BUSINESS RESEARCH METHODS

(MBA523)
Assessing the Determinant Factors of Internal Audit Effectiveness,
on the case of Lion International Bank S.C

Research Proposal

Submitted To: Seid Mohammedbirhan(Assistant

Professor)

Mekelle University

College Of Business and Economics

Department Of Management

MBA Program Post Graduate Studies

Addis Ababa, Ethiopia

Submitted By: Mihiret Lemma

CBE/PE/592/09 AA

May, 2017

Addis Ababa
Acronyms
IIA - Institute of Internal Auditors

IA - Internal Auditing

IAF- Internal Audit Function

CFIA- Competency Framework for Internal Auditing

NBE- National Bank of Ethiopia

Contents

CHAPTER ONE .....................................................................................................................................1

1. INTROUDACTION ............................................................................................................................ 1
1.1. Background of Study ........................................................................................................................ 1
1.2. Internal Audit ................................................................................................................................ 1
1.3. Back ground of the company .......................................................................................................... 2
1.4. Statement of the Problem .............................................................................................................. 2
1.5. Research Question ......................................................................................................................... 3
1.6 Research Hypothesis ......................................................................................................................... 3
1.7. Objective of the Study ................................................................................................................... 4
1.7.1. Specific objectives .............................................................................................................. 4
1.7.2. Main objective..................................................................................................................... 4
1.8. Significance of the Study ............................................................................................................... 4
1.9. Scope of the Study .......................................................................................................................... 5
1.10.Limition of the Study 5

1.11.Organization of the Study 5

CHAPTER TWO .................................................................................................................................. 6

2. LITRATURE REVIEW ................................................................................................................... 6
2.1 Theoretical Review........................................................................................................................ 6
Internal Audit ...................................................................................................................................... 6
2.1.1 Agency Theory........................................................................................................................... 6
2.1.2 Contingency Theory................................................................................................................... 7
2.1.3 Lending Credibility Theory ....................................................................................................... 8
2.2.3 Internal Audit Effectiveness....................................................................................................... 8
2.2Empirical Reviews on Internal audit effectiveness ....................................................................... 9
2.2.1 Management Support ............................................................................................................... 9
 2.2.2 Managements Perception of IAs Value ................................................................................. 10
2.2.3 Organizational Independence ................................................................................................... 10
2.2.4 Adequate and competent Internal Audit Staff.......................................................................... 12
2.2.5 Approved Internal Audit Charter ............................................................................................. 12
CHAPTER THREE ............................................................................................................................ 13
3 RESEARCH DESIGN AND METHODOLOGY ........................................................................... 13
3.1 Research Design.............................................................................................................................. 13
3.2 Sampling Method ........................................................................................................................ 14
3.3 Sampling Techniques .................................................................................................................. 14
3.4 Data collection instrument ........................................................................................................... 14
Primary data will be used to accomplish this study. Questionnaires will be distributed to internal
audit officers of each bank .................................................................................................................... 14
3.4.1 Primary Data............................................................................................................................ 14
3.5 Data Collection Procedures .......................................................................................................... 14
3.6 Validity and Reliability Data ....................................................................................................... 15
3.7 Data Analysis Techniques ............................................................................................................ 15
3.8 Ethical Consideration ................................................................................................................... 15
Budget ................................................................................................................................................... 16
Time Schedule.......................................................................................................................................16

Reference /Bibliography.......................................................................................................................17
 CHAPTER ONE

1. INTROUDACTION

1.1.Background of Study
For most of its history internal audit has served as a simple administrative procedure comprised
mainly of checking documents, counting assets, and reporting to Board of Directors,
Management or External Auditors. In recent times, however, a combination of different forces
has led to a quiet revolution of the profession. Organizations have to demonstrate accountability
in the use of shareholders money and efficiency in the delivery of services. Organizations now
demand great competency and professionalism from internal audit, and scarce resources must be
deployed more efficiently to minimize and manage risks. Technological advancement makes it
possible to track and analyse data with continually increasing speed thus making it essential for
organizations to be well advised by the internal audit department. Internal audit varies from one
organization to another, and making change to modern internal audit can be a substantial
undertaking.

