CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Insurance companies in rivers state are increasing by the day, as the

consciousness of uncertainty cloud the minds of Nigerians due to issues

surrounding the economy. Insurance companies confront risk management

primarily used to hedge against the risk of a contingent, uncertain loss. The

auditing of insurance companies should not be cajoled with but should be taken

seriously because they are risk bearers. They manage financial risk therefore their

financial stand should be empirically checked to detect and prevent fraud.

Fraud negatively impacts organizations in many way including financial,

reputation, psychological and social implications. According to various surveys,

monetary

Losses from fraud are significant. However, the full cost of fraud is immeasurable

in terms of time, productivity, and reputation including customer relationships.

Depending on the severity of the loss, organizations can be irreparably harmed

due to the financial impact of fraud activity. Therefore, it is important for

organizations to have a strong fraud program that includes awareness,

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prevention, and detection programs, as well as a fraud risk assessment process to

identify fraud risks within the organization.

An effective internal audit activity can be extremely helpful in addressing fraud.

Although management and the board are ultimately responsible for fraud

deterrence, internal auditors can assist management by determining whether the

organization has adequate internal controls and fosters an adequate control

environment

Coram, Ferguson and Moroney (2008) in their view sees internal audits as

consisting of all the measures taken by the organization for the purpose of;

protecting its resources against waste, fraud and inefficiency; ensuring accuracy

and reliability of accounting and operating data; ensuring compliance with the

policies of the organization; evaluating the level of performance in all

organizational units of the organization.

For internal audit function to be effective as a management tool for internal

control, internal auditors should be at liberty to state their opinions without any

bias or restrictions. Although complete independence is literally impossible

because internal auditors are often organizational employees and not outsiders

(Gay & Simnett 2007), an independent frame of mind is essential and internal

auditors should have the ability to make tough recommendations without fear or

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favour. Sawyer (1988) also argues that internal auditors should be independent in

order to perform their duties and should state their opinions freely without any

bias or restrictions.

Internal audit (IA) departments have become an important part of organizational

structure as value adding service and a very crucial instrument of management

control. The importance of internal audits has been confirmed in a variety of

legislation such as the Sarbanes Oxley Act (2002) in the USA. The recent spate of

corporate collapses and financial scandals has resulted in an increased focus on

internal auditing as an important consideration for organizations. With the global

financial crisis of 2008-2009, internal auditing becomes especially important in

managements toolkit for safeguarding the rate of return on capital and ensuring

that capital is not wasted or devalued.

The Institute of Internal Auditors’ (IIA’s) IPPF defines fraud as:

“Any illegal act characterized by deceit, concealment, or violation of trust. These

acts are not dependent upon the threat of violence or physical force. Frauds are

perpetrated by parties and organizations to obtain money, property, or services;

to avoid payment or loss of services; or to secure personal or business

advantage.”

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Another definition of fraud from the publication “Managing the Business Risk of

Fraud: A Practical Guide,” sponsored by The IIA, the American Institute of

Certified Public Accountants, and the Association of Certified Fraud Examiners

(AICPA), states:

“Fraud is any intentional act or omission designed to deceive others, resulting in

the victim suffering a loss and/or the perpetrator achieving a gain.”

Fraud can occur at various levels in an organization; therefore, it is important to

establish appropriate preventive and detective techniques. Although fraud

prevention and detection are related concepts, they are not the same. Fraud

prevention entails implementing policies and procedures, employee training, and

management communication to educate employees about fraudulent activities.

On the other hand, fraud detection entails activities and programs designed to

identify fraud or misconduct that is occurring or has occurred.

The importance an organization attaches to its internal audit activity is an

indication of the organization’s commitment to effective internal control and

fraud risk management.

The internal auditor’s roles in relation to fraud risk management could include

initial or full investigation of suspected fraud, root cause analysis and control

improvement recommendations, monitoring of a reporting/ whistleblower

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hotline, and providing ethics training sessions. If assigned such duties, internal

auditing has a responsibility to obtain sufficient skills and competencies, including

knowledge of fraud schemes, investigation techniques, and laws.

1.2 STATEMENT OF THE RESEARCH PROBLEM

The incidence of fraud continues to increase across private and public sector

organizations and across nations. Fraud is a universal problem as no nations is

resistant, although developing countries and their various states suffer the most

pain. Today; modern organized financial crimes have appeared. Financial crimes

such as employee theft, payroll frauds, fraudulent billing systems, management

theft, corporate frauds, insurance fraud, embezzlement, bribery, bankruptcy,

security fraud (EFCC, 2004), among others, have taken the Centre stage in the

scheme of things; and on the scale of private, public and governmental

preference.

Nigeria as a nation is deeply soaked in, and characterized by, fraud and its related

corrupt practices. These have had severe negative consequences on the country

and its global image. Fraud and related ills have caused instability in the economy

resulting to a high mortality rate of business organizations and the consequent

losses of revenues.

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Business practices in Nigeria have been equally marred by incredible waves of

fraud, involving misappropriation of funds, cheque forgeries, funds diversion, etc.

As in the society at large, frauds has become one of the most intractable

problems of modern day business in Nigeria. While public concern is growing by

the day and management vigilance improving with the aid of computerization, it

is on record that millions of naira are lost to fraud and forgeries which Stanley

(1994) had argued results in huge financial losses to business organizations and

their customers, depletion of shareholders’ funds and capital base as well as loss

of confidence in businesses.

Nwachukwu (1995), wrote that more money is stolen in or through banks by

means of fraud committed with pen than through other means. Just as the banks

are hit, so also are other business organizations. Fraud may take the form of theft

of inventory assets, misuse of expense account, secret commission and bribery,

false invoicing, electronic and telecommunication fraud, unauthorized use of

information, cheque forgery, false financial statements, and so on, but whichever

form it takes, the fundamental point is that the business organization that falls

victim to fraudulent acts suffers and bears the brunt.

As a result of these backdrops, this study is dedicated to investigate the role of

internal audit in fraud management in insurance companies in Rivers State.

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1.3 AIMS AND OBJECTIVES OF THE STUDY

The main aim of this study is to examine the relationship between internal audit

techniques and fraud management in quoted insurance companies in Rivers

State.

Other specific objectives include;

i. To determine if there is any relationship between the size of the internal

audit and fraud prevention in quoted insurance company.

ii. To ascertain the nature of relationship between the size of the internal

audit and fraud investigation in quoted insurance company.

iii. To examine if there is any relationship between the qualification of the

internal audit and fraud prevention in quoted insurance company.

iv. To find out the nature of relationship between the qualification of the

internal audit on fraud investigation in quoted insurance company.

v. To investigate if there is any relationship between the quality of audit

work on fraud prevention in quoted insurance company.

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 vi. To evaluate the nature of relationship between the quality of audit work

on fraud investigation in quoted insurance company.

1.4 RESEARCH QUESTION

I. To what extent does the size of internal audit relate with fraud

prevention?

II. What is the extent of relationship between the size of internal audit and

fraud investigation?

III. To what extent does the qualification of internal audit relate with fraud

prevention?

IV. Is there any significant relationship between the qualification of internal

audit and fraud investigation?

V. To what extent does the quality of audit work relate with fraud

prevention?

VI. What is the extent of relationship between the quality of audit work and

fraud investigation?

1.5 RESEARCH HYPOTHESIS

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The study attempts to test the following null hypothesis generated from the

problem of study:

Ho1; There is no significant relationship between size of the internal audit and

fraud prevention.

Ho2; The size of the internal audit has no significant impact with fraud

investigation.

Ho3; There is no significant relationship between qualification of the internal

audit and fraud prevention.

Ho4; The qualification of the internal audit has no significant impact with fraud

investigation.

Ho5; There is no significant relationship between the quality of audit work and

fraud prevention.

Ho6; The quality of audit work has no significant impact with fraud investigation.

1.6 SIGNIFICANCE OF THE STUDY

This study would be of great importance to the following;

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1. Management and Staff: It is expected that the findings of this research would

be useful to management and staff in the insurance companies especially the

managers and top level officers whose interest are geared towards the

enhancement of the chances of making great profit and retaining goodwill. It will

assess the effect of fraud, manipulations, errors, improper authorization,

dishonesty; inadequate accounting records etc. on profitability in view of the

existing of internal audit.

2. Academic scholar: The research work will add to the existing body of

knowledge and it will serve as reference materials for further study.

1.7 SCOPE OF THE STUDY

1. Geographical scope: The research work covers internal audit and fraud

management in quoted insurance companies in Rivers State.

2. Content scope: The reviewed literature or journal were those covering

internal audit, fraud prevention, fraud investigation.

3. Unit of analysis: The unit of analysis of this research work are the manager

and staff of the quoted insurance companies in Rivers State.

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 1.8 LIMITATION OF THE STUDY

1. The research work was limited by the fact that it covers just quoted

insurance companies in Rivers State, any inclusion or exclusion in terms

of coverage will alter and produce a different result.

2. The response from Respondent and some of the questionnaires issued

or interview granted was not objective.

1.9 DEFINITION OF TERMS

The researcher at this point believes that some key words and terms that will be

encountered while reading this research work should be defined;

Internal auditor:

An internal auditor is an employee of a company charged with providing

independent and objective evaluations of the company’s financial and operational

business activities, including its corporate governance.

Internal control:

This is the process for assuring achievement of an organization’s objectives in

operational effectiveness and efficiency, reliable financial reporting, and

compliance with laws, regulations and policies.

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Internal audit:

This is an independent objective assurance and consulting activity designed to

add value and improve an organizational operation.

Fraud prevention:

Fraud prevention involves those actions taken to discourage the commission of

fraud and limit fraud exposure when it occurs.

Fraud investigation:

Detective controls are designed to provide warnings or evidence that fraud is

occurring or has occurred. Although detective internal controls may provide

evidence that fraud exists, detective internal controls are not intended to prevent

fraud.

Fraud risk assessment:

The fraud risk assessment is a tool that assists management and internal auditors

in systematically identifying where and how fraud may occur and who may be in a

position to commit fraud

Fraud risk management:

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Fraud risk management is an ongoing process that provides an organization with

the tools to manage fraud risk in a manner consistent with the regulatory

requirement as well as entity’s needs.

1.10 ORGANIZATION OF THE STUDY

This study comprises of five chapters each, dealing with different aspects. Chapter

one highlights the subject matters under consideration; such as

i. Background of the study

ii. Statement of the research problem

iii. Objective of the study

iv. Research questions

v. Statement of hypothesis

vi. Significance of the study

vii. Scope of the study

viii. Limitation of the study

ix. Definition of terms, and the chapter two of this project derives into the

literature review and theoretical framework. Chapter three consists of the

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research methodology. Chapter four consist of the analysis, presentation and the

interpretation of results and chapter five contains the summary, conclusion and

recommendation.

