent levels in organizations in the economy and

so, each organization should have an internal auditing department set up to continue the

campaign.

The recommendation on the internal auditing services was that they should endeavor to

extend services to empower and improve the internal audit function and ensure effective

performance. Recommendation in fraudulent reduction was that in order to reduce fraud

effectively, the audit commit should be given regular access to the organizations records

when ever need arises and that staff should be constantly monitored. The internal audit

should also be independent and be seen as independent from the organization.

x

CHAPTER ONE

1.0 Background to the study.

1.1 Introduction.

Internal auditing is an independent, objective assurance and consultancy activity

systematically designed to add value and improve an organizations operations,

performance, efficiency and effectiveness. It helps the organization to achieve its

objectives and goals by bringing a systematic, disciplined approach to evaluate and

improve the effectiveness of governance, risk control, planning and management control

(IIA Report, 1999).

In the past, auditors complained of fraud and theft as an objective of auditing and it was

the auditors duty to report to shareholders of all the dishonest acts that were observed and

had affected the propriety of the contents of the financial statements and by early 1930’s,

it was recognized that the auditing objective was for the verification of accounts (Carey,

P., 2000).

For the development of a true professional status of internal auditing, the institution of

internal auditors became the outgrowth for organizational development. Although the

roots are in accountancy, its key purpose lies in the area of management control. It

comprises a complete intracompany financial and operational review (Robert, B.M.,

1945). The internal audit function became responsible for careful collection and

interpretation of selected business facts to enable management to keep track of significant

business developments, activities and results from diverse and voluminous transactions

(Mautz, 1964).

By 1993, the statement of responsibilities of internal auditing noted that internal auditing

encompasses the examination and evaluation of the effectiveness of organizations system

of internal control and the quality of performance in carrying out assigned responsibilities

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(IIA Report, 2002). It led to reduction in corruption cases in many organizations that was

uncovered and had a big impact on the company’s sales and profitability. Auditors had to

explain to the shareholders what those effects would have on the organizations growth

(www.deloitte.com).

Many organizations have now employed the use of internal auditing since it is today’s

major factor in establishing the quality of the organizations internal control system.

Organizations are also struggling to implement more effective governance structures and

processes. In such s climate, it is no surprise that the internal audit function is viewed as

the most qualified group of professionals to help with such experimentation with

improved governance as well as support key governance processes for monitoring the

controls over and for evaluating the operational effectiveness of these management

strategies and initiatives.

However, to take advantage of this tremendous surge in the demand for their services,

not only do internal auditors need a considerably enhanced repertoire of skills, attributes

and competencies but they also need to commensurately raise their organizational status

and profile and align themselves appropriately within their respective organizations

(Stone, M., 2000)

Internal auditing group was to monitor compliance with the policies and standards and

the effectiveness of the internal control structure across the organization. There work was

focused on the areas of great risk as determined by the risk assessment approach (CCR,

2008).

Organizations today still face many problems despite the presence of internal auditing

teams. Companies are seen to have poor management of resources, mainly funds due to

the high levels of fraud. The findings of audit were meant to be used by management to

ensure that the organization grows but management seems to be so reluctant to take

immediate actions hence hindering organizational competitiveness and effectiveness.

2

http://www.deloitte.com/

1.2 Statement of the problem.

Majority of organizations today have created the internal audit department to examine the

fraud issues, financial reporting and misappropriation of the organizations assets by

ensuring accuracy, objectivity and consistency of the financial statements as a

prerequisite in monitoring proper organizational financial performance (Author, 2005).

This has led to the seen developments in organizations such as improved financial

records keeping, restricted access to financial records by unauthorized persons, fraudulent

detection and improved management of funds. This has led to faster organizational

growth. However, despite the establishment of the internal auditing department in

organizations and all the above advantages, the goals are not attained at the expected

level. The organizations today still have poor book keeping methods, lots of fraudulent

behavior by mostly the top officials and hence the poor performance and so it’s against

the above background that the researcher was compelled to evaluate the contribution of

internal auditing to organizational growth.

1.3 Purpose of the study.

The purpose of the study was to find out the contribution of the internal auditing

department towards the growth of Standard Chartered bank.

1.4 Objectives of the study.

The objective of the study was to;

i) Establish the contribution of internal auditing towards the growth of Standard

Chartered bank.

ii) Investigate how internal auditing affects the financial performance of the

organization

iii) Examine the relationship between internal auditing and organizational growth.

3

1.5 Research questions.

i) What is the contribution of internal auditing towards the growth of the

organization?

ii) How will internal auditing affect the financial performance and viability of

the organization?

iii) What is the relationship between internal auditing and organizational growth?

1.6 Significance of the study.

The study was carried out to attain the following;

i) To make organizations aware of the roles of internal auditors to effective and

efficient organizational growth.

ii) To avail more data on organizational development, this will help future policy

makers.

iii) To avail more analytical techniques, this could b used by future researchers.

