THE ROLE AND CHALLENGES OF INTERNAL AUDIT (IN CASE OF FINCAWA TOWN

FINANCE AND ECONOMIC DEVELOPMENT OFFICE)

BULE HORA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

THE SENIOR ESSAY SUBMITTED TO ACCOUNTING AND FINANCE DEPARTMENT

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR BA DEGREE IN
ACCOUNTING AND FINANCE.

PREPARED BY

1. NURE NUGUSE
2. ABEBE ALE

ADVISOR: OFGAHA ALEMU (MSC).

MARCH 2018

BULE HORA, ETHIOPIA

 Declaration
We Nure Nuguse and Abebe Ale under signed, declare that the senior essay is our original work
in conformity with international accepted practices, we have duly acknowledge and referenced
all materials used in this work. We understand that non adherence to the principle of academic
honesty, integrity misrepresentation or fabrication of any idea or data will constitutes sufficient
ground for disciplinary action by university and can also evoke penal action from the source
which has not been properly cited.

DECLARED BY: SIGNATURE DATE

1 Nure Nuguse ___________ _____

2 Abebe Ale ____________ _____

CONFERMED BY:

OF GAHA ALEMU _____________ ______

I
 APPROVAL SHEET
BULE HORA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTIMENT OF ACCOUNTING AND FINANACE

This is to certify that is the senior essay carried out by Nure Nuguse and Abebe Ale, on the topic
titled the role and challenges of internal audit (in case of finchawa town finance and economic
development office) and submitted in partial in fulfillment of the requirement for BA degree in
accounting and finance complies with the regulation of University and meets the accepted
signed by examining board.

Adviser Name Signature Date

_____________________ _________ _________

Examiner Signature Date

_____________________ ___________ __________

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 Acknowledgment
Before all we will like to express our deepest gratitude from the bottom of our heart to our
God, for his marvelous support to fulfill our heart desire and helping us to accomplish our
research and also glorious assistance to our mother. Next our special thanks to our advisor
Ofgaha Alemu for his valuable and priceless advises and ultimate support and comments in the
time of preparing this research paper. Finally, we are thankful for our family and friends,
especially for our friends Mr. Abdullah Oda and our brother Kedir Nuguse for their moral and
financial support.

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 ABSTRACT
The study will focused on the role and challenges of internal audit in case of fincawa town
finance and economic development office which was highly significant for woredas finance and
economic development office to obtain information about auditing practice and can help further
another researcher as supplementary document. The general objectives of the study was to
identify the role and challenges of internal audit in the woreda and the specific objective of the
study was constitutes; role and challenges of internal audit in the study area of identified it,
analyzing situation of internal audit in the study area. To do so the data would gather from
primary and secondary sources, from woredas manual supports and different books related to
the study. Descriptive method of the data analysis has been used to explain the study in
manageable way.

IV
Table of contents

Table of Contents
Declaration...............................................................................................................................I
APPROVAL SHEET....................................................................................................................II
Acknowledgment...................................................................................................................III
Table of contents......................................................................................................................I
CHAPTER ONE..........................................................................................................................1
1. INTRODUCTION................................................................................................................1
1.1. Background of the study..................................................................................................1
1.2. Statement of the Problem...............................................................................................2
1.3. Research question........................................................................................................... 2
1.4. Significance of the study..................................................................................................3
1.5. Scope of the study...........................................................................................................3
1.6. Limitation of the study…………………………………………………………………………………………………3

1.7. Organization of the paper................................................................................................4

CHAPTER TWO.........................................................................................................................5
2. REVIEW OF RELATED LITERATURE.....................................................................................5
2.1 Basic Concepts of Auditing............................................................................................... 5
2.2. INTERNAL AUDIT..............................................................................................................5
2.3. Types of audit and auditors.............................................................................................8
2.4. Standards of Auditing.................................................................................................... 10
2.5. Internal Auditing Manual...............................................................................................11
2.6. Techniques of Internal Auditing.....................................................................................11
2.7. Challenges of Internal Audit.......................................................................................... 13
CHAPTER THREE.....................................................................................................................15
3. RESEARCH DESIGN AND METHODOLOGY.........................................................................15
3.1. Research Design.............................................................................................................15
3.2 Sampling Design............................................................................................................. 15
3.3. Sampling Unit................................................................................................................ 16
3.4 population of the study.................................................................................................. 16
3.5 Sampling frame...............................................................................................................16
3.6 sample size..................................................................................................................... 16

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 3.7 Method of data analysis.................................................................................................17
Chapter Four.........................................................................................................................18
4. Data Analysis and Interpretation....................................................................................18
4.1. Organization Structure Of The Office.............................................................................18
4.2. Man Power Of The Organization...................................................................................18
4.3. Organization Work Process............................................................................................18
4.4 Characteristics of respondents by level of education.....................................................22
4.6 Duties and Responsibilities of the internal audit............................................................23
4.7 Scope of the internal audit department activities..........................................................23
4.8 Independence of Internal Audit......................................................................................24
4.9 The Audit Challenges......................................................................................................25
4.10 Challenges of Internal Audit.........................................................................................25
Chapter Five..........................................................................................................................28
5. Summery, conclusion and recommendation...................................................................28
5.1 summery Information, methodology and finding...........................................................28
5.2. Conclusion..................................................................................................................... 28
REFERENCE............................................................................................................................30
APPENDIX..............................................................................................................................31
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 CHAPTER ONE

