Internal auditor characteristics, internal audit effectiveness and moderating

effect of senior management

1. Introduction
Internal audit has become a crucial function within organisations due to the recent spate of corporate
collapses and financial scandals (Schneider, 2003; Arena et al., 2006). These events made internal
audit as one of the contributing factors towards good corporate governance, and has strongly
influenced on the adoption and practice of the internal audit. The effectiveness is a key issue for
those interested in internal audit such as internal auditors themselves or its main customers, namely:
(1) the board and the audit committee, to whom internal audit reports, (2) senior management, who
should be sure that internal audit activities cover the principal business risks, and (3) external
auditors, who have a direct interest in the work of internal audit (Brilliant et al., 1997; Mihret et al.,
2010; Lenz and Hahn, 2015). However, there is difference in perspectives among those interested
groups, for example, external auditors and audit committee are more interested in assurance
regarding controls (Hermanson and Rittenberg, 2003), while senior management wants the internal
auditor to provide both assurance and consulting (Sarens and Beelde, 2006). This difference partly
contributed to the incompatibility among researchers about the factors influencing internal audit
effectiveness and how we can measure it (Arena and Azzone, 2009). Hence, a special investigation
for each group becomes a necessary requirement, and this study aims to examine the influence of
some factors on the effectiveness of internal auditing from the perspective of external auditors.
There are several reasons why internal audit effectiveness remains a continuously relevant issue.
First, the role of internal audit of a company is considered important in the corporate governance field
(Bostan and Grosu, 2010). Second, the effectiveness of internal audit is a new research area in
internal auditing (Sarens, 2009), so only few studies have studied it worldwide, and several
researchers have recommended the need for more research especially in developing countries (Al-
Twaijry et al., 2003; Mihret and Yismaw, 2007; Yee et al., 2008; Endaya and Hanefah, 2013). Third,
as indicated earlier, until today, there is no consensus among researchers either about the factors
influencing, or the best framework for the effectiveness of internal auditing (Endaya and Hanefah,
2013). Thus, this study intends to contribute in this area of research.
This study also aims to examine the direct relationship between internal auditor’s characteristics and
internal audit effectiveness. The current study argues that individual characteristics of internal
auditors are necessary for internal audit effectiveness. This view is supported by International
Standards for Professional Practice of Internal Auditing (ISPPIA), which adopts these characteristics
as attributes for both organizations and individuals (IIA, 2012). This study also examines senior
management support as moderating variable on the above relationship. The current study argues that,
only when senior management has the interest and urge to support activities will ensure internal audit
effectiveness. The current study complements the few existing research that studied the importance of
senior management support such as Sarens and Beelde (2006), Sterck and Bouckaert (2006),
Schneider (2008), Arena and Azzone (2009), Martinov-Bennie (2011), and Lenz and Hahn (2015).
For example, Sarens and Beelde (2006) argue that the acceptance and appreciation of internal audit
within the company depends entirely on senior management support. Similarly, Schneider (2008)
confirms that the degree to which senior management commits to implement the recommendations of
internal audit has a significant impact on the effectiveness of internal auditing. Arena and Azzone
(2009) measured the effectiveness of internal auditing as a percentage of recommendations suggested

1
by internal auditors and those implemented by senior management. In addition, Sterck and Bouckaert
(2006) and Soh and Martinov-Bennie (2011) considered the relationship of internal auditing with
senior management in terms of support and reporting lines as crucial in contributing to internal audit
effectiveness. Moreover, Lenz and Hahn (2015), confirm that the relationship between internal audit
and its main customers including senior management will continue to be an important research field.
The limited research and the lack of empirical study in this particular area motivate this study. First,
the majority of previous studies have examined the existence of these characteristics at the
department level and ignored at the individual level. Second, no attention has been given in previous
studies, to examine the moderating role of senior management support on the relationship between
internal auditor’s characteristics and internal audit effectiveness.
The current study extend the investigation in one of the key issues for auditing: assessment of internal
audit effectiveness from the perspective of external auditors using data collected from Libya for the
following reasons. First, External auditing standards (SAS No. 9, SAS No.65, and ISA 610), that
originated in the developed countries and have been adopted by developing countries, recommend
external auditors to evaluate internal audit effectiveness when relying on the work of internal
auditors. This reliance assists in achieving audit efficiency, and the level of this reliance may also
vary accordingly (Mihret and Admassu, 2011). This reliance depends on external auditors’
perceptions about the role and effectiveness of internal audit, and external auditors rely on the work
performed by internal auditors only when they are sure about the effectiveness of internal auditing
(Al-Twaijry et al., 2004; Endaya, 2014). Second, effective coordination and cooperation between
internal and external auditors lead to several benefits for them and also for the clients whom they
serve (Endaya, 2014), and the benefits for external auditor could include a decrease in the size of
audit sample and its processes. This case could finally lead to saving time and cost of the audit
(Wallace, 1984; Felix et al., 2001; Ho and Hutchinson, 2010; Mat Zain et al., 2015). Third, external
auditing is mandatory for Libyan firms (Libyan commercial law 1953, articles 580 and 583; the
income tax law No. 7/2010, articles 49 and 71), and the audit process must be completed no later than
the four months after the end of the year (the income tax law No. 7/2010, articles 49 and 71).
Therefore, as a result of the limited time available for the external auditors and to save cost, Libyan
auditors rely on the work of internal auditors in many respects in carrying out their duties. This view
is supported by Agbara (2011) who noted that, most of Libyan external auditors relied, to some
extent, on the work of the internal auditors. Fourth, limited research about internal auditing in Libya
as a developing country (Abuazza et al., 2015) increases the importance of achieving this study.
The findings are particularly interesting, as it confirms both the crucial role of senior management
support on internal audit effectiveness as well as its moderating effect on the direct relationship
between internal auditor’s characteristics and internal audit effectiveness. This result contributes to
both audit and management fields by studying the relationship between internal audit and senior
management, and extends to other relevant and related areas too. The findings of the study will be
useful to other developing and developed countries. As with other studies, this study has its own
limitations. Therefore, the current study emphasizes the need for further research in this new context
and encourages it.
The remainder of this study is structured as follows: Section 2 provides the literature review and
hypotheses development; Section 3 covers the methodology; Section 4 contains the empirical results.
The study ends with a summary and conclusion.

