Managerial Auditing Journal

Emerald Article: Internal auditing practices and internal control system

Faudziah Hanim Fadzil, Hasnah Haron, Muhamad Jantan

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Faudziah Hanim Fadzil, Hasnah Haron, Muhamad Jantan, (2005),"Internal auditing practices and internal control system", Managerial
Auditing Journal, Vol. 20 Iss: 8 pp. 844 - 866
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MAJ
20,8

Internal auditing practices and

internal control system

844

Faculty of Accountancy, Universiti Utara Malaysia, Kedah, Malaysia

Faudziah Hanim Fadzil

Hasnah Haron
School of Management, Universiti Sains Malaysia, Penang, Malaysia, and

Muhamad Jantan
Centre for Policy Research, Universiti Sains Malaysia, Penang, Malaysia
Abstract
Purpose Two main objectives and they are: to determine whether the internal audit department of
the companies listed in the Bursa Malaysia complies with the Standards for the Professional Practice
of Internal Auditors IIA (2000); and, to determine whether compliance to SPPIA will affect the quality
of the internal control system of the company.
Design/methodology/approach Two sets of questionnaires were used in the study. Internal
auditing practices was measured by the items listed in the SPPIA and the internal control was
measured by means of the statement on internal control: guidance for directors of public listed
companies. The population used in this study was all the companies listed in the Bursa Malaysia in
2001. This study used both descriptive and inferential analyses.
Findings It was found that management of internal audit department, professional proficiency,
objectivity and review significantly influence the monitoring aspect of the internal control system.
Scope of work and performance of audit work significantly influences the information and
communication aspect of the internal control system while performance of audit work, professional
proficiency and objectivity significantly influence the control environment aspect of the internal
control system. The study also shows that management of internal audit department, performance of
audit work, audit program and audit reporting significantly influences the risk assessment aspect
of the internal control system. Lastly, performance of audit work and audit reporting significantly
influences the control activities aspect of the internal control system.
Research limitations/implications The research has contributed to the agency theory with
respect to the bonding costs that management has to pay to the internal auditors for the best interest of
the principals of the companies. Another important implication pertains to the extent of the internal
auditing practices among internal auditors in Malaysian public listed companies. Research has also
shown that the compliance with internal auditing practices partially influence certain aspects of the
quality of the internal control system.
Originality/value This is the first empirical study that has linked the compliance of the internal
auditing function to the SPPIA and its effect on the internal control system.
Keywords Auditing, Auditing standards, Malaysia
Paper type Research paper

Managerial Auditing Journal

Vol. 20 No. 8, 2005
pp. 844-866
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900510619683

Introduction
Internal auditing has undergone dramatic changes that have expanded its scope in a way
that allows it to make greater contributions to the organization it serves. Internal auditing
is also performed in diverse legal and cultural environments; within organizations that
vary in purpose, size, and structure; and also by persons within or outside the
organization. Furthermore, the internal auditing profession also walks a tightrope

between serving as a management consultant and an independent professional. A survey

done by the Malaysian Institute of Corporate Governance (MICG), The Institute of Internal
Auditors Malaysia (IIAM) and Ernst and Young concluded that internal auditors are best
placed to understand and appreciate the business processes of a company and they act as
management consultant to reduce risks. Internal auditors also help run a company more
efficiently and effectively to increase shareholders value.
As this is the case, internal auditors need to be out in front, leading the business
units with regards to the internal control system and also focusing on strategic
business objectives. The internal auditors also need to establish themselves as vital
cogs in their organizations, rather than as observers who watch from the periphery and
wait for events to impact them (Sawyer and Vinten, 1996).
One issue that has emerged related to the internal auditing practices is; what is a
proper and sound measurement of the internal auditing practices? Barrett (1986)
notes, effectiveness (of internal audit) can be described, but it is difficult to quantify
and in the final analysis, effectiveness is determined by the perception of auditees.
In the company environment, management is the most important auditee of the
internal audit department since effectiveness of the internal auditing practices can be
described through the expectations of management with regard to the internal auditing
practices. The management will expect the internal auditors to perform their internal
auditing practices to a certain level that is complying with the Standards for the
Professional Practice of Internal Auditors (SPPIA) (now known as the Professional
Practice Framework (PPF)), since it can be easily described. Compliance with SPPIA is
therefore an indication of the effectiveness of the Internal Audit Department.
The auditing profession, both internal and external, has come under increasing
scrutiny since the highly publicised collapse of energy trader, Enron (Vinten, 2003) in
the USA last year. The uncovering of alleged irregularities at Technology Resources
Industries Berhad (TRI) has highlighted the need for greater corporate governance in
Malaysia.
TRI had issued false invoices between 1998 and 1999, which amounts to MYR260
million (USD 68 million). According to Dato Samad Alias, the President of the
Malaysian Institute of Accountants (MIA), This could be the largest accounting fraud
in Malaysian history. The false invoices was discovered by Telekom Malaysia, who
took control of the TRI in June 2002, after conducting several internal audits, when
Arthur Andersen was TRIs auditor. We had to rely on the information prepared by
the companys accountants, said Dato Abdul Samad, who was then head of the
Andersens Malaysian office. If TRI was to restate 1998 and 1999 accounts, its net book
value will reduce as much as MYR 198 million (Financial Times, 2002). The case has
certainly shed a light on the importance of the role of internal auditors, which was only
recognised and emphasised after irregularities were discovered.
Internal auditors are often described as both a business partner and a policeman
because of his work as a business partner with client management and also because he
acts as an independent reviewer of management. As a business partner, the internal
auditor is expected to provide expertise to assist an organization in meeting its
objectives while as a policeman; an internal auditor is often thought of as an adversary
looking for flaws. As such, the extent of the internal auditing practices plays an
important factor on these roles. This study will provide empirical evidence whether
compliance with internal auditing practices will lead to a better internal control system.