CHAPTER TWO

LITERATURE REVIEW

2.1 THEORETICAL LITERATURE REVIEW

This study was anchored on Fraud Triangle Theory, Fraud Scale Theory, Agency
Theory and Stewardship Theory as discussed:
2.1.1 Fraud Triangle Theory
Fraud Triangle Theory was established by Donald Cressey (1959). The theory
argue that fraud offenders can be categorized into: Independent businessmen, long
term violators, and absconders. Independent businessmen are involved in
borrowing and they keep the funds for themselves, while long term violators are
involved in borrowing to protect family (Ewa, & Udoayang, 2012). The
absconders take the cash and run and they are normally unmarried, antisocial
people who fault outside impacts or individual deformities for their activities.
Pressure is financial, vice and work related while opportunity is in the controls
around the working environment, accounting and procedures. Opportunity also is
affected by performance apprehension because view of location is the best
impediment (Fish, 2012). Shrouded controls don't deflect fraud and the controls

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can't be unsurprising. It is based on this research gaps that this study will be
undertaken to bridge the gap as insurance fraud has continued to exist even with
the existence of previous studies as gathered in this literature review (Gramling,
2004).
2.1.2 Fraud Scale Theory
Fraud Scale Theory was established by Steve Albrecht (1986). The theory suggest
that the nine causes of fraud include: Living past means, overpowering craving for
individual increase, high individual obligation, and close relationship with clients,
pay not equivalent with employment, and wheeler-managing, solid test to beat
framework, inordinate betting and family/peer weight. He built up the fraud scale
which had: Situational weights (Prompt issues with environment and generally
obligations/misfortunes caused by individuals), saw openings (achieved by poor
controls), Individual respectability (which is affected by individual code of
conduct) (Fish, 2012).
2.1.3 Agency Theory
Agency Theory was established by Ross and Stephen (1973). The theory was
founded on the notion that there must be two parties for any contract to be
successful (Adams, 1994). In their case, the employer and employee are the two
parties who represent a firm to attain its long range objectives (Clarke, 1990). The
relationship between the principal (employer) and agent (employee) determines the
performance of any organization in the dynamic business environment. It reveals
how to best make connections in which one social occasion chooses the work
while another get-together makes the fundamental strides (Ewa and Udoayang,
2012). Chen and Container (2012) contend that money related administration is
about hazard, and every speculator gets together with an alternate resilience for
hazard. In an office relationship, odds are high that principals and specialists have
distinctive hazard resistances, which can prompt to mistaken assumptions and an
15
inability to concede to contributing choices. Notwithstanding when operators act
toward principals' objectives, their method for doing as such may struggle with
principal’s hazard resiliences. For instance, in a shareholder-official relationship,
an official may wish to gain battling organizations to accomplish the mutual
objective of expanding piece of the pie at a rebate, yet this arrangement might be
regarded excessively unsafe by a lion's share of shareholders (Cole, 2000). In the
realm of fund, some organization connections are trustee, implying that specialists
are lawfully required to act in light of a legitimate concern for their principals
(Kantarelis, 2007). Trustee obligations formalize an organization relationship and
give more noteworthy security to principals. On account of a money related
organizer who holds influence of lawyer for an individual customer, for instance,
that organizer has the privilege to direct monetary exchanges for the benefit of the
person without his assent or mindfulness. In this case, the monetary organizer is
legitimately required to settle on choices exclusively to the greatest advantage of
his customer, instead of getting things done with his customers' cash basically for
his very own benefit (Ewa & Udoayang, 2012).
2.1.4 Stewardship Theory
Davis et al. (1997), states that a steward takes care shareholder wealth through firm
performance, in light of the route that hence, the steward's utility focuses of
confinement are extended. In this point of view, stewards are administrators
attempting to ensure and make benefits for the shareholders. In this way,
stewardship hypothesis stresses concerning association being as stewards,
combining their objectives as a section of the connection (Spencer, 2007). The
stewardship point of view recommends that stewards are fulfilled and persuaded
when different leveled achievement is refined.
The theory sees the criticalness of association structures that enable the steward
and offers most conspicuous self-lead in light of trust (Donaldson and Davis,
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1995). It weighs on the position of specialist to act all the more self-representing so
that the shareholders' advantages are expanded. When in doubt, this can minimize
the expenses went for checking and controlling representative conduct (Tracy,
2008). Jain and Narang (2009) affirm that keeping in mind the end goal to secure
their reputations for being pioneers in affiliations, directors are inclined to work the
firm to help cash related execution and moreover shareholders' advantages. In this
sense, it is assumed that the affiliation's execution can clearly influence perspective
of their individual execution.

2.2 CONCEPTUAL REVIEW

2.2.1 The Concept of Internal Auditing

The Institute of Internal Auditing (IIA, 1999) presented a broad definition of
internal auditing as; “Internal auditing is an independent, objective assurance and
consulting activity designed to add value and improve an organization’s
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”. The Glossary to the IIA
standards differentiate independent and objectivity concepts as; “Independence:
The freedom from conditions that threaten objectivity or the appearance of
objectivity, such threats to objectivity must be managed at the individual auditor,
engagement, functional and organizational levels.”
Al-Twaijry, Brierley and Gwilliam (2003) explain that there are two benefits in
having an internal audit department within organizations. First, it improves
organizational operations and manages risk. Second, it helps an organization in the
prevention and detection of mistakes or fraud, and the safeguarding of assets.
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However, in recent years the literature indicates that the role of the Internal Audit
(IA) function has changed in response to shifts in global business practices. Such
changes created opportunities for internal audit to provide consulting services to
management and assist boards of directors to manage risk (Mihret, James & Mula
2010). Hass, Abdolmohammadi and Burnaby (2006) reviewed the American IA
literature and established that the literature indicates a paradigm shift in the
activities performed by internal auditors.
Therefore, the Institute of Internal Auditors (2011) now defines internal auditing
as: an independent, objective assurance and consulting activity designed to add
value and improve an organization operation. 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
‘. It can be argued that this definition highlights two important issues. The first one
is that internal auditors should be independent. Secondly, internal auditing is an
appraisal function for the organization ‘s activities to help staff and management in
performing their duties and ensuring adequate internal control. According to this
definition also, internal auditors should play a relevant role in evaluating and
improving the effectiveness of the risk management process. The definition also
presents both assurance and consulting activities as key components of the IA
function.
Goodwin (2004) states that the new definition of internal auditing has shifted its
focus on the IA function to add value by improving the operations of the
organization and by evaluating and improving the effectiveness of the
organization‘s risk management, control and governance processes. Therefore, the
new definition of internal auditing has changed the role of internal auditors to a
value added and consulting function to management.
2.2.2 Internal Auditing Function
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Traditionally, the function of the internal audit is to assess the effectiveness of the
organizations internal control and to report to management on areas of the control
system that needs to be strengthened. Its activities may also cover nonfinancial
areas like compliance with laws and regulation.
However, from existing literature it can be found that the roles of internal auditing
have well been expended over the years. Even from the definition of internal audit,
if can be seen that the role of the internal audit has shifted.
Formally, internal audit could be defined as an independent, appraisal function
which is established within an organization to examine and evaluate its activities as
a service to the organization.
Now IIA has modified its definition of internal auditing. Internal auditing can now
be defined as an independent objective assurance and consulting activity designed
to add value and improve and organizations operation.
According to IIA, In the first definition of internal auditing, the objective was to
assist members of the organization in the effective discharge of their
responsibilities. Therefore, internal auditing will provide detailed analyses,
appraisals, recommendations, counsels and information concerning the activities
reviewed. Therefore, the audit objective includes ensuring effective control.
However, in today’s definition according to IIA, internal auditing should help an
organization accomplish set objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control
and governance.
This the new definition throws a lot light on the effectiveness of three features- risk
management, control and governance processed one can deduce that the ability to
achieve the organizational set objective largely depend on the effectiveness of
these three features. Therefore, the success of an organization largely depends on
the effectiveness of its internal audit.
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The IIA certainly sees the objective of the internal auditing as both supporting and
strengthening of the organizations governance mechanisms and evaluative and
improving the effectiveness of risk management and control. This suggests that the
value of internal audit as part of the governance structure is at the operational level
rather than as part of the higher level oversight structure.
The need for an effective internal audit cannot be over flogged for instance, in a
study by Coram, Ferguson and Moroney (2008) to assess the importance of the
internal audit function in detecting and self-reporting fraud through
misappropriation of assess within organizations, they found that organizations
which had some in-house internal audit function were more effective in detecting
and self-reporting fraud than where the internal auditing were completely
outsourced.
According to ASX (CGC 2010), the internal auditing has the responsibility to
generally carry out analysis and independent appraisal of the adequacy and
effectiveness of a company’s risk management and I.C system. Therefore, the
internal auditor plays a major role in providing both assurance and consultancy
services with respect to risk management in the organization.
However, some studies have shown that over involvement of the internal audit in
the organizations risk management processes may threaten the objectivity of the
internal auditor. In a study by [6], carried out to examine the impact of internal
auditors’ involvement in enterprise risk management and their ability to report a
breakdown in risk management procedure, they found that a high involvement of
the I.A in the enterprise risk management processes impacted on the willingness of
the internal audit to report a breakdown in risk procedure to the audit committee.
They also found that a strong relationship with the audit committee does not appear
to affect the willingness of the internal audit to report to the audit committee.
2.2.3 Internal Audit Effectiveness
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Even with the expanded role of internal audit, the effectiveness of internal audit to
the organization will not be questioned. In a study by Nagy & Cenker (2002) to
find out how organizational members perceived the new role of internal audit and
if a justification of the effectiveness of internal audit was required. They
discovered that the organizational members (top management) did not feel any
need to justify the effectiveness or role of the internal audit function.
According to Mihret and Yismaw (2007), the extent to which an organizations
internal audit meets its purpose of establishment is dependent on some factors
which are internal audit quality, management support, organizational setting and
attributes of the auditee. The ability of the internal audit to provide useful audit
findings and recommendations would promote management interest in its
recommendation. For an internal audit to be effective, it must receive the support
in terms of resources and commitment to the implementation of its
recommendation Mihret and Yismaw (2007) [10] tried to identify factor impacting
on the effectiveness of the internal audit services by examining how internal audit
quality, management support, organizational support, organizational setting,
auditee attributes and the interplay among these factors influence internal audit
effectiveness.
In their finding, they reported that management support and audit quality are very
important factors influencing audit effectiveness. They also found that
organizational settings (not including budgetary status of internal audit) enables
effective internal audit and the attributes of the auditees are not significant enough
to undermine audit effectiveness.
2.2.4 The Scope of Internal Audit Work
IA scope is another important factor that impacts on IA effectiveness. Al-Twaijry,
Brierley and Gwilliam (2003) state that the scope of IA works is a significant

21
indicator of IA effectiveness a viewpoint which is supported by ISPPIA. In
general, audit work should cover all systems and activities in all departments and
locations throughout the organization. The International Federation of Accountants
(2007) states that the scope of internal audit functions varies widely and depends
on the size and structure of the entity and the requirements of management.
Nevertheless, internal audit activities may include the following:
1. Monitoring and reviewing internal control systems, and recommending
improvements thereto.
2. Examination of financial and operating information. The internal audit function
includes reviewing the means used to identify, measure, classify and report
financial and operating information, and specific inquiry into individual items
including detailed testing of transactions, balances and procedures; 3. Review of
the economy, efficiency and effectiveness of operating activities, including non-
financial activities of an entity.
4. Review of compliance with laws, regulations and other external requirements,
and with management policies and directives and other internal requirements (The
International Federation of Accountants 2007).
The scope of IA is also expanding to determine whether the systems designed by
management are adequate and effective and whether the activities audited comply
with the appropriate requirements (Fadzil, Haron & Jantan 2005).
The IIA‘s Standards for Professional Practice of Internal Auditing state that the IA
activity must evaluate risk exposures relating to the organization‘s governance,
operations, and information systems regarding the reliability and integrity of
financial and operational information, effectiveness and efficiency of operations,
safeguarding of assets, and reviewing the systems established to ensure compliance
with those policies, plans, procedures, laws, regulations and contracts which could
have a significant impact on operations and reports, and should determine whether
22
the organization is in compliance (Institute of Internal Auditors 2011d). Internal
audit also needs to carry out appraisal of existing systems and be involved in the
revision or development of new systems before implementation. The internal audit
function should assist management in the evaluation of new technology, especially
in developing countries where the auditors ‘support in technical areas would
arguably be more paramount than areas where the business practice remains
relatively stable (Mihret & Woldeyohannis 2008).