All over the world there is a realization that the Internal Audit activity has the potential to
provide hitherto unparalleled services to management in the conduct of their duties. This
potential has been turned into a challenge and embodied in the new definition of Internal
Auditing from the Institute of Internal Auditors (the IIA). Commercial banks have come to the
realization that internal audit is essential in improving management of assets in the banks leading
improved financial performance of banks (Internal Audit Guide Line, 2014).

1.2. Internal Audit

Internal Audit is an objective and independent appraisal service within an organization on risk
management, control and governance by measuring and evaluating their effectiveness in
achieving the organizations agreed objectives. In addition, internal audits findings are
beneficial to the Board of Directors and line management in the audited areas. The service
applies the professional skills of internal audit through systematic and disciplined evaluation of
the policies, procedures and operations that management put in place to ensure the achievement
of the organizations objectives, and through recommendations for improvement.

Internal audit has several aims and principles which it is necessary to adhere to. It is the board of
directors of the bank, however which bears final responsibility that the banks management
applies an appropriate and effective system of internal audit, a system of evaluating banking
activity risk and risks concerning bank capital, appropriate methods of monitoring compliance
with laws, measures and internal procedures. Likewise, the bank's management is responsible for
drawing up procedures which identify measure, monitor and control the risks that the bank faces.
Internal auditing (IA) serves as an important link in the business and financial reporting
processes of corporations. Internal auditors play a key role in monitoring a companys risk
profile and identifying areas to improve risk management (Goodwin and Kent, 2006). Thus,
internal audit quality strongly needed so as to keep abreast of developments and technical
progress witnessed by the world. As the literature reviews show, there is lack of adequate
literatures on factors determining the internal audit quality.

Therefore, carefully examining factors determining internal audit quality could fill the gap to the
literature in general and in Ethiopian context particularly on commercial banks of internal audit
quality.

1.3. Back ground of the company

Currently, according to the third quarter National Bank Of Ethiopia (NBE,2015), Ethiopia has 18
banks as of March 2015 of which 16 are privately owned. They form the countrys main
financial institutions. Lion International Bank S.C is one of operating banks in Ethiopian banking
industry. Lion International Bank was established as per the intent of the new policy and
Ethiopian investment code. It come into existence on October 2,2006 according to the
Commercial Code of Ethiopia 1960 and the licensing and supervision of banking business
Proclamation No.84/1994.

As of June 30th 2015/16 its total Deposit stood at Birr 6.33 billion; while total asset and Capital
of the Bank reached birr 8.1 billion and 1.2 billion, respectively (LIB, annual report
2015/16).The bank also has more 165 branches across the country and more than 1,284
employees whom as its key asset.

Accordingly, Lion International Bank envisions To be the leading bank in Ethiopia by the year
2035. In its strategic document too, it is clearly stated that the bank values both its customers
and employees as not only important but also essential actors in all its endeavours of fulfilling
public expectations.

1.4. Statement of the Problem

Internal auditors have the right and ability to access all information in every part of the
organization and their function lies at every activities of the corporate governance system. All
the stakeholders will therefore benefit from having a strong Internal Audit Function (IAF) which
will provide value to the other cornerstones of corporate governance. Because internal auditors
can make line managers aware of their responsibility; can act as a consultant in monitoring risk,
identifies weakness in internal control system, and facilitates the implementation of risk
management as well as IA contributes to the appropriateness of procedures and operations of the
audited body (Cohen and Sayag, 2010; Arena and Azzone, 2009; Dittenhofer, 2001).
` The internal audit staffs are organized inefficiently with low technical staff proficiency, that
does not prepare a strategic plans to conduct their activities to produce effective internal audit
output to their organization (Cohen &Sayag, 2010; Arena and Azzone, 2009; Mihret and
Yismaw, 2007). Moreover, the number of actual audit performed in a period is usually less than
the number of audits stated in the annual audit plan is not supporting the effectiveness of the
internal auditors in the organization (Mihret and Yismaw, 2007).