4

CHAPTER TWO

2.0 LITERATURE REVIEW.

2.1 The contribution of internal auditing towards organizational growth.

On the basis of the available literature, this chapter points out some of the contributions

of internal auditing towards organizational growth. This literature provides a critical

review of the issues and concepts that have been written, sited and explored by different

authors, researchers and scholars. It is meant to give the reader an understanding of the

contribution of internal auditing; internal and external audit relationship, the

responsibility of internal auditing and organizational growth as well as organizational

performance.

2.2 Internal Auditing.

Internal auditing is an independent appraisal function established by management for the

review of internal control systems as a service to the organization and it is also defined as

an independent, objective and consulting activity designed to add value and improve the

organizations operations (IIA, 1999). It helps an organization to accomplish its objectives

by bringing a systematic, displined approach to evaluate and improve the effectiveness of

risk management, control and governance processes. This definition is designed to

embrace the expanding role of internal audit which in recent years has evolved from a

narrow focus on control to include risk management and corporate governance (Walker et

al., 2003; Brody & Lawrence, 2000). This definition is used as a framework to develop

hypotheses concerning the characteristics of companies that use internal audit (Colbert,

2002). Internal auditing is a profession that has evolved steadily with the progress of

management science after World War II (SOA, 2002).

5

2.2.1 Roles of internal auditing.

2.2.1.1 Internal auditing as a risk management mechanism.

Internal auditing professional standards require the function to monitor and evaluate the

effectiveness of the organization’s risk management process. This relates to how the

organization sets its objectives, identifies, analyses and responds to those risks that could

potentially impact its ability to release its objective (www.us.kpmg.com). Internal

auditors add value to the entity by providing assurance that its risk exposures are properly

understood and managed (Walker et al., 2003). Internal audit plays a major role in

monitoring a company’s risk profile as well as identifying key areas to improve the risk

management processes (Race, 2002). Curtis C, Verschoor, et al. (2001) explain that

internal auditing helps organizations to identify and evaluate risks, moving the profession

into the front line of risk management. Fred, F. & Simon, K. (1999) state that a strong

organizational commitment to managing risks requires the development of a risk-based

culture within the company.

2.2.1.2 Internal auditing as a control mechanism.

Internal control is the process adopted by the directors and management of an entity to

provide reasonable assurance that the objective of the entity are achieved with regard to

operations, financial reporting and compliance with regulations (Brody, R.G & Lowe,

D.J., 2000). External auditing standards recognize that an effective internal auditing

function can significantly strengthen the control environment by reviewing the internal

control structure (Kirschencheiter, M., 2000).

As a result of the asymmetry of information between senior managers and division

managers (Brody, R.G & Lowe, D.J., 2000), senior managers lose their ability to tightly

control operations. This is compounded by the existence of internal agency costs that

arise because of difference in incentives between top managers and those at the operating

level. Therefore, it is important to have in place a strong system of internal control, which

includes the use of internal audit as a review and monitoring mechanism (Wright, A., &

Rajeswarn, 2004). In this way, senior management delegates their responsibilities with

6

http://www.us.kpmg.com/

respect to internal control to the internal audit function (Davidson, R., & Kentie, P.,

2005).

2.2.1.3 Internal audit as an internal governance mechanism.

The internal auditing process is important in a corporation’s governance mechanism

because it evaluates the corporate activities, controls or procedures and ensures that they

are adequate and in compliance with senior and human resources guidelines (Marquis, C.

2010). Marquis, (2010) adds that internal auditing helps the firm to adhere with the

regulatory standards and industry policies. From an agency perspective, the importance

of strong governance stems from the need to align the interests of management with other

stakeholders in the firm in order to reduce agency costs (Cohen et al., 2004). Various

corporate governance mechanisms can be used to monitor management’s behavior and

these include independent directors on the board, an independent board chair, an effective

audit committee and both external and internal audit (Carcello et al., 2005). Cohen et al.,

(2004) describe the complex interaction between these governance mechanisms as the

“corporate governance mosaic”. Davidson, R., (2005) argues that internal audit is a

substitute mechanism for monitoring by directors. However, information asymmetry

problems between executive and independent directors suggest that internal audit is more

likely to be a complementary mechanism. This is supported by research evidence

examining the relationship between internal audit and audit committees (Carcello, et al.,

2005; Goodwin, 2003 and Raghunandan et al., 2001) and this is also consistent with the

IIA view that internal auditing helps an organization to evaluate and improve other

governance processes (IIA, 1999, 2004). Hence, there should be a positive association

between the use of internal audit and both an independent board chair and the proportion

of independent directors on he board plus a positive association between the internal

audit function and a strong audit committee because the goal of both are “closely

intertwined” (Reed, S.A., 2002).

7

2.2.1.4 Reviewing the accounting system.

The accounting system is mainly made up of the accounting information systems and this

is the total suite of components that together comprises of the inputs, storage transactions

processes and collecting and reporting of financial transaction data (Goodwin, J., 2003).