2
2. Literature review and hypotheses development

2.1 Prior Studies

Literature on internal audit effectiveness in the 1980s and 1990s focused more on this issue from the
perspective of external auditors at the departmental level by examining the three factors proposed by
AICPA (SAS No. 9; SAS No.65), which included competence, objectivity and performance of
internal audit department. Studies such as Brown (1983), Schneider (1984), Messier and Schneider
(1988) and Maletta (1993) have attempted to understand external auditors’ rank ordering of the
importance of these factors without an explicit attempt to model the interactions among these factors
(Krishnamoorthy, 2002). According to Krishnamoorthy (2002) it is futile to attempt a ranking of
these factors since there is no single factor that can be considered dominant under all conditions.
Schneider (2010) argues that, these factors are integrated when the external auditors make their
decisions on internal auditing. Although ISPPIA has adopted these characteristics as attributes that
must be applied for both the organizations and individuals (IIA, 2012), past researches have not
given adequate attention to study the relationship between internal auditor’s characteristics and
internal audit effectiveness.

Sarens and Beelde (2006) based their study on five case studies within Belgian companies found that
the senior management expectation has a significant influence on internal auditing, and the internal
auditing meets most of these expectations. The results of the study also indicate that, senior
management expects internal audit to: firstly, compensate for management loss of control due to
organisational complexity; secondly, safeguard the corporate culture through personal contacts with
people in the field; thirdly, be a supportive function in the monitoring and improvement of both the
risk management and internal control system; fourthly, be a training ground for future managers;
and fifthly, cooperation between internal and external auditors increases audit coverage. On the other
hand, internal auditors expect the senior management to take the first step in the formalization of the
risk management system. They look for the support and overall acceptance from senior management.

Mihret and Yismaw (2007) identified factors that have an impact on the effectiveness of internal
audit services, based on public sector higher educational institutions in Ethiopia. Their model
consisted of four interrelated factors: internal audit quality; management support; the organisational
setting; and attributes of the auditees. Their findings indicate that internal audit effectiveness is
strongly influenced by internal audit quality and management support. In contrast organisational
setting and auditees attributes do not have a strong impact on internal audit effectiveness. The
researchers also suggest a need for future research to fully understand internal audit effectiveness by
using other variables.

In a related study, Halimah Ahmad et al., (2009) attempted to explore the significance of internal
auditing in the Malaysian public sector, and its subsequent extent and influence in the public sector
hierarchy and decision making. Their findings indicate that internal auditing is curtailed by under-
staffing and hampered by inadequate support from top management, while the auditors seldom
extend their full cooperation. The auditors themselves lack appropriate knowledge and training on
effective auditing approaches. The negative perception accorded to internal audit led to inaction by

3
management on recommended remedies, which only serve to nullify the positive contribution of
internal audit that strives to elevate the service delivery quality of the public sector.

Arena and Azzone (2009) studied the effectiveness of internal auditing by dividing the internal
auditors into three different groups according to their opinions as follows: the first group related the
effectiveness of internal audit with the quality of internal audit procedures, the second group related
internal audit effectiveness to the output of internal audit activities and finally, the third group related
it to the outcome of the audit activities. Arena and Azzone (2009) measured the effectiveness of
internal auditing by the level of internal audit recommendations implemented by senior management.
Sarens (2009), in his editorial review on twenty two papers presented in the Academic Conference on
Internal Audit and Corporate Governance, which was held in Rotterdam, the Netherlands, in April
2008, recommended that the characteristics of both internal audit and individuals as crucial areas for
future research in internal audit effectiveness. Research in this area would provide invaluable input
for educating and training of future internal auditors.
Endaya and Hanefah (2013) argued that agency theory; institutional theory; and communication
theory as appropriate theories for building a theoretical framework of internal audit effectiveness, and
suggested a model that comprises internal auditor’s characteristics and internal audit department
performance as factors that influences directly the internal audit effectiveness, and organization
member support as a moderating factor. They too suggested that the theoretical framework proposed
in their study need to be further studied in future studies.
Lenz and Hahn (2015) provided a synopsis of literature about internal audit effectiveness during the
last decade, and suggested a multifaceted model comprising macro and micro factors that impact
internal audit effectiveness. The macro factors, in their model, comprise four key dimensions or
categorical blocks: organizational factors; internal audit resources; internal audit processes; and
internal audit relationships, while the micro factors comprise the following three institutional forces:
compliance with laws and regulations (coercive force); consultation or professional bodies (normative
force); and learning from mimicking others’ (good) practice and prescriptions from consulting firms
(mimetic force). According to them the relationship between internal audit and senior management
will continue to be an important research field.
The current study complements the prior studies referred to above. In the current study, while agency
theory is mainly employed to understand economic motives that make internal auditors embark on an
on-going quest to achieve their personal interests even if they were against the organization members’
interests or organization interests, institutional theory explains more about the level of compliance
with standards for the professional practice of internal audit and its auditors, and its impact on
companies’ support of internal audit (Endaya and Hanefah, 2013).
2.2 Hypotheses Development
This section displays the hypotheses of study based on the literature and the arguments provided by
this paper.

