ASSESSMENT OF INTERNAL AUDIT PRACTICE

(A CASE OF FINANCE AND ECONOMIC DEVELOPMENT

OFFICE IN ADAMA TOWN)

SENIOR RESEARCH PROJECT SUBMITTED TO DEPARTEMENT OF

ACCOUN TINING AND FINANACE FOR A PARTIAL FULLFILMENT OF BA
DEGREE IN ACC OUNTING

PREPARED BY;-

1. ZEWDU ESKEZ IA ……………R/4658/06

2. ZEMENU BERHIUN ………….R/4653/06

ADVISOR: EDEN.G

ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

MAY, 2016

ADAMA, ETHIOPIA
 STATEMENT OF DECLARATION

The under signed students, hereby declare that, this senior research project is our original work,
which has not been presented for a degree in this or elsewhere university. All sources of
materials used for this study have been fully acknowledged.

Name Signature

1. ------------------------------------------------------- -------------------

2. ------------------------------------------------------- -------------------

Date: - -------------------------------------------------

CONFIRMATION

This thesis or research project work is conducted under my supervision and fulfill all
requirements of research standard of program. I hereby approve the submission of thesis or
senior research project for examination.

Advisor’s name: - ---------------------------------------

Signature: - ----------------------------------------------

Date: - ----------------------------------------------------
 ACKNOWLEDGEMENT

First of all, I would like to give a great thanks to the Almighty of God for his help throughout my
life.

Second I would like to express a deepest gratitude and appreciation for my advisor Eden G. her
precious time devoted in reading and correcting my research paper and assisting me in writing
this senior essay.

And then I want to send my grateful thanks for Adama finance and economic development office
employees for their invaluable information and cooperation. Especially to Ato Mohammed; the
head manager of the organization.

Last but not least my special thanks extend to my families for their financial and moral support
not only for the preparation of this paper, but also for my entire life

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 ABSTRACT

The main objective of the study is to assess internal audit practice in finance and economic
development office of Adama town.

To achieve this objective the necessary data was collected from primary as well as secondary
data sources. At the end the researcher prepare questioners for the target company employees to
obtain the primary data and secondary data was obtained from manuals and related written
materials and documents.

From the company’s five (5) departments the researcher selects two departments such as audit
and inspection and payment and account in order to take sample of the research project.

Finally, the researcher analysis and interprets the data obtained from different sources by using
quantitative as well as qualitative methods of data analysis and Conclusions and
recommendations are made accordingly.

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 TABLE OF CONTENTS

Content Page

ACKNOWLEDGEMENT................................................................................................................i

ABSTRACT....................................................................................................................................ii

TABLE OF CONTENTS...............................................................................................................iii

LIST OF TABLES..........................................................................................................................vi

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

1. INTRODUCTION.......................................................................................................................1

1.1 Back ground of the Study.......................................................................................................1

1.2 Back ground of the organization............................................................................................2

1.3 Statement of the problem.......................................................................................................3

1.3 Objectives of the study...........................................................................................................3

1.3.1. General objective of the study........................................................................................3

1.3.2. Specific objective...........................................................................................................3

1.4 Significance of the study........................................................................................................4

1.5 Scope of the study..................................................................................................................4

1.6 Limitations of the study.........................................................................................................4

1.7 Organization of the study.......................................................................................................4

CHAPTER TWO.............................................................................................................................5

2. REVIEW OF RELATED LITERATURE...................................................................................5

2.1Theoretical literature...............................................................................................................5

2.1.1Auditing............................................................................................................................5

2.1.2 Types of auditors.............................................................................................................5

2.1.3. Internal auditing.............................................................................................................6

2.1.4. The objective of internal auditing..................................................................................6

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 2.1.5 Functions of internal auditing..........................................................................................6

2.1.6. Historical evaluation of internal auditing.......................................................................6

2.1.7. Role of internal auditing.................................................................................................7

2.1.8. Types of internal audit....................................................................................................7

2.1.9. Role and image of internal auditing...............................................................................9

2.10. Internal audit report.............................................................................................................9

2.11. Internal control....................................................................................................................9

2.12. Components of internal control.........................................................................................10

2.12.2. Risk assessment..........................................................................................................11

2.12.3. Control activities........................................................................................................11

2.12.4. Information and communication................................................................................12

2.12.5. Monitoring..................................................................................................................12

2.13 internal audit effectiveness.................................................................................................12

2.13.1. Internal audit quality..................................................................................................13

2.13.2. Management support..................................................................................................14

2.13.3. Organization setting...................................................................................................14

2.13.4. Audit attributes...........................................................................................................15

2.14. Audit planning...................................................................................................................15

2.15. Objectives of conducting an audit of financial statements...............................................16

2.15.1. Management responsibility........................................................................................16

2.15.2 Auditors responsibility................................................................................................17

2.16 Empirical frame work........................................................................................................17

CHAPTER THREE.......................................................................................................................19

3. RESEARCH METHODOLOGY..............................................................................................19

3.1. Research design...................................................................................................................19

3.2. Target population................................................................................................................19

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 3.3. Sampling techniques...........................................................................................................19

3.4. Sample size.........................................................................................................................20

3.5. Type and source of data......................................................................................................20

3.6 Method of data collection....................................................................................................20

3.7. Methods of data analysis.....................................................................................................20

CHAPTER FOUR.........................................................................................................................21

4. DATA ANALYSIS AND INTERPRETATION.......................................................................21

CHAPTER FIVE...........................................................................................................................34

5. CONCLUSION AND RECOMMENDATION........................................................................34

5.1 Conclusions..........................................................................................................................34

5.2 Recommendation.................................................................................................................35

REFERENCE................................................................................................................................36

APENDEX

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 LIST OF TABLES

List Page

Table 4:1 Back ground of Respondents.....................................................................................................21

Table 4:2 Auditors capability to audit........................................................................................................22

Table 4:3Audit planning in the company...................................................................................................23

Table 4: 4 Segregation of duties in the company.......................................................................................24

Table 4: 5 The organization internal control over financial reporting........................................................24

Table 4:6 Internal auditor’s quality............................................................................................................26

Table 4:7 Internal auditor’s quality............................................................................................................27

Table 4: 8 Independence and objectivity of internal auditors....................................................................27

Table 4: 9 Compliance with policies and procedures.................................................................................28

Table 4: 10 Responsibly of auditors to detect misstatements.....................................................................29

Table 4: 11Internal audit department’s follow up procedures....................................................................30

Table 4:12 Audit performance of the organization....................................................................................31

Table 4:13 Preparation of audit report.......................................................................................................31

Table 4:14 Financial analyses in internal audit practice............................................................................32

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 CHAPTER ONE

1. INTRODUCTION

1.1 Back Ground of the Study

Auditing is an objective, systematic and independent examinations of accounts which is

conducted by professionally qualified person. (Arens, 1997)

Auditing can be simply classified as internal and external auditing. The common definition of
auditing is a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the result to interested users. (Konra,
1999)

Prior to 1941, internal auditing was essentially a clerical function because much of record
keeping at that time was performed manually. auditors were needed to the accounts of records
after it were completed in order to locate errors, the old concept of internal audit can be
compared with a form of insurance that the major objectives of it was discovering fraud. (Spener,
2010)

Internal auditing is essentially an appraisal activity within the organization for the review of
accounting operation method and procedure, financial and other operations of the organization
by measuring and evaluating efficiency and effectiveness of the organization. auditing is an
import ant managerial control device (Doug, 2010).