The objectives of this system are to collect and store data about accounting transactions

in order to generate meaningful output for decision making (Nkundabanyanga, 2004).

The internal auditing department must ensure that the transactions in the accounting

system are following the laid down procedures and that there is no manipulation of the

accounting information.

Accounting system controls consist of basic controls and dispute over basic controls

which the internal auditor should constantly review. Basic controls are the ones that are

necessary for the compliments and accuracy of the accounting records and they can

include custody controls that is to say, adequate arrangements for custody of accounting

records in that there is separation of related record keeping and physical arrangements

that prevent unauthorized access to accounting records.

2.2.2 Internal and external audit relationship.

The value internal audit can add to the organization is affected by the corporation and co-

ordination between the internal and external audit (Cenker, W.J., 2002). Although the

primary purpose of internal audit differs from that of the external audit, there are

common interests that provide the basis for co-operation between them (Moeller and

Witt, 1999). Not only is the internal audit function an important part of the internal

control system, but the reliance by external audit on the work of internal audit is likely to

result in less external audit work being performed and external audit cost savings (Felix

et al., 1998 & Gramling, 1999).

If the internal audit department consists of quality internal audit staff in terms of their

competence, objectivity and work performance then they are likely to be capable of

contributing to an effective external audit (Morrill, et al., 2003). Barton, (2003) argues

8

that if there are doubts about the internal auditor’s objectivity and competence, then

reliance on their work by the external auditor may reduce the quality of the external audit.

The external auditors may choose to rely on substantive tests or tests relating to the

application of internal controls performed by the internal audit department, which may

alter the type, quality and timing of external audit work (Morril, J., 2003). However,

Nagy & Cenker (2002) question whether the external auditor can rely on the newly

defined internal audit function in terms of its movement away from a traditional

assurance approach to a value added and consulting approach to internal audit

(IIA, 2000).

2.2.3 Responsibility of internal auditing.

Internal auditing is performed by internal auditors who are appointed by the management

to ensure the correctness in accounting data and detection of frauds (Maletta, M.J., 2001).

So, the internal auditors are answerable to management and the board of directors which

discharges their duties and responsibilities.

Internal auditors are required to have broad based interpersonal and analytical skills to

ensure that the accounting system is efficient and also provide with accurate and material

information through detection of errors and frauds as emphasized by Ramaswamy,

(2004).

According to Kirschencheiter, M.(2000), internal auditors are given some degree of

independence in order to enable them perform their duties. They report to the board of

directors and management on whether the policies and plans of activities prescribed by

management have been implemented. That is whether the internal controls established are

adequate or whether the actual results vary from the estimated ones.

2.2.4 Professional competence.

Mclure, (2000) defines professional competence as the ability to perform to recognize

standards. To them, a person described as competence in a profession is considered to

9

have repertoire of skill, knowledge and understanding which he or she can apply in a

range of contexts in organization.

2.2.4.1 Approaches to competence.

In distinguishing between the different approaches to competence, Mclure (2000)

highlighted four categories on which competence can be based. These include

competence based on description of action, behavior or outcome in the form that is

capable of demonstration, observation and assessment; competence which can be seen as

a broad cluster of ability linked together conceptually; competence as a deep cognitive

structure of general, which is not fixed but has potential to develop and competence that

is determined by actors in any given situation, that is to say, that which is situational

specific.

The question for an individual profession is to identify a level which is accepted in terms

of a minimum requirement to be professionally recognized and developing a system for

ensuring that individuals maintain their level of competence and achieve recognition for

development beyond the minimum requirement.

2.3 Organizational growth and financial performance.

This is a subjective measure of how well a firm can use assets from its primary mode of

business and generate revenues (Dess, G. & Robinson, R., 2004). This term is also used

as a general measure of a firms overall financial viability over a given period of time, and

can be used to compare similar firms across the same industry or to compare industries or

sectors in aggregation (Durand, R., 2004).

The most common way through which managers know whether the organization is

performing well financially is by use of ratio analysis. A financial ratio is used as a

benchmark for evaluating the financial performance of an organization (Pandey, 1999).

10

2.3.1 Financial performance measurement.

Financial performance measurement is an integral part of planning and control cycle

(Robinson, R., 2003). A measure of past performance is valuable not only to the current

control activities but also to provide data for future plans which can not be made realistic

without assessment of what happened in the past.

There are many different ways to measure financial performance, but all measures should

be taken in aggregation (Dall, T., 2004). Line items such revenue from operations,

operating income or cash flow from operations can be used, as well as total unit sales.

Furthermore, the analyst or investor may wish to look deeper into financial statements

and seek out margin growth rates or any declining debt (Pandey, 2002).

According to Kaplan (2006), the main areas to be analyzed when considering an

organizations growth are profitability, liquidity, efficiency and leverage levels as ratios

which can be used to predict an organizations performance.