1. INTRODUCTION

1.1. Background of the study

The term internal audit as interpreted by many people was the steps took by many
businesses to prevent employee fraud; in fact these steps were a part international. An
organization internal control system consists of polices and procedure establishing to
provide reasonable assurance all civilized countries need internal control for several
reasons such as to finance development activities, to meet their day to day expenses related
maintenance of free and fair societies, to control economy through fiscal measures and to
certain extents, to change the economic need of peoples as well as behavior of peoples
(B.N.Tondon.Sad Harasanam, 2005). An efficient system of control was established by the
management as matter of convenience and effectiveness of internal was best regard as the
whole system of control of financial and non-financial areas established by the
management in conduct of business including internal check, internal audit and other
forms of control .The internal control is exercises in the form of internal check and internal
audit {SHEKHAR auditing 2003}. The internal auditor’s professions involve steadily with
the progress of management science after Second World War {kicks and leks shay, 2002,
P22}. It is conceptually similar in many ways to financial auditing the internal auditing
function is mostly financial in nature and concerned with verifying calculation and clerical
operation as opposed to verified adherence to procedure and internal control over the
year. However, the scope of internal auditing and the role of internal auditor had been
extended for beyond these traditional boundaries. Two closely relate factors had
contributed to the shift of internal auditing to include operational auditing. One of these
factors was the growth of business enterprises in size and system of accounting within the
organization. Now a day, internal audit becomes functioning of various operation of an
enterprises including the function of the systems internal check accuracy for remedial
action.

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1.1.1. Background of the organization

Fincawa Town Finance and Economic Development office was located in Fincawa town,
which was located in0romia region. The town is founded in the south of Addis Ababa
Ethiopia, which were 491 from Addis Ababa. Fincawa town finance and economic
development office was established in 2006. The mission of the fincawa town finance and
economic development office was strengthening the services given by the office and
allocating all the organizations resources for the purpose of improving the life of the
Societies on the behalf of organizations mission.

1.2. Statement of the Problem

Organizations overall functions or financial performance was depend on internal auditing
activities. The internal auditing was important to the organization and communities by
reducing frauds and any other illegal activities, which can make by organizations
employees. Finance was practice all over the world as tool to drive services like
summarization of taxes, preparations budgets, managing and controlling resources and
budget properly. So, to deliver this service, the organization uses financial, human, material
and information as the key resources and these resources are use effectively and efficiently
if there was strong internal control system (borton and john son, 1990). Internal auditing
was one methods of internal financial activities insured the optimum use of resources,
human, financial and material in the most efficient way to accomplish an organizations
objectives and it was the strengthen of the system of internal control and the way in which
it operates (burtons Johnson, 1990). Obviously, in order to meet this organization
objectifies and goals internal audit has a vital role. But, there were some factors which
affect the roles of internal audit like lack of organizations of internal auditing department,
low performance of audit work, challenges that face internal auditors like frauds,
corruption, misstatements of accounts and lack of mutual trust and misunderstanding
among the reduce inefficient use of financial resources as much as possible.

Many researchers done on this title focused on the internal auditor are expected to provide
recommendations for improvement in those areas where opportunities or deficiencies are
identified. But the study has to assess the role of internal audit in the fincawa town finance
and economic development office.

1.3. Research question

This study is try to answer the following questions concerning with the role and challenges
of internal audit in fincawa town finance and economic development office.

1. What policies and procedures are used in an audit work?

2. What the finance and economic development office supervision and follow up
established policies and procedures?
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 3. What the importance of giving duties to internal auditors?

1.3.1Objectives of the study

1.3.2. General objectives of the study

The general objective of the study is to investigate the role and challenges of internal audit
in case of fincawa town finance and economic development office.

1.3.3 Specific Objectives of the Study

The study has the following specific objectives

 To assess the role of internal audit in the Fincawa Town Finance And Economic
Development Office
 To determine how internal audit department of organization will be organized.
 To determine the performance of internal audit.
 To determine key challenges of the internal auditors of Finchawa Town Finance and
Economic Development Office.
 To assess the independence of internal auditors in the Organization.

1.4. Significance of the study

The study would conduct on the role and challenges of the internal audit in Fincawa Town
Finance and Economic Development Office and would give possible solution. The study
would first help me to know and identify problem associate with internal audit. The study
would help organization to arrive on their weakness and strength and took corrective
action if there is a weakness in internal audit.

1.5. Scope of the study

Due to the time, resource constraints, the number of population and the area coverage of
different financial institutions, such as banking, credit saving and etc. The scope of the
study has limit to identifying and assessing the role and challenges of internal audit in case
study of fincawa town finance and economic development office.

1.6 limitation of the study

The issue of the role and challenges of internal audit was associated with all financial
institutions, which found in different areas. But it were difficult to cover all finances due to
time and financial constraints. So the study was focused on only finchawa finance and
economic development office. Besides this, data inadequacy limits this study not to be
discussing in detail some very important related concepts and areas.

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1.7. Organization of the paper
This paper organizes in to five chapters. Each chapter had its own subtitle that helps to
discuss and elaborate clarification of the main chapters. Therefore chapter one of the paper
deals with the background of the study, background of the organization, statement of the
problem, objective of the study, general objective of the study specific objective of the study
significance of the study, scope of the study and limitation of the study. Chapter two of the
papers contains literature review and chapter three of the paper aspect to research
methodology of the study chapter four contains data analysis and description and chapter
five was about recommendation and conclusion.

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 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1Basic Concepts of Auditing

Concepts were abstractions derived from experience and observation and are designed to
aid the understanding of similarities within subject matter and difference from the subject
materials. Mach like engineering, physics, economics, sociology and other social and
physical sciences, auditing is based up on series of fundamental concepts (Kinrath, 1999).
The importance of auditing concepts that they are basis for the standards, the guidelines or
measures of quality from which audit procedures are derived. Together therefore auditing
concepts standards and procedures are related.

2.2. INTERNAL AUDIT

2.2.1 Definition of Internal Audit

The term internal audit means the examination of accounts of business concern by its
employees especially appoints for the purpose. The internal audit is devised with view to
detect frauds. Error and irregularities when they had already been committed and cannot
be prevent or detected by the internal check arrangements (Professor Johannes Kinfu And
Engida Bayu. 2009, P. 51). Basically, internal audit is considered as services activities.
Internal audit represent an important tool of management. The traditional view of internal
audit is insuring proper maintenance of accounting records, detection and avoidance of
errors and frauds and safeguarding an asset of enterprises. Thus internal audit is a service
activities performed within an organization. It is a superior internal control in nature. It
performs the evasion of effectiveness of the management, the internal audit does
operational audit.