The starting place for internal audit theory is the definition of internal audit. the divergence and
interpretation of the audit role is explored, in terms of the way we may practice more average
from the standard its own approach and style. The institution of internal auditors ( IIA )definition
internal auditing is an independence objective assurance, and consulting activity designed to add
value and Importance to an organization’s operation. It helps an organization to accomplish its
objectives by bringing a systematic way of risk management, control and governance process.
(Spencer, 2010)

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Internal auditing refers to an independent appraisal of the activity within the organization for
the review of accounting, financial and other operations and activities by stuff of
auditors function as part of the management and reporting to it and not to the shareholders.
According to the institute of internal auditors USA internal auditing is an independent appraisal
function established within an organization to examine and evaluate its activities as a service to
the organization. (Basus, 2010)

1.2 Back ground of the organization

Adama is one of the towns which exists in Oromia national regional state administration. And it
is the capital of eastern Shewa zone. It is about 100 Kilo meters from Addis Ababa.

Adama finance and economic development office is found under Oromiya National regional
state administration that stands to meet the desired objectives and distribute to different sectors
according to their role and responsibilities.

This organization was established as office of finance and economic development since 1994
E.C

Adama finance and economic development office run its Activities by the support of the regional
Government as well as the federal government for the development of our country Ethiopia.

Mission of the organization

 Spread modern and fast financial service in the town by creating accountable and
transparent work system.

 Saving the towns resource with effective management.

 Implementing the pectoral plan based on relevant data.

Vision of the organization

To see integrated and sustainable development in the town through self reliance on its own
resources and seeing also the town as well as the country free from poverty, for the near future.

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1.3 Statement of the problem

In recent years, researchers and practitioners have widely discussed the need for internal auditors
of adding more value to their companies operation and contributing to the achievement of
corporate objectives. (Orma et al, 2012) this study was focused on increasing attention on issues
such as; performance evaluation and effectiveness of the company’s internal auditing. companies
employ their own internal auditors to do both financial and operational audits. internal auditors
focus on different areas. But the extent of internal auditing may vary from one company to
another (arenas etal, 2012)

The most important factors which affects the effectiveness of internal auditing practices of
Adama finance and economic development office are; lack of strong internal control over
financial reporting, absence of proper follow up procedures (implementing)audit
recommendation, lack of better use of new technology, work load on individual auditors and
improper position of auditors.

And to come up with this; the researcher answers the following basic research question.
 What are the internal audit qualities of the organization?
 How effective is the internal control system of the organization over financial reporting?
 How the management controls the audit quality of the organization?
 How internal audit offices prepare audit planning?
 How the applicability of independency is determined in the organization?

1.3 Objectives of the study

1.3.1. General objective of the study

The general objective of the study is to assess the internal audit practices of finance and
economic development office of Adama town.

1.3.2. Specific objective

A care full review of the main objective leads to develop the following specific objectives.

 To know internal audit quality of the organization

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  To assess the effectiveness of internal control system of the organization over financial
reporting
 To assess how the management controls the audit quality of the organization
 To assess and evaluate internal audit plan of the organization
 To assess the professional independency of auditors in the organization.

1.4 Significance of the study

The research paper have how the following import ants; first the output of the study will help the
organization to solve its problem second; the researcher will develop farther research skills and
finally the research paper will used as a base for further researchers.

1.5 Scope of the study

This study is limited to some specific activities of internal auditing practice in office of finance
and economic development in Adama town. And this is because auditing practices are wider as
well as require huge amount of resources to conduct.

1.6 Limitations of the study

The researcher faces some limitations during conducting this research project like; lack of
experience, unwillingness of respondents to give relevant information, shortage of resource and
the total distributed questionnaires are not fully collected

1.7 Organization of the study

The study was organized and classified in to five chapters. The first chapter deals with back
ground of the study, identification of the problem, the extent to which the study have been under
taken. Objectives and significance of the study

The second chapter presents about the theoretical as well as empirical literature review regarding
the research. In the third chapter methodology of the research was discussed.

The fourth chapter discusses about data analysis and presentation. And finally; the fifth chapter
presents conclusions and recommendation of findings.

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 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

INTRODUCTION

In this chapter the literature review on internal auditing and related literature was discussed in to
two parts that are; the theoretical and empirical bases of internal auditing.

2.1Theoretical literature

The theoretical literature is concerned with theories of internal auditing rather than their practical
applications.

2.1.1Auditing

Auditing is an objective examination performed by professionally qualified person. Auditing is

rather a generic term meaning which involves reports of attestation. (Kinfo & bayou, 2009)

The general definition of auditing is the accumulation and evaluation of evidence about
information to determine and report on the degree of correspondence between the information
and established criteria and auditing should be done by competent person. (Arens, 1997)

2.1.2 Types of auditors

Auditors could broadly be classified into external auditors and internal auditors.

2.1.2.1. Internal auditors

Internal auditors are a managerial control activity performed within an organization as a service
to management by an employee of the organization. it involves a review of operation through the
measurement and evaluation of the other control mechanism and assessment of the extent to
compliance. In order to maintain, independence they present their report directly to the board of
directors or the top management. (Kinfo and Bayou, 2009)

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 2.1.2.2. External auditors

External auditors are an independent staff assigned by an auditing firm to assess and evaluate
financial statement of their clients to perform agreed up on evaluation and is engaged as an
independent contractor external to the organization to generate an independent opinion (kinfo,&
bayou, 2009).

2.1.3. Internal auditing

Companies employ their own auditors to do both financial and operational audits. (Kinfo&
bayou,2009).

2.1.4. The objective of internal auditing

The objective of internal auditing is to assess members of the organization in the effective
discharge of their responsibilities. Internal audit furnishes them with analysis, appraise
recommendation, counsel and information concerning actively reviewed. The audit objective
includes promoting effective control of reasonable cost. (Kinfo& Bayou, 2009).

2.1.5 Functions of internal auditing

The internal auditing function includes verification, evaluation, and compliance of operation and
the following are some of them.

 Review and appraise internal control procedure

 Ascertain effectiveness and efficiency of operation
 Evaluate quality of performance in carrying out assigned responsibility
 Recommend improvement in better management control
The internal auditor can perform the work through either functional approach, operational
approach or financial approach. (Kinfo and bayou, 2003)
2.1.6. Historical evaluation of internal auditing

The historical development of internal auditing is closely tield with the advancement in internal
accounting and reporting mechanism for better management decision making. this gives away to
the growth and development of management accounting. internal auditing thus come to either

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financial or non financial operation in nature, pre or post audit partial or post complete audit,
investigation or spot check (Kifo and bayou, 2009)

2.1.7. Role of internal auditing

According to Hermanson and Rittenbug (2003) internal auditors have the following roles

 Risk assessment
 Providing assurance regarding controls
 Compliance
 Consulting and operation
2.1.8. Types of internal audit

2.1.8.1. Compliance audit

As Hermanson, ( 2003 ) staffed compliance audit is conducted to determine whether the audits
are following specific procedure, rules or regulation set by some higher authority. the following
are examples of compliance audit for private business.

 Determine whether accounting personnel is following the procedure prescribed by the

company controller.

 Examine contractual agreement with bankers and other lenders to be sure that the
company is complying with legal requirements. results of compliance are typically
reported to management rather than outsiders, because management is primarily group
concerned with the extent of compliance with prescribed procedures and regulations.

