Concept Paper Approval Sheet

The Role of Internal Audit in the Improvement of the Companys Corporate Policies,
Accountability, and Information and Transparency.

Proponents:

Caibigan, Bianca Lizette O. 25% Panopio, Jonah M. 25%

De Castro, Jasper Cary B. 25% Velez, Shiela Crista A. 25%
Evaluator 1
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Approved Disapproved

Evaluator 2
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 Approved Disapproved

Evaluator 3
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Approved Disapproved
Title of the Proposed Study:

The Role of Internal Audit in the Improvement of the Companys Corporate Policies,
Accountability, and Information and Transparency.

Area of Study:

Internal Audit

Background of the Study:

Internal control is necessary in attaining effective management, and increasing organizations

nowadays are entrusting the review of processes and report to its internal auditor (Miles, 2017). Internal
Auditing is an independent, objective assurance and consulting activity designed to add value and
improve an organizations operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control,
and governance processes (Gupta, 2016). The role of an internal auditor varies from providing
independent assurance to acting as management advisor (Deloitte, 2010).

Financial statement auditing is a reliable claim for a good corporate governance and reliable
financial reports (PwC, 2017). Furthermore, the research is perceived to be important since it will
evaluate the extent of importance of internal auditing in the corporate governance of an organization.

The Philippines is one country that put in place the policy framework mainstreaming internal
audit in government operations. However, after more than four decades since the first law on internal
auditing was enacted, a significant number of government agencies are unable to officially establish an
internal audit unit (IAU) (Mendoza, 2015). Hence, earning the interest of the researchers.

The variables to be used in the study are the Internal Audit Structure, Audit Committee
Involvement, Internal Audit Performance and Corporate Governance to be presented and discussed
briefly in the conceptual framework.
Statement of the Problem:

The study aims to address following queries:

1. What are the factors determining internal audit performance?

2. How does the audit committee affect the performance of the internal audit function?

3. How has internal audit enhanced corporate governance?

Objectives of the Study:

The study aims to examine the factors such as:

internal audit structure, which include team size; composition, in terms of experience and
expertise; and whether combined assurances or collaborations are conducted;

involvement of audit committee in the internal accounting function activities; in the reviews of
audit planning, audit execution, and actions on recommendations of internal audit; and

internal audit performance impacts on corporate governance in four key dimensions; legal
framework/corporate policies, accountability, and information and transparency.

Hypotheses:

Based on the information mentioned, the researchers will be proving that:

1. Number of audit team members will not be associated with overall internal audit performance.

2. High levels of professional expertise of audit team members will be associated with high overall
internal audit performance that creates greater number of recommendations for improvements of
elements in the corporate governance framework.

3. A combination of audit activities will be associated with overall high internal audit performance.

4. Number of collaborations of audit activities will be associated with high overall internal audit
performance.
Literature Review:

Internal audit, a component of corporate governance, continues to evolve due to changes in

business strategies and requirements placed on it by legislators. The roles of internal auditors and audit
committees, the key personnel in internal audit functions, are changing to a more value-added approach as
business strategies move towards corporate sustainability and organizational excellence. Suggestions
forwarded to improve the performance or determining the quality of internal audit function include
effective involvement of audit committees in internal audit activities, the employment of competent
internal auditors and determining the impact of internal audit on corporate governance (e.g., Mohamad &
Muhamad Sori, 2011, Sarens, 2009, Turley & Zaman, 2007).Research on the quality of internal audit has
focussed mainly on the relationships of internal audit with internal control and audit committees (e.g.,
Fadzil, Haron, & Jantan, 2005; Mat Zain & Subramaniam, 2007; Turley & Zaman, 2007). However, none
has linked the impact of internal audit performance to corporate governance.

This study provides an agency of value view, explaining the effectiveness of IAF and its impact
on corporate governance. Using a convergent mixed methods approach, the main findings from survey
data collected from corporate members of the Institute of Internal Auditors Malaysia are compared and
integrated with perspectives from chief audit executives of selected public listed companies interviewed.
The factors investigated are the structure of the IAF, activities of best practices in internal auditing, ACs
involvement as stated by the Malaysian public listing guidelines (Bursa Malaysia, 2000, 2009b) and the
World Banks corporate governance framework (World Bank, 1991). An exploration on the extent of
collaborations and combined assurances in internal audit is also carried out.

When Adam Smith (1776) raised the issue of conflicting interests of agents such as managers and
general workers in managing firms, he was elucidating on the owners motivation to realise the greatest
possible value on capital employed. As a counter measure, and to instil confidence in agents, Jensen and
Meckling (1976) reasoned that self-monitoring internal audit is undertaken. It is assumed that in self-
monitoring, the purposeful placement of internal audit in the corporate structure, which is mandatory for
Malaysian public listed companies, contributes to the quality of good governance.

In the global economy of the twenty-first century, good governance has become a central issue.
One of the most important events of the 1980s was the emergence of corporate failures, which later
escalated to global financial crisis. The consequences of corporate failure were demonstrated in Australia
by the collapse of the National Safety Council of Australia in the 1980s and the Pyramid Building Society
in Victoria in 1990 (Somerville, 2006). These were followed by the fall of the HIH group, with a
deficiency of AUD5.3 billion, in 2001 (George & Malane, 2003). In America, Enron Corporation filed for
bankruptcy in 2001 after incurring losses of US$62 billion through manipulation of financial statements
by the company executives, including the undertaking of risky business activities. Then in 2002,
telecommunications company WorldCom collapsed, with losses of approximately US$11 billion
(Somerville, 2006).

In the context of preventing corporate failure, questions have been raised about the performance
of internal audit and other forms of auditing (Imhoff, 2003; Mohamad & Muhamad Sori, 2011). It is
worldwide practice for the internal auditors to report to the AC, not to management (except for
administrative interface), in order to maintain their independence (The Institute of Internal Auditors [IIA],
2012b; Verschoor, Barrier, & Rittenberg, 2002). The effective relationship between internal auditors and
the AC is crucial in ensuring good governance (MIA Professional Standards & Practices [MIA], 2012).
There is, therefore, potential for better functioning of business in Malaysia to optimise the internal audit
function and audit committee interaction. Presumably, an effective internal audit would depend on the
understanding of the internal audit process and, importantly, of the impact of internal audit on corporate
governance. The complexities in internal audit relate to the objective and scope of the audit. There are
various internal audits such as management audit, operational audit, systems audit, compliance audit,
computer audit, probity audit, value-for-money audit, and quality audit (Pickett, 2003; Whittington &
Pany, 2004). These various types of audits create pressure for management and employees, giving them
the perception that they are constantly being audited. This poses the question of effectiveness of the audits
and how such audits would aid the organisation in its corporate governance and risk assessment
framework. Questions surrounding the effectiveness of internal audits need to be addressed in the light of
reliance placed on the IAF as one of the mechanisms of corporate governance.

Framework:

The concept used by the researchers in the framework of The Role of Internal Audit in the
Improvement of the Companys Corporate Policies, Accountability, and Information and Transparency.
is from the study Redefining Internal Audit Performance: Impact on Corporate Governance by
Razimah Binti Abdullah from the Edith Cowan University
Audit Committee

Involvement

Internal Audit Corporate

Performance Governance

Internal Audit

Structure