Objectivity is a key element of internal audit effectiveness (Schneider, 2003). Internal auditors
should have personal objectivity that permits the proper performance of their duties (IIA, 2004), and
must have an impartial, unbiased attitude and avoid any conflict of interest (IIA, 2012, sec. 1120).

4
Professional Bodies (AICPA, 1975, 1991; IIA Standards; IFAC, 2009) have demanded the
objectivity of internal auditing, and also several studies have considered objectivity as a significant
element for internal auditing (Brown, 1983; Schneider, 1984, 2003; Messier and Schneider, 1988;
Maletta, 1993; Stewart and Subramaniam, 2010). In these studies, objectivity was measured by
organizational status of internal auditing and its reporting level. Despite the importance of these
elements for internal audit objectivity at the department level, however, their presence do not mean
simply the existence of objectivity when there is any threat for objectivity at the individual level.

Several studies too noted the importance of effective communication (Endaya and Hanefah,
2013). Also, ISA 610 (2009) issued by IFAC requires external auditors to evaluate the effective
communication when using the work of internal auditors. Mihret and Yismaw
(2007) consider effective communication as part of the internal audit quality, which is considered
one of the important variables that influence the effectiveness of internal auditing.

Standards issued by professional bodies (AICPA, 1975, 1991; IIA Standards; IFAC, 2009) demand
proficiency and due professional care (competence) of internal auditors, and several studies (Brown,
1983; Schneider, 1984, 1985, 2003; Messier and Schneider, 1988; Maletta, 1993) have considered
proficiency and due professional care as a significant element of internal auditing.

The Institute of Internal Auditors (IIA) requires all its members to attend continuous professional
development programs. Several studies considered training and development as part of
the competence of internal auditor (Brown, 1983; Schneider, 1984; Messier and Schneider, 1988).
As such, in this study due professional care is argued important for the internal auditors, and even
more important is the training and development to improve their professional performance.

The relationship among the above characteristics is clear. For example, internal auditors must
possess the knowledge, skills, and other competencies that are needed to achieve their individual
responsibilities (proficiency and due professional care), and the only way for internal auditors to
continue this professional conduct is by undergoing proper training and development program. On
the other hand, professional judgment will lose value when there is any doubt about objectivity of
internal auditors. The internal auditors work can fail if it is not communicated effectively.

As discussed above, this study expects internal auditor’s characteristics to influence the effectiveness
of internal auditing. Thus, the following hypothesis is proposed.

Hypothesis 1: Internal auditor’s characteristics are positively related to internal audit effectiveness.

Although a number of findings show that there is a relationship between internal auditor’s
characteristics and internal audit effectiveness, it nevertheless depends on senior management
support. For example, senior management actions have a significant impact on the relationship
between objectivity and internal audit effectiveness. More specifically, when senior management
does not interfere in internal audit scope and allow unrestricted auditing work on them, the impact of
objectivity on internal audit effectiveness is higher. Conversely, senior management interference or
restriction in internal audit scope has a negative impact. In addition, open and candid
communications between chief internal auditor and senior management, and the encouragement for
feedback during the communication process, without any doubt, have a significant impact on this
relationship. Moreover, the facilities provided by management such as computer techniques

5
programs and other techniques and the introductory training program enhances the competence of
internal auditor which need adequate budget for training programmes. This budget is reviewed and
approved by senior management. Therefore, an adequate internal audit budget for training
programmes strongly depends on the support of senior management. Also, in prior literature, no
study was undertaken to examine the impact of senior management support as a moderating variable.
Therefore, this study expects senior management support to moderate the relationship between
internal auditor’s characteristics and internal audit effectiveness. The second hypothesis is as
follows:

Hypothesis 2: The relationship between internal auditor’s characteristics and internal audit
effectiveness is moderated by senior management support.

3. Methodology

3.1 Population and Sample of the Study

The population of this study comprised different auditing firms located in Tripoli wherein the
majority of Libyan audit offices are located including the big ones. The subjects of this study were
limited to the members of Libyan Association of Accountants and Auditors (LAAA). Registration as
a LAAA’s member requires at least a bachelor's degree in accounting and five years’ experience of
accounting work in audit office after graduation. These education and experience conditions provide
a guarantee on the ability of LAAA's members to evaluate internal audit effectiveness. Also due to
political uncertainties during the study period, the exact number of LAAA members and the number
of auditing firms located in Tripoli were not available. Therefore, convenience sampling was used to
collect data during the first quarter of 2015.
To increase the anticipated response rate for the empirical study, this study has adopted the following
steps. Firstly, this study adopts the personally administered questionnaire, which normally, in Libya
as a developing country, has the highest response rate. Secondly, this study also adopts collection
data through audit offices, because data collection process through audit offices is easier than
collecting from individuals directly, and allows access to the largest number of the target sample. On
the other hand, to increase the internal validity, participants were advised not to discuss the questions
and answers with their colleagues and they were also requested to return the questionnaire once it
was completed.
Tabachnick and Fidell (2007), suggests the following formula for calculating sample size: N > 50 +
8 m (where m= number of variable). Thus, 74 subjects were required for this study, but in order to
ensure a higher response rate, 150 LAAA’s members were chosen for the distribution of the
questionnaire. To minimize the impact of the size of the office on the sample size, only three LAAA
members were chosen from each firm. This approach is similar to the method adopted by Zuraidah
Mohd Sanusi et al. (2009), whereby only six external auditors from each audit firm were chosen for
their study.