2.3.1.1 Profitability measurement.

The firm manager has to continuously evaluate the effectiveness and efficiency of the

organization in terms of profits (Pandey, 1999). Profit is another generally accepted

measure to evaluate the business both internally and externally (Porth, 2003). Internal

users of financial information identify profit as the reward for the skills of being a

successful entrepreneur. Recent press coverage in the UK has indicated that this measure

is a major determinant of the reward system of managers of decentralized units. If they

meet certain qualified performance targets, they obtain the financial reward that

recognizes their entrepreneurial skills (Peter Druker, 1997).

External users of accounts recognize profit as a measure for identifying the successor

failure of the policies of the directors who, as stewards of the assets are entrusted with the

task of increasing the wealth of the shareholders (Kaplan, 2006).

11

An operating profit margin is calculated as the net income plus interest expense minus

family living and income taxes divided by gross revenues (Dess, G., 2003). According to

Walker, E (2001), the proportion of earnings or revenues is the operating profit and thus

available to compensate debt and equity capital which indicates the operating margins

and reflects ability to generate revenues and control costs in such a way as to generate a

profit.

2.3.1.2 Economy, Efficiency and Effectiveness.

Thomason (2004) says that organizational performance is mainly judged in term of

economy, efficiency and effectiveness.

Economy involves attaining the appropriate quantity and quality of physical, human and

financial resources at minimal cost. Economy therefore implies the principle of frugality.

Efficiency is the relationship between the goals and services produced and the resources

used to produce them with the objective of maximizing output and minimizing inputs.

Efficiency implies maximizing the output to input ratio (Kakuru, 2001).

The effectiveness of the organization as a performance measure focuses mainly on how

well the objectives are being achieved through the spending of the available resources.

However, Durand, (2004) argues that when evaluating the performance, most managers

like to distinguish between effectiveness and efficiency because these two are very hard

to separate. Effectiveness is the degree to which inputs are used in relation to the level of

output. Performance can be either efficient or effective but neither condition can occur

independently.

According to Kaplan (2006), the three measures can be in conflict with the other and may

have to sometimes compliment each other and therefore it may be so hard for one to be

ignored.

12

2.3.2 Benchmarking.

Bench marking is the practice of looking for those businesses that are the best at doing

something and learning how they do it in order to emulate that performance (Durand, R.,

2004). Financial benchmarking involves looking for actual performance data from firms

that are comparable to your own. Firm business managers have several alternatives

available for setting performance standards or benchmarks. Generally, it is important to

assess an organizations current performance relative to performance in prior years. This

can often lead to valuable insights into trends in business performance (Durand, R.,

2004). It is also important to try to control financial performance by projecting expected

values for the key performance measures for the organization. The organization can then

use these projections to systematically evaluate variations between planned performance

and actual performance.

Benchmarking enables the organization to learn about their own business practices and

the practices of others. It helps an organization to identify areas in which it is not

implementing the practices and to determine improvement programmes which will lead

to achievement of and upon current practices (Kakuru, 2001).

Benchmarking should focus on areas which are significant strategic importance to the

organization. It will also be useful to target areas where its envisaged significant

improvement can be made. This is likely to create a positive motivational influence on

the staff and improve their commitment to the benchmarking ethos (Peter, D., 1997).

Benchmarking may have one or more on focus. It may for example be internal in nature

where on one internal unit learns from another or external. It may focus on the best

practices of the competitors where this information can be obtained. Again, it may focus

on customers such as the performance with the expectations of the customers such as the

performance of faulty goods amongst those reaching the customers (Kaplan, 2006).

However, organizations always have to make an effort to know as much as possible about

the source of the benchmarks against which they plan to measure their firm’s

13

performance (Durand, R., 2004). Some benchmarks are highly variable in terms of what

constitutes top performance because organizations of different sizes operate different

economies of scale and also factors such as the type of firm commodities produced.

2.4 Relationship between internal auditing and organizational growths.

Internal auditing departments are set up with the aim of having a positive influence on

organizational growth. For an organization to run effectively and efficiently, internal

controls have to be put in place and hence calling for strong internal control function

within the organization (Reed, S.A., 2002).

If the internal auditing department is functioning well, then in most cases, profits will be

high and there will be the value for money in terms of economy, efficiency and

effectiveness. The value for money implies that efforts must be made to ensure that the

available funds are spent in the provision of goods and services in a way which

maximizes the benefits to the users of the services and goods. But if the internal audit

department is not functioning well, then in most cases, the profits will be low and there

will not be value for money (Reid et al, 1997; 2000).

Sufficient, relevant and reliable information is a prerequisite for an effective and

efficient organizational growth and its internal auditors who review the reliability and

integrity of financial and operational information and the means to identify, measure,

classify and report such information (Flora, 2003). An organization is said to perform

well if it is having a good financial management (Pandely, 1999). This is all supported by

the internal audit function.

It can be noted that internal audit is intended to overcome the tendencies of corruption,

fraud, misappropriations and abuse of office in most organizational growth.