Internal auditing
practices and
control system
845

MAJ
20,8

846

The development of SPPIA

SPPIA are the criteria by which the operations of an internal auditing department are
evaluated and measured and intended to represent the internal auditing practices, as it
should be. It is also meant to serve the entire profession of internal auditing, in all types
of organisations where internal auditors are found. It was first developed in June 1978,
at the Internal Auditors International Conference in San Francisco. The SPPIA
comprise of five general standards of:
(1) independence;
(2) professional proficiency;
(3) scope of work;
(4) performance of audit work; and
(5) management of the internal audit department.
This framework allowed the future expansion of the internal auditing practices until
the new framework was released in January 2002.
A new framework, called PPF was released in January 2002[1] and it consisted of
three sets of standards: attribute, performance, and implementation standards. The
attribute standards address the attributes of organisations and individuals performing
internal audit services while the performance standards describe the nature of internal
audit services and provide quality criteria against which performance of these services
can be measured. The implementation standards on the other hand provide guidance
applicable in specific types of engagements. However, this new framework is not
utilised in this study because of the timing of its release.
Internal control system. The internal control system plays an important role in the
internal auditing practices since the internal auditors might be considered as being
specialists in management control (Chambers et al., 1987). Internal auditing practices
appraise the effectiveness of internal control systems, which is a definition of internal
auditing and which also includes an appraisal of the actions by management to correct
situations, which are at variance with planned outcomes. The definition of internal
control systems reveals that it is not fundamentally different from management
control, which has an essential component of control such as planning, organising,
staffing and directing (Chambers et al., 1987). Senior management and the audit
committee normally expect that the CAE will perform sufficient audit work and gather
other available information during the year so as to form a judgement about the
adequacy and effectiveness of the control processes. The CAE should then
communicate that overall judgement about the organisations system of controls to
the senior management and the audit committee. This is necessary since internal
auditors play an intermediary role and assist in the discharge of the oversight function
of audit committee. If the above internal audit function is not available, the
management needs to apply other monitoring processes in order to assure itself and the
board that the system of internal control system is functioning as intended. In these
circumstances, the board of the company will need to assess whether such processes
provide sufficient and objective assurance or regular review and appraisal of the
adequacy and the integrity of the internal control systems in the company.
Bursa Listing Requirements has established industry taskforce which formulated the
Statement on Internal Control: Guidance For Directors of Public Listed Companies

to fulfil the above circumstances. The aim of this guidance is to assist listed companies in
making disclosures in their annual reports on the state of internal control, in compliance
with the Listing Requirements of the KLSE. Pursuant to the requirements of the Code in
relation to the Internal Audit Function, in May 2001, the Securities Commission
appointed the IIAM to establish a separate industry taskforce to formulate these
Guidelines to assist the board of public listed companies in effectively discharging their
responsibilities in relation to establishing an Internal Audit Function. Risk assessment,
control environment, control activities, information and communication and monitoring
are five important characteristics in this guideline.
The roles of internal auditors. In the revised statement of responsibilities of internal
auditing issued by the Institute of Internal Auditors (IIA) (2000) as part of the
standards framework, the section on objectives states:
The objective of internal auditing is to assist all members of management in the effective
discharge of their responsibilities by furnishing them with analyses, appraisals,
recommendations and pertinent comments concerning the activities reviewed. The internal
auditor is concerned with any phase of business activity where he can be of service to
management. This involves going beyond accounting and financial records to obtain a full
understanding of the operations under review (p. 3).

Sawyer and Vinten (1996) noted four benefits managers have gained from internal
auditing assistance. These benefits were providing managers with the bases for
judgement and action, helping managers by reporting weaknesses in control and
performance and in recommending improvements, providing counsel to managers and
boards of directors on the solutions of business problems, and supplying information
that is timely, reliable and useful to all levels of management.
Additionally, the statement sets forth the types of services that should be performed
and the kinds of activities carried on by the internal audit function in attaining the
overall objective. Internal auditors should first review and appraise the soundness and
adequacy of the accounting, financial, and other operating controls, and promote
effective controls at reasonable cost. Secondly, the internal auditors should ascertain
the extent of compliance with established policies, plans, procedures, laws and
regulations, which could have a significant impact on the companys operations. Then
the internal auditors review the means of safeguarding assets and when appropriate,
verify the existence of such assets and appraise the economy and efficiency with which
resources are employed. Lastly, the internal auditors review operations or programs to
ascertain whether results are consistent with established objectives and goals and
whether the operations or programs are being carried out as planned.
Reviewing and evaluating the adequacy and effectiveness of an organisations
internal control system and the quality of performance in carrying out assigned
responsibilities is representative of several primary core activities of internal audit
work. The purpose of the review of the adequacy of the internal auditing is to ascertain
whether the established system provides reasonable assurance that the organisations
objectives and goals will be met efficiently and economically.
Adequate control is considered to be present if administrative management has
planned and organised in a manner, which provides reasonable assurance that the
organisations objectives and goals will be achieved efficiently and economically.
Reasonable assurance is provided when cost-effective actions are taken to restrict
deviations, such as improper or illegal acts, to a tolerable level.