2.2.2. Role of internal auditor

The internal auditor had to see that there is no waste and inefficiency in the organization
and insures that the organization incurred liabilities in respect of its valid and legitimate
activities. The internal auditor had to make effort to found out the weakness of the internal
control and the internal check system following in the organization and suggest necessary
improvements. An enterprise will go inform it only when it is convinced in terms of the
benefits offered and cost involves.

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2.2.3. Objectives and scope of internal audit

Activities of audit may broadly be classified as financial and operational audits. Financial
audit may be

 Continuous review of internal accounting controls

 The examination of balance sheet items
 The ascertainment of the extent to which the asset of the organization
accounted for

Under the operational audit we may include;

 The study and assessment of operational practice

 The examination and ascertainment of the extent to which established policies,
plans and procedures are complained with budgetary setting.
 Determining whether objectives, plans and targets and associated control
producers are properly instituted.

2.2.4. Code of Ethics for Internal Auditors

A code of ethics is necessary and appropriate for profession of internal auditing found as it
is on the trust places in its objective assurance about risk management control and
governance the code of ethics extended beyond the definition of internal auditing to
include two essential components such as principles and rule of conduct. In the code, the
six principles are identified as follows (Professor, Johannes Kinfu andEngidaBayu, 2009)

 Responsibilities
 The public interest
 Integrity
 Objectivity and independence
 Due care
 Scope and nature of services

Responsibilities

CPA (certified public accountant) render important and essential services in our free
enterprises system all members have responsibility to cooperate with other member (K.C
and Lekshay, 2002) to;

 Improve the art of accounting

 Maintain the public’s confidence in the profession
 Carry out the self-regulatory activities

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The public interest

Member should accept the obligation to act in a way that will serve the public interest,
honor the public trust and demonstrate commitment to professionalism. The public
interest is defined as the collective well-being to the community of the people and
institutions that CPA’s public interest includes clients, creditor, grantors, governmental
agencies, employees, stock holders and the general public.

Integrity

To maintain brooders public confidence, member should perform all professional

responsibilities with the highest sense of integrity. Integrity is the personal characteristics
that are in dependable in CPA. This element is the benchmark by which member must
ultimately judge all decisions make in engagement integrity is also the quality in public
trust is based.

Objectivity and independence

A member should maintain objectivity and be free of conflicts of interest in discharging

professional responsibilities. A member in public practice shall be independent in fact and
appearance when providing auditing and other services. Objectivity is a state of mind
although this principle is not precisely measurable. Independence is the corner stone of the
profession’s philosophical structure.

Due care

Member should observe the profession’s and ethical standards, strive continually to
improve competence and the quality of services, and discharge the professional
responsibility to the best of the member’s ability the principle of due care is at the center of
profession’s ongoing quest for excellence in the performance of professional services.

Due care requires each member to discharge his/her professional responsibilities with
competence and diligence.

 Competence is the product of education and experience

 Diligence involves steady, earnest and energetic application.

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Scope and Nature of Services

Member in public practice should observe the principle of the code professional conduct in
determining the scope and nature of service to be provide. This principle applies only to
members who render services to the public. Employees of the organization that they audit,
this type of auditor are involved in an independent appraisal activity called internal
auditing, within an organization as a service to the organization. The objective of internal
auditing is to assist the organization and to assist the management as its responsibilities.
The scope of internal auditor function extends to all phases of an organization’s activities.
Internal auditors are primarily involves with compliance and operation audits (Kinrath,
1999). The work of internal auditor may supplement the work of independent auditors in
the financial statement audit. Many internal auditor are certified (CIAs-Certified internal
auditors) and some are also CPAs (Certified public accountants).

2.3. Types of audit and auditors

2.3.1. Types of auditing

According to ARENS (1997) there are three types of auditing; operational audits,
compliance audits and audits of financial statements.

1. Operational Audit. An operational audit is a review of any party of organization

operating procedures and method for the purpose of evaluating efficiency and
effectiveness. Because of many different areas in which operational effectiveness can be
evaluate it is impossible to characterize the conduct of typical operational audits. In one
organization, the auditor might evaluate the relevancy and sufficiency of information used
by management in making decision to acquire new fixed assets, while in different
organization the auditor may evaluate the efficiency of the paper flow in processing a sale.
In operational audit, the review is not limited to accounting.

2. Compliance Audits

The purpose of compliance audit is to determine whether the audit is following specific
procedures or rules set down by some higher authority. A compliance audit for private
business could include determining whether accounting personnel are following the
procedures prescribed by the company controller. Reviewing wage rates for compliance
with minimum wage laws, or examining contractual agreement with banks and other
lenders to be sure the compiling with legal requirements. Results of compliance audits are
generally reported to some within the organization unit being audited rather than to be
broad spectrum of user.

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3. Audits of financial statements

An audit of financial statements is conducted to determine whether the overall financial

statements the quantifiable information being verified is stated in accordance with
specified criteria. The criteria are generally accepted accounting principles, although it is
also common to conduct audits of financial statement prepared using the cash basis or
some other basis of accounting appropriate for the organization. The financial statement
most commonly included is the statement of financial position, income statements and
statements of cash flows, including accompanying foot notes.

2.3.2. Types of Auditors

The four most widely known types of auditors are (ARENS 1997, P.6 and 7)

General Accounting Office (GAO) Auditors: the United States (US) is a nonpartisan
agency in the legislative branch of federal government. The GAO which is headed by the
comptroller general report and, is responsible solely to congress many of the GAO’s audit
responsibilities are the same as those of certified public accountants (CPA). Much of
financial information prepared by various government agencies is audited by the GAO
before it is submitted to the congress.