This research focused on assessing the determinant factors for the effectiveness (the level of
effectiveness and competency) of internal audit process in the Lion International Bank. With
regard to this, the researcher is attempted to identify the factors influencing internal auditors
effectiveness in the case organization under consideration. Specifically, how management
support, managements perception of IAs values, organizational independence, adequate
competent internal audit staff, and presence of approved internal audit charter influence the
effectiveness of internal audit will be examined and answered. The research is intended to fill the
gap identified in some researchers done by some few scholars so far literatures (Haile Mariam,
2014; Cohen &Sayag, 2010; Arena and Azzone, 2009; Mihret and Yismaw, 2007). These
studies were done for Mass organizations (all public sectors) just by taking the title; determinants
of internal audit effectiveness on the Public sectors. But, the researcher believes that the
recommendations given and conclusions remarked by them were a bit hasty generalizations.
The researcher confirms that absence of empirical study on the case organization selected,
Commercial Bank of Ethiopia, particularly in the audit area is the actual gap identified which
necessitated the research

1.5. Research Question

Q1: What are the factors that affect/determine the effectiveness of Internal Audit Function in the
Lion International Bank?

1.6. Research Hypothesis

The following five hypothesis are designed to uncover the relationships between the
independent factors selected for the study, i.e., the management support , management
perception of internal audit values, organizational independence of the internal audit team,
adequate and competent internal audit staff placement , and the presence of approved internal
audit charter and the dependent variable; internal audit effectiveness.

H1: Does the Management support given to the internal audit enhance the effectiveness in the
Lion International Bank?
H2:Does Managements perception of internal audit values matter the internal audit
effectiveness in the in the Lion International Bank ?

H3: Does Organizational independence of internal audit team affect the internal audit
effectiveness in the Lion International Bank?

H4: Does Adequate and Competent IA staff placement impacts to the internal audit effectiveness
in the Lion International Bank?
H5: Does the presence of Approved Internal audit charter affect to the internal audit
effectiveness in the Lion International Bank?

1.7. Objective of the Study

The Objective of this empirical study is categorized under two sub-Categories

1.7.1. Specific objectives

The specific objectives of the study are:

To examine the contributions of management support in the Lion International Bank.

To examine the contributions of managements perception of IA values in the Lion
International Bank.
To examine the contributions of organizational independence of the IA Staff in the Lion
International Bank.
To examine the contributions of adequate and competent internal audit staff in the Lion
International Bank.
To examine the contributions of the presence of approved internal audit charter for
internal audit effectiveness in the Lion International Bank.

1.7.2 Main objective

The main objective of this study is to assess the determinants factors influencing the
internal audit effectiveness in the case organization selected for the study.
1.8. Significance of the Study

This research is very essential to show the effectiveness of the internal audit in the Lion
International Bank as it assesses the factors which determine and influence the effectiveness of
the internal audit. In addition, this research is important for future researchers as a reference
material to develop a literature framework.

1.9. Scope of the Study

The relevant dimensions selected in particular for this study is limited to such factors;
management support, managements perception of IAs value, organizational independence,
adequate and competent internal audit staff, and the presence of approved internal audit charter .
The target groups of the population are the internal audit team/staff and auditee across the bank
which are currently well re-structured to core and support functional processes with a
decentralized hierarchy/ chain of command.

1.10 Limitation of the study

This study is limited to Lion International Bank in Ethiopia. The result of the study may suffer
from some limitations.

Despite the above probable limitation, the researcher made his maximum effort to design the
research as properly as possible and to achive.

1.11. Organization of the Study

The research will be structured in five chapters.

The first chapter contains an introduction/ a brief background of the study, statement of the
problem, research questions, objectives of the study, significance of the study, and the
methodologies used to conduct the study. The second chapter describes the detail review of
related literatures with regard to the internal audit effectiveness and the variables which affect
the internal audit effectiveness. The third chapter will discuss research design and methodology
(i.e., research methodology that has been presented in this proposal will be putted in to the
ground). The fourth chapter is the analysis, discussions and presentation part of the research
findings, and in Chapter five the conclusions and recommendations are given and remarked
based on the case study results; followed by the list of references used references and appropriate
appendixes.

CHAPTER TWO

2.LITRATURE REVIEW

This section looks at theoretical reviews and empirical studies which have been carried out in
this area both in the global and the local perspective.