Internal auditing
practices and
control system
847

MAJ
20,8

848

The role of internal auditing in the review of effectiveness of the system of internal
control is to ascertain whether the system is functioning as intended. Effective control
is present when the administrative management directs the system in such as way as
to provide reasonable assurance that the organisations objectives and goals will be
achieved. The purpose of the review for quality of performance is to ascertain whether
the organisations objectives and goals have been achieved.
The primary objectives of an organisations system of internal control are to provide
administrative management with reasonable assurance that financial information is
accurate and reliable; the organisation complies with policies, plans, procedures, laws,
regulations and contracts; assets are safeguarded against loss and theft; resources are
used economically and efficiently; and established objectives and goals for operations
or programs can be met. Internal auditing focuses on an evaluation of this system or
framework of internal control.
A second type of audit work that internal auditors are guided to perform is
reviewing the accuracy and reliability of financial and operating information and the
means used to identify, measure, classify and report such information. Information
systems provide data for decision-making, control, and compliance with external
requirement. Therefore, internal auditors should examine information systems and
determine whether financial and operating records and reports contain accurate,
reliable, timely, complete and useful information, and controls over record keeping and
reporting are adequate and effective.
The performance of reviews of the systems established to ensure compliance with
policies, plans, procedures, laws, regulations and contracts represents a third element
of audit activity described by the standards. Administrative management is
responsible for establishing the systems designed to ensure compliance with such
requirements as laws, rules, regulations, policies and procedures. The internal auditors
role is to determine whether the systems designed by management are adequate and
effective and whether the activities audited are complying with the appropriate
requirements.
Further, as described by the standards, the internal auditors role includes providing
appraisals with recommendations regarding administration management established
objectives and goals for operations and programs.
Research framework and methodology
The main source of data is annual reports of Malaysian public listed companies. Data
collected from the firms report were used to examine the existence of internal audit in
the firms and if any, the functions of the internal auditors. Corporate annual reports
were used because it is seen to be the main form of company communication (Zeghal
and Ahmed, 1990; Unerman, 2000) and also they were widely available (Buhr, 1998;
Gray et al., 1995; Unerman, 2000).
Research framework
This study focuses on two variables: internal auditing practices and quality of the
internal control system. The theoretical framework is as follows:
Figure 1 model proposed is based on the postulate in the agency theory where the
principal will incur the agency cost in order for them to observe the agents action.
The relationship between principals and agents is that the principals will incur

Internal auditing
practices and
control system
849

Figure 1.
Theoretical framework

monitoring expenditures while the agents incur bonding costs to ensure that the work
of looking after the wealth of the principals is done (Adams, 1994). The cost of internal
audit is an example of this bonding costs. Sherer and Kent (1983) perceived internal
auditing to be a bonding cost borne by the senior manager to satisfy the demands for
accountability made by external participants especially shareholders. Not internal
audit professionals argue that an effective audit function will correlate with an
organisations success in meeting management objectives and whether the internal
control system is functioning as intended.
Research hypotheses
The research hypotheses will examine the compliance of the internal auditing practices
to the quality of the internal control system. There are 45 sub-hypotheses relating the
internal auditing practices to internal control system.
H1.

The better the compliance of internal audit department to the standards of

internal auditing practices, the higher the quality of the internal control
system.

H1a. relates monitoring of the internal control quality with the nine components of the
internal auditing practices.
H1a1. The better the management of the internal audit department of the internal
auditing practices, the higher the monitoring of the quality of the internal
control system.
H1a2. The greater the scope of work of the internal auditing practices, the higher
the monitoring of the quality of the internal control system.
H1a3. The higher the performance of audit work of the internal auditing practices,
the higher the monitoring of the quality of the internal control system.

MAJ
20,8

H1a4. The higher professional proficiency of the internal auditing practices, the
higher the monitoring of the quality of the internal control system.
H1a5. The higher the independence of the internal auditing practices, the higher
the monitoring of the quality of the internal control system.

850

H1a6. The higher the objectivity of the internal auditing practices, the higher the
monitoring of the quality of the internal control system.
H1a7. The better the audit reviews of the internal auditing practices, the higher
the monitoring of the quality of the internal control system.
H1a8. The better the audit programs of the internal auditing practices, the higher
the monitoring of the quality of the internal control system.
H1a9. The better the audit reporting of the internal auditing practices, the higher
the monitoring of the quality of the internal control system.
H1b. relates information and communication of the internal control quality with the
nine components of the internal auditing practices.
H1b1. The better the management of the internal audit department of the internal
auditing practices, the better the information and communication of the
quality of the internal control system.
H1b2. The greater the scope of work of the internal auditing practices, the better
the information and communication of the quality of the internal control
system.
H1b3. The better the performance of audit work of the internal auditing practices,
the better the information and communication of the quality of the internal
control system.
H1b4. The higher the professional proficiency of the internal auditing practices,
the better the information and communication of the quality of the internal
control system.
H1b5. The higher the independence of the internal auditing practices, the better
the information and communication of the quality of the internal control
system.
H1b6. The higher the objectivity of the internal auditing practices, the better the
information and communication of the quality of the internal control
system.
H1b7. The better the audit reviews of the internal auditing practices, the better the
information and communication of the quality of the internal control
system.
H1b8. The better the audit programs of the internal auditing practices, the better the
information and communication of the quality of the internal control system.
H1b9. The better the audit reporting of the internal auditing practices, the better the
information and communication of the quality of the internal control system.

H1c. relates control environment of the internal control quality with the nine
components of the internal auditing practices.
H1c1. The better the management of the internal audit department of the internal
auditing practices, the higher the control environment of the quality of the
internal control system.
H1c2. The greater the scope of work of the internal auditing practices, the higher
the control environment of the quality of the internal control system.
H1c3. The higher the performance of audit work of the internal auditing practices,
the higher the control environment of the quality of the internal control
system.
H1c4. The higher the professional proficiency of the internal auditing practices, the
higher the control environment of the quality of the internal control system.
H1c5. The higher the independence of the internal auditing practices, the higher the
control environment of the quality of the internal control system.
H1c6. The higher the objectivity of the internal auditing practices, the higher the
control environment of the quality of the internal control system.
H1c7. The better the audit reviews of the internal auditing practices, the higher the
control environment of the quality of the internal control system.
H1c8. The better the audit programs of the internal auditing practices, the higher
the control environment of the quality of the internal control system.
H1c9. The better the audit reporting of the internal auditing practices, the higher
the control environment of the quality of the internal control system.
H1d. relates risk assessment of the internal control quality with the nine components of
the internal auditing practices.
H1d1. The better the management of the internal audit department of the internal
auditing practices, the higher the risk assessment of the quality of the
internal control system.
H1d2. The greater the scope of work of the internal auditing practices, the higher
the risk assessment of the quality of the internal control system.
H1d3. The higher the performance of audit work of the internal auditing practices,
the higher the risk assessment of the quality of the internal control system.
H1d4. The higher the professional proficiency of the internal auditing
practices, the higher the risk assessment of the quality of the internal
control system.
H1d5. The higher the independence of the internal auditing practices, the higher
the risk assessment of the quality of the internal control system.
H1d6. The higher the objectivity of the internal auditing practices, the higher the
risk assessment of the quality of the internal control system.