2.2.5 Internal Audit Performance

The performance of the IA function should be monitored to ensure it provides
value to the organization and carries out its role economically, efficiently and in
accordance with best professional practice. In general, work performance involves
internal auditors planning their audits, developing working programs, preparing
time budgets for audit tasks, documenting all audit procedures in working papers
and preparing internal audit reports. IA effectiveness is understood as the
performance or efficiency of the tasks within the IA function (Santiso 2006).
Performance is considered to be the most appropriate component in evaluating IA
effectiveness (Rupšys & Boguslauskas 2007b) as it significantly influences the
information and communication aspects of the internal control system (Fadzil,
Haron & Jantan 2005). In line with various other researcher’s standards of the IIA
require the auditor to plan and perform the work such that he or she would be able
to arrive at useful audit findings and forward recommendations for improvement
(Institute of Internal Auditors 2011). According to the definition of internal
23
auditing (Institute of Internal Auditors 2011), IA is expected to add value to
organizations by effectively managing IA activity; reviewing operations and
programs to ascertain the extent to which results are consistent with the
organization ‘s goals; establishing audit plans, reports and programs to achieve
audit objectives; and determining appropriate and sufficient timeframes to achieve
objectives.
Co-Operation between the Internal and External Auditor
Internal audit departments should maintain good co-operation with external
auditors for mutual benefit. Such a relationship between the internal and external
auditors is very important for both parties because, in this way, external auditors
have the opportunity to increase efficiency and credibility of financial statements;
and it enables internal auditors to obtain essential information in the assessment of
risks control. Mihret‘s (2010) study revealed the importance of internal and
external audit linkages; and Arena and Azzone (2009) and Goodwin (2004) state
that a positive interaction between IA and external audit is very important for both
aspects. The relationship between the internal and the external auditors assists the
board of directors through its audit committee to effectively oversee the audit
process and the financial reporting process (Braiotta & Marsh 1992). The board of
directors, the audit committees, executive managers, internal auditors and external
auditors are the cornerstones of effective corporate governance in organizations.
Therefore, effective corporate governance should be maintained based upon a
strong relationship between external auditors and the internal audit function. The
International Federation of Accountants (2007) highlights the need for
coordinating the efforts of both internal and external auditors. The importance of
the relationship between internal audit and external audit is reaffirmed by the
International Federation of Accountants (2007, p. 7) as follows:

24
the role of the internal audit function is determined by management or those
charged with governance. The objectives of management and those charged with
governance differ from those of the external auditor whose overall objective is to
obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to report on the
financial statements in accordance with the auditor‘s findings. The objectives of
the internal audit function vary according to the requirements of management or
those charged with governance.
The internal audit function may achieve its objectives in a manner similar to that of
the external auditor. Accordingly, certain aspects of the internal audit function‘s
activities may be useful to the external auditor in determining the nature, timing
and extent of audit procedures to be performed, Goodwin (2004). Notwithstanding
its degree of autonomy and objectivity, the internal audit function is not
independent of management or the entity. The external auditor has sole
responsibility for the audit opinion expressed and, accordingly, that responsibility
is not reduced by the external auditor‘s use of the work of the internal audit
function‘. Therefore, there is no doubt neither party can do without the other; and
the work and success of one party is crucial to the success of the other. As a result,
the interaction between the internal and external auditors should contribute to IA
effectiveness, Mihret and Yismaw (2007).
Internal Audit as a Risk Management Mechanism
Value addition to the entity can be given by the internal auditors. It can be done by
giving assurance that its exposures regarding risk are properly managed and
understood (Leithhead, 1999). Internal audit need to play a vital role in monitoring
the risk profile of a company. Moreover, it should identify areas in order to better
the risk management procedures (Lindow & Race, 2002).

25
An internal audit can be helpful for organizations in identifying and evaluating
risks and putting the profession at the front line of the risk management (Walker et
al., 2003). Further, Kwan (1999) describes that within a company, development of
a risk based culture is required in order to build a strong organizational
commitment for risk management. This should result in the development of an
integrated risk management framework.
2.2.6 Internal Audit as a Control Mechanism
The management and directors of an entity adopt the process of internal control.
This process gives assurance about the achievement of the entity’s objectives
regarding financial reporting, operations and compliance with the regulations
(COSO Report, 1992). External auditing standards (Such as: AUS, 402 and ISA,
400) shows that the control environment can be strengthen by using effective
internal audit function by:
(i) Review of the internal control structure of a firm
(ii) On behalf of the management; monitoring different operations regarding
the information system and control procedures.
The asymmetry of information between divisional managers and senior managers
result in weakling the ability of the senior managers to firmly control operations.
The reason for this problem is the presence of internal agency costs (Ettredge et al.,
2000) which occurs between the upper management and the lower level staff
because of the incentive’s differences. So the use of strong internal controls system
including the internal audit for reviewing and monitoring mechanism. So keeping
this in mind, senior management can delegate their responsibilities in accordance
with the internal control to the internal audit function (Chambers, 1981).
2.2.7 Internal Audit as Internal Governance Mechanism
From the agency point of view, the role of strong governance within a firm lays by
aligning the management interests with the stakeholders in order to minimize
26
agency costs (Cohen et al., 2002). An independent board chairman, independent
directors on the board, internal audit, external audit and effective audit committee
are different corporate governance mechanisms used to monitor behavior of the
management (Cohen et al., 2004; Davidson et al., 2005). According to (Cohen et
al., 2004) the complex interactions within these governance mechanisms are like a
“corporate governance mosaic”. But problems between independent and executive
directors due to asymmetry information shows internal audit more likely as a
complementary mechanism. This is supported by determining evidences from the
researches examining the relationship between audit committees and internal audit
(Carcello et al., 2005). This is in accordance with the IIA view about internal
auditing; which helps organizations to improve and evaluate governance processes.

2.2.8 The Independence of Internal Audit Departments

The concept of independence is generally used to mean the ability of the auditor to
be fair and objective in his/her review and appraisal and not to be under undue
pressure from any party to the extent that this could bias his/her opinion. The IIA‘s
Standards for Professional Practice of Internal Auditing (glossary) defines
independence of internal auditors as: ‘The freedom from conditions that threaten
objectivity or the appearance of objectivity. Such threats to objectivity must be
managed at the individual auditor, engagement, functional and organizational
levels‘(Institute of Internal Auditors 2011b). Independence of IA has been
identified by the IIA, the American Institute of Certified Public Accountants
(AICPA) and others as crucial to the viability of the IA function. The IIA has
27
issued a number of attribute standards under which the IIA explored the issue of
independence in the ISPPIA, more specifically, the Standard 1100 Independence
and Objectivity. This standard states that the internal audit activity should be
independent in performing their work. The Standard 1100 states: “that
independence is the freedom from conditions that threaten the ability of the
internal audit activity to carry out internal audit responsibilities in an unbiased
manner” (Institute of Internal Auditors 2011).
A large body of research has examined auditor independence, but this has been
predominantly in the context of external audit (Gendron & Bedard 2006). In other
words, limited prior research has focused on internal auditor independence. In the
few studies dealing with IA effectiveness, they have mostly concentrated on the
external audit and whether the external auditors utilize the work of the internal
auditors (Cohen & Sayag 2010). However, recently, there has been more attention
to issues associated with the independence of IA (Stewart & Subramaniam 2010).
This growth in research, as explained earlier, relates to the way the role of IA is
gradually being transformed from primarily being concerned with checking the
propriety of transactions and records and a systems evaluation approach, to
becoming a value-adding service with a broader scope of activities, including
assisting organizations in the management of risk.
Subsequently, the role of IA has developed to a pre-eminent position of advising
the board of directors, although tensions remain between this consulting role and
the need for independence (Mihret, James & Mula 2010). IA services derive their
value and credibility from the fundamental 2010). Vanasco, Skousen and
Santagato (1996) point out that without independence the desired results of internal
auditing cannot be realized. Therefore, the position of IA in an organization is
bounded; it is a corporate unit that should have a large degree of autonomy and
independence in order to perform its activities in a proper manner (Arena &
28
Azzone 2009), and the independence of IA activity is a prerequisite to providing a
wide range of IA services.
Similarly, Clark, Gibbs and Schroeder (1981) find that the independence of the
internal audit department is the most important criteria influencing IA services.
Bou-Raad (2000) believes that the strength of an internal audit department is
assessed according to the level of IA independence from management and from
other operating responsibilities. Independence of internal auditors increases the
internal auditor‘s effectiveness because this independence may reduce the level of
conflict between loyalty to the employer and loyalty to specific managers, and
gives auditors an encouraging work environment in which they can perform their
task without pressure. Thus, internal auditors should be sufficiently independent
from the auditee to be able to conduct their work objectively and without
interference (Cohen & Sayag 2010).

2.2.9 Competence of Internal Auditors

For IA to be effective, internal auditors need appropriate competence to perform
their work satisfactorily (Burnaby et al. 2009). This view is supported by Al-
Twaijry, Brierley and Gwilliam (2003) who suggest that the staffing of internal
audit departments and the management of its staff is vital to the effective operation
of IA, and that unless they possess the necessary competencies the power of
internal auditors may be diminished. Mihret, James and Mula (2010) also support
this view by stating that technical competence and continuous training are
considered essential for effective internal audit’. Libby and Frederick (1990)
indicate that experience is an important tool in enhancing auditors‘knowledge.
29
In addition, Bonner and Lewis (1990) state that years of experience is considered
as an indicator of auditors’ knowledge and expertise. Internal auditors require a
wide range of competencies to achieve satisfactory performance in the various
hierarchical positions within internal audit departments (Burnaby et al. 2009).
Competence requires knowledge and professionalism that the auditor should
acquire from education, on-the-job training, and experience.
Thus, legislators set requirements that must be met before people are qualified and
entitled to perform audits (Paape 2007). Engle (1999) categorizes the most
important benefits that will be realized from competent internal audit staff, namely,
1) staff will be able to conduct useful audits that effectively contribute to the
achievement of organizational goals;
2) internal auditor‘s competence will increase the probability that external auditors
use the work of internal auditors, leading to a potential reduction in the cost of
external audits; and
3) internal auditors who are familiar with the organization under audit are in an
ideal position to provide information about financial statements.

2.2.10 Dimensions of Internal Audit

2.2.10.1 Quality of audit work
This situation can be explained by considering explainable responsibility of the
auditors at any point of time in terms of public expectations, and considering
auditing quality as a conceptual idea which cannot be observed directly (Lin &
Liu, 2009). Therefore, most experts address factors that indirectly indicate or
influence the auditing quality. In this regard, most researchers have often used a
normative approach and considered factors such dependency, professional care;
professional competence, appropriate supervision and professional uncertainty as

30
factors which create audit quality. Normative approach is also used in development
of accounting standards.
Deangelo (1981) for the first time considered the concept of auditing quality in
terms of descriptive aspects. He believed that auditing quality can be analyzed in
two dimensions: auditor capabilities explore the importance of errors and
distortions and the auditor capability to report errors and discovered distortions.
Other conceptual definitions of quality auditing are provided. For example, Zhou
(2007) considered auditing quality equal to quality of accounting standards,
accounting, accounting requirements and their disclosure. However, review of the
existing related literature suggests that public acceptance of these comments have
not been considered as much as Deangelo views. Other researchers such as Watts
and Zimmerman (1985) and Lee et al. (2003) also emphasized the definitions
provided by Deangelo. They considered the mentioned conceptual definition more
than any other definition in auditing literature. Although researchers accepted
Deangelo view and did not attempt to redefine the concept, they expanded the
definition and provided operational definitions in accordance with this concept that
will be discussed in the following views.

