Essay: Importance Of Internal And External Auditing In Business - A Comparative Study.

1. To provide students with the opportunity to study an area of special interest in greater depth than the general curriculum
2. To provide students with the opportunity to undertake independent investigation through desk based research skills
3. To encourage the development of critical and analytical skills
4. To provide students with the opportunity to integrate theoretical and conceptual knowledge within a critical literature review

On completion of this module, students should be able to:

1. Demonstrate the ability to select a suitable topic for investigation and to appreciate its relationship with current developments in the respective subject area(s);
2. Demonstrate the ability to define clear research aims and to select and review secondary sources;
3. Apply creative thinking to problem solving;
4. Draw meaningful conclusions and recommendations from the sources reviewed;
5. Critically review their performance

Why is this topic worth investigating? Should include academic as well as applied justification for your choice.

• Research Objectives - why are the specific accomplishment you hope to achieve at the end of study?
• Research questions- what is the issue or problem that you are investigating? Phrase up to 3 questions which you will attempt to answer through your literature review discussion.

These may later be useful as sub-headings to divide your discussion into clear sections.

• Literature review- identify main area(s) of theory/ academic debate relevant to topic and outline the current state of research/ understanding of topic, discussing the significance of this literature to your project. Sources should include the above 5 sources, and preferably additional academic/ professional/ government research, reports, statistics, newspaper articles and information gathered from the Internet (although you should consider carefully the validity and reliability of web based materials).
• Research methods – indicate how do you plan to gather the data, what research design would you considered in relation to the questions raised.
• List of References – At proposal stage, you should be able to indicate that you have the skills to identify at least (minimum) 5 credible and academically rigorous sources upon which to base your arguments for the literature review. These should be formatted according to APA referencing style.
• You may also include conclusion that shows anticipated outcome of research, or a statement of how unique and innovative your work is, whether it achieves a useful new insight into the subject, or simply replicates existing work.

The present research is undertaken to examine the importance of auditing within an organization. The activity of auditing within an organization can be regarded as the process of independently checking the financial records of an organization so as to assure that the financial statements prepared are accurate. The overall process of auditing is carried out by an auditor who holds the responsibility of developing and examining the financial records. An auditor provides opinions about the accuracy and faithful presentation of financial information that forms the basis for decision-making of its end-users. This research holds high importance for providing an understanding of the process of auditing that is crucial for assessing the adequacy of the control mechanism of a firm. There are mainly two types of audit carried by an organization, that is, internal and external audit. This research is conducted to demonstrate the importance of internal and external auditing within a firm by providing an insight into both types of auditing (Abdolmohammadi, 2009).

The research will help in making a comparison between the internal and external auditing to determine which more effective for promoting the growth and development of a firm. The difference between the internal audit, that is, reviewing the internal operational processes of a firm and the external audit, that is, conducted by a third party to check the financial report accuracy will be illustrated adequately with the help of research process. The research topic selected of examining the effectiveness of internal and external auditing is selected in the context to illustrate the nature of their processes and their relative importance for a firm. This will help the readers in identifying and comparing effectively between the processes of internal and external auditing.

This will help the business companies to implement the internal or external auditing procedures for attaining the organizational goals and objectives. The research issue is selected for exploration as there is large importance of reviewing the internal as well as external control mechanism of a firm with the help of auditing process. The increasing fraudulent activities within the firms is causing the need for reviewing and examining its internal as well as external control structure to protect the interest of general public. The business companies worldwide largely places focuses on carrying out external auditing of their firms and ignores the relative significance of internal auditing as well. The internal auditing is required by the management of a firm to assure that it has adequately implemented the risk and governance mechanisms for maximizing the operational efficiency (Alzeban, 2015).

Background on Auditing

The present research will aim to attain the following objectives:

• To develop an understanding of the importance of auditing process for the development and growth of the businesses
• To examine and analyze the difference between internal and external auditing process
• To gain an understanding into the effectiveness of the internal auditing over external auditing

In the context of the above stated objectives, this research will mainly aim to achieve the following research question “Does internal auditing is effective over the external auditing processes carried out by businesses at a global level?” This research will also attain the answer for the following sub-research questions in context of this main research question as follows:

• What is the significance of auditing process carried out by firms for achieving their stated goals and objectives?
• How the process of internal auditing within a firm does is different from that of external auditing?