 The fore, a significant portion of work of this type is often done by the auditors employed
by the organization units.

2.1.8.2. Financial statement audits

A financial statement audit is conducted to determine whether the financial statements ( the
information being verified) are stated in accordance with specified criteria. normally, the
criteria’s are international accounting standards although auditors may conduct audits of
financial statement prepared using the cash basis or some other basis accounting appropriate for

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the organization in determining whether financial statement are fairly stated in accordance with
accounting standards. the auditors gather evidence to determine whether the statement contain
material error or other miss-statement as business increase in complexity. no longer for auditors
sufficient to focus only on accounting transaction. an integrant approach to auditing considers
both risk of misstatement and operating controls intend to prevent misstatement. (Arna etal,
2012).

2.1.8.3. Operational audit

Operational audit deals with efficiency and effectiveness of an organization's operation. other
auditors use the term of management auditing or performance auditing instead of operational
auditing.

refering to those activities , while others do not distinguish among the terms performance
auditing, management audit and operational audits are used by them inter changeably.
Effectiveness results to meeting objectives such as; producing parts without defects efficiency
refers to determining the resources used to achieve those objectives such as determining whether
parts are produced at a minimum cost. Efficiency is defined as reducing cost without reducing
effectiveness. (Richiute and David, 2003)

The purpose of operational auditing of internal control is to evaluate efficiency and effectiveness.
The scope of operational auditing concerns any control affect effectiveness of internal control
over financial reporting and it effect on the fair presentation of financial statement (Richiute and
David, 2003).

2.1.8.4. Functional audits

A functional audit deals with one or more functions in the organization concerning efficiency
and effectiveness of functions for division or for the company as a whole. (Kinfo&bayou,2009).

2.1.8.5. Organizational audits

An organizational audit emphasizes how efficiently and effectively functions interact the planed
organization and the methods coordinate activities are important in the type of audit. (kinfo and
Bayou,2009)

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 2.1.9. Role and image of internal auditing

The role and image of internal audit has been very thorny to say the least in many respects.
Internal audit is a service to management and the internal auditor has been described as the ears
of management. The caution is needed not to project a negative image of spy or detective
function. Internal auditors as an employee of the organization must find acceptable by colleagues
and established good working relationship but it is also expected to maintain certain degree of
independency. (Kinfo &bayou, 2009)

2.10. Internal audit report

According to kinfo and bayou (2009), the end product of any audit work culminates in writing of
audit report. but un like external auditors report, the internal auditors report is not standardized
short term in its nature ( content). Audit report of internal auditors requires a lot of imagination
and creatively with communicative ability in its writing. the audit report should basically contain
the following.

 Details of purpose and scope of audit work

 Description of tools and audit procedure
 Finding, suggestions, opinion and recommendation.

2.11. Internal control

Internal control consists of policies and procedures designed to provide management, with
reasonable assurance, that the company achieves its objectives and goals. management typically
has three broads objectives in designing an effective internal control system , reliability, of
financial reporting, efficiency and effectiveness of operation and compliance with law and
regulation. (Arenas etal, 2012)

Management of internal audit department, performance of audit work and report significantly
affects internal control system. the internal control system play an important role in the internal
auditing practice since internal auditors might be considered as being specialists in management
control. the role of internal auditing is review of effectiveness of the system of internal control is
to ascertain whether the system is functioning as intended.

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Effective control is present when the administrative management directs the system so such a
way as to provide reasonable assurance that the organizations objectives and goals will be
achieved. The purpose of the review for the quality of performance is to ascertain whether the
organization objective and goals have been achieved. (Arenas et al, 2012)

The primary objective of any organization system of internal control is to provide administrative
management with reasonable that financial information is accurate and reliable. The organization
complies with the policies, plans, procedures laws, regulations and contracts assets and safe
guarded against lose and theft.

Resources are used economically and efficiently and established objectives and goals for
operation or programs can be met internal auditing focuses and evaluation of this system as
frame work of internal control.

The objective of internal auditing is to assist all members of management in effective discharge
of chair responsibility by furnishing them with analysis, effective internal control system,
reliability of financial reporting , efficiency and effectiveness of operation and compliance with
law and regulation. (Arenas etal,2012)

2.12. Components of internal control

As arenas et al (2012) internal control includes five categories of control that management design
and implement to provide reasonable assurance that management control objectives met these
are;-

 Control environment
 Risk assessment
 Control activities
 Information and communication
 Monitoring
2.12.1. Control environment

As arenas et at (2012), the service as the umbrella for the other four components of actions,
policies and procedures that reflect overall attitudes of top management, directors and owners of

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the entry about internal control and its important to the entity about internal control and its
importance to the entity it has sub components of;-

 Integrity and ethical values of directors and owners of an entity

 Commitment to competent internal and its important
 Board of directors and audit committee participation
 Management philosophy and operating style ‘
 Organization structure
 Human resource policies and practices.
2.12.2. Risk assessment

As areans et al (2012) for financial reporting, management identification and analysis of risk
relevant to the preparation of financial statement in conformity with appropriate accounting
standards. management's identification and analysis of risk assessment procedures are;-

 Identify factors affecting risk assessment

 Assess significance of risk and likely hood of occurrence accounting frame work. such
as; GAAP or IFNS
 Determine actions necessary to manage risks.
2.12.3. Control activities

As Arenas et al (2012); Control activities are policies and procedures in addition to those
included in the other four control components that help to ensure actions are taken to address the
achievement of the entities objectives. there are potentially many such control activities in any
entity including both manual and automated controls. The control activities generally fall in to
the following five types.

 Adequate separation of duties

 Proper authorization transactional and activities
 Adequate documents and records
 Physical control over assets and records
 Independent checks on performance.

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 2.12.4. Information and communication

As Arenas et al (2012), information and communication initiate records, process and reports the
entity transaction and to maintain accountability for the related assets. these are transaction
related audit objectives that must be satisfied;-

 Occurrence maintains accountability for related assets

 Completeness
 Accuracy
 Posting and summarization
 Classification
 Timing
2.12.5. Monitoring

Monitoring deals with ongoing or periodic assessment of the quality of internal control
management to determine that control are operating as intended and that they are modified
appropriate for change in conditions monitoring management is not applicable assessment the
quality of internal control performance to determine whether control are operating intended and
is modified when needed (Arenas et. al 2012).

2.13 internal audit effectiveness

Internal audit is effective if it provides the required service from the functions or in other words
it achieves the objective of the function. (Ditten hoffer, 2001) as Barnet (1986), noted the
effectiveness of internal audit can be difficult to quantify. Thus; effectiveness is determined the
perception of audits. Internal audit is effective when it meets the intended outcome and is
supposed to bring about audit effective quality service. There are four potential facts influencing
effectiveness of internal audit these are;-

 Internal audit quality

 Management support
 Organization setting and
 Audit attributes

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 2.13.1. Internal audit quality

Internal audit quality which is demonstrated by the offices capability to provide useful audit
finding and recommendation is one of the most prominent factors on which audit effectiveness is
achieved. The performance standard of the IIA requires that auditor to post and perform the work
such as he/she should be to arrive at useful audit finding and forward recommendation for
improvement. The office ability to properly plan, perform and communicate the result of audit is
proxy for audit quality.