2.2.10.2 Internal Audit Size

According to Adrian (2016), IIA Standard 2030 states that the Chief Audit
Executive (CAE) “must ensure that internal audit resources are appropriate,
sufficient, and effectively deployed to achieve the approved plan.” Due to the
functional responsibility of the governing entity, the board or the audit committee
must approve the resource plan of internal auditing. Stakeholder theory suggests
that the board and management can use the allocation of resources to internal
auditing as a signal to increase the acceptance and reputation of internal auditing
throughout the organization and to strengthen the confidence of external
31
stakeholders in the entity’s good corporate governance and comprehensive
assurance coverage (Peters, 2012; Adams, Cited in Ho & Hutchinson, 2010; Holt
& Dezoort, 2009). Anderson et al. (2010) summarize these elaborations as follows:
The appropriate size of the internal audit department should be based on the
specific mission of the function – as determined by management and the audit
committee – and should vary with the scope of internal auditing’s mission,
experience of its personnel, the technology it uses, the control, compliance, and
operational audit emphasis, and geographic areas covered. In accordance with ISA
610.6, the FRC (2012, para. 4.12) states that – comparable to its existence – the
size of internal auditing depends on various factors, such as the number of
employees, cost/benefit considerations, and aspects of scale, diversity, and
complexity of a company’s business operations. These dependencies may be
explained by the application of organizational theories. For instance, using the
rationales of agency theory, i.e., a greater need for monitoring due to increased
complexity and the resulting loss of control, Sarens (2007) finds larger internal
audit activities with increasing firm size, diffusion of ownership, and the number
of reporting levels. While Arena and Azzone (2007), from the perspective of
institutional theory, also find a firm’s industry, the degree of internationalization,
and the decentralization of internal control to be relevant for internal audit size,
related literature unanimously identifies firm size as the main determinant.148
Screening extant literature for specific data on internal audit size, Allegrini and
D’onza (2003) find an average number of 10 or fewer internal auditors in Italian
firms, which is in accordance with Arena and Azzone (2007). They further show
differences between the number of internal auditors per employee between
financial (0.8%) and nonfinancial firms (0.2%). The dependence of internal audit
size on the organization’s industry is supported by Sarens et al. (2011) as well as
Carcello et al. (2005). Similarly, the study of Ho and Hutchinson (2010) indicates
32
an average internal audit size of six employees in Hong Kong firms, which
corresponds to a ratio of 0.5% internal auditors per employee. Moreover, the
evidence collected by Sarens and Abdolmohammadi (2011) in the Belgian context
falls in the same range of about 10 internal auditors per firm, equaling a slightly
higher average ratio of 3.7% internal auditors per employee. Arena and Azzone
(2007) point out that the average number of internal auditors for firms with 100 to
10,000 employees is comparable, which could imply the “existence of a minimum
threshold amount of resources (number of internal auditors) [sic] necessary for
carrying out internal audit activities, which does not depend on a company’s size”.
This is in agreement with the findings of Sarens and Abdolmohammadi (2011),
i.e., that relative internal audit size does not vary at the same rate as firm size. To
approximate internal audit size, extant literature most frequently applies the
number of internal auditors or the activity’s budget (Goodwin-Stewart & Kent,
2006). Since the respondents might be reluctant to disclose the latter figure, the
staff size is used in the present study. Moreover, Anderson et al. (2010) point out
that the degree to which internal auditing meets its stakeholders’ expectations –
regarding the types of services provided – varies based on aspects of internal audit
organization. Since these aspects, in turn, are shaped by organizational
characteristics, the results of this thesis must be tested with respect to their
variability due to firm size, industry, and other variables.
2.2.10.3 Internal Audit Qualification
By ‘professional qualification’ we mean the independent award or certification
that a person has acquired occupationally reliant knowledge and skill and can
apply these in a work-related context. The skills and knowledge that SAIs require
for their professional qualifications will depend on their mandate and the scope of
their audit field. When applied to the internal audit profession, all five of the
aforementioned characteristics are applicable Ahlawat and Lowe (2004).
33
Individuals aspiring to become certified members of the profession must comply
with specific criteria such as being in possession of a bachelor’s degree, having at
least two years’ uninterrupted practical experience in internal auditing or a related
field (IIA 2012), and the successful completion of the certification programme.
Once compliance has been achieved, individuals are eligible to become members
of a professional body with recognised ethical standards, the IIA, and are then able
to use the designation Certified Internal Auditor (CIA). Internal audit professionals
must adhere to the IIA’s International Professional Practices Framework (IPPF)
(IIA 2011), which highlights that internal auditors must render value-adding,
independent and objective services to various stakeholders, be associated with a
professional body, and serve the public at large. These may include some or all of
the following, according to Ahlawat and Lowe (2004):
1. Expert knowledge of a particular country’s legislation and/or economic policies;
2. Auditing practices – a systematic examination of financial or accounting records
to verify their accuracy, truthfulness or compliance with the legislative framework;
3. Accounting – the systematic recording, reporting, and analysis of the financial
transactions of public sector and sometimes private sector organisations; and
4. Accountancy – compiling and providing financial information primarily for
published financial statements of public sector (and sometimes private sector)
Organisations, using standard bookkeeping procedures in accordance with national
or international standards; and auditing financial statements of public (and
sometimes private sector) organisations in accordance with national or
international standards.
In some countries, including most countries with a Court system, auditors perform
financial and performance audit as two aspects of a public entity review. Some
countries have set training courses, in cooperation with universities, to provide

34
their auditors with professional skills in both accounting and performance sectors
Ahlawat and Lowe (2004).
2.2.11 Concept of Fraud
Fraud is a deliberate act (or failure to act) with the intention of obtaining an
unauthorized benefit, either for oneself or for the institution, by using deception or
false suggestions or suppression of truth or other unethical means, which are
believed and relied upon by others. Depriving another person or the institution of a
benefit to which he or she it is entitled by using any of the means described above
also constitutes fraud (http://sites.tufts.edu/amas/controls-compliance/fraud-
prevention/).
Fraud takes many forms. Some examples include: embezzlement, kickbacks, theft,
fraudulent financial reporting, environmental crimes, software piracy, bid rigging,
computer-related crime, identity theft, credit card fraud, check fraud, fraudulent
workers compensation claims, ghost employee schemes, expense report
schemes,“dummy” vendors, unreportedconflicts of
interest,etc(http://sites.tufts.edu/amas/controls-compliance/fraud-prevention/).
According to Adeniji (2004:354) and ICAN (2006:206), fraud is an intentional act
by one or more individuals among management, employees or third parties, which
results in a misrepresentation of financial statements. Fraud can also be seen as the
intentional misrepresentation, concealment, or omission of the truth for the purpose
of deception or manipulation to the financial detriment of an individual or an
organization which also includes embezzlement, theft or any attempt to steal or
unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 1998
and, Bostley and Drover 1972). Fraud has increased considerably over the recent
years and professionals believe this trend is likely to continue. According to Brink
and Witt (1982), fraud is an ever present threat to the effective utilization of
resources and it will always be an important concern of management. ISA 240
35
„The Auditor‟s Responsibilities to Consider Fraud in an Audit of Financial
Statement (Revised)‟ refers to fraud as “an intentional act by one or more
individuals among management, those charged with governance, employees or
third parties, involving the use of deception to obtain an unjust or illegal
advantage”. Aderibigbe and Dada (2007) define fraud as a deliberate deceit
planned and executed with the intent to deprive another person of his property or
rights directly or indirectly, regardless of whether the perpetrator benefits from his
or her actions.
2.2.12 Forms of Fraud
Weirich and Reinstein (2000 cited in Allyneand Howard 2005), define fraud as
“intentional deception, cheating and stealing”. Some common types of fraud
include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales,
undeclared stock, making unauthorized “write-offs”, and claiming excessive or
never-incurred expenses. Pollick (2006) regards fraud as a “deliberate
misrepresentation, which causes one to suffer damages, usually monetary losses”.
Albrecht et al (1995 cited in Allyne and Howard, 2005:287) classified fraud into
employee embezzlement, management fraud, investment scams, vendor fraud,
customer fraud, and miscellaneous fraud. Fraud also involves complicated
financial transactions conducted by white collar criminals, business professionals
with specialized knowledge and criminal intent (Pollick 2006). According to
Aguolu (2002), fraud can take place in one of two forms, which are either
defalcations or manipulations.
Defalcation is the misappropriation of a company’s assets. Manipulation is ether
the falsification of a company’s records or the improper use of the asset of the
company. Defalcation will often go with manipulations. Where the assets of a
company have been misappropriated, the offender will often after the records to
conceal the misappropriation. Manipulations on the other hand, may go without
36
defalcation. This may take the form of inflating the assets oromitting liabilities in
order to show a particular view. However, for the purpose of this paper, the forms
of fraud identified by Aguolu (2002) were adopted.
2.2.13 Financial crimes
Financial crimes cannot be precisely defined but can be described. No one
description suffices. Wikimedia dictionary describes financial crimes as crimes
against property, involving the unlawful conversion of property belonging to
another to one‟s owns. Williams (2005) incorporates corruptions to his description
of financial crimes. Other components of FCs cited in William‟s (2005) descrition
include bribes cronyism, nepotism, political donation, kickbacks, artificial pricing
and frauds of all kinds.
The array of components of financial crimes, some of which are highlighted above,
is not exhaustive. The EFCC Act (2004) attempts to capture the variety of
economic and financial crimes found either within or outside the organization. The
salient issues in EFCC‟s (2004) description include “violent, criminal and illicit
activities committed with the objective of earning wealth illegally… in a manner
that violates existing legislation… and these include any form of fraud, narcotic
drug, trafficking, money laundering, embezzlement, bribery, looting and any form
of corrupt malpractices and child labour, illegal oil bunkering and illegal mining,
tax evasion, foreign exchange malpractice including counterfeiting, currency, theft
of intellectual property and piracy, open market abuse, dumping of toxic waste and
prohibited goods, damage to the environment, etc.
This description is all-embracing and conceivably includes financial crimes in
corporate organization and those discussed by provision authors (William, 2005
and Khan, 2005). At the level of corporate organizations, financial crimes were
known to have led to the collapse of such organizations. Cotton (2003) as cited in
(Izedonmi, and Ibadin, 2012) attributes the collapse of Enron, WorldCom, Tyco,
37
Adelphia, to corporate fraud. $460 billion was said to have been lost. In Nigeria,
Cadbury Nig Plc whose books were criminally manipulated by management was
attributed to have lost 15 billion Naira. In the case of the nine collapsed
commercial banks in Nigeria, about one trillion naira was reported to have been
lost through different financial malpractice. This and other financial and economic
crimes are being investigated by EFCC under the EFCC Act (2004).