Savcuk (2007) stated that the process of auditing can be regarded as independently reviewing and examining the records and activities of an organization for assessing the appropriateness of system controls. This is done to ensure that businesses are complying effectively with the established policies and procedures that are essential for their sustained growth and development. In this context, Karagiorgos (2009) also explained that the auditing process is mainly undertaken by a firm for ensuring that all business processes are carried out in a transparent and ethical manner. The business firms are required to continually review their internal as well as external control and systems for developing their competitive strength by gaining credibility and reliability in the mind of the investors. The increasing globalization and complexity of businesses is causing the increase in the number of cases related to fraudulent financial reporting. This has caused the development of role of auditing within businesses to overcome the increases cases related to fraudulent activities within a firm due to weak internal or external control structure (Karagiorgos, 2009).

According to Bo?a-Avram & Palfi (2009), there are mainly two types of audit carried out by a business firm, that are, external and internal auditing. External audit can be regarded as the process of examining the financial records and books of a company from the perspective of the shareholders to determine their accuracy and reliability. The function of an external audit is carried out by an independent body known as auditor who possesses the responsibility of determining the accuracy of the financial statements developed by a firm. Similarly, Candreva (2006) also stated that the primary responsibility of an auditor is to express a neutral opinion as per the generally accepted accounting principles. The external auditor can be regarded as an independent contractor while major role is to the reports on the financial statements of an organization. Rittenberg (2006) also stated that the businesses carry out the external auditing of their financial reports on an annual basis for assuring that their financial statements prepared are free from any type of materialistic error and represents a true and fair view of the actual financial position to the investors. It is required that external auditing needs to be carried out as per the international auditing standards for examination and evaluation of the financial statements of an organization.

Internal and External Auditing

On the other hand, Savcuk (2007) has argued that internal audit is carried out for reviewing the financial and operational activities of a firm on a continuous basis to assess the effectiveness of its internal control systems and procedures. It refers to the unbiased and systematic analysis of business activities to identifying the areas of improvement and thus strengthening the internal control systems and processes within a firm. The different type of activities that are performed within internal auditing can be stated as follows:

• Evaluation of the accounting and internal control system
• Examining the daily operational activities
• Evaluating the financial and non-financial information within an organization
• Identification of frauds and errors

As per the views of Bogonko (2016) the internal auditing is mainly carried out by a business firm with the aim of enhancing the organizational value by ensuring that there is presence of effective internal control and risk management system. The process of internal auditing is carried out by the internal auditors who are mainly the management people of an organization. The business largely develops a separate department for performing continuous audit to increase the effectiveness of organizational systems and policies. Thus, it can be stated that internal audit is an independent and consulting activity of an organization that is carried out mainly to improve the internal control system for achieving the organizational aims and objectives (Bogonko, 2016).

Van Staden & Steyn (2009) has also stated that the demand for external as well as internal audit has been increased largely with the increasing complexity in the business environment. The audit carried out by businesses helps in carrying out its independent verification for reducing the chances of error and fraudulent activities. External auditing carried out by an independent external auditor has been placed large importance by the business corporations for enhancing the credibility of their financial reports in the mind of their stakeholders. However, Roziani (2011) has also stated that with the increasing fraudulent cases within the business firms related to their weak governance mad control structure has largely placed importance on internal auditing activities as well. The occurrence of corporate accounting scandals such as Enron, WorldCom and others have shaken the investors’ confidence and caused many changes within the accounting regulations to tighten the internal control structure of the firms.

Hammad & Imdadullah (2012) has also argued that the businesses are also realizing that the fraudulent activities that occurred within their firms can result in causing significant long-term damage to their reputation besides the financial losses. Internal auditing deals with improving the internal control within the firms for restoring the public trusts and overcoming the occurrence of fraudulent activities. The primary objective of the internal audit is to provide suggestions to the management for carrying out their roles in an effectively by reviewing of its overall internal control systems and processes. Abbott, Parker & Peters (2010) has stated that the deficiencies present within the internal control systems such as governance or risk management structure are highlighted adequately within the internal audit. The internal auditing can be categorized as more effective over external auditing as the presence of a strong governance structure within a firm will help in reducing the materials misstatement errors during the financial reporting process.