The survey involved the following phases: (1) pretest, and (2) actual survey. The questionnaire was
pretested by four academics specializing in accounting including two LAAA members. The purpose
was to confirm that terms and items used were adequate and suitable for the study. Based on the
comments collected from the pretest, the questionnaire was reviewed and amended. The survey

6
implementation followed three steps: (i) initial submission; (ii) first follow up; and (iii) second
follow up. In the first step, three LAAA members from each firm were given the questionnaires. The
first follow-up was done through phone call for their cooperation and reminder to complete the
questionnaire and returning it within one week, while the second follow-up was done through
visiting these offices to collect the questionnaires from those who answered and a reminder to others.

A few of the audit offices did not allow questionnaires to be sent to their audit staff due to various
reasons including being too busy or very tight schedule. Furthermore, some LAAA members could
not be reached because their office had moved elsewhere. From 150 questionnaires distributed, 121
were returned, and seven questionnaires (two due to missing values, and five due to outliers) were
found to be not suitable. The respondent’s profile is in Table 1.

INSERT TABLE 1 ABOUT HERE

Table 1 show that all respondents have high educational background; this is in line with LAAA’s
requirements for registration as a LAAA member, which requires at least a bachelor's degree in
accounting (78.9%). Majority (43.0%) of them have more than 10 years of auditing experience. Most
of the respondents too are from audit firms with less than 5 members (46.5%). Nevertheless, the
respondents do represent all sizes of the audit firms.

3.2 Variable measurement

Internal auditor’s characteristics in this study include four dimensions covering twelve items. Three
items identified by Mutchler (2003) to measure the objectivity, three items to examine the
relationship between internal auditor and auditees (Smith, 2005), and to measure effective
communication were used in this study. Another three items used by previous studies such as Ahmad
et al., (2009), Schneider (2008) and Ali et al., (2007) to measure the proficiency and due
professional care, and three items used by Desai and Desai (2010), Ali et al., (2007), Haron et al.,
(2004), Messier and Schneider (1988), Schneider (1984) and Brown (1983) to measure training and
development were also adopted in this study. The internal auditor’s characteristics are measured on a
five-point Likert scale ranging from 1= not at all to 5= strongly influence.

Senior management support is measured by its actions and its requests that aim to strengthen internal
auditing. In this study, senior management support is measured based on four items developed by
ISPPIA and used by previous studies such as Mihret et al (2007), Mousa (2005), Golen (2008), and
Smith (2005). Items of senior management support are measured on a five-point Likert scale ranging
from 1= not at all to 5= strongly influence.
As mentioned earlier, there is no agreement among researchers about measuring the effectiveness of
internal auditing. Audit researchers relate it either to the quality of internal audit procedures, output of
activities or outcome of activities (Arena and Azzone, 2009). Lenz and Hahn (2015) noted that a
number of researchers (Felix et al, 2001; Krishnamoorthy, 2002; Cohen et al, 2010; Messier et al,
2011) have considered internal auditing as an effective function when meeting expectations of
external auditors. Lenz and Hahn (2015) confirm that the higher the utilitarian benefit for external
auditors leads to the higher internal audit effectiveness from external auditors’ perspective. External

7
auditors, as a main user of the internal auditing report, are more interested in assurance regarding
controls (Hermanson et al., 2003), and one of the main benefits for them is internal auditors
evaluation of the internal control system (Hasnah Haron et al., 2004). As such, the effectiveness of
internal auditing from the perspective of external auditors depends on the effectiveness of internal
control system in auditee organisation. The effectiveness of internal auditing is very important for the
management as well as the external auditors. The outcomes of internal auditing address a wide range
of aspects i.e. the output of the audit process (Arena and Azzone, 2009). This includes the
effectiveness of the internal control system in auditee organisation (Dittenhofer, 2001). In this study,
internal audit effectiveness is measured based on items used by Dittenhofer (2001), who considered
internal auditing as effective only when it can be determined that the auditee organization is
effectively complying with policies, procedures, laws, and regulations (Dittenhofer, 2001). Therefore,
four items in this study are used to measure internal audit effectiveness from external auditors’
perspectives. Participants in this study were asked to rate the effectiveness of internal auditing by
using five-point Likert scale ranging from 1= not important at all to 5= very important.
4. Data analysis and discussion

In this study, outliers were detected using box plots; five cases were found as outliers and deleted
from data analysis. The reliability is identified by computing its Cronbach’s alpha coefficient, and
the values were greater than 0.7. Content validity was used to check the validity before the
questionnaire was pre-tested. One-way analysis of variance (ANONA) is also conducted to test
whether there is any statistically difference in respondents’ evaluation on internal audit effectiveness
as the dependent variable of this study related to respondents’ position, educational certification,
experience, or the size of audit office. ANOVA results show that it is not statistically significant (p >
0.05). The results indicate that the evaluation is affected by a number of interlaced factors, which
sometimes are conflicted in their impact. For example, experience could have a significant influence
in respondents’ evaluation when there are no differences related to other factors such as educational
background or professional certification. Respondents who have high educational background and
low experience could have similar perception with respondents who have high experience and low
educational background. In other words, educational certification reduces the influence of
experience.

Tables 2, 3 and 4 present the results of descriptive statistics of this study. It is observed that
proficiency and due professional care have the highest mean of 4.19 (see Table 2), which is
consistent with the findings of prior studies such as by Maletta (1993) and Haron et al. (2004),
followed by internal auditor’s objectivity with 4.09, training and development (mean = 3.38) and
effective communication (mean = 3.29). The explanation of these results could be related partly to
the relatively fewer previous audit studies on the role of effective communication and training in
enhancing the performance of internal auditing compared to the studies about the role of objectivity
and competence. Thus, the results are relevant for researchers and policy makers in this area.