2.1 Theoretical Review

Internal Audit

A simple and more traditional meaning of internal auditing is defined as: an independent
appraisal function established within an organization to examine and evaluate its activities as a
service to the organization. Later on, the new Institute of Internal Audit (IIA, 2001), defined
internal audit as: an independent, objective assurance and consulting activity designed to add and
improve an 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 processes. According to this definition, the major scope of
the internal auditors are making assurance to the organization and giving consultant services to
the overall managements of the corporate governance. By providing the independent opinion and
conclusions regarding the operation, function, system and wellbeing of the organization the
internal audit can provide assurance services; and by giving the advisory service based on the
specified requests of an engagement client the internal auditor can give the Consulting service to
the organization. Internal audit are the mechanism through which information about the
effectiveness of the quality system is gathered by auditors selected from within the company, but
who are independence of the area, function or procedures being audited (IIA, 2001
 Review of Audit Theories

Various theories have been formulated on internal audit concepts. These include Agency,
contingency, and lending credibility theories discussed as follows:

2.1.1Agency Theory

Agency theory is concerned with resolving problems that can exist in agency relationships; that
is, between principals (such as shareholders) and agents of the principals (for example, company
executives). The two problems that agency theory addresses are: the problems that arise when
the desires or goals of the principal and agent are in conflict, and the principal is unable to verify
what the agent is actually doing and the problems that arise when the principal and agent have
different attitudes towards risk. Because of different risk tolerances, the principal and agent may
each be inclined to take different actions. Adams (1994) in his article stated that Agency theory
can provide for richer and more meaningful research in the internal audit discipline. Agency
theory contends that internal auditing, in common with other intervention mechanisms like
financial reporting and external audit, helps to maintain cost-efficient contracting between
owners and managers. Agency theory may not only help to explain the existence of internal audit
in organizations but can also help explain some of the characteristics of the internal audit
department, for example, its size, and the scope of its activities, such as financial versus
operational auditing. Agency theory can be employed to test empirically whether cross-sectional
variations between internal auditing practices reflect the different contracting relationships
emanating from differences in organizational form.

2.1.2Contingency Theory

Contingency means: one thing depends on other things and Contingency theory means: it
depends. Audit functions are task-oriented and can be loosely structured. The functions also can
vary considerably, depending on the area of a company under audit and the type of business
model, so auditors must carefully manage their inspections and take variables into account to get
the job done. The contingency theory also can be applied to an audit teams structure. Typically,
audit team managers receive audit projects. They then create ad hoc audit teams for the projects,
selecting auditors based on expertise and experience in the subject areas, and on auditor
availability, all of which add up to contingencies for any given audit project. Daft (2012), Audit
teams use a mix of structure and contingency to get the output rolling quickly. The subject of
auditing projects can include such diverse areas as evaluation of production processes, inspection
of company accounts, and assessment of compliance with industry standards. Selecting auditors
with specialized training or those who have a particular skill set in the subject area minimizes the
learning curve and reduces opportunities for errors. The quality and output of audits remain
assured when audit teams use resources according to expertise and experience, and when
auditors are flexible and can adapt to process fluctuations. For example, an auditor experienced
in evaluating financial instruments can be effective in an audit exercise of a bank or hedge fund,
even when the financial instruments the institution offers do not fit the typical mould (Davoren,
1994).

2.1.3 Lending Credibility Theory

Volosin (2007) in his book mentioned that the lending credibility theory is similar to the agency-
theory and it states that audited financial statements can enhance stakeholders faith in
managements stewardship. The business world consists of different groups that are affected by,
or participate in, the financial reporting requirements of the regulatory agencies. They are
shareholders, managers, creditors, employees, government and other groups. The major
recipients of the annual reports are the shareholders, including individuals with relatively small
shareholding and large institutions such as banks or insurance companies. Their decision is
usually based on the financial reporting and the performance of the companys management,
who have a responsibility to act in the interests of investors. The auditor is appointed by the
companys shareholders and reports his results to his clients. The aim of the auditors report is to
comment on how accurately the company presents its financial situation and how it is
performing. This should reassure the shareholders that their investment is secured and also help
to reduce the practice of misleading accounting procedures designed to show the company in a
more favorable light. Basically, the audit is represented as a process designed to evaluate the
credibility of information of a companys financial statements (Letza, 1996).