Internal Revenue Agents: the internal revenue service’s [IRS] under the direction of the
commissioner of the internal revenue, has as its responsibility the enforcement of the
federal tax laws as they have been defined by congress and interpreted by the courts. A
major responsibility of IRS is to audit the returns of tax payers to determine whether they
have complied with tax laws. The auditors who perform these examinations are referred to
as internal revenue agents.

Internal Auditors: internal auditors are employed by individual companies to audit for
management much as the GAO does for congress. The internal audit group in some level
firm can include over hundred persons and typically report directly to the president,
another high executive officer or even the audit committee of board of directors.

Internal auditor’s responsibilities vary considerably, depending on the employer some

internal audit staff consist of only one or two employees who may spend most of their time
doing routine compliance auditing. Other internal audit staff consists of numerous
employees who have diverse responsibilities, including many outside accounting areas.

Certified public accountant (CPA): CPA firm have their primary the performance of audit
function on published financial statement of all publicly traded companies and small
companies and non-commercial organization. The use of certified public accountant is
regulated by state law through the licensing the department of each state.

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2.4. Standards of Auditing

2.4.1. Internal Auditing Standards

Internal auditors are expected to comply with the institution of internal auditor’s standard
of professional conduct. The institute of internal auditor’s standard requires internal
auditor to be skilled in dealing with people and communicating effectively. External auditor
tend to believe the public has the responsibilities to how to understand their audit while
internal auditor has believe it is their own responsibility to see that their report are
understand properly.

2.4.2. General Standards

The general standards relate to the quality of the auditor’s work:

Training and proficiency how do to the independent auditor achieve the adequate technical
training and proficiency. This requirement is usually interpreted to mean college or
university education in accounting, business and auditing, participation is continuing
education programs and substantial public accounting experience.

Independence is mental attitude; competence alone is no not sufficient. The auditor must
be free from management is influence in performing the audit and in reporting findings. An
auditor should not have any direct or indirect interest in the client’s corporation and
should avoid any relationship with client that will cause an outsider who had knowledge of
all the facts to doubt the CPA’s independence.

Due professional care; the auditor is expected to be diligent and careful in performing an
audit and issuing a report on the findings. The experienced auditor should plan every steps
of the audit engagement and should critically review the work done by this journals,

Full compliance with this standard will rule out any negligent acts or materials omissions
by the auditors. This does not mean that auditor makes perfect judgment like member of
other professions.

2.4.3. Quality of Internal Audit Personnel

In ascertaining the quality of personnel, the independent auditor should enquire in to
(Shekhas, 2003);

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The qualifications and technical training of the internal audit personnel is some case both
the internal auditors and the independent auditors belong to the same professional
organization and are subject to the same professional regulation except for independence.
The extent supervision provided by the chief internal auditor, including the supervision on
planning, monitoring progress, assessing calculation reached, reviewing reports and
following up to insure that recommendations accepted are carried out. Standard can be
defined as a measure accepted by an authority are by the general consent, to which one is
expected to conform and in relation to which the performance can be judged.

2.4.4. Degree of Independence of the Internal Auditors

The independent auditor should ensure himself that the internal auditors in a position to
perform his work with satisfactory degree of independence and objectively. In assessing
his independent auditor should satisfy himself that the internal auditors reports to the
highest levels of management. In such a case he is likely to be more objective than when he
reports to the lower level of management. A review of the findings and recommendations
contain in the reports of the internal audit personnel will usually be a useful factor in
judging their independence and objectivity.

2.5. Internal Auditing Manual

The internal audit manual is a detailed statement giving full instructions, hints and
guidance’s to audit staff to how they should proceed with audit work and make it
dependable. It is the most important internal written auditing documents in addition to
statement of policy, statement of procedure and bulletin and various other published
information’s and affecting auditing which are incorporates weather desirable as part of
the auditing manual. Generally the auditing state the auditing objectives, standard of
performance expected to and procedure time recording and audit report preparation to the
other matter of general nature.

2.6. Techniques of Internal Auditing

The internal auditor should establish a time frame with in which management’s response
to the audit finding is required and evaluate the response received. The response shall
include sufficient information for the internal auditor to evaluate the adequately and time
lines of corrective action.

The internal auditor should receive periodic updates from management in order to
evaluate status of management efforts to correct previously reported condition. The head
of internal audit should develop escalation procedures for any management response,
which are judged to be in adequate in relation to the identified. These procedures should
ensure that the risks of not taking action have been understood and accepted at a
sufficiently senior management.

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2.6.1. Audit plan
An internal auditing involves two kinds of audit plan. The first is concerned with the overall
audit activity to be scheduled over certain span of period by internal audit department, and
the second audit planning is actual plan of audit project. This involves the planning of the
examination process which includes preparation of audit programmer, identification of
audit approach, selection of staff for formation of an adapted, flow charting client’s
organization structure and management information cycle, and preparation of time table
for critical audit events.

2.6.2. Audit programming

The audit programmer contains audit work plan and programmer that include types of
verification and types of errors to be identified, relevant and appropriate auditing
procedures, list of work to be performed and consecutive work schedule, assessment of
internal control and audit information needed to be gathered. The programmer is prepared
by the auditor in advance and definitely requires some preliminary exchange of
information with the prospective client and client’s firm. The advantage of audit
programmer are ; to serve as checklist work to help specify scope of audit works, and serve
as bases for contract agreement and terms of audit while helping to identify preparation
require on part of auditor and client. The disadvantage is that once prepared and strictly
adhered to it can be inflexible.

2.6.3. Preliminary survey

This enables the internal auditors to acquaint him/her with general situation governing
such partially audit project prior to the common comment of actual audit work. This can be
accomplished by looking directive of management to the staff such as accountings staff
such manual and department instructions.

2.6.4. Audit Completion and Review

Before the preparation of financial audit report, the need to review the updated permanent
audit file total, audit work done, the audit working paper, cleaning if any remaining audit
queries. Review of summary audit finding, review action take on the last previous audit
report and recommendation.