INSERT TABLE 2 ABOUT HERE

The descriptive statistics (see Table 3) show that senior management support is one of the significant
variables for internal audit effectiveness (mean = 4.06), and the findings reveal that all items have
strong influence on its effectiveness (mean > 3.5). This result confirms strongly that, internal
auditors need senior management support for the effectiveness of their audit work. For that, internal

8
auditors must have the full support of the senior management to carry out their duties without any
obstacles. These acts of senior management increase the confidence of internal auditors, which will
eventually lead to internal audit effectiveness.

The descriptive statistics (see Table 3) also reveal that open communication between chief audit
executive and senior management (mean = 3.65) has a strong influence on the assessment of internal
audit effectiveness. This is in line with the suggestion by Hahn (2008) that one of the barriers that
can cause much harm to the organization is communication complexity. He added that solving such
a problem necessitates the recording of information in clear and simple manner for understanding
and feedback.
INSERT TABLE 3 ABOUT HERE

The above findings support the argument by Sarens and Beelde (2006), and Schneider (2008) that
internal audit effectiveness is highly dependent on senior management’s support to act on the audit
recommendations. Peter (1994) argues that the cooperation between senior management and internal
auditors improves the organization’s performance. The Libyan external auditors also perceive that
senior management’s support is very important to ensure all recommendations by internal auditors
are strictly followed by all departments.

Table 4 confirms the argument by Dittenhofer (2001) that internal auditing becomes effective when
the auditee organisation is effectively complying with policies, procedures, laws, and regulations.

INSERT TABLE 4 ABOUT HERE

The multiple regression results, as displayed in Table 5, show that the internal auditor’s
characteristics is positively and significantly related to the effectiveness of internal auditing. The
results indicate that 38.7 percent (R = 0 .387) of the effectiveness of internal auditing is explained
by the independent variable. The R was statistically significant with F = 70.712 and p < 0. 01.

INSERT TABLE 5 ABOUT HERE

To test the moderating effect of senior management support on the above relationship the Moderated
Multiple Regression (MMR) was used. According to Frazier et al. (2004), moderated multiple
regression is the preferred statistical method for examining moderator effects.

Based on Frazier et al. (2004) and Bennett (2000) recommendations, a predictor variable (internal
auditor’s characteristics) and a moderator variable (senior management's support) were standardized.
Next, a new variable was created by using the newly standardized variables (Z1= ZCharacteristics ×
ZManagement). Then, two steps of hierarchical regression were then conducted for the moderating
effect. In the first step of the regression, independent and moderator variables were entered into the
model as predictors of the outcome variable. In the second step, an interaction term (independent
variable × moderator variable) was then entered.

The findings show that the moderation effect of senior management’s support is significant for the
relationship between internal auditor’s characteristics and the effectiveness of internal auditing (see

9
Table 6). As shown in Table 6, the R square increases from .518 to .539. The interaction coefficient
(standardised beta) is also significant (R change = .022, b = .151, p < .05).
INSERT TABLE 6 ABOUT HERE

Despite the importance of senior management support for internal audit effectiveness, only few
recent studies such as Mihret and Yismaw (2007) and Ahmad et al. (2009) have considered it as an
independent variable. From the results, it is clear that the direct relationship between internal
auditor’s characteristics and internal audit effectiveness is dependent on senior management support.
More specifically, only when the activities of the internal audit are supported by senior management
internal audit effectiveness can be achieved.

5. Summary and conclusion

5.1 Summary and implications of the study

The findings indicate that internal auditor’s characteristics are positively and significantly related to
internal audit effectiveness, and senior management support is very important in this relationship.
This is highlighted in the Moderated multiple regression, which show that internal auditor’s
characteristics have a significant impact on internal audit effectiveness, and senior management
support has a moderating effect on the relationship. The R square increased from .518 to .539 and
the interaction coefficient was also significant. The findings are in line with the few existing research
(Sarens and Beelde, 2006; Sterck and Bouckaert, 2006; Schneider, 2008; Arena and Azzone, 2009;
Martinov-Bennie, 2011; Lenz and Hahn, 2015) that have confirmed the importance of senior
management support for internal audit effectiveness.
The findings strongly support the integrated relationship among individual characteristics of internal
auditors. The results are positively and significantly related to internal audit effectiveness, the R
square was statistically significant with F = 70.712 and p < 0. 01. This is consistent with the ISPPIA,
which has adopted these characteristics as attributes for both organizations and individuals (IIA,
2012); however, previous studies only examined the effect of objectivity and competence at the
department level. Thus, future study could be on how such characteristics should be considered for
both internal audit and its auditors.
Moreover, the findings provide an empirical evidence for the theoretical framework proposed by
Endaya and Hanefah (2013). The findings warranted attention as a result of lack of empirical study
in this particular area.

The findings of this study could have implications on the practice of the Libyan’s internal audit in
terms of the internal auditor’s characteristics as attributes for both organizations and individuals, and
also receiving enough support from senior management. Moreover, the implications of this study are
not restricted to Libyan environment and could extend to the professional organisations and the
auditors in other developing countries. Furthermore, the implications of this study could extend to
the corporate governance field where the role of internal auditing is considered important. The
current study also studies the relationships among some elements of internal audit effectiveness from
the perspective of external auditors, which to-date still remains unresolved. Thus, the findings could
have implications on both audit and management literature.

10
5.2 Limitation and scope for future work
As with other studies, this study too has its own limitations. First, this study like several previous
studies used the questionnaire to collect the data. Thus, it is bound to suffer from limitations
associated with this method including response rates and bias. However, this study attempted to
minimize these disadvantages through: (1) the use of personally administered questionnaire, which
normally has a higher response rate than others, (2) careful design and pre-testing the questionnaire
and (3) directing it to external auditors who are interested in internal audit effectiveness. Second, the
sample was limited to LAAA’s members in Tripoli wherein the majority of Libyan audit offices are
located including the big ones. Therefore, the findings are not necessarily generalizable to all those
interested in internal audit. Future studies can test this model by collecting data from other interested
groups in internal audit.

