The Effect of the Factors in the Internal Audit Department on

the Internal Auditors Objectivity in the Banks Operating in

the United Arab Emirates: (A Field Study)
Dr. Riham Muqattash, Asisstant professor, Al-Ain University of Science and Technology, Abu-Dhabi

ABSTRACT
Since the demand for range of non-audit services increases, the need for appropriate supervision
and standards for assuring professionalism and especially objectivity in audit services also increases, this
study examined the factors affecting the objectivity of internal auditors in the internal audit department,
in addition, it is determined if the internal auditors objectivity is affected by the independence of the
internal audit activity. Hence, internal auditors are developing new strategies to meet up these challenges
and are becoming more practical, providing a broadened variety of services and otherwise changing the
internal audit model. This study depends on sample of Banks Operating in the United Arab Emirates.
Data is collected from chief audit executive directors whom working in internal audit department of
banks. A descriptive statistical methods and regression have been used. The outcome of the study showed
that there is a significant positive relationship between the factors in the internal audit department and
the objectivity of the internal auditors, such as: rotation of employees, outsourcing audit activities,
havening a formal manual, audit charter and quality assurance department. Also the results of the study
showed, there is a significant positive relationship between the independence of the internal audit activity
and the objectivity of the internal auditors, and this indicated that the internal auditors' objectivity is
affected by the degree of the independence of the internal audit activity.
Keywords: Internal auditors, objectivity, independence, internal audit activity.
INTRODUCTION
Over the years, internal auditing has evolved into a highly professional activity that extends to the
appraisal of the efficiency and effectiveness of all phases of a companys operations, both financial and
non-financial. These changes have led to the formation of internal audit departments ( Zarkasyi, 2006),
and became one of the important units in the most modern banks in the world (Sharairi, 2011).One of
the strongest means to monitor financial reporting, ethics, and governance is the internal audit groups in
corporations ( Bariff, 2003).
The internal audit function could be viewed as a first line defense against inadequate corporate
governance and financial reporting. With appropriate support from board of directors, audit committee,
the internal audit staff is in the best position to gather information on inappropriate accounting practices,
inadequate internal controls, and ineffective corporate governance (Bariff, 2003).
The Institute of Internal Auditors (IIA) defines internal auditing as follows: Internal auditing is an
independent, objective assurance and consulting activity designed to add value and improve the
organizations operations. It helps an organization to accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management, control, and
governance process, and the IIA defines Objectivity as: An impartial, unbiased mental attitude and

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Journal of International Management Studies, Volume 6, Number 3, October 2011

avoidance of conflicts of interest, allowing internal auditors to perform engagements in such a manner
that they have an honest belief in their work product and that no significant quality compromises are
made (IIA, 2007).
This research aims to study the effect of the factors in the internal audit department and the
independence of the internal audit activity on the objectivity of the internal auditors through studying
The Institute of Internal Auditors framework for managing threats to objectivity (Mutchler, 2003).
Thus this study focused on the factors in the internal audit department which affects the objectivity
of the internal auditors, so the study seeks to answer the following questions:
1.Does the factors in the Internal audit department level (rotation between the internal auditors, having
quality assurance department, using the IIA standards, having audit charter, having resident auditor, and
outsourcing audit function) effect the Internal auditors objectivity in the banks operating in the United
Arab Emirates?
2.Does the Independence of the Internal audit activity (the audit department follows and reports to the audit
committee, the promotion, incentives, and termination of the CAE is made by the audit committee)
affects the objectivity of the internal auditors in the banks operating in the United Arab Emirates?
THEORETICAL BACKGROUND
Despite the increasing focus on internal audit, there have been a limited number of prior reviews of the
internal auditors' objectivity literature. Mutchler (2003) edited Chapter 7, Independence and Objectivity: A
framework for research opportunities in internal auditing, which was published by the IIA Research
Foundation on research opportunities in internal auditing. The purpose of this chapter is to discuss the concepts
of independence and objectivity within the perspective of internal auditing and to recommend ideas for future
research. The framework discussed specific factors in the internal audit department which affect the objectivity
of the internal auditors such as: rotation of employees on jobs, third party outsourcing, and reporting
responsibilities.
Gramling et al. (2004) in his study examined the literature and future research opportunities relating
to the role of the internal audit function in corporate governance. They focused on the relationship
between internal audit and other cornerstones of governance (i.e. external auditors, the audit committee
and management), they also evaluated the literature on internal audit quality including objectivity and
independence. The reviewer(Coram et al.2008) found that the role if an internal audit function in
corporate governance has been analyzed using the external auditors, evaluation of its quality ,
determinants of its reliance decision, the extent and nature of its work relied on by the external auditor
and other aspects of the external audit.
On the other hand (Bariff, 2003) discussed the importance of the internal audit group in corporations.
The Chicago Chapter member of the IIA conducted a survey including its member companies to determine
what current practices, preferred practices and the gaps related to internal audit has been founded
independent, scope, and Sarbanes-Oxley compliance monitoring. The study examined the question related to
appointing and removing the CAE, and added that the independence of the internal audit function is at risk if
e.g. The chief financial officer (CFO) has responsibility of hiring and firing the CAE.
The study reveals that the internal auditors indicated that the audit committees need to be more
proactive in internal audit reporting, and chief audit executive personal matters like(hiring and firing), and
internal audit scope should include strategic issues, and confirming the review of internal controls. The
results of the survey declared that internal auditors want to take position to participate in monitoring