2.6.5. Audit Working Paper

The internal auditors should prepares working papers, which provide the evidential
supports for audit reports and demonstrates the internal auditors compliance with the
standards of internal auditors and supports for audit conclusion reached. The internal
auditors should document in the working papers the following aspects of audit process:

 Planning, examination and evaluation of effectives of risk management

 Control and governance process

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  The auditing procedure performed and conclusion reached, review, reporting and
follow up

Audit working papers should designed in such a way that they provide the principal
evidential support in planning , performance and review of auditors should keep in mind
that the content and arrangement of the working paper reflect the degree of the internal
auditors proficiency.

2.7. Challenges of Internal Audit

Challenges mean that any threat or obstacles that affect the overall activities of the
organization and it reduces the quality and quantity of final report. In addition to this
challenges affect the organizational objects and goal, the internal audit process has its own
challenges regardless of its level in the internal audit is not very effective in an covering
and reporting on upper management discrepancies or identifying conflict of interest
within the board.

2.7.1. Internal audit focuses escalating challenges

Today business environment is both elevating the importance of internal audit and
subjecting it to significant challenges. As companies extend their operation across the
globe, internal audit department must recruit, train and manage staff that can operate
across a variety of cultures and far-flung location. They must also deal with multiple
regulatory regimes.

Internal audit departments are responding in several ways. Internal departments must
recur a strong position within their companies underpinned by trust and close
relationships with staff in other business unit. They must balance the advantage of
centralization and they must marshal capable staff through hiring training and co sourcing.
Internal audit departments’ at large, global companies force a multitude of challenges.

2.7.2. The Changing Role of Internal Audit

Accelerating change of characterized the business landscape for many years and can be
expected to continue new competitors, technologies and financial instruments, changing
cost structure and regulations, increasingly integrated global companies and other
developments are creating new risk and opportunities for organizations to consider.

Internal auditors have new opportunities to both expand its traditional value presentation
activity and leverage its skill in new way to support value creation. Lending organization
increasingly expect internal audit to use its quantitative skill and risk knowledge to support
improvement in risk management internal audit personnel can bring their core skill of risk
and control analysis to this increasingly important activities its skill has it role
encompasses activities.

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2.7.3. The Auditors Responsibility to serve public
The auditors are to representative of the public in the financial reporting process. Thus the
role of independent auditors is ensure that financial statement are fair to all parties and not
biased to certain group complex and specialized body of knowledge, even members of the
profession should acquire knowledge through formal education.

2.7.4. Limitation and Objective of Auditing

According to institute of chartered accountant of Indian has certain inherent limitation. It
would not possible for the auditors discover all errors and frauds in the financial
statements become of this checking. The auditors have different objectives, the first one in
the under secondary objective is:

 Detection and prevention of errors

 Detection and prevention of frauds

2.7.5. Materials vs. Immaterial misstatement

Misstatements are usually considered as material if the combined uncorrected errors and
fraud in the financial statement would likely have change or influence the decision of
reasonable person using the statement.

2.7.6. Errors and Frauds

Errors: error may be defined as a mistake of negligence or misjudgment without an
intention to defraud. Errors are an intentionally misstatement or omission of amount in the
financial statements.

Error may involve mistakes in gathering or processing data.

Frauds: means the willful misrepresentation made with an intention of deceiving others. It
is intentional. It is knowingly committed to defraud the proprietors of the concern.
Detection of fraud is more difficult than detection of errors. Financial statement users
expect auditors to search for and detect fraud. Therefore, the auditors should be careful to
consider those errors and fraud when she/he performing audit serve.

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 CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1. Research Design

The study has been carried out using descriptive survey methodology to define things as it
occurs. Descriptive research is concerned with describing characteristics or function of a
particular individual or group or phenomena. To arrive on appropriate conclusion about
the issue and in order to answer research questions to necessary data are will collecting
both qualitative terms. In qualitative approach more information has been obtaining
regarding to the study.

3.1.1 Sources of Data

The researcher were used both types of data, primary and secondary sources of data.
Primary sources of data are collected through questionnaires and conducting interviews
while secondary sources of data collected from different reference books, organizational
manual and searching from internet

3.1.2 Methods of data collection

The researcher used different methods to collect data necessary for the study. Primary
sources of data are collected through self-administered questionnaires and structured
interviews. The questionnaires included both cloth ended and open ended and were
distributed for internal auditors of finchawa town finance and economic development
office and structured interview conducted with the manager of finance of audit office.
While secondary sources of data were collected through reviewing different books,
organization manuals and any sources related with the study. The data gathering tools are
designed in order to get relevant information about the study and they are simple and time
saving

3.2 Sampling Design

The study was used purposive (non-probability) sampling techniques. The purpose of
using these techniques was that, out of the total employees of the organization there are
only one internal auditor and one general manager and again one vice manager. So the
researcher, were used purposively included only those employees who had direct relation
with the study.

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3.3. Sampling Unit
Sampling unit for the study was employees of Fincawa Town Finance and Economic
Development Office. The offices have 32 employees among these there are four internal
auditors.

3.4 population of the study

The total population of the study was 32, which were employees of the organization.
Among the 32employees only five internal auditors are selected purposively to give
relevant information about the organization.

3.5Sampling frame
Staff members of fincawa town finance and economic development office, internal auditors
and the manager of the town finance and economic office are sample frame for study,
which is thirty-two.

3.6 sample size

Out of 32 employees of the organization, only one internal auditors and one manager of
fincawa town finance and economic development office are selected as a sample to give
necessary information about the organization, so the sample size for the study are totally
twenty four.