Therefore, audit quality is arguable function of extensive staff expertise reasonableness of the
scope of the service, effect of planning, execution and communication of internal audits (Mihret
&Yismaw, 2007).

2.13.1.1. Staff expertise

The IIA’S standard (1010) on proficiency of the auditor require that the internal auditors possess
the knowledge, skill and other competencies needed to perform their responsibility internal
auditors experience knowledge, and education are the most valuable to management. (Boarad,
2000).

2.13.1.2. Scope of the service

This refers to involvement in different range of activities (Bourad, 2000).

2.13.1.3. Planning

Planning is generally considered as a vital audit activity and it includes preparing strategic plan,
annual plan and program, for individual audit assignments the operational standard number 500
of internal audit standard of the government of Ethiopia, dealing with the planning aspects of
internal audit , requires the preparation of strategic plan , usually five years plan, periodic or
annual plan, and plan for individual audit assignments. an annual plan prepared as subject of
strategic plan would have been more useful an effective internal audit function requires the head
of the internal audit office to periodically report to senior management on the internal audit
activity purpose, authority, responsibility and performance relative to its plan. (Bourad, 2000)

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 2.13.1.4. Field work and quality review

Field work involves performing the task identified in the audit program to collect evidence for
assessment of the audits current operation considering the identified criteria. the field work
should be recorded in audit working papers in a consistent and standardized manner. proper
planning enables accomplishment of large number of audit in a given period by improving
efficiency.

2.13.1.5 Audit communication

Through audit communication takes place throughout the period of field work written audit
report is issued up on completion of audits the auditors hold on exist conference with the audit to
discuss the audit finding in the draft audit report internal auditors should undertake following up
on the implementation of audit recommendations (Bourad 2000).

2.13.2. Management support

Management support is one of the two most important factors (the other being internal audit
quality ) influence the audit effectiveness there should be a response to audit finding
commitment to strength internal audit this positively reflects an audit quality and enhance audit
effectiveness, the management’s commitment to implement audit recommendation improves
audit effectiveness. (Dhumbe et al 2004)

2.13.3. Organization setting

Organization setting includes the states of internal audit in the organization structures, probity of
audit office internal organization, budgetary status of the internal audit office and the existence
of sound established criteria to evaluate audits practice (Hayes ,19990).

2.13.3.1. Organization status and internal organization

The internal audit function of organization should be given a sufficiently high status in
organization structure to enable better communication with senior management and be ensure
independency of internal audit from the audits independency of the audit from the audit is a
paramount value in provides effective internal control audit service to management for efforts

14
and atmosphere of objective and uninhibited appraisal and reporting of finding without influence
from the units auditing (Hayes et. 1999).

Proper internal organization is also a vital achieve audit effectiveness in auditing independence
of individual auditors could be achieved by auditor rotation and assigning auditors to
engagement with which they executive or other relationship that are deemed to compromise
objectivity (Hayes et, 1999).

2.13.3.2. Organization policies and procedures

In order to make internal auditing effective there should exist clear policies and procedures
against which organizational practices are to be gauged also the result of internal audit service
helps to improve those policies and procedures and these improves internal audit effectiveness
(Hayes 1999).

2.13.4. Audit attributes

To achieve effective audit work, the auditors required to have full and un restricted access to all
activities record and properties and provided with cooperation from the audited the capability of
the audit to meet their objectives also reflects on audit quality (Mihret and Yismaw, 2007).

The concept of internal audit effective nest possess direct relevance to value added internal
audit. because the former serves as a measure of the later, as internal audit might be an indication
have of value added, the lower effectiveness of internal audit might be an indication of low
value added internal audit effectiveness and value added internal audit are positively associated.
(Mihret, 2008).

2.14. Audit planning

As Arenas et at (2012) the first generally accepted auditing standard of field work requires
adequate none of the work and most be properly supervisor any assistants. There to obtain
sufficient appropriate evidence for the circumstances to help keep audit costs reasonable and to
avoid misunderstanding with clients.

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Planning an audit and designing an audit approach ;-
 Get materiality and assess acceptable audit risk and inheret risk
 Understanding internal control and internal control risk
 Develop overall audit plan and audit program
 Gather information to assess fraud risk
 Accept client and perform initial audit planning
 Perform preliminary analysis procedures
 Assess client business risk
 Understand the client business and industry

2.15. Objectives of conducting an audit of financial statements

The purpose of an audit is to provide financial statement users with an opinion by the auditor on
whether the financial statement is presented fairly, in all material respects in accordance with
applicable financial accounting frame work 9Arens et al, 2006).

2.15.1. Management responsibility

The management responsibility for adapting sound accounting of policies maintain adequate
internal control and making fair representation in the financial statement rest with management
rather than with the auditor knows more about the company’s transaction and related assets
liability and equity than the auditor, in contrast the auditors knowledge those matters and internal
control is limited to that acquired during the audit (Arenas et, 2006).

The annual reports of many public companies include a statement about management
responsibilities and relationship with CPA firm. Management responsibility for the interpret and
fairness of representation (assertions) in the financial statements carries with it. Privilege of
determining which presentation and discuss it considers necessary .management insists of
financial statements disclosure that the auditor find an acceptable and opinion the auditor can
either issues an adverse or qualified opinion or with draw from his engagement (Arena et al,
2006).

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 2.15.2 Auditors responsibility

As arenas et at (2006) the overall objectives of auditors are;-

 To obtain reasonable assurance about whether the financial statement as a whole and free
from material misstatement , whether due to fraud or error, thereby enabling the auditors
to express an opinion whether the financial statement are prepared with all material
respects, in accordance with an applicable financial reporting frame work and;
 To report on the financial statement and communicate as required by audit standards in
accordance with the auditors.
2.15.2.1. Auditors responsibilities for detecting material error

Auditors spend a great portion of their time by planning and perform audit to detect un
international mistakes made by management and employees auditors fined a variety of errors
resulting from such things as mistakes in calculations , omissions, and misunderstanding and
misapplication of accounting standard, incorrect summarization and descriptions. auditors
responsibility for detecting material Fraud audit standard make no distinction between the
auditors responsibilities for searching for errors and fraud in either case the auditor must obtain
reasonable assurance about whether the statement are free of material misstatement. the
standards also recognize that fraud is often canceling the fraud, the difficulty of detection doesn’t
change the auditors responsibilities to properly plan and perform the audit to detect material
misstatements , whether caused by error or fraud (Arena elala 2006).

2.16 Empirical frame work

Empirical review is derived from or relating to experiment and observation rather than theory
and the researcher review research work an internal audit practice as a source of empirical
review.
According to Arenas (1997) internal control can never be regard as completely effective
regardless of the care in their design and implementation, even if the system personnel could
design an ideal system its effectiveness depends on the competence and dependability of the
people using it.

According to chamber (1992) internal control can be defined as the process through which can
an entity attempt to minimize the like hood of accounting related error irregularities and illegal

17
acts internal control is a process effected by an entity’s board of directors managements and
other personnel designed to provide reasonable assurance;-
 Effectiveness and efficient of operation
 Compliance with applicable law and regulation
According to chamber (1992), the best set of qualities of internal auditors may no avail in the
obscene an understanding of the polices and culture of the organization the clarity of their role is
imperative in ensuring their effectiveness.

Hermanson et al (2003), review internal audit related problem that were reveled provide specific
recommendation for building an effective value adding internal related problem is interrupted as
a sign of effectiveness’ this being primary concern of the board and top management in the after
math of the bankrupted internal audit make a difference when it was effective in the area.