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compliance with Sarbanes-Oxley act, and the results display that internal auditors are ready and already
active in the challenge to restructure the confidence in financial reporting and markets.
A research published by (The American Accounting Association, 2007) investigates the Institute of
Internal Auditors (IIA) recommendations (that internal audit report directly to the audit committee, rather
than to upper management).
This study examined the impact of audit committee dominion over the internal audit function on the
nature of internal audit activities. The data was obtained from 72 chief internal auditors from fortune 1000
firm. The measurement used is derived from three key facts of the audit committee-internal audit
relationship: reporting duties, termination rights and budgetary control. The results shows strong, positive
relation between the audit committee functional internal audit authority variable and the amount of
internal audit resources devoted to internal control, 25% of the sample firms suggests significant room for
improvement in terms of the stature of the audit committee in its dealings with internal audit function, this
also validates the IIAs recommendations concerning audit committee internal audit termination/hiring
rights and budgetary controls. The evidence suggests that the internal audit function is slowly evolving
from the eyes and ears of management to the eyes and ears of the audit committee, also the audit
committees are slowly evolving take a great role in their interaction with internal audit..
The study of (Coram et al. 2008) assessed whether organizations with an internal audit function are
more likely to detect and self-report fraud than those without, they used a unique self-reported measure of
misappropriation of assets fraud for the first time. The fraud data are from the 2004 KPMG fraud survey,
which reported fraud from 491 organizations in both private and public sector in Australia and New
Zealand. The internal audit data are gathered through a survey sent to the respondents of the KPMG fraud
survey. The study revealed that organizations with an internal audit function are more likely than those
without such a function to detect and self-report fraud, and organizations that rely solely on outsourcing
for their internal audit function are less likely to detect and self-report fraud than those that undertake at
least part of their internal audit function themselves.
The study findings suggests that internal audit adds value through improving the control and
monitoring environment within organizations to detect and self-report fraud, also it suggests that keeping the
internal audit function within the organization is more effective than completely outsourcing that function.
There is further evidence of the close relationship between audit committees and the head of
internal audit in a recent South African study conducted by (Marx & Voogt, 2010) among 30 large listed
companies. In this study, 93.3% of chief audit committee chairs revealed that their organizations chief
audit executives report to the audit committee and 83.3% meet with the audit committee more than three
times a year. This study also revealed that chief audit committee chairs were extremely satisfied with the
contribution that internal audit makes to corporate governance.
The exploratory study of (Ahlawat, 2000) examines whether outsourcing of the internal audit function
is susceptible to client advocacy vis-a-vis in-house auditing, which itself may be sensitive to an employer
advocacy. Advocacy implies that an auditor will be partial to its client's interest, especially if these interests
are specifically known. The study further examines whether advocacy is mitigated by the experience of
internal auditors, and whether their judgments are influenced more by ethical or by economic concerns.
For this research, sixty-six practicing members of the Institute of Internal Auditing completed a
case study involving a corporate acquisition scenario. Of the 66 participants, 35 were from corporations
(in-house), while the remaining 31 were from the Big 5 accounting firms (outsource). Advocacy was
manipulated by asking participants to assume the role of internal auditor for either the buyer or the seller
of a target division. Results indicate that significant advocacy existed in the judgments of both in-house