2.2.3 Internal Audit Effectiveness

Different authors defined the term effectiveness as follows; For instance, Arena and Azzone
(2009) defined effectiveness as the capacity to obtain results that are consistent with targets,
Mihret and Yismaw, (2007) internal audit effectiveness is defined as the extent to which an
internal audit office meets its supposed objective or the extent to which it meets the intended
outcome, and Dittenhofer (2001) Effectiveness is the achievement of internal auditing goals
and objectives using the factor measures provided for determining such factors. All the three
authors defined effectiveness in terms of achieving the internal audit goals and objectives,
though interpreted in different ways. Mihret and Yismaw (2007) described the characteristics of
effective internal audit unit from the internal audit point of view. Effective Internal Audit
undertakes an independent evaluation of financial and operating systems and procedures,
contributes to the achievement of organizational goals, needs managements commitment to
implement recommendations, provides useful recommendations for improvements as necessary,
affected negatively by lack of attention from management which in turn adversely affects the
auditee attributes, and management support is a natural quid pro quo for effective internal audit.

2.2.Empirical Reviews on Internal audit effectiveness

As the main aim of this research is to assess the effectiveness of internal audit, different authors
and researchers idea and recommendations regarding the related topic of internal audit are
analyzed and presented. Although the prologue of internal audit in Ethiopia are dated in the
1940s the time also the united states and most European countries are adapted; the effectiveness
of internal audit in the banking industry in particular are challenged because of the factors that
hinder the development of internal audit in Ethiopia. For the ease of presenting the literature
those studies regarding the main factors that influence the effectiveness of internal audit; such as
management support, the perceptions of the management, organizational independence of
internal auditors, Organizational independence of internal audit team, adequate competent of
internal audit staff, and the presence of approved internal audit charter reviewed by different
researchers are included in this literature as they are proofed the key determinant factors their
respective case studies.

2.2.1 Management Support

Organizations management has a close relationship with internal auditors in their day to day
activities. They need good support and perception from their management to be more effective
and to achieve the audit objectives. Management support is expressed in terms of supporting the
auditing process by fulfilling the necessary resources, finance, transport if required, providing
training, introducing auditors with new technology and procedures, budgeting funds for
certification another facilities that facilitate the internal auditing works. Management support has
a far-reaching consequence on IA effectiveness in organizations. For example, Mihret and
Yismaw (2007) in their case study of IA effectiveness on public sector shows that the component
of management support consists of the response to audit finding and the commitment to strength
internal audit which has significance influence on IA effectiveness. Given the fact that internal
audit activities are performed in dynamic management process and more supportive
environment, internal auditor expects senior management to take the first steps to support the IA
process.

Internal audit actively seeks management support with resources, commitment to promote and
communicate their added value. The management support is almost crucial to the operation and
internal audit; because all other determinants of IA effectiveness derive from the support of top
management, given that hiring proficient IA staff, developing career channels for IA staff, and
providing organizational independence for IA work are the results of decisions made by top
management (Cohen and Sayag, 2010). This means it is the interest of management to maintain a
strong internal audit department (Mihret and Yismaw, 2007; Adams, 1994). In addition,
implementation of audit recommendations is highly relevant to IA effectiveness which is the
component of management support (Mihret and Yismaw, 2007). The management of an
organization is viewed as the customer receiving IA services. As a result, managements
commitment to use audit recommendations and its support in strengthening internal audit is vital
to IA effectiveness. Therefore, audit finding and recommendations would not serve much
purposely unless management is committed to implement them. Furthermore, Belay (2007) find
that to curb corruption and inefficiency in the public sector of Ethiopia, it is mandatory to have
effective internal audit function(IAF) that in turn needs appropriate governance structure,
mobilizing sufficient and appropriate resource and competent personnel.

2.2.2 Managements Perception of IAs Value

Perception is the process of attaining awareness or understanding of sensory information or it is

the mental image or intuitive recognition of experience when aware of the elements of the
environment (Woodard C.A, 2002). To function effectively, internal auditors and the customers
of audit services should possess a similar understanding of what makes internal auditing a value
added activity. The failure to reach this understanding could result in the perception that internal
audit is simply an obstacle to achieving production objectives. This can result in underutilized
audit services and ignored audit recommendations which adversely influence the effectiveness of
IA (Arena and Azzone, 2009). When employees at all levels perceive that the top management
assigns importance to the function of IA, they will cooperate and support these processes (Cohen
and Sayag, 2010). This implies that internal audit staffs are more motivated and encouraged to
perform audit activities given good managements awareness of IA values.