14

2.5 Conclusion.

The above literature has indicated how central and important the notions of roles

responsibility and competence are to the professional practice.

Various scholars and authors have written about the two variables by clearly bringing out

the role played by an effective internal on the organizational growth. Therefore, a strong

relationship exists between the two variables as discussed above.

15

CHAPTER THREE

3.0 METHODOLOGY

3.1 Introduction.

This chapter describes how the research was conducted for the purpose of this research

work. Specifically, it discusses the research designs used, population and sample size,

sampling procedure and design, methods of data collection, measurement and data

analysis. It also provides for the limitations to the study.

3.2 Research design.

The study was basically cross-sectional in nature and was conducted using questionnaires

for primary data, journals, financial reports and statements, internal audit reports and

textbooks for secondary data. The research was descriptive because it involved the use of

tabular presentations for organizing data gathered in a systematic and orderly manner

such as presentations.

3.3 Survey population.

The study mainly covered the employees of the internal audit department that is to say,

the head of audit, plus 30 internal auditors of Standard Chattered bank.

3.4 Sampling.

3.4.1 Sample design.

The research was based on purposive sampling and convenience sampling designs. These

methods were valuable when collecting data from the respondents.

16

3.4.2 Sample size

The researcher based on the sample size of 30 respondents and got enough information

and representation to make the analysis. This was intended to add more value to the

findings as it was convenient.

3.5 Sources of data and collection methods.

The sources of data were both primary and secondary, which assisted the researcher to

make a through analysis of the study problem at hand.

3.5.1 Primary data.

Primary data was collected from respondents through distribution questionnaires,

personal interview guides and observation to some extent of the staff.

3.5.2 Secondary data.

Secondary data was obtained from internet articles, business journals and textbooks plus,

Standard Chattered banks financial reports.

3.6 Data processing and analysis.

Data was edited, coded, classified and tabulated before it was entered into the computer

for analysis. The analysis was done using Microsoft word by making reference to the

available literature. After selecting the respondents, the researcher embarked on the field

research and collected both qualitative and quantitative data. The data was edited to

correct possible errors, omissions and contradictions and later was coded to attach value

to the data as the information was analyzed in form of tables.

17

3.7 Data presentation.

The data was presented in form of tables. The findings were presented in a report form

and were based on findings from the field that is, primary data and also available

literature authored by different scholars. Data was presented in both qualitative and

quantitative form.

3.8 Problems encountered during the study.

The following were the problems the researcher went through during the study.

i) The problem of funds to finance the research that were needed to collect data

from the field, printing, typing and binding.

ii) Time horizon allowed for the research was not sufficient.

iii) There was a delay by the respondents to the research tools especially the self-

administered questionnaires.

iv) Some websites were not easily accessible due to privacy, need for subscription

and passwords needed for full access.

3.9 Solutions to the problems.

The following were the solutions to over come the above problems.

i). More effort like extensive and timely research were invested to over come the

time horizon problem and made a complete study.

ii).The researcher kept on visiting the organization to remind the respondents of

the questionnaires.

iii).The supervisor helped in analyzing the researcher’s data and friends helped

type the work to finish in time.

18

CHAPTER FOUR

4.0 ANALYSIS, PRESENTATION AND INTERPRETATION OF THE RESEARCH

FINDINGS

4.1 Findings on the demographic characteristics of respondents.

4.1.1 Findings on the sex of respondents

Table 1: Sex of respondents.

Sex Frequency Percentage

Male 21 70.0

Female 9 30.0

Total 30 100.0

Source: primary data.

According to the above table, it can be seen that 70% of the respondents were male and

30% were female. This implies that the male are the most employed persons in Standard

Chattered bank, Speke road.

4.1.2 Findings on the age of respondents.

Table 2: Age of respondents.

Age Frequency Percentage

20-29 years 15 50.0

30-39 years 14 46.7

40-49 years 1 3.3

Total 30 100.0


19

The table shows that 50% of the respondents are of age between 20-29 years, 46.7% are

between 30-39 years, and 3.3%, 40-49 years. This implies that the bank employs mostly

those between 20-29 years.

4.1.3 Findings on the level of education of the respondents.

Table 3: Respondents level of education.

Education level. Frequency Percentage

Diploma 6 20.0

University degree 19 63.3

Masters 5 16.7

Total 30 100.0


From the table, 20% of the respondents are diploma holders, 63.3% are university degree

holders and 16.7% are master’s degree holders. This implies the internal auditors are well

educated and trained and most of them are university degree holders.

4.1.4 Findings on the respondents experience with the organization.

Table 4: Respondents experience.

Level of experience Frequency Percentage

1-3years 11 36.7

3-4years 11 36.7

4-5years 1 3.3

5years and above 7 23.3

Total 30 100.0


20

The table shows that 36.7% of the respondents have three years experience, 36.7% have a

four years experience, 3.3% have five years experience and 23.3% have more than five

years experience. This implies that the internal auditors have enough experience with the

subject of study

4.1.5 Findings on the marital status of the respondents.

Table 5: Respondents marital status.