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95

and outsource auditors. However, the extent of advocacy was less severe in the case of outsource auditors.
Also, regardless of whether participants themselves made ethical or economical choices, they seemed to
believe that most people, in general, are motivated by economic rather than ethical considerations.
The study of (Goodwin and Yeo, 2001) examines two factors that may influence the independence and
objectivity of internal audit. These two factors are: first, affecting the organizational independence of the
internal audit function is its relationship with the audit committee. The second is the use of the function as a
management training ground. It is argued that this practice might affect individual objectivity because
internal auditors may be reluctant to withstand pressure from an auditee who could be their future
supervisor. The survey sample consisted of chief internal auditors in Singapore. A strong relationship
between the audit committee and the internal audit function was found, with the level of interaction being
greater when the audit committee was comprised solely of independent directors, and the use of the internal
audit function as a management training ground was also found to be quite widespread in Singapore.
HYPOTHESES OF THE STUDY
Internal auditors objectivity and independence is an important concern highlighted by the Institute of
Internal Auditors (IIA) Practice Advisory 1120-1: Individual Objectivity, which stresses that internal
auditors must have an impartial, unbiased attitude and avoid any conflict of interest. Conflict of interest is a
situation in which an internal auditor, who is in a position of trust, has a competing professional or personal
interest. A conflict of interest exists even if no unethical or unacceptable perform results. A conflict of
interest could impair an individual's ability to perform his or her duties and responsibilities objectively. The
objectivity is presumed to be impaired if an internal auditor provides assurance services for an activity for
which the internal auditor had responsibility within the previous year, also the IIA emphasized on using
Outsourcing for some activities - Assurance engagements for functions over which the chief audit executive
has responsibility must be overseen by a party outside the internal audit activity (IIA, 2009).
However, Objectivity is a very important attribute that internal auditors should work for. It is
considered as the key element of the effectiveness of the internal audit function. Internal Auditing
Standards and studies stressed the importance of both, the organizational independence of the internal
audit function and the individual objectivity of internal auditors (Harrell, 1989), (Bazerman, 1997),
(Goodwin and Yeo, 2001).
Regarding internal audit department (Sawyer, 2003) emphasis on the policy of internal auditing to
review drafts of audit reports with management personal responsible for the activities examined in
advance of the formal release of the reports, also the audit charter should be written and reviewed
periodically by the internal audit department. For the credibility of the charter, it should be approved by
the top management and authorized by the board of directors and its audit committee (Burnaby, 1994)
and (Peursem, 2004).
The independence of the internal audit activity is highlighted by the Institute of Internal Auditors (IIA)
Practice Advisory 1110-1: Organizational Independence, which stresses that The internal audit activity must
be independent, and internal auditors must be objective in performing their work , and the chief audit executive
must report to a level within the organization that allows the internal audit activity to fulfill its responsibilities
(IIA, 2009). The Institute of Internal Auditors IIA believes strongly that to achieve necessary independence,
the CAE should report functionally to the audit committee or its equivalent, for administrative purposes the
CAE should report to the chief executive officer CEO of the organization (IIA, 2005) .

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The reporting level of the department is one of the critical issues of organizational independence. A
number of previous studies have investigated the reporting level of the internal audit department, for
example, (Clark, 1981) found that, the independence of the internal audit department and the level of
authority (the level to which internal audit personnel report) were the two most important criteria
influencing the objectivity of their work.
Also (Chambers, Selim and vinten, 1990) mentioned a framework regarding the independence of
the internal audit activity, they said one of the factors affecting the independence of the internal audit
activity is the organizational independence, and they emphasized on the level the internal auditors reports
should sent to.
The study has two hypotheses:
The first hypotheses: There is a significant relationship between the factors in the internal audit
department level and the internal auditors objectivity in the banks operating in the United Arab Emirates.
The second hypotheses: There is a significant relationship between the independence of the internal
audit activity and the internal auditors objectivity in the banks operating in the United Arab Emirates. The
relationship between the variables is in Figure (1)
Independent Variables