2.2.3 Organizational Independence

Independence has no single meaning and interpretation across the people; hence the concept is
subject to ambiguity and uncertainty (Wines, 2012). However, for the purpose of the case study
independent refers to the concept of being free from any management influence while internal
auditors perform audit activities and issue audit report (Belay, 2007; MoFED, 2004).
Independence is fundamental to the reliability of auditors reports. Those reports would not be
credible, and investors and creditors would have little confidence in them, if auditors were not
independent both in fact and appearance. The assurance services provided by auditors derive
their value and credibility from the fundamental assumptions of independence of mind and
independence in appearance (Wines, 2012; Stewart and Subramanian, 2010). While the internal
audit typically focuses on the whole management process, to maintain objectivity, to increase the
reliability of information, to be free from unacceptable risk of material bias, and to issue
reasonable and credible audit opinion, it is required to be independent (IIA,2001).

Independence in fact exists when auditors are actually able to act with objectivity, integrity,
impartiality and free from any conflict of interest. While the concept of independence in
appearance is the auditor should be perceived by others (the public or other third party) to be
independent. In this case, conflict of interest will also exist when a reasonable person, with full
knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable
of exercising objective and impartial judgment in relation to the conduct of the audit of the
audited body. Auditors should be sufficiently independent from those they are required to audit
in order to conduct their work without interference. Coupled with objectivity, organizational
independence contributes to the accuracy of the auditors work and gives employers confidence
that they can rely on the results and the reports (Cohen &Sayag, 2010).
As Stewart and Subramanian (2010) review under organizational status the IAF should be given
the appropriate status in the organization to enable the function to exercise organizational
independence and individual internal auditors to act objectively since internal auditors found in a
unique position as employees of an organization with responsibility to assess and monitor
decisions made by management and also to the management. Furthermore, many auditors have
been argued that in order to achieve audit objectives and become effective organizational
independence is very important. For instance, the independence of internal audit department and
the level of authority to which the internal audit staff report are the important criteria influencing
the objectivity of its work, and added that organizational independence is more crucial to the
effectiveness of the internal auditors, as it protects the auditor from pressure or intimidation, and
increases the objectivity of the auditing work (Cohen and Sayag, 2010).

2.2.4 Adequate and competent Internal Audit Staff

Adequate staffing is essential for a system to its full capability. Weakness in staffing can lead to
mismanagement, error and abuse, which can negate the effect of other controls (MoFED, 2004).
The size of IA staff and the competency of internal audit are the critical characteristics of IA
quality that cant be separated. This means at the absence of one dimension the other cannot
contribute to the quality of internal auditors. Auditors must comply with minimum continuing
education requirements and professional standards published by their relevant professional
organizations (IIA, 2001). The IIAs standard 1210, on proficiency of the auditor require that the
internal auditors should possess the knowledge, skill and other competencies need to perform
their responsibilities (IIA, 2001. As part of this, Competency Framework for Internal Auditing
(CFIA) focuses on the skills needed by an individual person to be an efficient internal auditor.
The literature review specifically conducted on the communication skills (Smith, 2005) stated
that the development of effective communication skills (such as listening, interpersonal, written
and oral communication skills) is an important part of internal auditors advancement potential.
Internal auditors must possess highly developed communication level skills to become a
successful professional. The development of these skills is not only enhances the auditors
potential, but will also improve the quality of audits produced. In addition to the above
dimension of IA quality, the competence of internal auditors can be measured in terms of
academic level, experience and the efforts of staff for continuous professional development and
compliance with audit standards. Both the quantity of audit effort and the quality of professional
care exercised will determine the overall quality of the internal audit work (Cohen and Sayag,
2010; Belay 2007). Arena and Azzone, (2009) also stated that IA effectiveness increase in
particular when the ratio between the number of skilled internal auditors and employees grows.
This shows that sufficiently large number of skilled professionals enables the IA to do its duties.