Internal auditing
practices and
control system
851

MAJ
20,8

H1d7. The better the audit reviews of the internal auditing practices, the higher
the risk assessment of the quality of the internal control system.
H1d8. The better the audit programs of the internal auditing practices, the higher
the risk assessment of the quality of the internal control system.

852

H1d9. The better the audit reporting of the internal auditing practices, the higher
the risk assessment of the quality of the internal control system.
H1e relates control activities of the internal control quality with the nine components of
the internal auditing practices.
H1e1. The better the management of the internal audit department of the internal
auditing practices, the higher the control activities of the quality of the
internal control system.
H1e2. The greater the scope of work of the internal auditing practices, the higher
the control activities of the quality of the internal control system.
H1e3. The higher the performance of audit work of the internal auditing
practices, the higher the control activities of the quality of the internal
control system.
H1e4. The higher the professional proficiency of the internal auditing practices,
the higher the control activities of the quality of the internal control system.
H1e5. The higher the independence of the internal auditing practices, the higher
the control activities of the quality of the internal control system.
H1e6. The higher the objectivity of the internal auditing practices, the higher the
control activities of the quality of the internal control system.
H1e7. The better the audit reviews of the internal auditing practices, the higher
the control activities of the quality of the internal control system.
H1e8. The better the audit programs of the internal auditing practices, the higher
the control activities of the quality of the internal control system.
H1e9. The better the audit reporting of the internal auditing practices, the higher
the control activities of the quality of the internal control system.
Internal auditing practices and the quality of internal control system
Independence and objectivity is seen as an important attribute to the quality of internal
audit function (IIA, 2000; Bethea, 1992; Traver, 1991; Farbo, 1985; Clark et al., 1980;
Glazer and Jaenicke, 1980). If internal auditors are not independent and objective, they
are of little value to those who demand their service (Clark et al., 1980; Elliot and
Willingham, 1980; Ward and Robertson, 1980; Williams, 1978). The internal audit
department must be granted the license to carry out its responsibilities freely and
objectively and also their judgements reached must be unbiased.
Most internal audit professionals argue that an effective internal audit function
unequivocally correlates with an organisations success in meeting management
objectives and whether the internal control system is functioning as intended.

Research design
The basic research design utilised for this study was a survey design. The collection of
primary data was accomplished through the use of a mail survey instrument
(questionnaire). Data collected from the questionnaire is divided into two components:
(1) the measurement of the internal auditing practices was sent to the CAE/Head of
Internal Auditing Department; and
(2) questionnaire on the measurement of the quality of internal control system was
sent to the audit committee.

Internal auditing
practices and
control system
853

Sample and method of data analysis

All the companies (812 companies) listed in the Bursa Malaysia in year 2001 were used
as the population in this study. The year of 2001 was chosen due to the availability of
the data and the current status of the data.
This study used both descriptive and inferential analyses. Descriptive analysis is
used to determine if Bursa Malaysia listed companies comply with the standards in
their internal audit practices while the inferential analyses (multiple regression
analyses) were used to test the hypotheses. The variables have met the assumptions of
multiple regression analysis.
Factor analysis was run on the internal auditing practices variable and the internal
control system. As a result, the internal auditing practices variables have been broken
up into nine components instead of the present five[2]. The components of the internal
controls system remains the same.
Analysis and findings
Table I shows information on sampling and return rates of the questionnaires sent to
the internal auditors and the audit committees of the Bursa Malaysia listed companies.
Of the 812 questionnaires mailed, 654 subjects were contacted but only 250 responses
from both internal auditors and audit committees were received resulting in a response
rate of 38.23 per cent.
Certain demographic information was gathered from each subject. While the data
was not collected to address a specific research question, it provides an insight into the
subjects and may assist in interpreting results of the analysis. The demographic
variables are: current position, qualification, professional accounting and/or auditing
qualification, name of external auditors, establishment of the internal audit department
and number of employees of the internal audit department.
Summaries of the demographic data collected from the internal auditors are shown
in Table II and the audit committees in Table III.
Descriptive analysis
The extent of internal auditing practices. Table IV shows the mean results of the extent
of the internal auditing practices items. From the results, independence is a highly rated
Questionnaires mailed
Undelivered
Subjects contacted
No. of responses
Responses rates (250/654)

812
158
654
250
38.23 (per cent)

Table I.
Summary of response
rates

MAJ
20,8

Demographic

Characteristics

Frequency Percent

Current position

854

Table II.
Summary of
demographic data on
respondents from internal
auditors

Table III.
Summary of
demographic data on
respondents from audit
committees

Manager of the IAD

Senior auditor
Others
Qualification (excluding professional) First degree in
Post graduate
Diploma
Certificate
Others
Professional accounting/auditing
Professional qualifications (CPA Aust.,
qualification
CACA, ACCA, MICPA[2], CIMA)
No professional qualifications
Type of business of the company
Trading
under KLSE listing
Industrial products
Consumer products
Properties
Finance
Construction
Plantation
Technology
Hotels
Mining
Trust
Infrastructure
External auditor of the company
Big 4 audit firms
Others
Existence of internal audit department Existence
Non-existence
Number of employees of the internal Five employees
audit department
Six to ten employees
. 10 employees
Outsourced

Demographic

Characteristics

Current position

Manager
Director
Audit committee
Senior
Others
First degree
Post graduate
Diploma
Certificate
Others

Qualification

178
17
55
106
88
22
5
29

71.2
6.8
22.0
42.4
35.2
8.8
2.0
11.6

174
76
49
45
40
37
30
20
12
5
4
3
3
2
166
84
231
19
144
54
42
10

69.6
30.4
19.6
18.0
16.0
14.8
12.0
8.0
4.8
2.0
1.6
1.2
1.2
0.8
66.4
33.6
92.4
7.6
57.6
21.6
16.8
4.0

Frequency

Per cent

88
59
57
6
40
82
34
6
4
124

35.2
23.6
22.8
2.4
16.0
32.8
13.6
2.4
1.6
49.6

item of internal auditing practices from the perspective of the internal auditors with a
mean of 4.46 while the least rated items is professional proficiency with a mean of 3.88.
The analysis of the results also reveals that, of the 50 internal auditing practices
items, there are 35 items having a score between 4.00 and 5.00 and 15 items between