Dependent Variable

Factors in the internal audit department level

The Independence of the Internal Audit Activity

The Objectivity of the

Internal Auditors

Figure 1: The independent and dependent variables

The elements of independent variables and dependent variables are in table (1).
Table 1: Elements of independent and dependent variables
Factors in the internal audit department level :
The internal audit Dep. Is committed to comply with the internal audit
1
standards of IIA.
The paper work of the internal auditor is checked by his direct superior and
2
chief audit executive.
The internal auditor report is checked by his direct superior and chief audit
3
executive.
There is policy of rotation between the internal auditor in the internal audit
4
Dep.
5 The internal auditors never audit their own work. (they use Outsourcing).
6 The internal audit Dep. has a policy of avoiding conflict of interest.
7 The internal audit Dep. has report forms for internal auditors.
8 The audit results are discussed by the audited parties.
The audited parties written reply regarding the audit results is ready before
9
sending the results to the audit committee.
1
The written reply from the audited parties is documented.
0
1
The internal audit department has manual.
1
The Independence of the Internal Audit Activity :

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1
2
3
1
2
3
4
5

The internal audit Dep. Is reporting to the audit committee.

The promotion of the chief audit executive and incentives is made by a
decision from the audit committee.
Audit committee provides full support to the internal audit Dep.
The objectivity of internal auditors:
There is a Quality Assurance dep. In the Internal audit Dep. To check the
quality of the internal auditor reports.
The internal audit Dep. Maintain awareness and commitment of the internal
auditors objectivity.
The internal audit Dep. Has a written Audit Charter reviewed periodically by
the internal audit department.
The internal audit Dep. Is following Audit Committee in the hierarchy of the
bank.
The chief audit executive is fired only by a decision from the audit committee.

Sample of the Study

The study population consists of the chief audit executives or the internal auditor whom are
working in the UAE banking sector, exchange with a number of 23, in order to achieve the objectives of
the study and test hypotheses and to achieve the results, (27) questionnaires have been distributed, (23)
questionnaires have been restored and analyzed.
In order to achieve the objectives of the study, a questionnaire was developed which included the
factors in the internal audit department which affects the internal auditors objectivity, after referring to
the theoretical literature and previous studies related to the subject of the current study, as well as by
reviewing the relevant research tools. The tool was formed from three parts; the first part included a
variety of items in order to obtain personal data that are characterized by the study sample, and the other
contained paragraphs that measure key variables of the study. A five Likert scale has been adopted to
determine the degree of importance of each item of the questionnaire, where (5) points was given to the
situation of "strongly agree" and (4) points for the case of "agree", and (3) points to the case of "neutral"
and (2) points to the "disagree" and (1) point to "strongly disagree".
Demographic of study sample
The following table (2) gives a general overview of the sample surveyed in term of the
demographic information.

Demographic object
Qualifications

Professional certificate

Functional level

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Table 2: Demographic information

The valid items
Frequency
PhD
10
Master degree
11
Bachelor
2
others
0
CIA
2
CPA
12
CMA
7
Others
2
Chief executive auditor
9
Internal audit supervisor
2
Internal auditor
8
Assistant auditor
4

Percent %
43.5
47.8
8.7
0
8.7
52.2
30.4
8.7
39.1
8.7
34.8
17.4

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Experience

1-5 years
6-10 years
More than 10 years

6
6
11

26.1
26.1
47.8

The number of respondent holding PhD. Degree is 10, and Master degree 11 of the sample, this
indicates that the banks are encouraging the employees to have a high degree of qualification. The
majority of respondents have professional certificate CPA with a percentage of 52.2%, and most of the
respondents is a chief executive auditor or internal auditor with a percentage 39.1% and 34.8%
respectively, this indicates awareness of banks to have qualified employees in the internal audit
department. The respondents have long experience working in banks with more than 10 years, maybe this
is an indicator how banks hire the auditors.
Internal Reliability
Coefficient of reliability (Cronbach's alpha) was used to measure the internal consistency of the
paragraphs of the questionnaire for its ability to produce results compatible to the responses of respondents.
Table 3: Internal reliability
Scale
Objectivity of the internal auditors
Internal audit department
Independence of the internal audit activity