Modern internal audit has been constructed up on the three E’s, at effectiveness and economy
(Riddly, 2008) and view effectiveness as doing the right thing efficiency, means doing them well
and economy means them cheaply.

Academic research an internal auditing effective point out that support for self-management is
essential in practice as Sah and bunnies (2011) show the most common employed measure of
internal audit effectiveness related to its efficiency acceptance and adoption of internal audit
recommendation it stresses the crucial skill of internal auditor being able to speak especially in
controversial situation.

As Getie and Wondim (2007) research work was an internal audit effectiveness in large pul
sector high education institution in Ethiopia, the finding of the study high lights the internal audit
effectiveness is strongly influenced by internal audit quality and the management support.

Mihret et al 2008, research work an antecedents and organizational performance on internal audit
effectiveness stated. The purpose of this paper is to synthesize, relevant theoretical and empirical
literature to develop proposition and suggest a research agenda on antecedent and organization
performance implication of internal audit effectiveness. the report originality argument that a
positive association between compliance with standards for the professional practice of internal
auditors and organizational goal achievement could serve as an approach assess internal audit
effectiveness.

18
 CHAPTER THREE

3. RESEARCH METHODOLOGY

In this chapter, detailed methodology, showing that the research design target population
sampling technique, sample size, type and source of data and data collection method was
presented respectively.

3.1. Research design

The research design employed in this study was descriptive type of research design.

Descriptive type of research design is a type of research design which directly describes the
situation of some specific process. (Gorge Morales, 2014) and it was employed in this research
in order to describe internal auditing practice of finance and economic development office of
Adama town analytically.

3.2. Target population

This research was conducted to assess the internal audit practices of finance and economic
development office of Adama town. in the organization there are a total employees of 64. from
these 41 of them are employed in auditing and payment and accounting departments and those
41 employees become the target population of the study.

3.3. Sampling techniques

Sampling is the process of choosing sample from a large population which used to make
generalized statement. (Leedey, 1998)

The method of sampling technique used in this study was judgmental type of non probability
sampling and census. Judgmental sampling technique was selected to take samples from
payment and accounting department. This technique was selected in order to get a better and
accurate data from those employees who are professional in the field of the study. Census was
selected due to the small number of audit department employees and to take all of them as a
sample.

19
3.4. Sample size

Adama finance and economic development office has 41 employees in auditing and payment and
accounting departments. To this research project the researcher takes 14/35 from payment and
accounting (40%) of them and 6/6 from auditing department. (100/% of them ) which constitute
a total of 20 samples was selected judgmentally and censuses.

3.5. Type and source of data

The researcher uses both primary and secondary sources of data in order to get realistic data. The
primary data was collected from the company’s management, auditing payment and accounting
departments by using unstructured interview and questionnaires.

And the secondary data was obtained from information pertaining to the company and its internal
auditing practice, from the company’s manual and reports, books and other various valuable
materials.

3.6 Method of data collection

The required data for the research was collected by using both open ended and closed ended
questionnaires and unstructured interview.

3.7. Methods of data analysis

The collected data was tabulated, organized, analyzed and interpreted to draw sound conclusion
and valid generalization. And to do these the researcher uses both qualitative and quantitative
methods of data analysis. Quantitative data analysis was used in order to discover inherent facts
and explore new facts.

Qualitative data analysis was used to provide depth and detail answers o research questions
through direct quotation and full description to explore new facts or to re-interpret already
known existing facts.

20
 CHAPTER FOUR

4. DATA ANALYSIS AND INTERPRETATION

The data obtained from the various categories of respondents with the help of chosen instruments
would be presented and discussed in this chapter.

The main target population of this study was employees of the company who works in the
departments of auditing, payment and accounting. the necessary data was obtained from the
target population through questionnaires and unstructured interview.

From the total distributed questionnaires of 20,to employees of finance and economic
development office of Adama town, that have direct relation with finance and auditing 16 of
them filed and returned.

Even those the total number of the samples didn’t filed and returned the questionnaires, the
method used to collect the data enables the researcher to got the reliable information on the study
area.

Table 4:1 Back ground of Respondents

Respondents
No. item Item Description Number Percent%
1 Sex Mal 12 75%
Female 4 25%
Total 16 100%
Diploma 0 0%
2 Degree 16 100%
Education status MA .degree 0 0%
Other 0 0%
Total 16 100%
3 < 1 year 0 0%
Years of experience in the 1-5 years 4 25.0 %
organization 6-10 years 4 25 %
> 10 years 8 50 %
Total 16 100%
Source; questionnaires 2016

21
As it is shown on the above abele 4.1 ; most of the respondents 12(75%) of them are males and
the remaining 4(25%)are females. from the above table one can understood that most of the
company's internal auditing practices are performed by males than females.

As indicated on the above table (table,4.1) none of the respondents are above and below degree
level that is 16(100%) of the respondent are degree holders. from this one can under stood that
the company’s internal auditing practice is performed by degree holders.

From the total respondents; (table,4.1): 8(50%) of employees had a work experience of greater
than 10 years, 4(25%) of them had an experience of 6-10 years and 4(25%) of the employees
have an experience of 1-5 years . Therefore most employees are experienced more than 5 years.
the company had good potential to improve its performance. Because it has well experienced
employees

B. Evaluation of Internal audit practice

To measure the auditor’s ability to properly plan, perform and communicate audit results, the
researcher raised the following two questions.

Table 4:2 Auditors capability to audit

Description Item Respondents response
Frequency Percent
(number) (%)
Does the company auditors arrive at a useful Yes 6 37.5%
finding and forwards recommendation for
NO 10 62.5%
improvement?
Total 16 100%
Do the auditors have the ability to property Yes 9 56.25 %
plan, perform and communicate audit results?
NO 7 43.75%
Total 16 100%
Source; questionnaires 2016
According to the employees response shown in the above table ‘4.2’ 6 (37.5%) of them replied
that auditors in the company arrives at a useful finding and forward recommendation for
improvement. And 62.5 % (10) of the respondents replied that auditors in the company doesn’t
arrive at useful finding and forward recommendation due to the reason that most of the

22
employees empowered only by experience. That is from lower position to auditing randomly
only by attending in distance and private colleagues. And this leads low quality of audit
inspection in the company.

From table ‘4.2’ above we can also look that 9(56.25%) of the respondents replied that internal
auditors of the company have the capability to proper plan perform and communicate audit
results but 7(43.75) of them responded that due to the auditors in proper position. they have not
the ability to properly plan ,perform and communicate audit results.

From this as the raised questions are the measures of internal auditors capability to audit, the
researcher under stood that the company auditors haven’t enough capability to audit because of
their improper position.

Table 4:3Audit planning in the company

Description Item Respondents response
Number Percent %
Dose the company Yes 16 100%
prepare strategic No 0 0
Adult plan? Total 16 100%
Dose the company Yes 16 100%
prepare periodic
(annual) audit plan? No 0 0

Total 16 100%
Dose the company Yes 16 100%
prepare plan for
individual audit No 0 0
assignments
Total 16 100%
Source; questionnaires 2016

According to table 4.3 above: 16(100%)of the respondents replied that the internal audit
department prepares all the three types of audit planning. Which are; strategic, annual and plan
for individual adult assignments? As result the researcher understands that the organization had a
good internal audit quality interim of planning. Since audit plan is a vital activity for
effectiveness of internal auditing practice which can add value of the organization.