Marital status Frequency Percentage

Married 13 43.3

Single 14 46.7

Divorced 2 6.7

Separated 1 3.3

Total 30 100.0


The table shows that 43.3% of the respondents are married, 46.7% single, 6.7% divorced

and 3.3% separated. This implies that most of the respondents are single committed to

performing their duties.

21

4.2. Findings on the importance of internal auditing.

4.2.1 Findings on fraud detection.

Table 6: Detection of fraud in the organization.

Response Frequency Percentage

Strongly agree 13 43.3

Agree 17 56.7

Total 30 100.0


The table shows that 43.3% of the respondents strongly agree and 56.7% agree. This

implies that surely, internal auditing helps in the detection of fraud in the bank which

improves its performance.

4.2.2 Findings on the organizations profitability.

Table 7: Organizations profitability.


Agree 17 56.7

Disagree 13 43.3

Total 30 100.0

Source: primary data

The table indicates that 56.7% do agree and 43.3% disagree. This implies that the banks

profitability has come with the help of the internal auditing department as all financial

statements will be put into account.

22

4.2.3 Findings on organizational competence.

Table 8: Organizations competence.


Agree 17 56.7

Disagree 13 43.3

Total 30 100.0


The table shows that 56.7% of the respondents agree and 43.3% of the respondents

disagree. This implies that internal auditing has helped to improve the banks competence

in relation to the others in the market through improved service delivery.

4.2.4 Findings on the banks record keeping.

Table 9: Record keeping in the bank.



Agree 17 56.7

Strongly disagree 1 3.3

Total 30 100.0


As per the table readings, 40% of the respondents strongly agree, 56.7% agree and 3.3%

disagree with the subject. This implies that internal auditing improves the banks record

keeping system which improves access to the record whenever done comes in hence

saving time. This also helps in detection of fraud.

23

4.2.5 Findings on competitive advantage to the organization.

Table 10: Organizations competitive edge.



Agree 13 43.3

Not sure 4 13.3

Total 30 100.0


The table indicates that 43.3% of the respondents do strongly agree, 43.3% agree and

13.3% are not sure. This shows that internal auditing provides a competitive edge to the

organization although more effort is needed.

4.3 Findings on organizational growth.

4.3.1 Findings on the organizations financial performance.

Table 11: Organizations financial performance.



Agree 19 63.3

Total 30 100.0

Source: primary data

The table indicates that 36.7% of the respondents strongly agree and 63.3% agree. This

implies that internal auditors function helps to improve the organizations financial

performance.

24

4.3.2 Findings on organizations competence.

Table 12: Organizations competence.



Agree 18 60.0

Total 30 100.0


From the table, 40% of the respondents strongly agree and 60% agree with the question.

This implies that internal auditing is used as a competitive tool for the organization in

relation to others.

4.3.3 Findings on risk levels in the organization.

Table 13: Risk in the organization.



Agree 16 53.3

Disagree 3 10.0

Total 30 100.0


The table indicates that 36.7% of the respondents strongly agree, 53.3% agree and 10%

disagree. This implies that with the introduction of internal auditing in the bank, risk

levels have greatly reduced such as fraud, mismanagement of funds among others.

25

4.3.4 Findings on economic performance, effectiveness and efficiency of the

organization.

Table 14: organizations economic performance,

effectiveness and efficiency.



Agree 9 30.0

Total 30 100.0


The table shows that 70% of the respondents strongly agree and 30% agree. This implies

that the organizations performance has improved in comparison to others with the help of

internal auditing.

4.3.5 Findings on profitability measurement in the organization.

Table 15: Ways of measuring profitability in the

organization.


Yes 23 76.7

No 7 23.3

Total 30 100.0

Source: secondary data.

The table shows that 76.7% of the respondents agree and 23.3% disagree.

This implies that the organization has ways of measuring its profitability levels. The bank

uses financial ratios mainly as a tool in measuring its profit. All such detailed

performances are with the help of internal auditing. Management should also consider

other methods of measuring its profitability.

26

4.3.6 Findings on fraud detection in the organization.

Table 16: Fraud detection in the organization.


Yes 21 70.0

No 9 30.0

Total 30 100.0


The table shows that 70% of the respondents agree and 30% disagree.

With those percentages, it implies that there is a high level of fraud detection in the

organization although, more effort is needed to eradicate it all.

4.4 Findings on the relationship between internal auditing and organizational

growth.

4.4.1 Findings on early symptoms of fraud.

Table 17: Symptoms of fraud.



Agree 11 36.7

Total 30 100.0


The table shows that 63.3% of the respondents strongly agree and 36.7% agree. This

implies that internal auditing plays a crucial role in the detection of fraud in the

organization.

27

4.4.2 Findings on material misstatements in financial statements.

Table 18: Material misstatements in the organization.