3.00 and 4.00. Items having scores ranging from 4.00 to 5.00 are strongly compliant
with IIA (2000, 2001).
The extent of existence of the quality of the internal control system. Table V shows
the means of the components of the internal control system. From the results, the risk
assessment component of internal control system is a highly rated item with a mean
of 4.29 while information and communication is the least rated item with a mean
of 4.12.
An analysis of the results also reveal that, of the 25 items stated, there are 23 items
having a score between 4.00 and 5.00. This suggests that the respondents consider
the 23 items identified earlier exist in their internal control systems. This is because
items having scores between 4.00 and 5.00 are perceived to be very important in this
study.
Hypotheses testing. Several methods of analyses were utilised to test these alternative
hypotheses. The analyses used to test the hypotheses include descriptive and statistical
analysis. The hypotheses sought to test for a significance difference of nine variables of
internal auditing practices and five variables of internal control system.
Hypotheses.
H1a. The better the management of the internal audit department of the internal
auditing practices, the greater the scope of work of the internal auditing
practices, the higher the performance of audit work of the internal auditing
practices, the higher professional proficiency of the internal auditing practices,
the higher the independence of the internal auditing practices, the higher the
objectivity of the internal auditing practices, the better the audit reviews of the
internal auditing practices, the better the audit programs of the internal
auditing practices, the better the audit reporting of the internal auditing
practices, the higher the monitoring of the quality of the internal control system.

Rank

Item

1
2
3
4
5
6
7
8
9

Independence
Scope of audit work
Audit reporting
Audit programs
Management of IAD
Performance of audit work
Audit reviews
Objectivity
Professional proficiency

Rank

Item

1
2
3
4
5

Risk assessment
Control activities
Monitoring
Control environment
Information and communication

Mean

Standard deviation

4.46
4.22
4.17
4.12
4.12
4.11
4.11
4.04
3.88

0.59
0.49
0.54
0.57
0.53
0.62
0.68
0.60
0.57

Mean

Standard deviation

4.29
4.28
4.15
4.14
4.12

0.51
0.45
0.61
0.59
0.46

Internal auditing
practices and
control system
855

Table IV.
Means scores of the
extent of the internal
auditing practices from
the internal auditors
perspectives

Table V.
Mean scores of the extent
of existence of the
internal control systems

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856

Table VI shows, the model is significant F 2:502 (sig. F 0:009: However, the
model only explained 8.6 per cent of the variation in monitoring. Internal auditing
practices of significant influence in their order of impact are management of internal
audit department beta 0:327; p # 0:05 (sig. F 0:013; professional proficiency
beta 20:197; p # 0:05 (sig. F 0:024; objectivity beta 20:146; p # 0:01 and
audit reviews Beta 20:174; p # 0:05 (sig. F 0:038:
The following Table VI summarises the results.
Thus, there is evidence to support that management of internal audit department of
the internal auditing practices positively influences the monitoring aspect of internal
control system while professional proficiency, objectivity and audit reviews of the
internal auditing practices negatively influence the monitoring aspect of internal
control system. Therefore, only H1a1 is accepted while H1a2 to H1a9 are rejected.
H1b.

The better the management of the internal audit department of the internal
auditing practices, the greater the scope of work of the internal auditing
practices, the higher the performance of audit work of the internal
auditing practices, the higher professional proficiency of the internal
auditing practices, the higher the independence of the internal auditing
practices, the higher the objectivity of the internal auditing practices, the
better the audit reviews of the internal auditing practices, the better the
audit programs of the internal auditing practices, the better the audit
reporting of the internal auditing practices, the better the information and
communication of the quality of the internal control system.

Table VII summarises the results.

Table VII suggests that the model is significant F 1:752 (sig. F 0:078;
p # 0:01: However, the model only explained 6.2 per cent of the variation in information
and communication. Internal auditing practices of significant influence in their order of
impact are scope of audit work beta 20:212; p # 0:05 (sig. F 0:031 and
performance of audit work beta 0:207; p # 0:05 (sig. F 0:021:
The results suggested that scope of audit work of the internal auditing practices
negatively influence the information and communication aspect of internal control
system while performance of audit work of the internal auditing practices positively

Table VI.
Results of H1a

Internal auditing practices

Beta

Sig.

Constant
Management of IAD
Scope of audit work
Performance of audit work
Professional proficiency
Independence
Objectivity
Audit reviews
Audit programs
Audit reporting

0.327
2 0.084
0.126
2 0.197
2 0.009
2 0.146
2 0.174
2 0.020
0.131

10.672
2.515
20.866
1.433
22.264
20.122
21.765
22.092
20.223
1.453

0.000
0.013 * *
0.388
0.153
0.024 * *
0.903
0.079 *
0.038 * *
0.824
0.148

Notes: Dependent variable: monitoring; *at 0.01 significant level; * *at 0.05 significant level; R 2: 0.086;
F: 2.502

Internal auditing practices

Beta

Sig.

Constant
Management of IAD
Scope of audit work
Performance of audit work
Professional proficiency
Independence
Objectivity
Audit reviews
Audit programs
Audit reporting

0.058
2 0.212
0.207
2 0.065
0.020
0.015
2 0.118
2 0.026
2 0.023

16.009
0.437
22.175
2.321
20.738
0.251
0.184
21.399
20.296
20.251

0.000
0.662
0.031 * *
0.021 * *
0.461
0.802
0.854
0.163
0.768
0.802

Notes: Dependent variable: information and communication; * * at 0.05 significant level; R 2: 0.062; F:1.752

Internal auditing
practices and
control system
857

Table VII.
Results of H1b

influence the information and communication aspect of internal control system.

Therefore, only H1b3 is accepted while the rest of the hypotheses are rejected.
H1c.