Table 4: 4 Segregation of duties in the company

23
Description Item Respondents response
Is proper segregation of duties in the company for Yes 16 100%
the activation of
- Record keeping No 0 0
-payment and receipt
-financial statement
-preparation and
-audit purchase and budget?

Total 16 100%
Source; questionnaires 2016

As shown on the above table ‘4.4’ 16(100%) of the respondent replied that there is a proper
segregation of duties in the company. according to the respondents, internal control in the
organization is good since the segregation of duties enable to check and balance. That is no one
handles all aspects of transaction from beginning to end. In case the practice of internal audit of
the organization is good hence it had good internal control.

Table 4: 5 The organization internal control over financial reporting

Description Item Respondents response
Number Percent %
Does the organization provide assurance that maintains Yes 10 62.5%
records in reasonable detail, accuracy, and fairly reflect
transaction and disposition of assets? No 6 37.5%
total 16 100%
Does it provide assurance that transactions are recorded yes 12 75%
and financial statements are prepared in accordance with
no 4 25%
the reporting frame work?
total 16 100%
Does it provide reasonable assurance regarding prevention, Yes 5 32.25%
or timely detection, and correction of un authorized
No 11 68.75%
acquisition, use or disposition of the entity’s assets that
could have a material effect on the financial statement?
Total 16 100%
Source; questionnaires 2016

24
As shown on the above table (table 4.5), the researcher raised 3 questions to sample of the
research which are the measure of the organization’s internal control system over financial
reporting.

The respondent 10(62.5%) responses that the organization maintains records in reasonable
detail, accuracy and fairly reflects transaction and disposition of assets of the entity . whereas the
rest 6(37.5%) of them responded that the organization doesn’t maintain records in reasonable
detail, accuracy due to the reason that no better use of new technology and proper follow up
procedures.

According to the second question (table 4.5): most of the respondents 12(75%) replied that the
organization provides assurance that transactions are recorded and financial statements are
prepared in accordance with the reporting frame work .and the rest 4(25%)of the respondents
revealed that the organization doesn’t provide assurance that transaction are recorded and
financial statement are prepared in accordance with the reporting frame work.

According to table 4.5 (question three): most of the respondent 11(68.75) responds that the
organization doesn’t provide reasonable assurance regarding of prevention, or timely detection
and correction of unauthorized acquisition, use or disposition of the entity’s assets that could
have a material effect on the financial statements. And the reason behind is that the work load on
individual work unit and no better use of new technology.

As all the above three question are measures of the organization’s internal control over financial
reporting the researcher under stood that the organization internal control over financial reporting
is medium ,based on the respondents response. As a result: internal auditing practice of the
organization is medium which is not effective, since internal audit practice significantly affects
the organization’s internal control over financial reporting system.

25
Table 4:6 Internal auditor’s quality
Description Item Respondents response
Number Percent%
Do internal auditors conduct internal control yes 16 100%
training? No 0 0
Total 16 100%
Do they provide advice to management about yes 14 87.5%
No 2 12.5%
control concerns in new system?
Total 16 100%
Dose the company auditors involve in the yes 3 18.75%
activity of drafting policies? No 13 81.25%
Total 16 100%
Source; questionnaire 2016

In the above table ‘4.6’; the researcher raises three types of activities that a capable auditor
should participate or involve in consulting activities. Most of the respondents (all of the
respondents) replied that the company auditors involve in the activities of conducting internal
control training and most of them 14(87.5) responds that the company auditors provide advice to
management about the control concerns in new system. but the rest 2(12.5%) of them revealed
that the company auditors didn’t involve in providing advice to the management about the
control concerns in new system due to the individual auditors work load and in effectiveness.

According to the above table ‘4.6’ most of the respondents replied that the company auditors
doesn’t involve in the activities of drafting policies. Because finance and economic development
offices are one of the public organizations; most of the time drafting policies exists at bureau of
finance and economic development at the woreda level.

Based on the data on the above table the researcher understands that Adama finance and
economic development office auditors involve in consulting activities which they must
participate in and this is essential to the organization effectiveness of auditing practice and can
also add value to the organization.

Table 4:7 Internal auditor’s quality

Description Item Respondents response

26
 Number Percent%
Do the company auditors involve in the following Yes 15 93.75%
types of audit?
- financial statement audit No 1 6.25%
- operational audit
- Compliance audit
16 100%
Source; questionnaire 2016

As shown in the above table ‘4.7’ most of the respondents 15(93.75%)are agreed or responds
that the company auditory involve or performs the three types of audits which are; financial
statement audit, operational audit and compliance audit. from the total respondent 1(6.25%) of
them responds that the company auditors doesn’t involve in the three types of audits.. due to the
reason that the work load of individual audits they didn’t much in operational audit of the
company.

As the response of the respondents; the company auditors’ scope of activity is appreciable. It
makes the internal auditing practice of the organization good. Because they performs all the
necessary types of audit

Table 4: 8 Independence and objectivity of internal auditors

Description Item Respondents response
Does internal auditors free from number Percent%
personal and external impairments? Yes 16 100%
No 0 0
Total 16 100%
Doses the company auditor’s Yes 10 62.5%
independent in fact and appearance?
No 6 37.5%
Total 16 100%
Doesn’t they subordinate their Yes 16 100%
judgment on audit matters to others? No 0 0
Total 16 100%
Source; questionnaires 2016

To become objective and independent, an auditor should posses the following characteristics:
Auditors should free from personal and external imperilments, independent in fact and
appearance and they should not subordinate their Judgment on audit matters to others.

27
Based on these measurements, the researcher measures the company auditor’s objectivity and
independence by raising the measurement criteria as a question to the respondents.

According to the above table 4.8; all of the respondents replied that 16(100%) of them. internal
auditors are free from personal and external impairments and 10(62.5%) of them also responds
that the company auditors are independent in fact and appearance, but 6(37.5%) of them
responds that Adama finance and economic development office auditors are independent in fact.
But they are not independent in appearance. And the reason is that due to working environment
condition and the company employees’ relationship. And for the third (3) raised question; all of
the respondents 16(100%) agrees that the company auditors didn’t subordinate their judgment on
audit matters to others.

From these the researcher understands that in Adama finance and economic development office
internal auditors are independent and objective; and the auditors objectivity and independence is
essential to the effectiveness of internal auditors function which adds value to the organization

Table 4: 9 Compliance with policies and procedures

Description Respondents response
Does the company follow budget preparation policies and
procedures applied to the public sector? Number Percent%
Yes 10 62.5%
No 6 37.5%
Total 16 100%
Does the organization follow purchasing policy which is Yes 9 56.25%
applied in the public sector?
No 7 43.75%
Total 16 100%
Dose the company applies information disclosure policy? Yes 15 93.75%
No 1 6.25%
Total 16 100%
Dose the organization follow personnel utilization policy? Yes 16 100%
No 0 0
Total 16 100%
Source; questionnaire 2016

As shown on the above table ‘4.9’ the researcher raises a list of policies and procedures that are
applied in the public sector. and most of the respondent respond that Adama finance and
economic development office applies the following policies and procedures, budget preparation,
purchasing ,information disclosure policy and personnel utilization policy with the respectively
28
10(62.5%), 9(56.25%),15(93.75%) and 16(100%). And the rest of the respondents didn’t agree
and the reason is that all of the procedures and policies are not applied in the organization due to
time and work load of the employees.