Cronbachs alpha
.794
.612
.604

Table (3) shows the results of reliability of the survey using the Cronbach's Alpha internal consistency,
by reviewing the values of reliability coefficients of internal consistency, it shows that all the values were
statistically acceptable and reflect consistency in a good degree which reflect the stability of the study.
Data Analysis
The independence variables internal audit department and Independence of the internal audit
activity explains 84% of the variance of the objectivity of the internal auditors. Therefore these variables
are the most effective ones on the objectivity of the internal auditors. See table (4)
Table 4: Data analysis by using R Square
R Square
Internal audit department
Independence of the internal audit activity
Objectivity of internal auditors

0.836366

According to table (5) below the hypothesis 1 is supported at significant level p < 0.05 and the Beta
for the positive relationship between the internal audit department and objectivity of the internal auditors
is 0.75, accordingly there is a significant positive relationship between the factors in the internal audit
department and the objectivity of the internal auditors.
Regarding hypothesis 2 its supported at significant level P<0.001 and the beta for the positive
relationship between independence of the internal audit activity and the objectivity of the internal auditors
is 0.43, accordingly there is a significant positive relationship between independence of the Internal audit
activity and the Objectivity of the internal auditors.

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Table 5: Data analysis by using Beta and T value

Objectivity of internal auditors
Objectivity of internal
(Beta)
auditors (t value)
Internal audit department
0.745541*
1.745198
Independence of the internal audit activity
0.431412**
5.909411
* P<0.05

** P<0.001

CONCLUISON
Internal audit has evolved over the years from modest beginnings to becoming a key component of
the control environment, and nowadays is an integral part of the corporate governance structures of
entities. (Marx & Voogt, 2010). Internal auditing with strong support of the IIA and its member firms is
in an excellent position to bring sanity to the financial markets and reports.
According to the internal audit department, the study revealed that there is a significant positive
relationship between the factors in the internal audit department and the objectivity of the internal
auditors, and almost all banks operating in the UAE have an audit manual, charter, and quality assurance
department, and committed to comply with the internal audit standards of IIA. According to the audit
reports the study showed the importance of having a policy of internal auditing to review audit reports
with the personal responsible for the activities examined in advance of the formal release of the reports,
also related to the objectivity of internal auditors the study showed that there is great effect of rotation of
employees in the internal audit department on the objectivity of internal auditors, and the banks should
apply this procedure from time to time, unless the number of employees in the audit department is 3 or
less, due to the small size of the bank. The results of the study showed that most banks operating in the
UAE apply Outsourcing in some circumstances, for certain activities.
According to the objectivity of internal auditors, the results showed that there is a significant
positive relationship between independence of the internal audit activity and the objectivity of the internal
auditors, and that almost all banks operating in UAE follow the procedure of internal audit department
reporting to the audit committee, and assigning, promoting, firing the CAE is done only by a decision
from the audit committee, so the higher reporting level, the higher the objectivity of the internal auditors,
these results are consistent with the study of (Bariff, 2003).
This study is considered to be the first in UAE discussing the factors affecting internal auditors
objectivity in the internal audit department, this study will aid the internal auditors to understand the
factors that might affect their objectivity, and it will enhance their integrity and banks credibility.
RECOMMENDATION AND LIMITATION
In the light of what has reached from the results, the research recommends the following:
1.Promote understanding and awareness of the internal auditors to their objectivity and how to maintain it
in their work.
2.The role of the top management in the banks to commit in training and qualifying internal auditors to
keep up with the new rules and regulations regarding the auditing profession.
One of the limitations of this study was selecting internal auditors in UAE banks only; however, it
seems that other groups interacting with internal auditors can contribute to this issue such as board of
director members, audit committee members, and key staff at banks. Hence, the results of the data could

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Journal of International Management Studies, Volume 6, Number 3, October 2011

not be generalized beyond this group. Furthermore, this study only captured a sector of the UAE
corporations, viewpoints, for this future research need to be undertaken to cover all the sectors in the
UAE, and make comparison between these sectors.

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