The better the management of the internal audit department of the internal
auditing practices, the greater the scope of work of the internal auditing
practices, the higher the performance of audit work of the internal
auditing practices, the higher professional proficiency of the internal
auditing practices, the higher the independence of the internal auditing
practices, the higher the objectivity of the internal auditing practices, the
better the audit reviews of the internal auditing practices, the better the
audit programs of the internal auditing practices, the better the audit
reporting of the internal auditing practices, the higher the control
environment of the quality of the internal control system.

Table VIII summarizes the result.

Table VIII suggests that the model is significant F 3:470 (sig. F 0:000;
p # 0:05: However, the model only explained 11.8 per cent of the variation in control
environment. Internal auditing practices of significant influence in their order of

Internal auditing practices

Beta

Sig.

Constant
Management of IAD
Scope of audit work
Performance of audit work
Professional proficiency
Independence
Objectivity
Audit reviews
Audit programs
Audit reporting

0.169
0.015
0.315
2 0.266
0.086
2 0.249
0.058
0.040
2 0.110

11.820
1.336
0.162
3.671
23.087
1.117
23.093
0.699
0.469
21.257

0.000
0.183
0.871
0.000 * *
0.002 * *
0.265
0.002 * *
0.485
0.640
0.210

Notes: Dependent variable: control environment; * * at 0.05 significant level; R 2: 0.118; F: 3.470

Table VIII.
Result of H1c

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858

impact are performance of audit work beta 0:315; p # 0:05 (sig. F 0:000;
professional proficiency beta 20:266; p # 0:05 (sig.F 0:002 and objectivity
beta 20:249; p # 0:05 (sig. F 0:002:
Therefore, the results show that performance of audit work positively influences the
control environment aspect of internal control system while professional proficiency
and objectivity of the internal auditing practices negatively influence the control
environment aspect of internal control system and therefore the null hypothesis is
accepted. Therefore, H1c3 is accepted while H1c1 to H1c2 and H1c4 to H1c9 are
rejected.
H1d.

The better the management of the internal audit department of the internal
auditing practices, the greater the scope of work of the internal auditing
practices, the higher the performance of audit work of the internal
auditing practices, the higher professional proficiency of the internal
auditing practices, the higher the independence of the internal auditing
practices, the higher the objectivity of the internal auditing practices, the
better the audit reviews of the internal auditing practices, the better the
audit programs of the internal auditing practices, the better the audit
reporting of the internal auditing practices, the higher the risk assessment
of the quality of the internal control system.

Table IX summarises the results.

Table IX suggested that the model is significant F 2:983 (sig. F 0:002;
p # 0:05: However, the model only explained 10.1 per cent of the variation in risk
assessment. Internal auditing practices of significant influence in their order of
impact are management of internal audit department beta 20:254; p # 0:05
(sig. F 0:049; performance of audit work beta 0:193; p # 0:05 (sig.F 0:027;
audit program beta 0:211; p # 0:05 (sig.F 0:016 and audit reporting
beta 0:238; p # 0:05 (sig. F 0:008:
Therefore, the results show that management of internal audit department
negatively influence the risk assessment aspect of internal control system while
performance of audit work, audit program and audit reporting of the internal audit

Table IX.
Result of H1d

Internal auditing practices

Beta

Sig.

Constant
Management of IAD
Scope of audit work
Performance of audit work
Professional proficiency
Independence
Objectivity
Audit reviews
Audit programs
Audit reports

2 0.254
2 0.157
0.193
2 0.121
0.071
0.045
0.015
0.211
0.238

11.395
21.975
21.640
2.218
21.411
0.932
0.554
0.184
2.438
2.655

0.000
0.049 * *
0.102
0.027 * *
0.160
0.352
0.580
0.855
0.016 * *
0.008 * *

Notes: Dependent variable: risk assessment; * * at 0.05 significant level; R 2: 0.101; F: 2.983

practices positively influence the risk assessment aspect of internal control system.
H1d3, H1d8 and H1d9 are accepted while the rest are rejected.
H1e.

The better the management of the internal audit department of the internal
auditing practices, the greater the scope of work of the internal auditing
practices, the higher the performance of audit work of the internal auditing
practices, the higher professional proficiency of the internal auditing practices,
the higher the independence of the internal auditing practices, the higher the
objectivity of the internal auditing practices, the better the audit reviews of the
internal auditing practices, the better the audit programs of the internal
auditing practices, the better the audit reporting of the internal auditing
practices, the higher the control activities of the quality of the internal control
system.

Internal auditing
practices and
control system
859

Table X suggested that the model is significant F 1:734 (sig. F 0:082; p # 0:01:
However, the model only explained 6.1 per cent of the variation in control activities.
Internal auditing practices of significant influence in their order of impact are
performance of audit work beta 0:176; p # 0:05 (sig. F 0:049 and audit
reporting beta 0:175; p # 0:01 (sig. F 0:057:
The results support the hypothesis that both performance of audit work and audit
reporting of the internal audit practices positively influence the control activities aspect
of quality of the internal control system. Therefore, H1e3 and H1e9, which positively
influence the control activities of the quality of the internal control systems are
accepted while the rest of the hypotheses are rejected.
Summary of results. The management of internal audit department of internal
auditing practices positively influences the monitoring aspect of the quality of the
internal control system but it is negatively influenced by the professional proficiency,
objectivity and audit review of the internal auditing practices.
Information and communication aspect of the quality of the internal control system is
negatively influenced by scope of work of the internal auditing practices but is positively
influenced by performance of audit work of the internal auditing practices.

Internal auditing practices

Beta

Sig.