Agree 21 70.0

Disagree 9 30.0

Total 30 100.0


The table shows that 70% of the respondents agree and that 30% disagree. This implies

that internal auditing helps in the prevention of material misstatements although efforts

are needed for effective management.

4.4.3 Findings on internal controls and ethical behavior.

Table 19: Internal controls and ethical behavior.


Agree 18 60.0

Disagree 12 40.0

Total 30 100.0


The table shows that 60% of the respondents agree and 40% disagree. This implies that

the internal controls are useful in the organization and that ethical behavior is observed

although some more effort is needed for better performance.

28

4.4.4 Findings on competitive advantage to the organization.

Table 20: Organizations competitive advantage.


Agree 18 60.0

Disagree 12 40.0

Total 30 100.0


The table shows that 60% of the respondents agree and 40% disagree. This implies that

internal auditing provides a competitive advantage to the organization in comparison to

others although more efforts are needed to have fuller competence.

4.4.5 Findings on risk management in the organization.

Table 21: Risk management.


Agree 19 63.3

Disagree 11 36.7

Total 30 100.0


The table shows that 63.3% of the respondents agree and 36.7% disagree. This implies

that internal auditing is a helpful tool in management of risks in the organization.

However, more efforts are required to have risks levels thoroughly reduced.

29

4.4.6 Findings on internal auditing and organizational growth.

Table 22: Correlations

Correlations.

Has internal auditing provided a competitive advantage to the organization?

Has internal auditing helped in identifying early symptoms of fraud?

Has internal auditing provided a competitive advantage to the organization?

Pearson Correlation 1 .810(**)

Sig. (1-tailed) .004 N 30 30Has internal auditing helped in identifying early symptoms of fraud?

Pearson Correlation .810(**) 1

Sig. (1-tailed) .004 N 30 30

** Correlation is significant at the 0.01 level (1-tailed).

Source: SPSS.

According to Pearson correlation co-efficient, the result is positive r=0.810 with a

significance at a level of 0.01 (1-tailed). This implies that there is a very strong

relationship between internal auditing and organizational growth. This strong relationship

is due to internal auditors full performance of there duties. Therefore, organizations

should set up internal auditing departments so as to improve this relationship for their

effective management and performance.

30

CHAPTER FIVE

5.0 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Introduction.

This chapter presents the conclusions and recommendations based on the findings of the

study. The chapter summarizes the findings of the study investigating on the role of an

effective internal audit towards organizational growth, focusing on Standard Chartered

Bank, Speke road.

The chapter also presents the conclusions based on the findings and the

recommendations.

5.2 Summary.

The study was carried out to investigate the role of an effective internal audit on

organizational growth. The findings from the study at Standard Chartered Bank revealed

a low positive correlation of 0.810 between an effective internal audit and organizational

growth.

The study further revealed that Risk management, internal control, internal governance

and the review of the accounting system are the core roles of internal auditors and so the

bank must invest financial resources to develop the status and empower their audit

departments to ensure that they carry out their roles effectively.

5.3 Conclusion.

The analysis of findings from quantitative and the qualitative data of the study reveal that

there was a low correlation of 0.810 and significance level of 0.01 between an effective

internal audit and organizational growth and financial performance of Standard Chartered

Bank. In essence, Standard Chartered Bank has a challenge to fully empower and monitor

its internal audit function in order for it to effectively perform its duties. The research

revealed that Risk management, internal control, internal governance and the review of

the accounting system are the core roles of internal auditors and therefore Standard

31

Chartered Bank, Speke road, must invest resources in the internal audit function so as to

enable it carry out its roles effectively and efficiently.

5.4 Recommendations.

Effective internal auditing is a critical factor on the financial performance and growth of

an organization and based on the findings and conclusions, the following

recommendations have to be made to empower and improve the internal audit function

and ensure its effective performance:

Standard Chartered Bank management should listen and act upon the advice of

the internal auditors and invest time, money and energy.

The objectives of internal audit should be agreed at the highest level in the bank

usually the main board or audit committee and should clearly be understood by all levels

of management.

Internal audit scope and the whole system of controls established by

management of the bank should applied to all activities, not just the controls over

financial accounting and reporting but all operations and management controls.

The internal audit should have access to people, systems, documents and

property as it considers necessary for proper fulfillment of its responsibilities.

The internal audit department should be competently managed in accordance

with professional standards and best practice and should be adequately staffed with

appropriately skilled persons.

Internal audit should be consulted about significant proposed changes in the

bank’s business, the internal control systems and the implementation of new systems.

The head of internal audit should have regular access to the chief executive of

the bank and the internal auditors should be independent and seen to be independent from

executive management of the bank. There should be no conflict of interest.

32

REFERENCES

IIA Report, (1999). “Definition of internal auditing”.

IIA Report, (2002). “Simply good business”.

Carey, P., and Simnet, R., (2000). “Voluntary demand for internal and external auditing

by family business”, A journal of practice and theory, University of Melbourne.