From the respondents; the researcher understands that Adama finance and economic
development office follows policies and procedures or the organization performs its activities in
compliance with policies and procedures and this activity leads or adds value to the internal audit
practice effectiveness.

Table 4: 10 Responsibly of auditors to detect misstatements

Description Respondents Response
Item Number percent
Do the company auditors verify financial statements yes 16 100%
assertion when misstatements exist by Appling the
following methods?
 By comparing information on the received
report to the purchase journal No 0
 By comparing recorded in the purchase
journal to supporting evidence such as paid
checks
 By comparing the general ledger account
cash in bank with the bank statement.
Total 16 100%
Source; questionnaires 2016

On the above table ‘4.10’, all the respondents 16(100%)replied that internal auditors verify
financial statement assertions when misstatement exists since the auditors are required to prepare
audit reports and they are taking responsibilities for the report they made ,they certify financial
statement assertion by comparing the information on the received report to the purchase journals,
comparing recorded purchase transaction in the purchase journal to supporting evidence such as,
paid checks and re concealing the general ledger account cash in bank with the bank statement.

Table 4: 11Internal audit department’s follow up procedures

Description Item Respondent response
Number Percent%
Does the company identify the required performance Yes 11 68.75%
level? No 5 31.25%
total 16 100%

29
 Dose the company determine whether or not performance Yes 12 75%
deficiencies exist?
No 4 25%
total 16 100%
Dose it classify performance deficiencies? Yes 9 56.25%
No 7 43.75%
total 16 100%
Dose it develop corrective action plan? Yes 16 100%
No 0 0
total 16 100%
Dose the organization evaluated the success of corrective Yes 10 62.5%
action ?
No 6 37.5%
total 16 100%
Source; questionnaires 2016

In any organization internal audit departments should follow the following procedures to insure
whether corrective action is taken as per recommendation; such as;

- identify the required performance level

- determine whether or not performance deficiencies exist

-Classify performance deficiencies

-develop corrective action plan and

-evaluate the success of corrective action.

As shown on the above table’4.11 Adama finance and economic development office follows the
listed procedures as most of the respondent replied.

The respondents percentage with respectively to the order of the procedures as most are
11(68.75%), 12(75%), 9(56.25%), 16(100%), 10(62.5%). and the rest responds that Adama
finance and economic development office internal audit departments doesn’t follow all the
procedures listed on the above. According to the result of unstructured interview; the reason that
the auditors do not follow all the listed procedures is due to that the recurring nature of the work
and negligence of employees.

As major of the respondent signified; the internal audit department Adama finance and economic
development office has formal follow up procedures that could help in some extent to enhance
the quality of audit. for this reason the internal audit of the organization follow up procedures is

30
good since it has some extent of good management support and this can improve the
effectiveness of internal audit practice.

Table 4:12 Audit performance of the organization

Description Item Respondents response
Number Percent%
How the past three years audit performance as compared Excellent 1 6.25%
to current year in terms of the following criteria?
Good 11 68.75%
- Staff experience
Satisfactory 3 18.75%
- percentage of audit recommendation
Poor 1 6.25%
- auditors education level
Total 16 100%
Source; questionnaires 2016

As shown on the above table ’ 4.12’ 1(6.25%), 11(68.25%), 3(18.75%) and 1(6.25%)of the
respondent replied that the audit performance of the last three(3) years when compared to the
current year was excellent ,good, satisfactory and poor respectively with the percentages. As a
result audit result of the last three years as compared to the current year was good and this
implies or indicates the current year performance of the organization.

Table 4:13 Preparation of audit report

Description Item Respondent
Number Percent%

monthly 5 31.25%
For how long the finance and economic development quarterly 10 62.5%
semiannually 1 6.25%
office prepare audit report?

annually 0 0
Total 100%
Source; questionnaires 2016
As indicated on the above table ‘4.13’ the office of finance and economic development. In
Adama town prepares audit report monthly, quarterly and semi annually with the respondent
responses percentage as the following respectively 5(31.25%), 10(62.5%),10(62.5%) and
1(6.25%).

31
Thus most respondents clearly stated that audit report is prepared on quarterly basis monthly and
quarterly basis of audit reports are advisable and improved effectiveness of internal control. And
this improves effectiveness of internal audit practice.

Table 4:14 Financial analyses in internal audit practice

Description Item Respondent response
How the organizations make financial -by using comparative 12 75%
analysis in order to assist internal analysis method
auditing practice? -by ratio analysis method 2 12.5%
-by trend analysis 2 12.5%
method
Total 16 100%
Source; Questionnaires 2016

From the above table ‘4.14’ 12(75%) of the respondents replied that Adama finance and
economic development office make financial analysis by using comparative method of analysis
and 2(12.5%)of the respondent replayed that the organization uses ratio analysis method. and the
rest 2(12.25%) replied that the organization uses trend analysis method.

From these the researcher understands that Adama finance and economic development office
makes financial analysis by using comparative financial analysis method. As comparative
method of financial analysis an effective method; it will assist the internal audit practice
effectiveness.

From the above table ‘4.14’ 12(75%) of the respondents replied that Adama finance and
economic development office make financial analysis by using comparative method of analysis
and 2(12.5%)of the respondent replayed that the organization uses ratio analysis method. and the
rest 2(12.25%) replied that the organization uses trend analysis method.

From these the researcher understands that Adama finance and economic development office
makes financial analysis by using comparative financial analysis method. as comparative

Method of financial analysis is an effective method of financial analysis; it will assist the internal
audit practice effectiveness.

32
33
 CHAPTER FIVE

5. CONCLUSION AND RECOMMENDATION

5.1 Conclusions

As known internal auditing is the most important activity within the organization for reviewing
of accounting, financial and other operation (Douglas, 2010). Therefore the main objectives of
the study were to assess the internal audit practice effectiveness and efficiency in finance and
economic development office of Adama town.

Based on the above analysis the following conclusions can be drawn by identifying the problems
of internal auditing practice.

The researcher distributed a well designed questionnaires to those the organization employees
who are selected as sample judgmentally and census. After the questionnaires collected; the
researcher analyzes and interprets the data obtained.

As the result of the finding internal audit practices in the organization is an objective assurance,
independent and participates in the consulting activities designed to add value and improve
organization operations

Therefore it adds value by performing, effective internal auditing in the areas of audit planning,
scope of the audit service, performing the activities in compliance with policies and procedures
maintain segregation of duties, prepare audit report quarterly that is important to determine
effective control and independence of internal auditors.

The organization internal control system over financial reporting and audit quality is medium.
There is no proper follow up (implementing) audit recommendation and this can minimize the
effectiveness of internal audit practices that reduce the ability of add value to the organization. In
addition the organization auditors are not qualified for their position ,work load on individual
auditors due to no better use of new technology ,and this leads the auditors don’t follow up
procedures and minimizes there detail substantive testing.

34
5.2 Recommendation

This study is conducted in order to assess the practice of internal auditing in Adama finance and
economic development office .Based on the findings of the study; the researcher forwards
constructive suggestions and recommendation in the hope of that they would be alleviate and
improve.