Constant
Management of IAD
Scope of audit work
Performance of audit work
Professional proficiency
Independence
Objectivity
Audit reviews
Audit programs
Audit reporting

2 0.098
2 0.136
0.176
2 0.049
0.123
2 0.063
0.043
2 0.078
0.175

14.046
20.748
21.399
1.979
20.560
1.576
20.751
0.507
20.876
1.915

0.000
0.455
0.163
0.049 * *
0.576
0.116
0.453
0.613
0.382
0.057 *

Notes: Dependent variable: control activities; *at 0.01 significant level; * *at 0.05 significant level;
R 2: 0.061; F: 1.734

Table X.
Result of H1e

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860

The control environment aspect of the quality internal control system is positively
influenced by performance of audit work of the internal auditing practices while it is
negatively influenced by professional proficiency and objectivity of the internal
auditing practices.
The risk assessment aspect of the quality of the internal control system is
negatively influenced by management of internal audit department of the internal
auditing practices but is positively influenced by performance of audit work, audit
program and audit reporting of the internal auditing practices.
The control activities aspect of the quality of the internal control system is
positively influenced by performance of audit work and audit reporting of the internal
auditing practices.
Discussion and conclusion
This study examined the extent of the internal auditing practices by the internal audit
department and the effects of the practices have on the quality of the internal control
system. Analyses were done from the Internal Audit Practice Scale and Internal Control
System Scale that were sent to all internal auditors and audit committees of the
Malaysian Public Listed Companies for the year 2001.
The extent of the internal auditing practices
One of the major findings in this study is the extent of internal auditing practices in
Malaysian Public Listed Companies. The five variables were derived from the IIA
(2000), which were: independence and objectivity, professional proficiency, scope of
work, performance of audit work and management of the internal auditing department.
However, this study suggest that the internal auditing practices should comprise of
nine functions instead of only five functions as suggested by the IIA (2000). The
functions suggested are as follows: management of internal audit department,
performance of audit work, independence, audit reviews, audit reporting, scope of audit
work, professional proficiency, objectivity and audit programs. The four new functions
are objectivity (separated from independence), audit reviews, audit programs and audit
reporting.
Comparison was also made between the variables of this study and IIA (2001).
Under IIA (2001), the standards consists of ten variables: purpose, authority, and
responsibility; independence and objectivity; proficiency and due professional care;
quality assurance and improvement program; managing the internal audit activity;
nature of audit work; engagement planning; performing the engagement;
communicating results; monitoring progress; and managements acceptance of risks.
The difference between this studys variables and IIA (2001) is the additional of five
new audit functions that is the monitoring progress; communicating results;
engagement planning; purpose, authority and responsibility; and managements
acceptance of risks.
Comparison with the findings of this study and the IIA (2001) were also made.
There are only two new functions of the internal auditing practices in the IIA (2001):
purpose, authority and responsibility, and managements acceptance of risks. The
rests of the internal auditing practices functions in this study are consistent to the IIA
(2000, 2001). Table XI shows the summary of comparisons of the extent of the internal
auditing practices.

SPPIA (2000)

This study (2001)

PPF (2002)

Independence and objectivity

Professional proficiency

Independence
Objectivity

Scope of work
Performance of audit work
Management of internal audit
department

Professional proficiency
Scope of work
Performance of audit work

Independence and objectivity

Proficiency and due
professional care
Nature of audit work
Performing the engagement
Managing the internal audit
activity
Monitoring progress

Management of internal audit

department
Audit reviews
Audit reporting
Audit programs

Communicating results
Engagement planning
Purpose, authority and
responsibility
Managements acceptance of
risks

Internal auditing practices and the quality of the internal control system
This study also examines the influence of internal auditing practices and the quality of
internal control system. It is shown that only the monitoring aspect of the quality
of internal control system positively influenced by the management of the internal audit
department. However, it is negatively influenced by the professional proficiency,
objectivity and audit review of the internal auditing practices. By managing the
department, the work performed by the internal audit department has been implemented
in the past and the work schedules have taken into consideration the goal of the internal
audit department and also the general purposes of company management. Therefore
this will positively influence the monitoring of the internal control system since this will
have an effective impact on the monitoring process and also reports on illegal acts are
properly monitored. However, this study suggests that professional proficiency such as
adequate knowledge, professional membership, certification, and training in electronic
data processing (EDP) system lead to lower monitoring of the quality of the internal
control system. This is because when the internal auditors have all the above-mentioned
criteria, it would imply that they are competent to do the work and therefore lower
monitoring of the quality of the internal control system is needed since the internal
auditors have a clear understanding of the internal control system. This is also true for
objectivity and audit reviews of the internal auditing practices on the monitoring of the
quality of the internal control system. Objectivity involves the unbiased attitude and
avoidance of conflict of interest by the internal auditors while audit reviews are
efficiently conducted in respect to the necessary audit operations. Therefore, internal
auditors need lower monitoring of the quality of the internal control system since the
entire necessary audit operations has been well conducted.
This study also suggests that scope of work of the internal auditing practices
negatively influences the information and communication aspect of the quality of the
internal control system while the performance of audit work of the internal auditing
practices positively influences the information and communication aspect of the
quality of the internal control system. Scope of work of the internal auditing practices

Internal auditing
practices and
control system
861

Table XI.
Summary of comparisons
of the extent of the
internal auditing
practices

MAJ
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862

involves reviewing the system to ensure compliance with procedures, policies, laws
and regulation and planning of the work and there is also better coordination between
external and internal auditors. This means that if there is better scope of work of
the internal auditing practices, this will lead to lesser control procedures of computer
information system and lesser assessment of information needed on the quality of
the internal control system. The internal auditors follow all the necessary procedures in
doing the audit work and therefore lesser information and communication of the
quality of the internal control system is needed. However, the better the performance of
audit work, the greater is the information and communication since in performing the
audit work, the internal auditors need to identify, analyse, evaluate and record
sufficient information to achieve the engagement objectives.
This study also perceived that the performance of audit work of the internal
auditing practices positively influences the control environment aspect of the quality of
the internal control system while professional proficiency and objectivity of the
internal auditing practices negatively influences the control environment aspect of the
quality of the internal control system. Performance of audit work plays a great impact
on the control environment of the quality of the internal control system. Therefore, the
better the performance of the audit work, the greater is the control environment on the
quality of the internal control system. In performing the audit work, the internal
auditors have been trained and are competent to do the audit work. Consequently, they
are able to identify and analyse the necessary records to achieve the audit objective.
This will have a positive impact on the control environment of the quality of the
internal control systems since the senior management will demonstrate a higher
climate of trust with better performance of the audit work.
This study also suggests that management of internal audit department of the
internal auditing practices negatively influences the risk assessment aspect of the
quality of the internal control system. However, the performance of audit work, audit
program and audit reporting of the internal auditing practices positively influences the
risk assessment aspect of the quality of the internal control system. Since the work
performed by the internal audit department has been implemented in the past and the
work schedules take into consideration the goals of internal audit department,
therefore, this will lead to lower risk assessment of the quality of the internal control
system. This is because; the necessary proper procedures are already applied in
managing the internal audit department. However, the better the performance of audit
work, audit program and audit reporting of the internal auditing practices lead to
better risk assessment. In performing the audit work, the internal auditors will identify
better risk management framework and risk management policy and also better
procedures should be installed in monitoring the applications of policies and
procedures of the organisation. This is also true for audit programs and audit
reporting. The better the audit program and audit reporting, the installation of the
procedures and application of policies in assessing the risk of the organisation will
further improve.
Performance of audit work and audit reporting of the internal auditing practices
positively influence the control activities aspect of the quality of the internal control
system. With trained and competent internal audit staff and better evaluation to
achieve the engagement objectives, this will lead to better control activities of the
quality of the internal control system. In this case, higher board of directors approval