Robert, B. Milne, (1945). “Fundamentals of the internal auditing function”, Modern

accounting systems. media.wiley.com.

James, K., (2003). “The effects of internal audit structure on perceived financial

statements”, Fraud detection.

Gramling A. A., and Maletta. J., (1995). “ The role of the internal audit function in

corporate governance”.

Carcello, Hermanson and Raghanandan, (2001). “Factors associated with U.S public

companies investment in internal auditing”, Risk management changing the internal

auditors paradigin.

McMulen, D. A., (1996). “Audit committee performance”, An investigation of the

consequences associated with audit committees.

Lowe, D. J., (1999). “The effects of internal audit outsourcing on perceived external

auditor independence”.

Sarbanes Oxley Act, (2002). “The Internal Auditing Pocket Guide”, Public company

audit committee.

Mautz. (1964). “Internal Auditing”, Directions and opportunities.

Colbert, (2002). “Risk Management and Ethical Environment”.

Coopers and Lybrand, (2003). “Continous Auditing”, Potentioal for internal controls.

Goodwin, J., (2003). “International foundation on auditing”.

Cenker, W.J., (2002). “Role of internal audit”.

Moeller and Witt, (1999). “Brick Modern Internal Auditing”.

Morrill, C and Morrill, J., (2003). “Reliance of external auditors on internal audit work”,

Review of quantitative finance and auditing.

Barton, T.L., (2003). “The role of the quality internal audit support in enterprise risk

management”.

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Kirschencheiter, M., (2000). “Internal Audit Quality, Independence and Growth”.

Paney, (1999). “Financial Management”, Modern internal audit.

Walter, E., (2001). “The Frame-work of Internal Auditors”.

Dess, G., (2003). “How to audit”.

Thomason, (2004). “Accounting and fraud in organizations”.

Kakuru, (2001). “Payments and financial performance”, Uganda.

Porth, S.J., (2003). “Internal auditing and control”.

Peter Druker, (1997). “Strategic management”, United states.

Kaplan Steven, E and Joseph, J. Schultz, (2006). “Role of internal audit in sensitive

communications ”.

Durand, R., (2004). “Performance of the operational risk management system ”.

Jill Solomon, “Corporate governance and accountability”.

K.H. Spencer Picket, “Audit Planning”, A risk-based approach, The internal auditing

handbook.

www.deloitte.com, (2010). “Risk management”, Annual review.

34

http://www.deloitte.com/

Appendix I

SURVEY QUESTIONNAIRES

Dear respondent,

I am Magala Job, a student of Makerere University pursuing a degree in commerce. This

is the survey questionnaire on the contribution of internal auditing towards organizational

growth and am requesting you to fill in to your best knowledge as this will help me to do

my research on this topic.

Please tick in the box par your response as appropriate.

SECTION 1. BIODATA.

1. Sex.

2. Age of respondent.

20-29years30-39years

40-49years

50-59years

Above 60years

3. Marital status.

4. Highest level of education.

35

MaleFemale

MarriedSingleDivorced

Separated

CertificateDiplomaUniversity degree

Masters degree

5. Experience within the organization.

SECTION II. IMPORTANCE OF INTERNAL AUDITING.

1. Internal auditing has helped in fraud detection.

Strongly agree Agree Not sure Disagree Strongly disagree

2. Internal auditing has led to higher profitability levels in the organization.


3. Internal auditing system assists in monitoring of organizations activities.


4. Internal auditing improves professional competence.


5. Internal auditing assists in tracking of organizations records.

Strongly agree Agree Not sure Disagree Strongly agree

36

1-3years3-4years4-5years

Above 5years

6. Internal auditing provides a competitive edge to the organization


SECTION III. MEASUREMENT OF ORGANIZATIONAL GROWTH.

1. The organizational financial performance has improved with internal auditing.


2. Benchmarking has improved organizations competence.


3. Risk levels have greatly reduced in the organization with internal auditing.


4. Economic performance, effectiveness and efficiency have improved.

Yes

No

5. The organization has ways of measuring profitability levels.

Yes

Disagree

6. There is a good system of fraud detection in the organization.


37

SECTION IV. RELATIONSHIP BETWEEN INTERNAL AUDITING AND

ORGANIZATIONAL GROWTH.

1. Assists in identifying early symptoms of fraud.


2. Audits detect material misstatements in financial statements.


3. Auditing improves internal controls and ethical behavior in the organization.


4. Internal auditing provides a competitive advantage to the organization.


5. Internal auditing improves risk management in the organization.


38

Appendix II

BUDGET

Item Amount

Typing 50000

Printing 30000

Photocopying 18500

Binding 25000

Transport 30000

Lunch 10000

Airtime 20000

Total 183500

39

Appendix III

TIME FRAME

Month Activity

March. Proposal writing and presentation.

April. Proposal presentation and data collection.

May. Data collection.

June. Data procession, data analysis and presentation, printing draft

and final copy of presentation

40

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