 The organization has medium internal audit quality and there is no proper follow up
(implementation) of audit recommendations. this activity minimizes the effectiveness of
internal audit incase reduces the ability to add value for the organization. therefore; the
internal audit practices of the organization needs an improvement in this area for
effective practice of internal audit to add value the organization must heir employees that
are qualified in internal auditing practice, and this will enhance the quality of internal
audit and proper follow up of audit recommendations.
 The internal auditors in the organization are not qualified for their position because of the
rank given for the position of internal audit officers are low, most internal auditors are
accounting graduates in private colleagues most of the time by distance and extension
programs. As a result they didn’t utilize efficiently and effectively the practice of auditing
and this will have an effect on internal audit practice. So, the manager should take a great
concern about internal auditor’s qualification.
 There is no better use of new technology application; and this result in most of the
activities performed manually. This leads increment for the individual auditors work load
and in efficient for proper time utilization.
The organization must consider this problem; because today every work goes with technology
improvement and will increase the effectiveness of the internal audit practice.
To overcome workloads on individual work units and to use work times efficiently; new
technology should be applicable in the organization.
 The organization has less training program in the practice of internal auditing and then
the manager should consider this issue too; and must give training program to the
employees. This improves practices of internal auditing.
The researcher believed that the future studies will be fruitful if they are conducted in the
areas of internal control system and quality of internal audit of the organization.

35
 REFERENCE

 Andrew chamber (1992) internal auditing, 3rd edition, United king dom.
 Arenas et at,(2012), auditing and assurance service ,14th edition United states.
 Ann swayey,(1992), internal auditing ,14th edition, India.
 Arenas et al, (2006), managerial auditing 17th edition .United kigdom.
 Arenas et al (2006) managerial auditing 17th edition , united kigdom
 Johanes kinfu and Ingida Bayou (2009).auditing introduction to principle and
practice.Ethiopia.
 KH speneer (2003),internal auditing hand book, 3rd edition ,India
 Dessalegn Getie and Aderajew Wondim (2007), managerial auditing Jour volum,22
Ethiopia.
 Dhumbe etal (2004), cost auditing and management 3rd edition. India.
 Douglas W.Regalia (2006), financial audit 3rd edition United States.
 G isselle bou-raad(200) managerial auditing Journal, volume 15 , India
 Heramson and rittenburg(2003), the potential of internal auditing 2nd edition. newyork.
 Jeffery Ridiey(2008), cutting edge internal auditing planning,4 th edition United K ing
dom
 Jogannes Kinnfu and Engida Bayou (2009), auditing introduction to principles and
practices, Ethiopia.
 K.H spencer (2003), internal auditing hand book, 3rd edition India.
 Lorry F.konrath (1999), auditing concepts and applications 4th edition, China.
 Mihret and W/Yohannis, (2008) value added role of internal audit, Ethiopia case study
managerial audit 7th edition, Ethiopia.

36
  APENDEX

ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY


 SCHOOL OF BUSINESS AND ECONOMICS
 DEPARTMENT OF ACCOUNTING AND FINANCE
 Questionnaires

 This questionnaire is designed to collected data regarding the application of internal

auditing practice/in case of finance and economic development office in Adama town.

 Your free will and cooperation in providing reliable information is development, since it
helps the researcher to forward professional suggestion.

 The researcher also wants to assure you that the information is to be only to academic
purpose to fulfill a research requirement for BA degree in the field of accounting and
finance.

 Thanks in advance for your invaluable information and cooperation!

 Supporting information
o Don’t write your name
o You simply tick () in the box and write on the space provided
o Us the language that you can clearly express your ideas.
A. Background of respondents

 1. Sex: Male Female

 2. Educational Status: Diploma Degree MA degree

other

 3. Years of experience in the organization: <1 year 1-5 Years 6-10

Years

 >10 years

 B. Evaluation of internal audit practice

 4. To measure internal auditors capability to audit

 a. Does the company auditors arrive at a useful finding and forward recommendation for
improvement? Yes No
  b. Dose the auditor have the ability to properly pan, perform and communicate the results
of audit work? Yes No

 c. If your answer is “No” what is the reason

 5. Audit planning in the company

 a. Does the company prepare strategic/5 years? Plan of audit? Yes

No

 b. Does the company prepare periodic/annual audit plan? Yes

No

 c. Dose the company prepare plan for individual audit assignments? Yes
No

 6. Is proper segregation of duties in the company in the activities of ?

 a. Record keeping and Yes No

 b. Payment and receipt Yes No
 c. Financial statement preparation and audit Yes No
 d. Purchase and budget Yes No

 E. If “No”, what will be reason?

 7. Do the organization internal control over financial reporting contains the following
activities?

 a.Maintenance of records in reasonable detail, accuracy and fairly reflect transactions and
dispositions of assets of the entity Yes No

 b. Provide assurance that transactions are recorded and financial statements are prepared in
accordance with financial reporting framework Yes No

 c. Provide reasonable assurance regarding prevention, or timely detection and correction of

un authorized acquisition, use or disposition of the entity’s assets that could have a material
effect on the financial statements Yes No
  d. If “No” justify your reason?

 8. Does the company auditors involve in the following types of consulting activities?

 a. Conducting internal control training Yes No

 b. Providing advice to management about the control concerns in new systems
 Yes No
 c. in drafting policies Yes No

 d. if “No” what is the reason?

 9. Do the company auditors involve in the following types of audit?

 a. financial statement audit Yes No

 b. Operational audit Yes No
 c. Compliance audit Yes No

 d. If “No”, what is your reason,

 10. Does the company auditors fulfill the following characteristics to become objective and
independence?

 a. free from personal and external impairment Yes No

 b. independent in attitude and appearance Yes No
 c. Do not subordinate their judgment on audit matters to others Yes No

 d. if “No”, what is the reason?

 11. To examine whether the organization follows policies and procedures those applied to the
public sector in Ethiopia

 a. Is the company follows budget preparation policies and procedures?

Yes No

 b. Dose the company follows purchasing policy? Yes

No
  c. Dose the company applies information disclosure policy? Yes
No

 d. Does the organization apply personnel utilization policy? Yes

No

 12. Does the company auditor verify financial statements assertion when misstatement
exists by applying the following methods?

 a. by comparing the information on the received report to the purchase

journal
 Yes No
 b. by comparing recorded in the purchase journal to supporting evidence such as paid
checks
 Yes No
 c. by reconciling the general ledger account cash in bank with the bank statement
 Yes No
 d. If “No”, justify the reason?

 13. To examine internal audit departments follow up procedure to insure whether corrective
actions are taken as per recommendation.

 a. Does the company identify he required performance level? Yes No

 b. Does the company determine whether or not performance deficiencies exist? Yes
No

 c. Does it classify performance deficiencies? Yes No

 d. Does it develop corrective action plan? Yes No

 e. Does the company evaluate the success of corrective action? Yes No

 f. If “No”, what is the reason

 14. How the past three years audit performance as compared to current year in terms of the
following criteria?

 a. staff experience: excellent good satisfactory poor

 b. Percentages of audit recommendation: excellent good satisfactory poor

 c. auditors education level: excellent good satisfactory

poor

 15. For how long the finance and economic development office prepare audit report?

 Monthly quarterly semi-annually

annually

 16. How the companies make financial analysis in order to assist internal auditing
practice?

 a. by using comparative financial statement analysis method

 b. by using ratio analysis method c. by using trend analysis method

 d. by apply all the listed methods

 17. Finally please recommend/comment/ the problems that encounter/affects/ internal

auditing practice in the company