Comparison of Internal and External Auditing

Prawitt (2009) in this context also stated that businesses need to place importance on carrying out internal auditors in a regular manner besides only focusing on carrying out external audit of their financial records. The fact has been highlighted by the occurrence of corporate accounting scandals such as Enron that have highlighted the importance of having a robust system of governing within the firms. The major benefit as per Holt & Deborah (2008) that the management of a firm realizes by carrying out internal audit is developing a sound base for judgment, identifying the weaknesses in control and performance. Developing suggestions for improvement and disseminating information about the business processes that is required by all level of management for better decision-making. It helps in examining the compliance of firms with the established policies, plans, procedures, laws and regulations to determine that business operations are carried out in an ethical manner (Holt & Deborah, 2008).

According to Rezaee (2009) the growing importance of developing an effective internal control environment within an organization is causing the need for business to carry out the internal audit in a regular manner. The control environment can be analyzed on the basis of the factors such as integrity and ethical values, board committee management philosophy and organizational structure. Alzeban (2014) has stated that the risk assessment within internal audit can be evaluated on the basis of the factors such as process-level objectives and risk identification. The monitoring of the governance and risk structure during the internal audit helps the businesses for evaluating the quality of the internal system and analyzes its internal performance (Alzeban, 2014). The factors that help in assessment of the components of an internal control system can be depicted as follows:

Zohra & Huq (2014) has stated that the effectiveness of the internal auditing can also be explained by the use of stewardship theory. The stewardship theory has stated that business directors and executives of a firm hold the responsibility of maximizing the interests of the shareholders. As such, there is need of presence of an effective internal control system and policies within a firm that helps in assuring that interests of the business executives are aligned with that of the shareholders (Zohra & Huq, 2014). Similarly, Cohen & Sayag (2010) has also stated that it will assure that business managers are carrying out their responsibility in an ethical manner and take the decisions that leads in ultimately improving the value of the shareholder’s. Thus, it can be said that internal auditing has emerged as a necessity within businesses to assure that the overall organizational activities are carried out in an ethical and transparent manner. It has become an integral part of modern business as it makes the businesses to comply with the accounting standards as per the standard regulatory requirements (Cohen & Sayag, 2010).

Effectiveness of Internal Audit

Ahmad, Othman & Jusoff (2009) stated that the business activities carried out as per the accounting standards reduce the chances of getting material misstatement errors during external auditing. As such, the importance of internal auditing is increasing among the businesses as they understand the significance of developing an adequate internal control structure to reduce the chances of error occurrence. The internal audit is gaining importance within the firm’s in-spite of less compliance requirements than external auditing. This is because it is essential for detection of fraud, management of risk and improving the organizational performance (Ahmad et al., 2009).

In the opinion of Mihret & Yismaw (2007), the significance of the internal audit is increasing within the accounting environment to attain the objectives of external auditing. The occurrence of the global financial crisis in the year 2008 and the regulatory and economic pressures is causing the businesses to carry out wide risk assessment and increase the effectiveness of their internal control structures. The internal auditing helps in developing a holistic approach for risk management by adequately addressing all the business risks. The significant business risks such as social, ethical, financial, operational and environmental can be adequately identified through the use of internal audit that will significantly lead in improving the external reporting structures of the firm (Mihret & Yismaw, 2007).

Ali, Gloeck, Ali, Ahmi & Sahdan (2007) also stated in this context that the businesses have largely understood that internal auditing is essential for them to enhance the value of their business activities subsides only reviewing the internal control systems and processes. This is because it leads to identification of the competent personnel and internal strengths and weakness of a firm. The increasing efficiency of the risk management structures help in promoting the fairness of business activities and adding value to the business outcomes. As per Zamzulaila, Zarina & Dalila, (2007), the development of having effective internal control systems will ultimately lead in preventing the occurrence of any financial uncertainty. The prevention of occurrence of any financial uncertain condition begins with improving the transparency and integrity within the business systems. This can be achieved adequately with the use of internal auditing by the business firms and therefore it is increasing in effectiveness as compared with the external auditing.