N
n=
1+ N ¿ ¿

Where,
 n¿sample size
 e¿ acceptable error
 N = Population size

32
n=
1+32 ¿ ¿

32
n=
1+32 ¿ ¿

32
n=
1+32(0.01)

n=24
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Therefore, representative sample of population is calculated at 90% degree of confidence.
Hence at 90% degree of confidence,

3.7 Method of data analysis

The data had been conducted through non probability sampling techniques. After
necessary primary and secondary data are collected, the more persuasive activity of data
analysis is carried out. The data analysis begins by editing and classifying collected data
into meaningful and relevant group. Then the edited and classified data are analyzed using
descriptive method of analysis. Among descriptive method distribution of analysis are used
by the tabulation, percentage and general controlling standards.

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 CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRITATION

This chapter provides the roles and challenges of data collected through questionnaires and
interview. The questionnaires that distributed for the internal auditor of finchawa town finance
and economic development office are filled and returned. The researchers used descriptive type
of data analysis. Data are classified in to their characteristic so as to make analysis is made for
each question with data. The total employees of the office are 32 and the sample drawn was 18
purposively. The respondents filled and returned questionnaires.

4.1. Organization Structure of the Office

In finchawa town finance and economic development office, in relation to the internal auditing
work there are one forms of organization structure such as: the structure of the woreda office.
Finchawa town finance and economic development office was structure as a department in
generally finance and economic development office. See the organizational chart or table of the
woreda below. (Table 4.)

The chart of organizational work process depicts report relationship and work memberships are
structured. It also shows how position and how work groups are combined in to team. As there
chart of the office in figure above indicate the office is to be divided in to 2, one core and (one
support process). The core processes include: government finance administration purchase
payment and property inspection and internal audit act. And in support process includes: human
resource gender office and HIV, ICT etc.

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Table 4.1 the organization employees

1. Core process owner Female Male Total

Government finance administration 1 5 6
Purchase payment and property 4 4 8
officer
Inspection and internal audit 1 - 1
Population media 1 2 3
Data collection and distribution 1 1 2
development
2. Support process owner Female Male Total
Human resource 6 4 10
Data of human resource statics - 1 1
Common service 1 - 1

Those all employees of organizations are working now by its own profession but throughout the
interview, the employees not have good relationship with each other especially among the
internal auditing department employees. Regarding to this reason the work not done mutually
and well not internal auditing department well not organized. As mentioned in the under the
support process owner it exists common services are including guard, janitors and office boy. As
mentioned in the above, under the support process owner it exists common service are include
guard, janitors and office boy

4.2. Man Power of the Organization

An organization role is determined by the responsibility that to be accomplishing certain
activities to achieve an organizational objectives each individual or organization structure are
drawn and then the researcher identified the number of employees in finchawa town finance and
economic office as follows.

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Table 4.2 Distribution and response

Number of Not Total

Response
distribution response
and Frequency Percentage frequency percentage
response

18 75% 6 25% 100%

Source: primary data (Questionnaire)

The questionnaire distributed for twenty four employees of the organization but not all
questionnaires were responded. Among them only eighteen are responded

Table 4.3 the working year of experience

Description Frequency Percentage

1-3 years 4 22%
4-6 years 6 33%
Above 6 years 8 45%
Total 6 100
Source: primary data (Questionnaire)

Regarding to the year of experience, out of the total respondents 22% have 1-3 years’ experience
and (33%) have 4- 6 year of experience and 45%have above 6 years experience. From this can
eight conclude that more 45% staff the internal audit of section of adequate experience that
enables then to provide not more sufficient and competent evidence about the existing condition
that affect the effectiveness of auditing of the system, experience and competence of auditing are
related to each other because if competent auditor have audit experience engaged in audit work,
errors can be minimized.

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Table 4.4 Getting sufficient supports from management

Do you think that Description Frequency Percentage

internal audit has got
sufficient support
from management?
Yes 15 83%
No 3 17%
To some extent - -
Total 18 100
Source: primary data (Questionnaire)

As observed from the above table, 15 (83%) of the respondents respond as “yes”, 3 (17%) of the
respondents or the employees are respond that “no”. according to the above table, most
respondents have said we cannot got sufficient support from management. The manager of the
organization must support internal auditors to done work effectively. Among the supporting
system of the management, there are paying sufficient salary payments, sufficient budget
assistance, and response for finding and so on.

Table 4.5 Training of internal audit

Do you think that Description No Respondents Percentage

internal audit staff got Yes 15 83%
sufficient training? No 3 17%
Total 18 100
Source: primary data (Questionnaire)

The above table shows 83% or 15 of the respondent’s respond that they got sufficient training.
On the other hand 17% or 3 of the respondents respond that no sufficient training. From the
above table we conclude that internal audit staffs have got sufficient training.

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Table 4.6 corrective action of the management

Do you think that the Description No of respondents Percentage

management took Yes 15 83%
corrective action in No 3 17%
the audit finding To some extent - -
time? Total 18 100%
Source: primary data (Questionnaire)

On the objective of evaluate the performance and key challenges of internal audit of finchawa
town finance and economic development office recommended possible solution for finding.
According to the above table, 3(17%) of the respondent said that the management took corrective
action on some extent on the audit finding and 15 (83%) are said yes, no one is not said does not
took corrective action in audit on time.

Table 4.7 kinds of auditing practice

Which kind of audit is Description No of respondents %

dominantly practices Financial audit 17 95%
in organization? Property audit - -
Performance audit 1 5%
Environmental audit - -
Total 18 100%
Source: primary data (Questionnaire)

The above table reveals that 95% of respondents or all respondents are answered as financial
audit is dominantly practiced in the organization. So we conclude that in finchawa town financial
and economic development office financial audit is dominantly practiced.

4.4 Characteristics of respondents by level of education

Table 4.8 Educational levels

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 No Items Respondents
Education In percent
In number
1 certificate 3 17%
- Diploma 5 28%
4 degree 10 55%
5 Masters - -
6 Total 18 100%
Source: primary data (Questionnaire)

The above table shows that all respondents educational level 10(55%) are degree. So they are
capable of answering questionnaire and their activities properly. In addition, the auditors have
their own work experience and knowledge to perform their work confidently.