2.2.5.Approved Internal Audit Charter

Internal audit charter is defined by the IIA as a formal written document that defines the
activitys purpose, authority and responsibility. The charter should be (a) establish the internal
audit activitys position within the organization; (b) authorize access to records, personnel and
physical properties relevant to the performance of managements; and (c) defined the scope of
internal audit activities (IIA, 2001). Additionally, an internal audit charter typically includes the
responsibilities of the IA in broad terms, the standards followed by the IA; and the relationship
between the IA and the audit committee. It may also defines access to the information
(documents, records, systems, and personnel) necessary to perform and reach conclusions on the
work, and it is a vehicle for asserting that there are no unreasonable limitations on the scope of
the auditor work. The charter should clearly identify and record any limitations and alter to
actual or potential changes on internal and external conditions that affect its ability to provide
internal control assurance from a forward looking perspective.

From the empirical literature studied it can be noted that effectiveness of internal audit function
is determined by the Management Support, Managements Perception of IAs Value,
Organizational Independence of internal audit staffs, adequate and competent Internal Audit
Staffs, and presence of approve internal audit charter. Internal audit function plays a key role in
corporate governance. Therefore, this study also aims to establish the relationship between
effectiveness of internal audit function (IAF) and the independent variables that affect the
internal audit task accomplishments of the case organization; the Lion International Bank.
 CHAPTER THREE

3 RESEARCH DESIGN AND METHODOLOGY

This chapter describes the research design and methodology which helps in drawing the logical
and coherent link between the data collected, analyzed, summarized, conclusions and
recommendations drawn in the subsequent chapters.

3.1 Research Design

The study uses descriptive research type. The reasons for selection of this research type are that
good description provokes the `what' questions of explanatory research. Therefore, according to
the above fact the researcher prefers descriptive research design in order to describe the
assessment of determinants of internal audit effectiveness in the selected sector for this study.
The author further argues that surveys collect data at a particular point in time with the intention
of describing the nature of existing conditions, or identifying standards against which existing
conditions can be compared, or determining the relationships that exist between specific events.

3.2 Sampling Method

The target population for this study will be those selected banks internal audit officers .now a
days Lion International Bank have above one hundered fourty internal audit sataff and also
fifteen compliance audit officer.

3.3 Sampling Techniques

The study will use simple random sampling technique to give all internal audit officers equal
chance of inclusion.

In this regard, the author takes the total of sixty-five internal audit officers. The Sample size from
the total population will be identified as per Taro Yamanes formula.
Where n is the sample size, N is the population size, and e is the level of
precision. Using this formula appropriate sample size will be determined.

3.4 Data collection instrument

Primary data will be used to accomplish this study. Questionnaires will be distributed to
internal audit officers of each branch.

3.4.1 Primary Data

These are believed to be qualitative data that will be collected through questionnaires distributed
to samples applicable for the study and their response is assumed to be also filled using their
experience, attitude, opinion, and perception. The responses will be collected using the
five point Likers scale ranging from 1 = Strongly Disagree to 4 = Strongly Agree.

3.5 Data Collection Procedures

The questionnaire will be distributed to the participants by personally reaching at their respective
office.

3.6 Validity and Reliability Data

To prove the reliability of the data the researcher will include the same type of questions in
different forms and the validity of the measurement will be assessed by using different
techniques.

3.7 Data Analysis Techniques

The data is intended to be analysed in descriptive statistics analysis techniques. To evaluate the
effects of various factors on the effectiveness internal auditors in the banking sector the
correlation analysis were used. The analytical tool will be supported using frequency and
percentage techniques. And also, the Statistical Package for Social Sciences (SPSS) version 20
and Excel were used for the data analysis. The final results of the study will be presented using
tables and graphs.
3.8 Ethical Consideration

I will have a discussion time with the participants to inform them the purpose of questionnaire and
interview is to prepare this research and I will tell them why I choose them to participate in my research.

I will also tell them how their identity and personal confidentiality will be protected .in addition to these I
also tell them after data collection and analysis are finalized the research result will be reported to them.
Budget

Stationery items 2,500.00

Laptop 10,000.00

Transportation 3,500.00

Internet 1,200.00

Miscellaneous expense 1,700.00

---------------------------

Total 18,900.00

-----------------------------

Time schedule

To preparing Research Proposal 3 weeks

Reviewing Literature 1 month

To preparing Research equations 2 weeks

To gathering a data 1 month

Analyzing 1 month

Organization of the study 1 week

Total 4 months and 2 weeks

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