2.2.14 Fraud Management

An understanding of effective fraud and forensic accounting techniques will assist
Professional Forensic Accountants in identifying illegal activity and discovering
and preserving evidence (Houck et al 2006). Hence, it is important to understand
that the role of a forensic accountant is different from that of regular auditor.
Crumbley and Apostolou (2005) as cited by (Okoye & Gbegi, 2013) describes a
forensic accountant as someone who can look behind the faced-out, accept the
records, at their face value-someone who has a suspicious mind that (considers
that) the documents he or she is looking at may not be what they purport to be and
someone who has the expertise to go out and conduct very detailed interviews of
individuals to develop the truth, especially if some are presumed to be lying.
Forensic accounting as a field of specialization that has to do with provision of
information that is meant to be used as evidence especially for legal purposes. The
persons practicing in this field (i.e. forensic accountants) investigate and
documents financial fraud and white-collar crimes such as embezzlement and
investigate allegations of fraud, estimates losses damages and assets and analyses
complex financial transactions. They provide those services for corporation,
attorney, criminal investigators and the government (Coenen, 2005, Zysman, 2001)
the forensic accountant’s engagements are usually geared towards finding where
money went, how it got there, and who was responsible. According to Bhasin

38
(2007), forensic accountants are trained to look beyond the numbers and deal with
the business realities of situations. Analysis, interpretation, summarization and the
presentation of complex financial business related issues are prominent features of
the profession. He further reported that the activities of forensic accountants
involve: investigating and analyzing financial evidence; developing computerized
applications to assists in the analysis and presentation of financial evidence;
communicating their findings in the form of reports, exhibits and collections of
documents; and assisting in legal proceedings, including testifying in courts, as an
expert witness and preparing visual aids to support trial evidence. In the same vein
Degboro and Olofinsola (2007) stated that forensic accountants provide assistance
of accounting nature in financial criminal and related economic matters involving
existing or pending cases. In financial crimes scenarios, the forensic accountant
must appreciate the seriousness of a situation and look beyond the game of
numbers. It must go beyond being a detective or regular accounting. The field of
forensic accounting is the product of forensic science and accounting, Crumbley
(2003) describes forensic scientists as the examiners and interpreters of evidence
and facts in legal matters. The science as used have according to Sadiq (2008)
involves the examination and interpretation of economic information. Forensic
accountant provides information that is used as evidence in the court of law. He
investigates, appraises and documents financial fraud and white-collar crimes
(such as embezzlement and frauds) by employees, management and other frauds or
crimes in the organization. He estimates losses, damages and assets
misappropriation and any other complex financial transaction. The whole process
ends in the production of report which is tendered to assist in legal adjudication.
The forensic accountants, in their investigation, use some investigative techniques
in financial crimes.

39
2.2.15 Measures of Fraud Management
2.2.15.1 Fraud Prevention

It is paramount for any institution to institute effective methods and procedures to

prevent and detect fraud related activities from taking place (Bierstaker, Brody and
Pacini, 2006). These approaches can take account of management communications
on prevention and detection of fraud bent behaviour, implementing clear
presentation as well as payment systems, pre-employment as well as on-going
screening and, most considerably inspiring a culture of fraud consciousness (PwC,
2012). A study carried out by PWC (2014) showed that thirty-seven percent of
respondents agreed that fraud had occurred in their organization as well as the rise
of economic offenses were exposing the business into risk of survival. Ernst &
Young (2014), reported that the fifty-nine nations convoluted in the review
approved on the incidences of scam and asserted that the circumstances are on the
rise.
New methods of scam continually arise and matters that controllers as well as
public consider unsuitable or fake are developing. Scam stoppage thus calls for
necessary measures to halt scam from happening. Detection of fraud comes next
once scam stoppage has been unsuccessful as it includes recognizing scam as fast
as possible when it has been committed (Bolton & Hand, 2002).
Fraud detection is characterized by actions and activities intended to identify and
locate fraud prior to, during, and subsequent to the completion of the fraudulent
activity. While “prior to” may sound like deterrence, it refers to the detection of
testing or probing activity used by criminals to facilitate a fraud attempt. “To
detect, is to uncover or reveal, to discover the existence or presence of the fact of

40
something hidden or obscure” (Webster, 1997, 1976, & 1941). Detection
encompasses three closely related activities in the fraud arena: fraud testing, fraud
attempts, and fraud successes. The separation is derived from the facts that not all
fraud attempts are successful and that not all perceived fraud attempts are intended
to be successful. These “tests” are attempts to reverse engineer the current fraud
policies and detection activities in order to locate vulnerability. Thus, detection in
the fraud arena must include revealing the existence of fraud testing and fraud
attempts, as well as successful frauds. The identification of testing, attempts, and
successes are typically clustered in the detection, prevention, and mitigation stages,
but are also relevant in each of the other stages of the Fraud Management
Lifecycle. Detection includes identification of a testing component, an attempt
component, and a success component.
Prevention is defined as, “to prevent, to stop or keep from doing or happening, to
hinder a person from acting” (Webster, 1997, 1976, & 1941). Prevent is a general
term meaning hindering, checking, or stopping. In the fraud arena the use of the
term prevention emphasizes both common forms of the definition, to keep from
doing and to hinder the fraudster from performing fraudulent activity. For the
purposes of this study the definition of prevention is to hinder, check, or stop a
fraudster from performing or perpetrating a fraudulent activity Wesley (2004).
.

Prevention stage activities are intended to prevent the fraud from occurring or to
secure the enterprise and its processes against fraud. The ability of prevention to
stop losses from occurring versus stopping fraudulent activity from continuing is
an important distinction. The latter activities are more appropriately mitigation
stage activities. Prevention, when perceived from a security perspective, can be
thought of as hardening the target. Prevention actions are frequently similar to

41
security activities in the information technology area. Deploying protective
procedures, processes, systems, and verifications, etc. that make fraud harder to
commit prevents fraud. Prevention activities are designed to make fraud more
difficult to commit. For example, the purpose of the many security features on
credit and debit cards is to make card based fraud more difficult, Wesley (2004).

2.2.15.2 Fraud Investigation

An investigation commences with the detection of a possible crime. Sometimes, at
the beginning it appears to be criminal activity but after gathering all the
information and facts it is concluded that it is the result of a mistake, ineptness or
incompetence or vice versa Darina (2012). The investigation team leader has a task
to coordinate the investigation and communicate and interface with management
according to the need. He should communicate clearly the roles and
responsibilities with each team member.
According to Darina (2012) the investigation team is formed and consists of the
leader, team members, management representative, supervisors and Legal Counsel,
possibly an expert from outside, as follows:
1. Leader of the investigation team is appointed.
2. Formation of an investigation team is made so that to complete the competent
team of investigators experts. They are invited to the investigation team, if
required, to provide the knowledge and skill sets useful for investigation (e.g. legal
counsel, fraud investigators, internal auditors, accountants or forensic accountants,
HR personnel, security or loss prevention personnel, IT personnel, computer
forensic experts, outside expert).
3. Management representative is selected in order to communicate with the
investigation team leader.

42
 4. Supervisors are selected and supervising tasks are divided with the aim who
will oversee an investigation on the middle level depending on the fact who
perpetrators are.
5. Legal Counsel may be appointed to supervise the investigation on the top level.
An investigation process comprises following activities:
1. Creating the plan of investigation,
2. detecting and analysing potential crime, preparing time schedule,
3. evidence collection,
4. interviewing,
5. findings summarized in a written- form protocol.
To create investigative plan is a good starting point. It enables the investigator to
prepare the steps how to approach the problem in an organized manner. The plan
should prioritize the performance of partial tasks to provide an interim report of
findings, if there is a need to prepare it, and to revise or plan next steps. The
investigation team approves what investigation tasks will need to be tackled and
distributes responsibilities and assigns the particular tasks to team members. The
following aspects should be considered in the plan:
a) the crime – first of all it is necessary to determine possible elements of the
crime and information that has to be collected to prove determined elements. In
this phase the case is assessed in terms of threat, risk, and vulnerability. The
parameters of the investigations are defined after the evaluating treat, risk and
vulnerability of the particular situations is done and listed. Time schedule for
investigation is prepared to fulfil legal requirements, to mitigate losses or potential
harm, or to fulfil conditions for submitting insurance claim.
b) materials - the investigator identifies what type of materials will have to be
reviewed to be prepared to investigate the crime e.g. determine and sum up
documents for review; processes to be learnt by investigator if needed (chemical
43
plant production, or sawmill operations etc); accumulate existing physical
evidence. All information collected needs to be kept confidential, protected against
being destroyed. Investigation should comply with applicable laws and rules
regarding collecting the information and interviewing witnesses. (Davia et.al,
1992).
According to ACFE evidence collection includes internal documents, such as -
personal files, internal phone records, computer files and other electronic sources,
email, financial records, security camera videos, physical and IT systems access
records and external records comprise e.g. public records, customer/vendor
information, media reports, information held by third parties, private detective
records, computer forensic examination. After gathering of evidence all
information will be analysed, including
1.review and categorization of information collected,
2.computer assisted data analyses and based on the results gained the phase of
development and testing of hypothesis will be implemented.
c) witnesses – availability of witnesses, the order in which witnesses should be
interviewed, existence of the suspect, determine the relations of witnesses to the
crime and to the potential suspect. “Interview is the main tool of investigation.
Interviewer must have following qualities:
A. Honesty, integrity and ability to persuade interviewees that the truth discovery
is important.
B. The ability to establish the rapport quickly and under the variety of conditions.
C. The ability to listen to interviewees and evaluate their responses and questions.
D. The ability to maintain self –control during interviews and not become
emotionally involved in the investigation. (Davia et.al., 1992).
Darina (2012) stated that investigations generally include interviews with neutral
third-party witnesses, corroborative witnesses, possible co-conspirators and the
44
accused. Interviewer should compose good questions that take into account the
background of the interviewee, that are short, simple and confined to the topic,
clear and easily understood, without sensational words e.g. confession, drug addict,
doper, stool pigeon, drunkard, emblezzer, not to evoke strong emotions, precise
and requiring a narrative answer. There are two methods to influence witnesses and
suspects’ state of mind:
1. Physical and mental abuse is an unjustified and illegal method in a democratic
society with human rights established that is sometimes used for interview.
2. Systematic interviewing is conducted in a friendly and humane atmosphere to
stimulate cooperation with the interviewee. The interviewed individual should
understand and feel that to speak the truth will be beneficial.
2.2.16 Relationship Between Internal Audit and Fraud Management
At today’s level of development, internal audit is a key participant in the system of
corporate governance. By introducing a systematic and disciplined approach,
internal audit is aimed at supporting and strengthening the mechanisms of
company management, as well as assessing and improving the effectiveness of risk
management and control processes (www.theiia.org). More specifically, internal
audit is expected to be focused on assessing the risks that could adversely affect
the organization, as well as on the establishment of a mechanism that will monitor
and control that risk, with a view to its elimination, or, at least, reduction Đukić
and Đorđević (2014).This role of internal audit means that it is a function that
knows all the processes in the company, the risks to which the company is
exposed, and internal control and the persons who carry out this control, which is
why its potential and ability to achieve high effectiveness in preventing and
detecting fraud is recognized. In this respect, the IIA Standards oblige internal
audit to, “in determining the objectives of its engagement, assess and take into
account the potential possibility of fraud” (ISPPIA 2210.A2) and “...assess the way
45
in which the company manages the risk of fraud” (ISPPIA 2120.A1). For these
reasons, today, the companies increasingly focus their programs, aimed at reducing
fraud, on internal audit, which is seen as the first line of defense, i.e. significant
management tool that ensures the protection of the company from internal criminal
behaviour Nestor (2004).
However, despite the obvious great potential of the internal audit to prevent and
detect fraud, and, in that regard, the expectations that have been placed before it,
the question arises as to how much internal auditors are actually really up to the
challenge in practice. The question arises because the Standard 1210.A2 itself
stipulates that “internal auditors must have sufficient knowledge to assess the risk
of fraud and the way in which the company manages that risk, but they are not
expected to have a level of expertise as the person whose primary responsibility is
detecting and investigating fraud”. So, with twelve years of experience in this
profession, Hodge (2012) recognizes that, in some cases, internal auditors have not
adequately responded to this task. In her view, the problem resides in the fact that
internal auditors do not really understand what it means to incorporate the
understanding of the risk of fraud into their work, not in the fact that they are
incompetent, negligent, or that there is some other reason why they are not able to
contribute to the prevention and detection of fraud. Some auditors interpret the
Standard requirements in the sense that they do not have too much responsibility to
prevent and detect fraud – they are not required to be fraud investigators, while
others are convinced that they possess the required knowledge, while reality is
actually the opposite. Based on her own experience, Hodge further states that the
understanding of the fraud risks is the individual responsibility of each auditor,
which is why they should constantly bear in mind their role in managing the risk of
fraud, and continually increase their knowledge about ways of preventing and
detecting fraud. A similar attitude was taken by DeZoort and Harrison (2008)
46
indicating that the level of responsibilities of internal auditors in preventing and
detecting fraud is, in fact, determined by their perception of the responsibility they
should have. Starting from the model of the triangle, first applied by Schlenker et
al. (1994), DeZoort et al (2008) investigated the effect of different types of fraud
(manipulation in financial statements, misuse of funds, and corruption) and the
professional obligation of application of standards on the internal auditor’s
responsibility to prevent and detect fraud. According to the triangle model,
personal responsibility of internal auditors is conditioned by the extent to which an
individual: (1) has a clear, welldefined set of regulations (standards, rules,
policies...), (2) feels a professional obligation, and (3) feels the connection with the
event by controlling it (there is an intention and possibility to establish and apply
specific measures as regards perpetrators). Starting from this model, results
obtained by DeZoort indicate that internal auditors show a higher degree of
responsibility for the prevention and detection of fraud relating to the misuse of
funds in relation to fraud related to the financial reporting process and corruption.
So, although the Standards of internal audit do not distinguish between types of
fraud that internal auditors should pay attention to, their perception of possibility to
control misuse of funds is perhaps the most pronounced. In addition, the study
results point to the position of internal auditors, based on which the highest degree
of responsibility for detecting fraud should be in the hands of the company bodies,
rather than the bodies outside of it (for example, external audit). However, at the
same time, internal auditors hold the position that the highest professional
responsibility belongs to the company management, accountants, and then the
internal auditors. Bearing in mind that the effectiveness of internal audit is largely
determined by the auditor’s personal attitude, knowledge, skills, etc., there are a
number of seminars, workshops, and conferences nowadays, which emphasize the
need for improvement of internal auditors in this area. More specifically, the
47
internal auditors are expected to: (1) become familiar with the work of the specific
part or process that is audited, in connection with possible acts of fraud,
characteristic of the subject of audit; (2) in work always apply professional
scepticism, i.e. deeper examination and critical evaluation of the findings, starting
from the assumption that managers or employees are neither honest nor dishonest.