5.3 Conclusion
This paper provides evidence that internal auditor’s characteristics are positively and significantly
related to internal audit effectiveness, and senior management support is very important in this
relationship. The findings warranted attention as a result of lack of empirical study in this particular
area. The findings of this study complement prior studies and provide some evidence for the
theoretical framework proposed by Endaya and Hanefah (2013). The results are consistent with the
assertion in audit literature, and could have some implications. As with other studies, this study has
its own limitations. Therefore, the current study emphasizes the need for further research in this new
context.

Notes
1. In line with the objective of the study; internal auditing is considered effective when the
auditee organization is effectively complying with policies, procedures, laws, and regulations
(Dittenhofer, 2001).
2. Internal Auditor’s Characteristics; it refers to the attributes that each internal auditor should
have which include; objectivity, effective communication, proficiency and due professional
care, and training and development.
3. Senior Management; a team of individuals at the highest level of organizational management
who have the day-to-day responsibilities of managing a company or corporation and they
hold specific executive powers conferred onto them with and by authority of the board of
directors and/or the shareholders (IIA, 2012).
4. Libyan Association of Accountants and Auditors (LAAA) is the regulatory body of the
accounting profession in Libya which was established by the Libyan government Law No.
116/1973. Paragraph 23 of this Law was limited to those practicing the profession is a
member of LAAA, as well as paragraph 24 which restricts membership to the citizens of
Libya only.

11
REFERENCES

Abuazza, W.O. Mihret, D.G. James, K. and Best, P. (2015), “The perceived scope of internal
audit function in Libyan public enterprises”, Managerial Auditing Journal, Vol. 30 No.
6/7, pp. 560-581
Agbara, A.H. (2011), “An investigation into audit quality in Libya”, a Ph.D. Thesis, (UK:
University of Gloucestershire).
Ahmad, H.N. Othman, R. Othman, R. and Jusoff, K. (2009), “The effectiveness of internal audit
in Malaysian public sector”, Journal of Modern Accounting and Auditing, ISSN 1548-
6583, USA, Vol. 5 No. 9, pp. 53- 62.
Ali, A.MD. Gloeck, J.D. Ali, A. Ahmi, A. and Sahdan, MH. (2007), “Internal audit in the state
and local governments of Malaysia”, Southern African Journal of Accountability and
Auditing Research, Vol. 7 No. 1, pp. 25-57
Al-Twaijry, A.A.M, Brierley, J.A. and Gwilliam, D.R. (2003), “The development of internal
audit in Saudi Arabia: an institutional theory perspective”, Critical Perspectives on
Accounting, Vol. 14 No. 5, pp. 507-531.
Al-Twaijry, A.M. Brierley, J.A. and Gwilliam, D.R. (2004), “An examination of the relationship
between internal and external audit in the Saudi Arabian corporate sector”, Managerial
Auditing Journal, Vol. 19 No. 7, pp. 929-944
American Institute of Certified Public Accountants (AICPA) (1975), Statement on Auditing
Standards (SAS) No. 9, “The effect of an internal audit function on the scope of the
independent auditor’s examination”, (AICPA- New York: USA).
American Institute of Certified Public Accountants (AICPA) (1991), Statement on Auditing
Standards (SAS) No. 65, “The auditor’s consideration of the internal audit function in an
audit of financial statement”, (AICPA- New York: USA).
Arena, M and Azzone, G. (2006), “Internal audit in Italian organizations: A multiple case study”,
Managerial Auditing Journal, Vol. 21 No. 3, pp. 275-292.
Arena, M and Azzone, G. (2009), “Identifying organizational drivers of internal audit
effectiveness”, International Journal of Auditing, Vol. 13 No.1, pp. 43-60
Bennett, J.A. (2000), “Focus on research methods mediator and moderator variables in nursing
research: Conceptual and statistical differences”, Research in Nursing & Health, Vol. 23,
pp. 415-420.
Bostan, I. and Grosu, V. (2010), “The role of internal audit in optimization of corporate
governance at the groups of companies”, Theoretical and Applied Economics, Vol. 17 No.
2, pp. 89-110