4.5 Objectives of internal auditing department

A part of the service department, the internal audit department of the organization is designed to
evaluate the strength and weaknesses of the laid internal audit system, provide suggestion and
recommendation for improvement, report on errors and irregularities to the top management for
corrective action to be taken.

According to the responses of the respondents objective of internal auditing department are
checking the reliability of financial statement, determine whether financial and operational
activities are performed based on the policies, rules and procedures of the organization whether
the organization objectives are achieved. In addition the role of internal auditing also include
determine whether the resources of the organizations are used efficiently and effectively and to
determine the performance of the organization and woreda resources are used for planned
purposes.

4.6 Duties and Responsibilities of the internal audit

Under the general supervision of the general manager, the internal audit service head has the
primary responsibility of the proper management of the internal audit function to ensure that the
audit work fulfills the objective sated in the audit manual. The department in general and the
audit service head specifically charged with the following duties and responsibilities.
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  Ensuring that all resources of the organizations are utilized appropriately
 Ensures that all resources of ensuring that all activities are free of corruption, favoritism
and any kind of malpractice.
 Review whether the organization accounting, cash management, stock control, purchase
of goods and services are in compliance with policies and procedures of the organization
and submits an audit reports to the general manager with recommendations for
improvement and corrective action.
 Forwards recommendations and comments on resource allocation and utilization of the
organization so that the set objectives shall be achieved.

4.7 Scope of the internal audit department activities

The scope of internal audit department of finchawa finance and economic development office
was listed in the manual of the organization as follows:

 Reviewing to ascertain whether the existing controls are adequate and effective
 Reviewing to ascertain whether the prescribed policies and procedures are being
followed.
 Reviewing to examine whether the asset of the organization are properly safe guarded
 Reviewing to examine whether the resources of the organization are being economical
and efficiently.

But the department has not apply all the above listed responsibilities and authorities. This occurs
due to existence of restrictive on the department. As the researcher observed from primary data,
there is restricted access of internal auditing department to all records, reports, activities, and
property and personal that they deem necessary to discharge their audit responsibilities. Because
of these restrictions in the organization the internal audit of the organization is in effective and in
efficient in their work.

4.8 Independence of Internal Audit

Institute of internal auditors (IIA) require internal auditors to be independent of the activities
they audit their independence is realized when they carry out their work freely and objectively
without any restrictions. This freedom exists only if the auditor has free access to all records and
information of the organization to dig out any problems exist in the organization.

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Independence permits them to perform impartial and unbiased judgment essential to the proper
conduct of their work. This can be realized through organizational status and objectives.

Table 4.9 Independence of Internal Audit

Description Response
Is the internal audit In number In percent
meaningfully independent
from management?
Yes - -
No 18 100%
Total 18 100%
Source: primary data (Questionnaire)

As it is clearly indicated in the above table most respondents 18(100%) respond that internal
audit is not meaningfully independent from management. Because the auditors are not free from
restriction of management during the audit work, the auditor is not perform his work according
to auditing standards and the auditors is failed to dig out error and problem that exists in the
organization. But of the respondents response that internal auditors are not meaningfully
independent from management because of fulfilling the listed criterion.

4.9 The Audit Challenges

The institute of internal auditor standard requires that the audit is to be effective. It must be
adequately planned guidance should be provided for the internal auditor and also there reported
audit finding is part of the standards.

Table 4.10 Performance of audit work

Is there good performance of audit work-in your Frequency of the Percentages of

organization? respondents respondent
Yes 17 95%
No 1 5%
Total 18 100%
What makes the performance of audit work poor?

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 Lack of using adequately planned audit work 10 55%
Lack of applying well prepared audit program 1 6%
Lack of following structured audit procedure 7 39%
Total 18 100%
Source: primary data (Questionnaire)

As shown in the above table few respondents respond that performance of audit work of the
organization is poor. Lack of using adequately planned audit work is 10 (55%), lack of following
structured audit procedure is also 7 (39%). But majority of respondents 1 (6%) respond that there
is good performance of audit work this due to somewhat applying the list qualification.
Generally as this information shows that the performance of internal audit is poor.

4.10 Challenges of Internal Audit

Challenges are any threat or obstacles that affect the overall activities of the operation
(organization) and these results or reduce the quality or quantities of the final reports.

Table 4.11 challenges of internal audit

Are there challenges that face internal auditor during Frequency of the Percentages of
audit work? respondents respondent
Yes 16 89%
No 2 11%
Total 18 100%
What is the reason for face challenges?

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 Financial irregularities 4 22%
Fraud 5 28%
Corruption 8 44%
Management failure 1 6%
Total 18 100%
Source: primary data (Questionnaire)

As clearly stated in the above table most respondents 16 (89%) response that the auditors face
challenges during the audit works and 2 (11%) of respondents respond that there is no challenges
that face the auditors in finchawa town finance and economic development office. This shows
that there are challenges that face auditors in finchawa town finance and economic development
office. The causes for these challenges according to respondent’s response are fraud 5 (28%) and
corruption 8 (44%), financial irregularities4 (22%) and management failure 1 (6%). Generally,
this study shows that fraud and corruption are the major challenges that face internal auditors
during the audit work in finchawa town finance and economic development office.

Introduction; Interview analysis by finchawa finance and economic development office

manager

1. Is the internal auditors are done their work independently?

As the manager answered that, we cannot confidentially believe to say they can work
independently, because there are numbers of the company or they are not independent external
auditors due to this in somewhat they are controlled by the company manager. But there is the
rule and regulations that guide them to work without any interference of any one.

2. For whom the internal auditor reports the work?

Internal auditors work is reported on time to the management department or the internal auditors
report their work for the zone auditors, manager of finance and economic development office.
This contributes for active participation of employees in the company issue.

3. What is the performance of the internal auditors?

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The auditors who work in this company has their own work experience, but it is this much to say
enough, because the internal auditors work experience and the knowledge about that work is
somewhat less. As my assumption this resulted from academic knowledge, because they hold
certificate through distance education program. As a conclusion the organization have to many
positive sides as well as for my finding purpose also they have some weak sides. The weak sides
of the organization are identically listed in our research.

