Internal Audit Functions: An Empirical Study of Public and Private Sectors in Nigeria

  • Abdulkadir Madawaki Department of Accounting, Al-Qalam University Katsina, Nigeria
  • Aidi Ahmi Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia
  • Halimah @ Nasibah Ahmad Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia
Keywords: Internal Audit Function, Public Sector, Private Sector, Nigeria, Comparison

Abstract

The study examines the similarities and differences between the private and public sectors internal audit functions in Nigeria. The features examined include the hierarchical position of the internal audit functions, outsourcing of internal audit activities, reporting relationship of the internal auditor, and the coordination between internal and external auditors. A survey of internal audit managers of both sectors was undertaken to establish their current practices. The results revealed that there are no much differences in the hierarchical positioning of the internal audit function in both sectors. A substantial difference was found in the reporting lines of internal auditors in both sectors. The results further showed that private sector outsources internal audit activities more than the public sector and a slight difference exists between the two sectors about the level of coordination between internal and external auditors. Finally, the result indicated that private sector experiences a reduction in external audit fees compares to its counterpart in the public sector.      

References

Abbott, L.J., Parker, S., & Rama, D.V. (2007). Corporate governance, audit quality, and the Sarbanes- Oxley Act: Evidence from internal audit outsourcing. The Accounting Review, 82(4): 803-835.

Adams, M.B. (1994). Agency theory and internal audit. Managerial Auditing Journal, 9(8): 8-12

Al-Twaijry, A.A., Brierley, J.A., & Gwilliam, D.R. (2004). An examination of the relationship between internal and external audit in the Saudi Arabian corporate sector. Managerial Auditing Journal, 19(7), 929-944.

American Institute of Certified Public Accountants (AICPA). (1990). The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements. Statement on Auditing Standards No. 65. New York, NY: AICPA.

Arena, M., & Azzone, G. (2007). Internal audit departments: adoption and characteristics in Italian companies. International Journal of Auditing, 11, 91-114.

Arena, M., & Azzone, G. (2009). Identifying organizational drivers of internal audit effectiveness. International Journal of Auditing, 13, 43-60.

Badara, M.S, & Saidin, S.Z. (2014). Empirical evidence of the moderating effect of the effective audit committee on audit experience in the public sector: Perception of internal auditors. Mediterranean Journal of Social Sciences, 5(10), 176-184

Barac, K., & Staden, M. V. (2014). Internal auditing as a corporate governance mechanism. A comparison between public sector and private sector functions. African Journal of Public Policy, 7(3), 17-31.

Beneish, M. D, Billings, N.B & Hodder L.D. (2006). Internal control weaknesses and information uncertainty. Working paper, Indiana University.

Brody, R.G., Golen, S.P. & Reckers, P.M. (1998). An empirical investigation of the interface between internal and external auditors. Accounting & Business Research, 28(3), 160- 171.

Caplan, D.H., & Kirschenheiter, M. (2000). Outsourcing and audit risk for internal audit services. Contemporary Accounting Research, 17(3), 387-428.

Carcello, J. V., Hermanson, D. R., & Raghunandan, K. (2005). Changes in internal auditing during the time of the major US accounting scandals. International Journal of Auditing. 9(2), 117–27.

Carhill, K.M., & Kincaid, J.K. (1989). Applying the standards in governmental internal auditing. The Internal Auditor, 46(5), 50-59

Carey, P., Subramaniam, N., & Ching, K. (2006). Internal audit outsourcing in Australia. Accounting and Finance, 46(1), 11-30.

Christoper, J., Sarens, G., & Lueng P. (2009). A critical analysis of the independence of the internal audit function: evidence from Australia. Accounting Auditing and Accountability Journal, 22(2), 200-220.

Coupland, D. (1993). The internal auditor’s role in public service orientation. Managerial Auditing Journal, 8(1), 3-13.

DeFond, M.L., & Francis, J.R. (2006). Audit research after Sarbanes-Oxley. Auditing: A Journal of Practice and Theory, 24, 5–30.

DeZoort, F., Houston, R., & Reisch, J. (2000). Incentive compensation for internal auditors. Internal Auditor, 57(3), 42-46.

Dickins, D. & O’Reilly, D. (2009). The qualifications and independence of internal auditors. Internal Auditing, 24(3), 14-21.

Emmanuel, O., & Usman, H. (2015). Internal audit techniques and fraud prevention: A case study of selected local government councils in Bauchi state. Mediterranean Journal of Social Sciences, 6(4), 232-244.

Felix, W. L., Gramling, A.A., & Maletta M.J. (2001). The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution. Journal of Accounting Research, 39(3), 513-534.

Glascock, K. (2002). Auditees or clients? The Internal Auditor, 59(4), 84-85.

Glover, S., Prawitt, D., & Wood, D. (2008). Internal audit sourcing arrangement and the external auditor’s reliance decision. Contemporary Accounting Research, 25(1), 193- 213.