12
Brilliant, D. Foley, L. Egan, D. Prince, D. Rushforth, J. Stewart, D. and Wynne, A. (1997),
“Report: Guidance on internal audit - exposure draft”, Managerial Auditing Journal, Vol.
12 No. 7, pp. 358-374.
Brown, P.R. (1983), “Independent auditor judgment in the evaluation of internal audit function”,
Journal of Accounting Research, Vol. 21 No 2, pp. 444-455.
Desai, R. and Desai, V (2010), “Towards a decision aid for external audit evaluation of the
internal audit functions”, Journal of Global Business Issues; Vol. 4 No. 1, ABI/INFORM
Global, pp. 69-73.
Dittenhofer, M. (2001), “Internal auditing effectiveness: an expansion of present methods”,
Managerial Auditing Journal, Vol. 16 No. 8, pp. 443-50.
Endaya, K.A. (2014), “Coordination and cooperation between internal and external auditors”,
Research Journal of Finance and Accounting, Vol. 5 No. 9, pp. 76-80
Endaya, K.A. and Hanefah, M.M. (2013), “Internal audit effectiveness: an approach proposition
to develop the theoretical framework”, Research Journal of Finance and Accounting, Vol.
4 No. 10, pp. 92-102.
Felix, W.L. Gramling, A.A. and Maletta, M.J. (2001), “The contribution of internal audit as a
determinant of external audit fees and factors influencing this contribution”, Journal of
Accounting Research, Vol. 39 No. 3, pp. 513-534
Frazier, P.A. Tix, A.P. and Barron, K.E. (2004), “Testing moderator and mediator effects in
counseling psychology”, Journal of Counseling Psychology, Vol. 51 No. 1, pp. 115-134
Golen, S. (2008), “Communication barriers between internal and external auditors”, ABEA
Journal, Vol. 27 No. 1, pp. 35-36
Hahn, M. (2008), “Overcoming communication barriers in organizations”, available on-line at:
http://ezinearticles.com/?Overcoming-Communication-Barriers-in-Organizations&id=
1033424 (accessed 30 November 2014).
Haron, H. Chambers, A. Ramsi, R. and Ismail, I. (2004), “The reliance of external auditors on
internal auditors”, Managerial Auditing Journal, Vol. 19 No. 9, pp.1148 – 1159
Hermanson, D.R. and Rittenberg, L.E. (2003), “Chapter 2: internal audit and organizational
governance”, Florida: The Institute of Internal Auditors Research Foundation.
Ho, S. and Hutchinson, M. (2010), “Internal audit department characteristics / activities and audit
fee: Some evidence from Hong Kong firms”, Journal of International Accounting,
Auditing and Taxation, Vol. 141 No. 1, pp. 1-16.
Institute of Internal Auditors (IIA) (2012), “International standards for the professional practice
of internal auditing (Standards)”, Florida: The Institute of Internal Auditors
Krishnamoorthy, G. (2002), “A multistage approach to external auditors’ evaluation of the
internal audit functions”, A Journal of Practice & Theory, Vol. 21 No.1, pp. 95-121.

13
Lenz, R. and Hahn, U. (2015), “A synthesis of empirical internal audit effectiveness literature
pointing to new research opportunities”, Managerial Auditing Journal, Vol. 30 No. 1, pp.
5-33
Maletta, M. J. (1993), “An examination of auditors’ decisions to use internal auditors as
assistants: the effect of inherent risk”, Contemporary Accounting Research, Vol. 9 No 2,
pp. 508-525.
Mat Zain, M. Zaman, M. and Mohamed, Z. (2015), “The effect of internal audit function quality
and internal audit contribution to external audit on audit fees”, International Journal of
Auditing, Vol. 19 No. 3, pp. 134-147.
Messier, W.F. and Schneider, A. (1988), “A hierarchical approach to the external auditor's
evaluation of the internal auditing function”, Contemporary Accounting Research, Vol. 4
No. 2, pp. 337-353.
Mihret, D.G. and Admassu, M.A. (2011), “Reliance of external auditors on internal audit work:
A corporate governance perspective”, International Business Research, Vol. 4 No. 2, pp.
67-79.
Mihret, D.G. and Yismaw, A.W. (2007), “Internal audit effectiveness: an Ethiopian public sector
case study”, Managerial Auditing Journal, Vol. 22 No. 5, pp. 470-484.
Mihret, D.G. James, K. and Mula, J.M. (2010), “Antecedents and organisational performance
implications of internal audit effectiveness: some propositions and research agenda”,
Pacific Accounting Review, Vol. 22 No. 3, pp. 224-252.
Mousa, F.R. (2005), “Developing a model for evaluating the effectiveness of the internal audit
function in Libyan organizations: case study with special reference to oil companies”, a
Ph.D. Thesis, (UK: Manchester Metropolitan University).
Mutchler, J.F. (2003), “Chapter 7- independence and objectivity: a framework for research
opportunities in internal auditing”, The Institute of Internal Auditors Research Foundation.
Peter, R. (1994), “Understanding internal audit”, Australian Accountant, Vol. 64 No 3;
ABI/INFORM Global, pp. 30-34.
Sanusi, Z.M. Iskandar, T.M. and Saleh, N.M. (2009), “Moderated- Mediation effect of individual
psychological differences on audit task performance: From the perspective of social
cognitive theory”. Paper submitted to the International Symposium on Audit Research
(ISAR), Maastricht, Netherlands, 26-27/6/2009.
Sarens, G. (2009), “Internal auditing research: where are we going? Editorial”, International
Journal of Auditing, Vol. 13 No. 1, pp. 1-7
Sarens, G. and Beelde, I.D. (2006), “The relationship between internal audit and senior
management: a qualitative analysis of expectations and perceptions, International Journal
of Auditing, Vol.10, pp. 219-241.

14
Schneider, A. (1984), “Modeling external auditors’ evaluations of internal auditing”, Journal of
Accounting Research, Vol. 22 No. 2, pp. 657-678.
Schneider, A. (2003), “An examination of whether incentive compensation and stock ownership
affect internal auditor objectivity”, Journal of Managerial Issues, Vol. 15 No. 4, pp. 486-
497
Schneider, A. (2008), “The relationship between internal audit and corporate management”,
Internal Auditing, Vol. 23 No. 5, pp. 12-20
Schneider, A. (2010), “Analysis of professional standards and research findings to develop
decision aids for reliance on internal auditing”, Research in Accounting Regulation, Vol.
22 No. 2, pp. 96-106.
Smith, G. (2005), “Communication skills are critical for internal auditors”, Managerial Auditing
Journal, Vol. 20 No. 5, pp. 513-519
Soh, D.S.B. and Martinov-Bennie, N.M. (2011), “The internal audit function: Perceptions of
internal audit roles, effectiveness and evaluation”, Managerial Auditing Journal, Vol. 26
No. 7, pp. 605-622.
Sterck, M. and Bouckaert, G. (2006), “International audit trends in the public sector: a
comparison of internal audit function in the government of six OECD countries finds
similarities in legal requirements, organizational structure and future challenges”, Internal
Auditor, August 2006, pp. 49-53.
Stewart, J. and Subramaniam, N. (2010), “Internal audit independence and objectivity: emerging
research opportunities”, Managerial Auditing Journal, Vol. 25 No. 4, pp. 328-360.
Tabachnick, B. C. and Fidell, L. S. (2007), “Using multivariate statistics”, Fifth Edition, Boston:
Pearson Prentice Hall.
Wallace, W. (1984), “A time series analysis of the effect of internal audit activities on external
audit fees”, Florida: Institute of Internal Auditors.
Yee, C.S.L. Sujan, A. James, K. and Leung, J.K.S. (2008), “Perceptions of Singaporean internal
audit customers regarding the role and effectiveness of internal audit”, Asian Journal of
Business and Accounting, Vol. 1 No. 2, pp. 147-174