The overall discussion helps in the literature review has highlighted the line of difference that exist between internal and external auditing. The internal auditing is carried out by the internal management people of a firm while external auditing is carried out by hiring an independent contractor know as auditor. Also, there is difference between their objectives as internal auditing aims to review the internal control systems while external auditing evaluates the accuracy and reliability of the external financial reports developed by a business firm. The growing importance of internal auditing within businesses as compared to external auditing can be attributed to developing an integrated system of internal control that will ultimately lead in reducing the error occurrence within the external financial reports developed (Azzali & Mazza, 2018).

Importance of Internal and External Audit in the Context of Fraud Prevention

Research method aims to provide the structure using which the research can be conducted in systematic way. It is highly important to give proper consideration and importance to research methods as it helps in providing the smoother platform for carrying out the research. Research method is complete guiding map necessary for organizing, arranging and conducting the research process in right manner so that it can completed in specified manner and in estimated time frame.

After framing the research question or questions, it is essential to collect the desired data and information related to research question. The data and information helps research to understand the research topic further and it also paves the path of achieving the research objectives. The role of research methods is to set the research tools that can be used to gather the data and information in proper manner so that no ethical violations can be done. As research methodology deals with various aspects of research, it has been divided in various sub parts such as research approach, research design, research method, data collection process, sample selection process, methods of data of analysis and lastly ethical considerations (Gliner & Morgan, 2012).

Research Approach

There are mainly two types of research approaches that can be applied in research and these research approaches are inductive and deductive research approach. In order to select the correct research approach there is need to have adequate understanding of research objectives. Both these research approaches differs on ground of their movement and manner used for gathering data and evidences. Inductive research approach is known as bottom up research approach and it moves from specific to general theory i.e. it collect facts and evidences for specific context and analyze them to provide general observations. On the other hand, deductive research approach moves from general to specific and it is the reason why it is known as top down approach. It means general evidences and information is gathered to draw the conclusion regarding the specific topic and subject (Hendricks, 2011).

In this research study the focus is use the inductive research approach as helps to satisfy the research objectives. As the purpose of the research study is to provide the general views on effectiveness of internal auditing and compare it with the external auditing, so it is required to gather data from some of large companies in Singapore and analyze them to provide arguments in favor and against the framed research question. Inductive research approach will provide proper platform to gather the specific data and information in relation to the research objectives. Further it will help to analyze the gather data in required manner to make general comment on research questions.

Conclusion

Research Design

Research design is the most important part in the whole research study as this research tools provides the basis for defining the manner through data and information can be collected. Research design provides the framework on which entire process of data collection and analysis depends. It means research design is the way to get the reliable and valid research outcomes (Gillham, 2010).

According to research question, it is important to use the exploratory research design as it best research design for this research study. Exploratory research design aims to investigate the facts and information in detailed manner so that proper understanding of concerned research topic can be made. Explorative research provide a platform through which each single aspect of research can be investigate thoroughly so to conduct the research in optimum manner. Research topic selected is very vast and requires exploring multiple aspects in minimum time and it can be done only when exploratory research design has been selected (Fowler, 2012).

The tools and techniques used to collect the information have been defined under research method area of the research study. The proper selection of research method helps to gather both qualitative and quantitative research data. The two main research methods that are viable for this research study are primary and secondary methods. Both these research methods differ on the grounds of manner of collection the data and information. Primary research method of data collection aims to provide original nature of data collection as it collects data directly from the source it generates. So it can be said that primary research method of data collection provide first hand (exclusive) information as this data has not been used by anyone else. On the other hand secondary research method provides data and information that has already been collected by someone and has been analyzed to reach at some conclusion. It means data and information provided in already completed researches are used in secondary research method to extract the required information. Some of important secondary sources of finance are research articles, journals, research reports, online articles, newspapers, published articles etc. The main reason why the secondary sources of data is collected and analyzed is to support the primary data.