2.3 EMPIRICAL REVIEW

Many researchers have tried to identify the critical success factors that determine
internal audit and fraud management. These include competence of the internal
auditors, their independence and management perception of their values and thus
their support for the internal audit function (Baharud-din et al, 2014; Arum, 2015).
A related study from Greece identified quality of internal audit, competence of
internal audit team. Independence of internal audit and management support
(George and Konstantinos, 2015). Another study identified independence of
internal audit system, scope of work, professional competence, examination
process and management support as attributes of internal audit effectiveness
(Adedokun and Monday, 2016). It is clear that independence of the auditors,
competence of internal audit and management support are ranked by many authors
as the most important attributes for internal audit effectiveness. However, the lack
of consensus on the determinants of internal audit effectiveness has been attributed
to the absence of a generally agreed theory underpinning researches in this area(Ali
et al., 2013). Competence and objectivity of the internal auditor are factors that
have been identified as making for internal audit effectiveness (Arum, 2015). A
Nigerian study identified risk management, effective internal control system, audit
experience, cooperation between internal and external auditors and performance
measurement as antecedents for internal audit effectiveness in the Nigerian public
sector (S. Badara and Saidin, 2014). Empirical studies on effectiveness of micro
48
finance banks internal audits in developing countries are few. A Nigerian study
identified five factors that make for internal audit effectiveness as independence,
scope of work, professional competence, examination process and management
support. Using a survey research design data obtained was analysed using multiple
regression and Pearson correlation coefficient. The result revealed that
independence of internal auditors in South- West Nigeria’s public sector needed to
be improved in addition the governments paying more attention to the
recommendations and reports of the auditors. The other remaining factors were
considered adequate (Adedokun and Monday, 2016). A related study on internal
control effectiveness opined that some internal auditors may not have the courage
to report their bosses who go contrary to statutory requirements as the Nigerian
environment is replete with situations were internal auditors who wanted to remain
true to their profession were either out rightly dismissed or denied promotion as
and when due or even slammed a saboteur for internal auditors were not versed in
public speaking and presentation skills. They also had limited skills in Information
Technology (IT) and International Financial Reporting Standards (Elmghaamez
and Ntim, 2016) (IFRS) preparation (Elmghaamez and Ntim, 2016). This finding
may not be generalized as it could be peculiar to the Libyan environment. An
earlier study in 2012 using also the Libyan environment, reported that Libyan
auditors of all types lacked independence as they would not voice their disquiet as
a result of fear of possible future retaliations. This finding agrees with similar
conclusion by Akinola in the Nigerian context. The auditors were not subject to
active training and lacked top management support (Zakari et al, 2012). “selling
the organization to regulatory agencies” (Akinola, 2016). A survey of 41 Libyan
internal auditors working in six Libyan banks and three insurance companies
revealed that Libyan internal auditors were not versed in public speaking and
presentation skills. They also had limited skills in Information Technology (IT)
49
and International Financial Reporting Standards (Elmghaamez and Ntim, 2016)
(IFRS) preparation (Elmghaamez and Ntim, 2016). This finding may not be
generalized as it could be peculiar to the Libyan environment. An earlier study in
2012 using also the Libyan environment, reported that Libyan auditors of all types
lacked independence as they would not voice their disquiet as a result of fear of
possible future retaliations. This finding agrees with similar conclusion by Akinola
in the Nigerian context. The auditors were not subject to active training and lacked
top management support (Zakari et al, 2012).

CHAPTER THREE

RESEARCH METHODOLOGY

50
3.0 Introduction

Research methodology defines what the activity of research is, how to proceed,’
measure progress and what constitutes success. It forms the framework which
specifies the type of information to be collected and the source of data and data
collection.

According to Baridam (2001), research methodology is operationally defined as an

activity of investigating the phenomenon experience which leads to new
knowledge, using methods of enquiring, which are currently accepted as adequate
by scholars in the field.

The various areas that were examined in this chapter are as follows:

 Research design
 Population of the study
 Sample technique
 Sample size determination
 Validity and Reliability of the Research Instrument
 Operational Measures of the Variables
 Data collection technique
 Data analysis technique

3.1 Research Design

51
 The research design is the method and plan used to collect data and test
relationship between the variable hypothesized (Baridam, 2001). In other words, it
has, been considered as a “blue print” for research, da1ing with at list four
problems: what question to study, what data are relevant, what data to collect and
how to analyze the result.

For the purpose of this study, a cross sectional survey design, a sub set of quasi
experimental research field survey of some selected insurance companies in Rivers
state.

3.2 Population of the Study

A population is the summation or totality of elements in a given location of

interest. According to Okafor (2002), research population is a complete set of
items, that is of interest to a researcher or investigator.

Basically the population of this work encompasses the top managers, HODs and
employees of this selected insurances companies in Nigeria. These insurance
companies and their branches were chosen because of their closeness to the
researcher’s location.

Name of Insurance companies Address Number of employees

Anchor insurance co. ltd 62 olu obasanjo way, 24
portharcourt, Rivers state.
Ark insurance brokers 20 Daniel kalio street, 16
D/line portharcourt,
Rivers state
Fin insurance c. ltd 180 Aba road 21
portharcourt, Rivers state
Great Nigeria insurance Plot 19 stadium road, Riz 23
plaza, Rivers state
Industrial & General insurance 2 ikwerre road, 19
portharcourt, Rivers state.
(IGI) plc

52
Therefore, the total population of the study is 103

3.3 Sampling Technique

Sampling technique arise as a. result of which type of sampling technique can be

used in carrying out our research, from the perspective of target population. At this
junction, simple random sampling is employed for this study: the reason is that it
will allow every members of the population to have an equal chance to the
selected. It will also allow the researcher to draw conclusions for the entire
population. Furthermore, if the sample is not a representative of the population,
conclusion can’t be drawn since the results that the researcher obtained from the
sample will be different from the target population.

3.4 Sample Size Determination

This research study is limited to selected insurance companies in River state, in

order to determine the sample size of this research work, the Taro Yamane’s
formu-la was used in determining the sample size with a significant level of 5%.

The formula is given as:

N
n = 1+ N ¿ ¿

where,

n = sample size soughed

e = level of significance = 0.05

N = population size

The sampling size is:

N
n = 1+ N ¿ ¿

53
 103
n = 1+ ¿ ¿

103
n = 1+(103 x 0.0025)

103
n = 1+ 0.2575

103
n = 1.2575

n = 81

Therefore, the sample size of the study is 81 which consist of managers, HODs and
employees

3.5 Methods of Data Collection

The research used two sources of data in carrying out this research namely: the
primary source and the secondary source.

The primary source includes:

 Questionnaires
 Personal observation
 Interview

The secondary source of data used in order to support findings includes textbooks,
journals, internet, newspapers etc.

3.6 Instrument for Data Collection

54
The instrument for data collection was a questionnaire. The questionnaire was
divided into two sections, A & B. Section A was used to gather demographic
information of the respondents, while section B was further divided into parts, 1,
2 ,3,4 & 5 Each sections was assigned a five response options of strongly agree
(SA), agree (A), Neutral (N), strongly disagreed (SD), and disagree (D) with a
corresponding value of 5,4, 3, 2 and 1.

3.7 Validation of the Instrument

To validate the instrument used, it was first presented to two experts in

measurement and evaluation unit who carried out face validation to check for
adequacy. After which it was later presented to one expert in Management for
content validity. Their comments and corrections were used to prepare the final
draft of the questionnaire used for data collection.

3.8 Reliability of the Instrument

To ascertain that the instrument was reliable, that is, able to consistently elicit the
same information from the respondents, the researcher adopted the test re-test
technique. 15 copies of the questionnaire were administered to 15 respondents not
participating in the study. The instrument was re-administered to the same
respondents within an interval of two weeks. The responses (results) of the first
and second tests were collated and subjected to a reliability test using the Pearson
Product Moment Correlation Analysis. The result obtained yielded a reliability
index of 0.8, using a cronbach alpha indicating high reliability of the research
instruments.

55
3.9 Operational Measures of the Variables

A variable is a measurable characteristic of a person, object, place or events.

According to Joe (2005), variables are conditions or characteristics that a
researcher observes, manipulates, control and measure in order to obtain relevant
data that will address his research question and research variables.

The major variables for the study are internal audit techniques measured by size of
the internal audit, qualification of the internal audit and quality of audit work.
While fraud management is measured by fraud prevention and fraud investigation.