Goodwin, J. (2004). A comparison of internal audit in the private sector and public sectors. Managerial Auditing Journal, 19(5), 640-650.

Goodwin, J., & Yeo, T. Y. (2001). Two factors affecting internal audit independence and objectivity: evidence from Singapore. International Journal of Auditing, 5(2), 107–125.

Goodwin, J. (2003). The relationship between the audit committee and the internal audit function: Evidence from Australia and New Zealand. International Journal of Auditing, 7(3), 263–78.

Gramling, A. A., Maletta, M. J., Schneider, A., & Church. B. K. (2004). The role of the internal audit function in corporate governance: A synthesis of the extant internal auditing literature and directions for future research. Journal of Accounting Literature, 23, 194– 244.

Hogan, C. E., & Wilkins, M. S. (2006). Evidence on the audit risk model: Do auditors increase audit effort in the presence of internal control weaknesses. Working paper, Southern Methodist University.

Ima, J. N. (2015). Effective internal audit as a tool for fraud deterrence in Nigerian Organizations. Humanity and Social Sciences Journal, 10(2), 73-80.

International Federation of Accountants (IFAC) (2009). International Standard on Auditing Using the Work of Internal Auditors. International Auditing and Assurance Standards Board ISA 610. New York, NY: IFAC.

James, K. (2003). The effect of internal audit structure on perceived financial statements fraud prevention. Accounting Horizons, 17(4): 315-27.

Leung, P., Cooper, B. J., & Robertson, P. (2004). Role of Internal Audit in Corporate Governance and Management, RMIT University, Melbourne.

Lowe, D., Geiger, M., & Pany, K. (1999). The effects of internal audit outsourcing on perceived external auditor independence. Auditing: A Journal of Practice & Theory, 18, 7-26.

Maletta, M. (1993). An examination of auditors’ decision to use internal auditors as assistants: the effect of inherent risk. Contemporary Accounting Research, 9(2), 508-525.

Messier Jr., W. F., Reynolds J. K., Simon C.A., & Wood D.A. (2011). The effect of using the internal audit function as management training ground on the external auditor's reliance decision. The Accounting Review, 86(6), 2131- 2154.

Modibbo, S.A. (2015). An assessment of the effectiveness of the internal audit unit at local government level in Adamawa state. International Journal of Humanities and Social Science, 54(1), 59-65.

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

Paape, L., Scheffe, J., & Snoep, P. (2003). The relationship between the Internal Audit function and corporate governance in the EU – a survey. International Journal of Auditing, 7(3), 247–62.

Patterson E. R., & Smith J. R, (2007). The effect of Sarbanes-Oxley on auditing and internal control strength. The Accounting Review, 82(2), 427-455.

Prawitt, D. F., Sharp, N. Y., & Wood D. A. (2011). Internal audit outsourcing and the risk of misleading or fraudulent financial reporting: Did Sarbanes-Oxley get it wrong? Working paper, Brigham Young University, Texas A&M, and Brigham Young University.

Public Company Accounting Oversight Board (PCAOB) (2007). An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements. Auditing Standard No. 5. PCAOB Release No. 2007-005A. June 12. Washington, D.C.: PCAOB.

Ramamoorthi, S. (2003). Internal auditing: history, evolution, and prospects. The Institute of Internal Auditors Research Foundation, Altamonte Springs, FL.

Ruud, T.F. (2003). The internal audit function: An integral part of organizational governance. The Institute of Internal Auditors Research Foundation, Altamonte Springs, FL.

Sarens, G., & De Beelde (2006). The relationship between internal audit and senior management: A qualitative analysis of expectations and perceptions. International Journal of Auditing, 10, 219-214

Scarbrough, D. P., Rama, D. V., & Raghunandan, K. (1998). Audit committee composition and interaction with internal auditing: Canadian evidence. Accounting Horizons, 12(1), 51– 62.

Schneider, A. (1984). Modelling external auditors’ evaluations of internal auditing. Journal of Accounting Research, 22(2), 657–678.

Scott, W.R. (1987). The adolescence of institutional theory. Administrative Science Quarterly, 32(4), 493-511.

Selim, G., & Yiannakas, A. (2000), Outsourcing the internal audit function: A survey of the UK public and private sectors. International Journal of Auditing, 4(3), 213–260.

Smith, G. (2005). Communication skills are critical for internal auditors. Managerial Auditing Journal, 20(5), 513-539.

Zain, M. M., Subramaniam, N., & Stewart, J. (2006). Internal auditors’ assessment of their contribution to financial statement audits: the relation with the audit committee and internal audit function characteristics. International Journal of Auditing, 10(1), 1-18.

Published
2018-01-01
How to Cite
Madawaki, A., Ahmi, A., & Ahmad, H. @ N. (2018). Internal Audit Functions: An Empirical Study of Public and Private Sectors in Nigeria. Indian-Pacific Journal of Accounting and Finance, 2(1), 26-37. https://doi.org/10.32890/ipjaf.2018.2.1.1
Section
Main Section