Primary research method for data collection is very important for this research study and it has been decided to use survey method through applying interview technique. So detailed survey questions will be drafted and asked with internal auditors as well as external auditors of large firms in Singapore. Survey questions will be defined and same for all the respondents so to make sure that data analysis can be performed in systematic manner. Interview questions are framed in such a manner that they would be helpful in extracting the information that is useful for this research. All the questions will be open ended as it would help to gain maximum information those respondents. The purpose of using the open ended questions in survey research data collection method is because it gives respondents a freedom to express their views, opinions and perspectives. The questions list is build in a manner that it can to achieve the maximum information from the respondents. Some questions will be general and some will specific to ensure that desirable information can be gathered to achieve the research objectives (Fink, 2015).

Secondary research method for data collection is used to perform the literature review in order to support facts and information that has been gathered for primary research purpose. As this research is on effectiveness of internal auditing and how it more important than the external reporting, there is need to make sure that all relevant literatures should be gathered and analyzed in literature review.

Sample selection is an important criterion to decide how respondents for the purpose of primary research will be decided so that research can be performed in proper manner. It has been decided to use random sampling for the purpose of primary data collection. Request for interview will be sent to all the members of selected for the sample and those members are selected that answer the request. Total 50 respondents will be selected from the list of respondents and interview will be performed with them on chosen date and time (Denzin & Lincoln, 2010).

Data analysis

In order to analysis the data, it can been decided to use thematic analysis method to evaluate the data collected from the respondents as it is best method to analyze the data collected through interview method.

Ethical Considerations

Every research study is confronted with some kinds of ethical issues affecting research results and outcomes. Ethical issues arise in the research study irrespective of the size and scope of the research study. In other words, size and scope of the research study do not create any impact on the ethical issues. Ethical issues are bound to arise in every research study whether the study has large scope and size or not. Proper and due consideration to the ethical issues play a significant role in improving authenticity and reliability of research results. Privacy, breach of confidentiality, biasness, undue advantage of the information, unauthorized passing of information to third parties, etc are some of the ethical issues handled by the researcher in the present research study (Crowther & Lancaster, 2008).

Conclusion

It can be stated from the overall discussion held within the research that the process of auditing within an organization is essential for independent verification of its internal and external control systems and processes. The process of auditing deals with the independently verifying the business systems to identify the loopholes that need to be overcame for reducing the chance of any error occurrence. There are mainly two types of audit that are carried within an organization, that are, internal and external auditing. The process of internal auditing is gaining more importance within business firms as compared with the external auditing. This is because internal auditing leads to improvement within the governing and risk management structure that help in enhancing the value of business activities. The development of an effective internal control structure developed on the principles of ethics and integrity will ultimately lead to reduction in the errors within the financial reports. Thus, the quality of external auditing eventually depends on the effectiveness of internal control structures present within a firm. The efficiency of the internal control mechanism depends on the quality of internal audit carried out by the business firms. The critical review of literature has also highlighted the difference that is present between the internal and external auditing process of a firm. Therefore, it can be stated from the literature reviewed has adequately addressed the research objectives and has lead in exploring the research issue in detail.

It is recommend to the future researchers in this context to examine the research issue by collection of specific data from the companies that are effectively carrying out both internal as well as external auditing, The present research has mainly explored the qualitative data in relation to the research issue and therefore lacks a practical base for exploring the research topics. As such, future researchers are recommended to identify, collect, analyze and interpret the specific data in relation to the research for enhancing the credibility and reliability of the research outcomes.

References

Abbott, L. J., Parker, S. & Peters, G. F. (2010).  Serving  two  masters: The association between audit committee internal  audit  oversight  and  internal  audit  activities.  Accounting Horizons.  24(1), pp. 1-24.

Abdolmohammadi, M. J. (2009). Factors Associated with the Use of and Compliance with the IIA Standards.  A Study of  Anglo-culture  CAEs.  International Journal of Auditing, 13(1),  pp. 27-42.

Ahmad, H.N., Othman, R., Othman, R. & Jusoff, K. (2009). The Effectiveness of Internal Audit in Malaysian Public Sector. Journal of Modern Accounting and Auditing, 5(9), pp. 53-62.

Ali, A. M., Gloeck, J. D., Ali, A., Ahmi, A., & Sahdan, M. H. (2007). Internal audit in the state and local governments of Malaysia. Southern African Journal of Accountability and Auditing Research, 7, pp. 25-57.