on the audit work performed is achieved and the internal auditors would diligently
investigate the variances. There are also improved recommendations made by
the internal audit department through audit reporting.

Internal auditing
practices and
control system

Implications of the study

The logical question at this juncture is: what do the results of this study imply? In other
words, how does the research contribute to theory building, provide guidance to the
internal auditors and serve as input for the next SPPIA? These questions are addressed
as follows:

863

Theoretical implications
The first theoretical implication is that this study has contributed to the agency theory
and internal audit paradigm where this study supported how the agency theory
provide more meaningful research in the internal audit discipline based on the premise
monitoring expenditure incurred by the principal and the agent. This study also
explains the existence of agency theory postulated and its influence on the extent of
internal auditing practices in Malaysian public listed companies and its effect on the
firms internal control system.
Practical implications
An important finding of this research pertains to the extent of the internal auditing
practices among internal auditors in Malaysian public listed companies. The first
practical implications refer to changing of internal auditing practices functions from
five to nine. The standard setter such as the IIA has the important role to revise the
PPF or the SPPIA based on this study. The IIA (2000) basically described the criteria
by which the operations of an internal auditing department are evaluated and
measured and they are intended to represent the practice of internal auditing, as it
should be. This includes independence and objectivity, professional proficiency, scope
of work, performance of audit work and management of internal audit department.
The study implied that the IIA should include nine factors in building up the SPPIA,
that is independence, scope of work, audit reporting, audit programs, management of
internal audit department, performance of audit work, audit reviews, objectivity and
professional proficiency since these factors revealed that CAEs placed much
importance on above factors. The assistance of internal auditing practices benefit
managers in providing bases for judgement and action, helping managers by reporting
weaknesses in control and performance, providing counsel to managers and board of
directors on the solutions of business problems and supplying information that is
timely, reliable and useful to all levels of management. Therefore, compliance to the
SPPIA is very important to internal auditors in the extent of the internal auditing
practices and IIA must play its role in representing the practice of internal auditing, as
it should be. Another implication is that all the variables in this study is consistent
with the IIA (2001).
The rationale behind the extent of the internal audit practices is that it provides
opportunity for the Chief Audit Executives or internal auditors to get the
managements undivided attention to the extent of internal auditing practices on the
quality of the internal control system. Reporting significant audit results and
recommendations give Chief Audit Executives an avenue for presenting their internal

MAJ
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864

audit practices to the president and other top management team members. The
reasonable and meaningful findings and recommendations contained in the audit
report are symbols of their contribution, which result in improvements to the
organisation as a whole.
Further, Chief Audit Executives might have perceived more importance to the
ability to provide independent reviews to the president or other top management team
members. Again, in order to comply with the SPPIA, Chief Audit Executives believe
that their departments should be independent, have bigger scope of audit work, better
management of internal audit department, higher performance of audit work, better
application of auditing standards to audit work, professional and proficient in internal
audit practices.
The results show that the five functions of the quality of the internal control system
are as per Committee of Sponsoring Organizations (COSO) standard. Currently,
Malaysian approved auditing standards have incorporated this and also adopted
the statement on internal control: guidance for directors of public listed companies
(MIA, 2001). Internal auditing department also should be seen to conduct their work
effectively and have trained staff.
Limitations of the study
This study provides empirical evidence that the internal auditing practices of the
public listed companies in Malaysia comply with the IIA (2000) and statistically
influence the quality of the internal control systems. This may be due to the auditing
standards enforced by the IIA (Malaysia) and MIA.
This study, however, has its limitations. Of 250 public listed companies included in
this study, it is only representative of 38.23 per cent of public listed companies for the
year 2001. Consequently, the results may not be generalisable to the population of
internal auditors as a whole. Furthermore, the extent of the internal auditing practices
is only limited to the IIA (2000).
Internal auditors typically work as a team in its normal internal audit practices.
This study is limited as only individuals who are Chief Audit Executives were
examined. The dynamics of group interaction were not considered. However, the
Chief Audit Executives represent the internal audit department suggesting that
the study of this individual is the logical first step.
This study assumed that auditors are of the same calibre across firms for each
designation. However, this may not be a valid assumption since years of experience of
the internal auditors are not included in the study.
Conclusion
While the results in this study are by no means conclusive, it is hope that this study has
contributed to the research done in the extent of the internal auditing practices.
This study has also provided some evidence on the extent of the internal auditing
practices and the influence it has on the internal control system.
Notes
1. Please refer to www.theiia.org/iia for detail explanation of IIA (2001).
2. MICPA Malaysian Institute of Certified Public Accountants.

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Further reading
Hair, J.E., Anderson, R.E., Tatham, R.L. and Black, W.C. (2002), Multivariate Data Analysis,
6th ed., Prentice-Hall, Englewood Cliffs, NJ.
Sawyer, L.B. and Dittenhofer, M.A. (1981), The Practice of Modern Internal Auditing,
The Institute of Internal Auditors Research Foundation, Altamonte Springs, FL.