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29 | P a g e
 CHAPTER FIVE

5. SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 summery Information, methodology and finding

The objective of this section is to summarize the result of the study from the previous chapters.
The study that has been made throughout this paper is concerned with the role and challenges of
internal audit system with special emphasis in case of finchawa town finance and economic
development office. The management as a matter of convenience and effectiveness establishes
an efficient system of control. Internal control is best regarded as the management in the conduct
of business including internal check and internal audit establishes the whole systems of controls
of financial and non-financial.

As the researcher identified in the analysis part majority of the respondents claim that there are
some problems that faced by the internal auditors during their work. Most of the respondents said
that there is a good performance of audit work. This is because there is a sufficient support and
training. And most of them said that there are challenges or obstacles that affect overall activities
of the operation or organization. This result is to reduce the quality or quantity of the final report.
In general even if many problems are raised or faced the internal auditors they have a great
contribution in the control of financial and non-financial assets.

5.2. Conclusion
Depending on the analyzed and assessment the conclusion for the conducted study is as follows:

 However the institution particularly audit department organized in well manner with
respect to human resource sometimes employs face shortage of material and budget to
objective the activity of each department and woreda is there is no recurrent training.
 The auditors providing their finding on error and irregularities and recommendation for
improvement but the management do not take the necessary corrective action on time.
 Auditors must have planned their audit work prepare audit program and apply the
necessary procedure to improve their performance efficiency.
 There is no enough manpower in the department as compared to the task burden of
employees: the office is organized to some extent of with respect to supplies and
equipment’s. Employees of the department are sometimes facing to guest record.

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  The institution is organized well in its internal audit department but there is no positive
relationship among internal audit department and some other department of the some
organization particularly with finance and purchase department.
 However the institution parties are well organized with respect to human.
5.3. Recommendation
Based on the facts and findings presents in the paper the following recommendations are
forwarded:
 The management has to support the department by providing the necessary
material and create smooth relationship between internal audit and other
departments providing recurrent training.
 The management should have to take corrective action on time.
 The auditor has to make practice performance and audit in addition to property
and financial audit.
 The auditors themselves are not performing efficiently due to lack of adequately
audit work well prepared audit program and lack of well-structured audit
procedure.
 The audits are not fully independent from the management they have faced
restriction an access to document: they are not the part of the management.

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 REFERENCE
[1] Alvin A. Arenas and Etal (1989) principle of auditing 9 thedition, Home Wood publishing
company.

[2] A. Millinchamp (1996), Modern auditing 7thedition vikas publishing house.

[3] Arens and Loebbeke, auditing and integrated approach 7 thedition (1997) virinda
publishing company.

[4] B.N TondonS.sadHarasanam (2005) a hand book of practical auditing 13thedition.

[5] Bora town and Johnson (1990) principle of auditing 5thedition, Home Wood publishing
company.

[6] David (2004) institute internal auditors 4thedition, veranda publishing company.

[7] John Willingham (1979) audit method and concept 3rdedition, vikas publishing house.

[8] Robertson Jack C (1990), auditing 6thedition, Home Wood publishing company.

[9] Shekhar, (2003) auditing, McGraw hill Company.

[10] Whittington and pany (1995) principles of auditing 4thedition McGraw hill company.

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 APPENDIX

BULE HORA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTEMNT ACCOUNTING AND FINANCE
This questionnaire is to be answered by the employees of finance and economic development
office in fincawa town. The purpose of the questionnaire is to collect reliable information on the
role and challenges of internal audit (in case of Fincawa finance and economic development
office). Your honest and kind effort will certainly have significant effect on the result of the
study. We would like to express our deepest thanks in advance for your help.

Instruction: please, put the right sign () by choosing one of the appropriate from the
following boxes.

Part One: Personal Data

1) Age:
18- 30yrs 41-50yrs

31-40 yrs. 51yrs and above

2) Marital Status:

Married Unmarried

3) sex: Male Female

4) Educational level:

Certificate Degree

Diploma Master and above it

5) Working year of experience.

1-3 years 4- 6 years above 6 years

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Part two: Internal audits related questionnaires

6) Do you think that internal audit staff got sufficient training?

a) Yes

b) No

c) Other……………………………………………………………………

7) Is there challenges that face internal auditors during audit work?

a) Yes

b) No

c) Other..................................................

8) Are the internal auditors meaningfully independent of management?

a) Yes
b) No
c) Other……………………………………………………………………………..
9) Do you think that internal auditors have got sufficient support from management?
d) Yes
e) No

c) Other...............................................................

10) Do you agree that the internal auditors departments are well organized?

a) Yes

b) No

c) Other…………………………………………………………………………..

11) Do you think that there is good performance of audit work in your organization?

a) Yes

b) No

c) Other……………………………………………………………………………………….

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12) . Is the internal auditors are done their work independently?

a) Yes

b) No

c) Other……………………………………………………………………………..

13) Which kinds of audit are dominantly practiced in your organization?

a) Financial audits

b) Property audit

c) Performance audit

d) Environmental audit
14) Is there good performance of audit work in your organization?

a) Yes

b) No

c) Other……………………………………………………………………………..

15) What makes the performance of audit work poor?

a) Lack of using adequately planned audit work.

b) Lack of applying well prepared audit program.

c) Lack of following structured audit procedure.

16) What is the reason for face challenges?
a) Financial irregularities.
b) Fraud
c) Corruption
d) Management failure
17) Core process owner
a) Purchase payment and property officer
b) Government finance administration
c) Inspection and internal audit
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 d) Population media
18) Support process owner
a) Human resource
b) Data of human resource statics
c) Common service
Interview questionnaire
1) Is the internal auditors are done their work independently?
2) For whom the internal auditor reports the work?
3) What is the performance of the internal auditors?

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