Alzeban, A.  (2015). Influence of  audit  committees  on  internal  audit  conformance with internal audit standards. Managerial Auditing Journal, 307(6), pp. 539-559.

Alzeban, A. 2014. The impact of culture on the quality of internal audit: An empirical study. Journal of Accounting, Auditing & Finance30 (1), pp 57-70.

Azzali, S. & Mazza, T. (2018). The Internal Audit Effectiveness Evaluated with an Organizational, Process and Relationship Perspective. International Journal of Business and Management, 13(6), pp. 238-252.

Bogonko, W. (2016). The Examination of the Effectiveness of Internal Audit in County Government of Nakuru. IOSR Journal of Business and Management (IOSR-JBM) 18(4), 54-60.

Bo?a-Avram, C. & Palfi. C. (2009). Measuring and assessment of internal audit’s effectiveness. Economic Science Series 18 (3), 784-790.

Candreva, P. J. (2006). Controlling Internal Controls. Public Administration Review, 463 - 465.

Cohen, A. & Sayag, G. (2010). The Effectiveness of Internal Auditing: An Empirical Examination of its Determinants in Israeli Organisations. Australian Accounting Review, 20(3), pp. 296-307.

Crowther, D. & Lancaster, G. (2008). Research Methods: A Concise Introduction to Research in Management and Business Consultancy. 2nd ed. Oxford: Butterworth-Heinemann.

Denzin, N. & Lincoln, Y. (2010). AHandbook of Qualitative Research. 2nd ed. London: Sage.

Fink, A. (2015). How to Conduct Surveys: a Step by Step Guide. 3rd ed. London: Sage.

Fowler, F.J. (2012). Survey Research Methods. 3rd ed. London: SAGE.

Gillham, B. (2010). Developing a Questionnaire. London/New York: Continuum.

Gliner, J.A. & Morgan, G.A. (2012). Research Methods in Applied Settings: An Integrated Approach to Design and Analysis. New Jersey: Routledge.

Hammad, M. & Imdadullah, M. (2012). Factors that Contribute to the Effectiveness of Internal Audit in Public Sector. International Proceedings of Economics Development and Research, 55(28), 141–144.

Hendricks, D.W. (2011). Analyzing Quantitative Data: An Introduction for Social Researchers. John Wiley & Sons.

Holt, T. P. & Deborah, A. S. (2008). The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency. Accounting Horizons 22(4), 275-288.

Karagiorgos, T. (2009). The Contribution of Internal Auditing to Management. International Journal of Management Research and Technology 3 (2), Serials Publications, 417-427.

Mihret, D. G., & Yismaw, A. W. (2007). Internal audit effectiveness: An Ethiopian public sector case study. Managerial Auditing Journal, 22(5), pp. 470-484.

Prawitt, D. F. (2009). Internal audit function quality and earnings management. The Accounting Review, 84(4), 1255-1280.

Rezaee, Z. (2009). Corporate Governance and Ethics. The International Journal of Accounting 44(3), 306-307.

Rittenberg, L. E. (2006). Internal control: No small matter. Internal Auditor 63(5), 47-51.

Roziani, A. (2011). Audit Committee Composition and Auditor Reporting; A study of Malaysian Environment. Journal of Small Business Management, 2(1), 68–74.

Savcuk, O. (2007). Internal Audit Efficiency Evaluation Principles. Journal of Business Economics and Management 6 (4), 275-284.

Savcuk, O. (2007). Internal Audit Efficiency Evaluation Principles. Journal of Business Economics and Management 6(4), 275-284.

Van Staden, M., & Steyn, B. (2009). The profile of the chief audit executive as a driver of internal audit quality. African Journal of Business Management 3(13), 918–925.

Zamzulaila, Z., Zarina, Z., & Dalila, M. I. (2007). The role of internal auditors in Malaysian local authorities. The International Journal of Interdisciplinary Social Sciences, 2(2), pp. 237-244.

Zohra, F.T.  & Huq,  U.R. 2014. The effects  of internal audit report  disclosure  on  investor  confidence  and decisions. Journal  of Business Studies 35 (2),  pp. 131-150.