3.10 Data Analysis Technique

The data obtained from a study may or may not be in numerical or quantitative
form, that is, in the form of numbers. If they are not in numerical form, then we
can still carry out qualitative analysis based on experience of the individual. On the
other hand, if they are in numerical form, we start, by working out some
descriptive statistics to summarize the pattern of findings.

The data analysis techniques used in this study includes the Pearson correlation
method coefficient (rho) was used to test the stated hypotheses at a 95% (0.05)
level of significance. The rationale for this decision was due to the fact that the
researcher seeks to examine the relationship between internal audit techniques and
fraud management.

The r- Pearson correlation coefficient formula:

r= N∑ xy – (∑ x ¿( ∑ y )
[N∑x2 – (∑x)2][N∑y2 – (∑y)2]

56
Where
N = number of pairs of scores
∑ xy = Sum of the products of paired scores
∑ x = Sum of x scores
∑y = Sum of y scores
∑x2 = sum of squared x scores
∑y2 = sum of squared y scores
The statistical package for social sciences (SPSS) was also used in analyzing the
data.

57
 CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.1 Introduction

This chapter focuses on the presentation of collected data by employing tabulations

and simple percentage methods. Further, the hypotheses were tested with statistical

package for social sciences (SPSS) version 21 using Pearson Correlation analysis

in other to examine the relationship between the independent variables and the

dependent variables. Data were obtained with the help of the questionnaire

designed for the study. The result of the analysis carried out would be used to draw

the necessary inferences of the study.

This chapter will also provide the interpretation of the data which will be discussed

under the following sub- headings:

a. Reponses to questionnaire distributed

b. Data Analysis

c. Test of hypotheses

d. Discussion of findings

58
4.2 Data Presentation

Data generated from the field will in this section be presented in table and figures.
A total of 81 copies of questionnaire were distributed to employees of the selected
insurance firms in Rivers State.

Table 4.1: Questionnaire Administration and Responses.

Number involved Usable copies (%)

Distribution 81 100
Useful copies returned 70 86.4%
Discarded Response 4 4.9%
Lost in Transit 7 8.7%

Source: Research Data, 2018.

Table 4.1 above shows that a total of 81 copies of questionnaires were distributed
amongst employees (staff) comprising of employees within the top, middle and
lower managerial echelon of the selected insurance firms. Out of the 81 copies of
questionnaire administered, only 70 copies returned were considered useful, this
accounted for 86.4% responses rate. Due to obvious mistakes and incomplete
responses, 4 copies representing 4.9% were discarded, while 7 copies representing
8.7% could not be retrieved due to misplacement and other reasons given by the
respondents. Therefore, the total response rate that formed the basis of our analysis
was 70 copies representing 86.4% response rate.

59
4.2.1 DEMOGRAPHIC ANALYSIS

Table 4.2: Frequencies showing Gender of Respondents

Gander
Frequency Percent Valid Percent Cumulative
Percent
Male 52 74.3 74.3 74.3
Valid Female 18 25.7 25.7 100.0
Total 92 100.0 100.0
Source: Survey Data (2018)

In table 4.2 above, it shows that 52 (or 74.3%) of the respondents are male while
18 (or 25.7%) of the respondents are female.

Table 4.3: Frequencies showing Age of Respondents.

Age
Frequency Percent Valid Percent Cumulative
Percent
20-29 years 19 27.1 27.1 27.1
30-39 years 22 31.4 31.4 58.5
40-49 years 15 21.4 21.4 79.9
Valid
50-59 years 12 17.1 17.1 97.1
60 and above 2 2.9 2.9 100.0
Total 70 100.0 100.0
Source: Survey Data (2018)

Table 4.3 made us to understand that 19 (or 17.14%) of the respondents are within
the age range of 20-29 years, 22 (or 31.4%) are within the age range of 30-39years,
15(or 21.4%) are within 40-49 years, 12 (17.1%) are within the age range of 50-59
years while 2 (or 2.9%) are in the age range of 60 years and above.

60
Table 4.4 Percentage Distribution of Respondent’s Marital Status

marital status

Frequency Percent Valid Percent Cumulative

Percent

Single 49 70.0 70.0 70.0

Valid Married 21 30.0 30.0 100.0

Total 70 100.0 100.0

Source: Survey Data (2018)

From the above table of marital status, we observed that 51 of the respondents are
single representing 55.4% and 41 of the respondents are married representing
55.6% of the total respondents.

Table 4.5 Percentage distribution of respondent’s educational Level

Educational qualification

Frequency Percent Valid Percent Cumulative

Percent

O’ level 17 30.9 30.9 30.9

OND/HND 22 56.4 56.4 85.3

Valid B.sc 25 9.1 9.1 94.4

M.sc 6 3.6 3.6 100.0

Total 70 100.0 100.0

Source: Survey Data (2018)

From the table above, O’Level represent 30.9%, OND/HND represent 56.4%, B.sc

represent 9.1%, M.sc holders represented 3.6% of the 70 respondents.

61
Table 4.6 Percentage distribution of respondent’s numbers of years in the
Organization

No. of years in the organization

Frequency Percent Valid Percent Cumulative

Percent

1-5 years 31 44.3 44.3 44.3

6-10 years 25 35.7 35.7 80.0

Valid
11-15 years 14 20.0 20.0 100.0

Total 70 100.0 100.0

Source: Survey Data (2018)

The table above shows the numbers of years the respondents has been with the
organization. Respondent who has spent 1-5 years in the organization were 31
representing 44.3%, 6-10 represent 35.7%, while 11-15 years in the organization
represented 20% of the total 70 respondents.

Table 4.7 Percentage distribution of respondent’s managerial position

managerial position

Frequency Percent Valid Percent Cumulative

Percent

Top managers 15 21.4 21.4 21.4

Middle managers 20 28.6 28.6 50.0

Valid
Lower managers 35 50.0 50.0 100.0

Total 70 100.0 100.0

The table above shows the managerial position of the respondents. Top managers
represents 21.4%, middle managers are 28.6% while the Lower manager represents
50% of the total respondents.

62
4.3 Data Analysis
Univariate Analysis on the Dimensions of Internal Auditing Techniques and
Measures of Fraud Management in Insurance Rivers State.
Table 4.8

S/N Quality of internal audit work (5) (4) (3) (2) (1)
SA A N D SD
M1 The quality system of our organization is 25 16 10 12 7
defined
M2 Current procedures are in line with national 37 18 8 4 3
standards
M3 Our audit work are usually scrutinized by 30 24 11 5 0
industry experts
S/N Size of the internal audit

M4 The number of our staff in the internal audit 35 21 9 3 2

department is sufficient to embark on the
exercise
M5 The staff in the unit are dedicated and 29 26 5 8 2
trustworthy
M6 The size of the staff in the department are 31 28 4 6 1
according to industry specification
S/N Qualification of the internal audit

M7 Our internal auditors have the necessary 25 16 10 12 7

academic qualification

M8 The I.T. skills set is very rich 30 24 11 5 0

M9 We encourage our internal auditors to develop 29 26 5 8 2
themselves
S/N Fraud prevention

63
M7 There is written code of ethics business 21 25 13 6 5
conducts

M8 Ongoing fraud awareness training is carried 20 17 6 15 12

out
M9 Management set an example and enforce a 34 23 2 8 3
zero tolerance approach on fraud issues
S/N Fraud investigation

M1 There is an internal audit function within the 29 26 5 8 2

organization
M2 Internal auditors of our firm liaise with 21 25 13 6 5
external auditors to ensure fraud are detected
M3 Our internal auditors have access to reported 30 24 11 5 0
instances of fraud.

Total Response 426 339 123 111 51

Total No. Of questions answered ( 70 1050

respondents multiplied by 15 questions)

Total percentage of responses (%) 40.6 32.3 11.7 10.6 4.9

Source: Survey Data (2018)

Table 4.8 shows the response of 70 respondents on their opinion on internal audit

techniques and fraud management under study with reference to (quality of internal

audit work, internal audit size, qualification of the internal audit) and (fraud

prevention, fraud detection). A total of 1050 questions were answered concerning

64
quality of audit work, size of the internal audit, qualification of the internal audit,

fraud prevention and fraud investigation. Results revealed that 40.6% of the

respondent strongly agreed to the 1050 questions, 32.3% agreed to the questions,

11.7% were neutral to the questions, 10.6% disagreed while 4.9% strongly

disagreed to the questions concerning on internal audit techniques and fraud

management. This implies internal audit techniques have positive impact on the

fraud management.

4.4 TESTING OF HYPOTHESES

When data are collected, the essence is to examine the relationship that exist

between the data collected and the hypotheses that were stated for the test to see

whether the perceived notion about the population before the research work holds

or not.

In testing each hypothesis that had been stated on this study, we use the available

and relevant table of responses generated from the study.

The research statistics used for this study is the Pearson correlation analysis, while

the Z test was used to test the level of significance. This is because of the large

number of sample size (70). This will be tested at a significance level of 5% or

0.05 with the aid of Statistical Package for Social Sciences (SPSS).

65
Rejection Rule:

p-value approach: Reject H0 if p-value ≤ α

Accept H0 if p-value ≥ α

The tested hypotheses were interpreted through the Dana’s (2001) correlation
decision framework. Where

± 00– 0.19 (Very weak)

± 0.20- 0.39 (Weak)

± 0.40- 0.59 (Moderate)

± 0.60- 0.79 (Strong)

± 0.80- 0.99 (Very strong)

± 1 (Perfect)

While testing the hypothesis 2-tailed test was used and the significance level was
5% (0.05).

Table 4.9 Statistical Analysis for Hypothesis One

H01: There is no significant relationship between size of the internal audit and
fraud prevention.

Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

66
If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

Correlations

Size of the Fraud

internal audit prevention

Spearman’s rho Pearson Correlation 1 .897

Size of the internal
Sig. (2-tailed) .000
audit
N 70 70
Pearson Correlation .897 1

Fraud prevention Sig. (2-tailed) .000

N 70 70

Decision:

From the result above, the correlation coefficient (r = 0.897) between size of the

internal audit and fraud prevention has a strong positive linear relationship. The

coefficient of determination (r2 = 0.80) indicates that 80% of fraud prevention can

be explained by size of the internal audit. The significant value of 0.000 (p< 0.05)

reveals a significant relationship. Based on that, the null hypothesis was rejected.

This implies that, there is a significant relationship between size of the internal

audit and fraud prevention.

Table 4.10 Statistical Analysis for Hypothesis Two

H02: The size of the internal audit has no significant impact with fraud
investigation.

67
Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

Correlations

Size of the Fraud

internal audit investigation

Pearson Correlation 1 .915

Size of the internal
Sig. (2-tailed) .000
audit
N 70 70
Pearson Correlation .915 1

Fraud investigation Sig. (2-tailed) .000

N 70 70

Decision:

From the result above, the correlation coefficient (r = 0.915) between size of the

internal audit and fraud investigation has a strong positive linear relationship. The

coefficient of determination (r2 = 0.84) indicates that 84% of fraud investigation

can be explained by size of the internal audit. The significant value of 0.000 (p<

0.05) reveals a significant relationship. Based on that, the null hypothesis was

rejected. This implies that, the size of the internal audit has significant impact with

fraud investigation.

68
Table 4.11 Statistical Analysis for Hypothesis Three
H03: There is no significant relationship between qualification of the internal audit
and fraud prevention.

Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

Correlations

Qualification of Fraud
the internal audit prevention

Pearson Correlation 1 .911

Qualification of the
Sig. (2-tailed) .000
internal audit
N 70 70
Pearson Correlation .911 1

Fraud prevention Sig. (2-tailed) .000

N 70 70

Decision:

From the result above, the correlation coefficient (r = 0.911) between qualification

of the internal audit and fraud prevention has a strong positive linear relationship.

69
The coefficient of determination (r2 = 0.83) indicates that 83% of fraud prevention

can be explained by qualification of the internal audit. The significant value of

0.000 (p< 0.05) reveals a significant relationship. Based on that, the null

hypothesis was rejected. This implies that, there is a significant relationship

between qualification of the internal audit and fraud prevention.

Table 4.12 Statistical Analysis for Hypothesis Four

H04: The qualification of the internal audit has no significant impact with fraud
investigation.

Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

Correlations

Qualification of Fraud
the internal audit investigation

Pearson Correlation 1 .899

Qualification of the
Sig. (2-tailed) .000
internal audit
N 70 70
Pearson Correlation .899 1

Fraud investigation Sig. (2-tailed) .000

N 70 70

70
Decision:

From the result above, the correlation coefficient (r = 0.899) between qualification

of the internal audit and fraud investigation has a strong positive linear

relationship. The coefficient of determination (r2 = 0.81) indicates that 81% of

fraud investigation can be explained by qualification of the internal audit. The

significant value of 0.000 (p< 0.05) reveals a significant relationship. Based on

that, the null hypothesis was rejected. This implies that, the qualification of the

internal audit has significant impact with fraud investigation.

Table 4.13 Statistical Analysis for Hypothesis Five

H05: There is no significant relationship between quality of the internal audit work
and fraud prevention.

Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

71
 Correlations

Quality of audit Fraud

work prevention

Pearson Correlation 1 .963

Quality of audit work Sig. (2-tailed) .000

N 70 70
Pearson Correlation .963 1

Fraud prevention Sig. (2-tailed) .000

N 70 70

Decision:

From the result above, the correlation coefficient (r = 0.963) between quality of

internal audit work and fraud prevention has a strong positive linear relationship.

The coefficient of determination (r2 = 0.93) indicates that 93% of fraud prevention

can be explained by quality of internal audit work. The significant value of 0.000

(p< 0.05) reveals a significant relationship. Based on that, the null hypothesis was

rejected. This implies that, there is a significant relationship between quality of

internal audit work and fraud prevention.

Table 4.14 Statistical Analysis for Hypothesis Six

H06: The quality of the internal audit work has no significant impact with fraud
investigation.

72
Decision rule:

If p-value is greater than alpha value, accept the null hypothesis and reject the

alternate.

If p-value is less than alpha value, reject the null hypothesis and accept the

alternate. Below is the SPSS output result:

Correlations

Quality of audit Fraud

work investigation

Pearson Correlation 1 .926

Quality of audit work Sig. (2-tailed) .000

N 70 70
Pearson Correlation .926 1

Fraud investigation Sig. (2-tailed) .000

N 70 70

Decision:

From the result above, the correlation coefficient (r = 0.926) between quality of
internal audit work and fraud investigation has a strong positive linear relationship.
The coefficient of determination (r2 = 0.86) indicates that 86% of fraud
investigation can be explained by quality of internal audit work. The significant
value of 0.000 (p< 0.05) reveals a significant relationship. Based on that, the null
hypothesis was rejected. This implies that, the quality of the internal audit work
has significant impact with fraud investigation.

73
4.5: DISCUSSION OF FINDINGS

The first hypothesis (Ho1) stated that there is no significant relationship between

size of the internal audit and fraud prevention. This was tested at 5% significance

level using Pearson correlation coefficient. The result from our analysis showed a

p-value of 0.000 while the alpha value was 0.05, therefore, following the decision

rule the null hypothesis was rejected and the alternate hypothesis accepted which

state that there is a significant relationship between size of the internal audit and

fraud prevention. Our analysis also showed correlation coefficient of 0.897 and

coefficient of determination of 80%. This implies that there is a strong positive

relationship between size of the internal audit and fraud prevention.

The second hypothesis (Ho2) stated that the size of the internal audit has no

significant impact with fraud investigation. This was tested at 5% significance

level using Pearson correlation coefficient. The result from our analysis showed a

p-value of 0.000 while the alpha value was 0.05, therefore, following the decision

rule the null hypothesis was rejected and the alternate hypothesis accepted which

state that there is a significant relationship between size of the internal audit and

fraud investigation. Our analysis also showed correlation coefficient of 0.915 and

coefficient of determination of 84%. This implies that the size of the internal audit

work has significant impact with fraud investigation.

74
The third hypothesis (Ho3) stated that there is no significant relationship between

qualification of the internal audit and fraud prevention. This was tested at 5%

significance level using Pearson correlation coefficient. The result from our

analysis showed a p-value of 0.000 while the alpha value was 0.05, therefore,

following the decision rule the null hypothesis was rejected and the alternate

hypothesis accepted which state that there is a significant relationship between

qualification of the internal audit and fraud prevention. My analysis also showed

correlation coefficient of 0.911 and coefficient of determination of 83%. This

implies that there is a strong positive relationship between qualification of the

internal audit and fraud prevention.

The fourth hypothesis (Ho4) stated that the qualification of the internal audit has no
significant impact with fraud investigation.

This was tested at 5% significance level using Pearson correlation coefficient. The

result from our analysis showed a p-value of 0.000 while the alpha value was 0.05,

therefore, following the decision rule the null hypothesis was rejected and the

alternate hypothesis accepted which state that there is a significant relationship

between qualification of the internal audit and fraud investigation. My analysis

also showed correlation coefficient of 0.899 and coefficient of determination of

81%. This implies that the qualification of the internal audit has significant impact

with fraud investigation.

75
The Fifth hypothesis (Ho5) stated that there is no significant relationship between

quality of internal audit work and fraud prevention. This was tested at 5%

significance level using Pearson correlation. The result from our analysis showed a

p-value of 0.000 while the alpha value was 0.05, therefore, following the decision

rule the null hypothesis was rejected and the alternate hypothesis accepted which

state that there is a significant relationship between quality of internal audit work

and fraud prevention. Our analysis also showed Pearson correlation to be 0.963

and co-efficient of determination of 93% which implies that there is a strong

positive relationship between quality of internal audit work and fraud prevention.

The sixth hypothesis (Ho6) stated that the quality of the internal audit work has no

significant impact with fraud investigation.

This was tested at 5% significance level using Pearson correlation. The result from

our analysis showed a p-value of 0.000 while the alpha value was 0.05, therefore,

following the decision rule the null hypothesis was rejected and the alternate

hypothesis accepted which state that there is a significant relationship between

quality of internal audit work and fraud investigation. Our analysis also showed

correlation co-efficient to be 0.926 and co-efficient of determination of 87%. This

implies that the quality of the internal audit work has significant impact with fraud

investigation.

76
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0. INTRODUCTION
In this chapter, we will provide a summary and discussion of our findings, and
draw conclusions as well as make recommendations for possible future
research.
5.1. SUMMARY OF FINDINGS
The findings of this research revealed that significant relationship between internal
audit technique and fraud management in quoted insurance companies in Nigeria:
1. There is a strong positive relationship between size of the internal audit and
fraud prevention.
2. The size of the internal audit work has significant impact with fraud
investigation.

3. There is a strong positive relationship between qualification of the internal audit

and fraud prevention.

4. The qualification of the internal audit has significant impact with fraud
investigation.

5. There is a strong positive relationship between quality of internal audit work

and fraud prevention.

6. The quality of the internal audit work has significant impact with fraud
investigation.

77
5.2. CONCLUSION
Using the method as described in chapter three to analyze the questions and a test
into the hypothesis provided by both the conceptual and theoretical framework in
prior chapters, The study examined intensively using very scientific providing
analysis into the relationship between internal audit techniques and fraud
management in quoted insurance companies in Nigeria. The study therefore shows
a strong positive significant relationship between size of internal audit and fraud
prevention. By implication of this firms that tend to implement internal audit
techniques tend to experience increasing performance. However, all of the
examined relationships proved significant.

78
5.3. RECOMMENDATIONS
Based on our findings, and conclusions above, we make the following
recommendations:
1. The researcher advices that firms should establish fraud policy and have a fraud
governance structure in place that assigns responsibilities for fraud investigations.
2. That the management should incorporated appropriate controls and skills to
prevent, detect, and investigate fraud.
3. That the management and the internal audit activity periodically assess the
effectiveness and efficiency of fraud controls.
4. That the management should ensure fraud investigation work papers and
supporting documents appropriately secured and retained.

5.4 SUGGESTION FOR FURTHER STUDIES

1. The study was conducted in Port Harcourt. Similar study should be conducted in other

geographical locations to confirm whether the result would be similar.

2. The study is limited to insurance firms in Port Harcourt. Future studies should duplicate

same in other sectors like health sector, banking sector, educational sector, and large

scale firms and so on.

3. Also, the study should make use of other variables to measure internal audit techniques

other than the variables used in this study.

4. The study should make use of other variables to measure fraud management other than

the variables used in this study.

79
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82
 APPENDIX

Section A

Please kindly fill in your opinion by ticking the appropriate box. Each question
should only have one answer.

Demographic Characteristics.

1. Gender: Male Female

2. Age Category: 0-15 16-25 36-35 46-55 56-above
3. Marital status: Single Married
4. Occupation: Civil servant Student Others specify
5. Educational background: O’Level ND/HND B.SC M.SC
Others specify………………….
6. Which of these managerial cadres are you in your present employment?

A. Top management ( ) B. Middle management ( ) C. Lower management ( )

7. Which of these appropriate your duration with your firm?

A. 1-5yrs ( ) B. 6-10yrs ( ) C. 11-15yrs ( ) C. 16-20yrs ( ) D. 21 and Above ( )

8. Which of these appropriate the number of years your firm has been in operation:
A. 1-5yrs ( ) B. 6-10yrs ( ) C. 11-15yrs ( ) D.16-20yrs ( ) E. 21 and above ( )

83
 SECTION B

Tick (√ ) in the box the option that best explains your opinion.

Key: Strongly Agree-SA, Agree-A, Neutral-N, Disagree-D, Strongly Disagree-SD

S/N Quality of audit work (5) (4) (3) (2) (1)

SA A N D SD
M1 The quality system of our organization is
defined
M2 Current procedures are in line with national
standards
M3 Our audit work are usually scrutinized by
industry experts

S/N Size of the audit (5) (4) (3) (2) (1)

SA A N D SD
M4 The number of our staff in the internal audit
department is sufficient to embark on the exercise
M5 The staff in the unit are dedicated and trustworthy
M6 The size of the staff in the department are
according to industry specification
M,

S/N Qualification of the audit (5) (4) (3) (2) (1)

SA A N D SD

M7 Our internal auditors have the necessary

academic qualification

M8 The I.T. skills set is very rich

M9 We encourage our internal auditors to

84
 develop themselves
S/N Fraud prevention (5) (4) (3) (2) (1)
SA A N D SD

M10 There is written code of ethics business

conducts

M11 Ongoing fraud awareness training is

carried out
M12 Management set an example and enforce
a zero tolerance approach on fraud issues

S/N Fraud investigation (5) (4) (3) (2) (1)

SA A N D SD
M13 There is an internal audit function within the
organization
M14 Internal auditors of our firm liaise with
external auditors to ensure fraud are detected
M15 Our internal auditors have access to reported
instances of fraud.

85