15
Author bios
Khaled Ali Endaya is a Lecturer in Accounting at the Faculty of Economics and Trade in
Tarhuna, Azzaytuna University, Libya. He is currently the Head of the Accounting Department.
He has been teaching auditing curricula for ten years, and has practical experience for over seven
years in accounting and auditing functions at Libyan organisations. He is a member of the
Libyan Association of Accountants and Auditors (LAAA), and he has published many papers in
the areas of auditing and accounting.
Mustafa Mohd Hanefah is Professor of Accounting and Taxation, Faculty of Economics and
Muamalat, Universiti Sains Islam Malaysia. He is currently the Dean for Research and
Innovation, USIM, and was the former Dean of the Faculty of Economics and Muamalat. He has
published many papers in international journals in the areas of financial reporting, taxation, zakat
awqaf, and Islamic financial reporting and accounting. He also serves as a member of the
editorial boards in a number of international journals.

16
 Table 1: Respondents Profile

Items Frequency Percentage

Position
Chief audit executive officer 36 31.6
Chief of audit team 19 16.7
Member of audit staff 59 51.7
Total 114 100.0
Educational certification
Bachelor Degree 90 78.9
Master Degree 21 18.5
Ph.D. degree 3 2.6
Total 114 100.0
Experience as auditor
Less than 5 years 27 23.7
5 - 10 years 38 33.3
More than 10 years 49 43.0
Total 114 100.0
Size of audit office
Less than 5 auditors 53 46.5
5 – 10 auditors 30 26.3
More than 10 auditors 31 27.2
Total 114 100.0

Table 2: Descriptive statistics – Internal Auditor’s Characteristics

Items Mean Std dev Min Max

Self-review 4.34 .529 3 5
Economic interest 4.25 .508 3 5
Relationship 3.69 .566 2 5
Internal Auditor’s Objectivity 4.09 .460
Report indicates to both of good and wrong performance 3.48 .641 2 5
The content of the report is discussed with the auditee’s management 3.39 .760 2 5
before issuing the final report
Auditee’s management comments are included in the report 2.99 .672 2 5
Effective Communication 3.29 .574
Experience or knowledge about auditing 4.25 .607 3 5
Professional certification 4.23 .498 3 5
Educational background 4.10 .532 3 5
Proficiency and Due Professional Care 4.19 .486
Continuing professional development program 3.75 .561 3 5
Training policy includes both of in-house and outside 3.32 .569 2 4
In-house training programs are available to new internal auditors 3.09 .541 2 5
Training and Development 3.38 .457

Scale*: not at all strongly influence

1 ‫ ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬5
 Table 3: Descriptive statistics – Senior Management Support

Items Mean Std dev Min Max

Issue statement requiring all organization’s department to follow the 4.39 .526 3 5
internal audit recommendations
Internal auditing has unrestricted access to review senior management’s 4.32 .524 3 5
work
Does not charge the internal auditor to carry out operational works 3.86 .650 2 5
Chief audit executive has open communication with senior management 3.65 .638 2 5
Total 4.06 .448

Scale*: not at all strongly influence

1 ‫ ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬5

Table 4: Descriptive statistics – Internal Audit’s Effectiveness

Items Mean Std dev Min Max

Reliable financial statements 4.28 .451 3 5
Financial controls 4.15 .536 3 5
Auditee company complied with statutes and regulations 3.82 .573 3 5
Auditee company complied with policies and procedures 3.62 .555 3 5
Total 3.97 .403

Scale**: not at all strongly important

1 ‫ ــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬5

Table 5: The Regression Models of Internal Auditor’s Characteristics with Internal Audit Effectiveness

Variable Coeff. (B) Std.Error Beta

Intercept 1.413 .305

Internal Auditor’s Characteristics .683 .081 .622***

.387

Adj. .382

F 70.712***

Df (1,112)
Note: Level of significant: *p <0.10, **p<0.05, ***p<0.01

‫ــــــــــــــــــــــــــــــــــــــــــــــــــــــــ‬
*The scale used 1: not influence at all; 2: little influence; 3: somewhat influence; 4: influence; 5: strongly influence. This applies to Tables 2 & 3.
**The scale used 1: not important at all; 2: little important; 3: somewhat important; 4: important; 5: strongly important. This applies to Table 4
Table 6: Senior management support moderates the relationship between internal auditors’ characteristics and
internal audit effectiveness.

Model 1 2

DV Internal Audit’s Effectiveness Internal Audit’s Effectiveness

Variable Coeff. (B) Std. Beta Coeff. (B) Std. Beta

Error Error
Intercept 3.967 .026 3.934 .030
Main effect –
Zscore (Characteristics) .155 .032 .386*** .142 .032 .352***
Zscore (Management ) .174 .032 .432*** .176 .031 .437***
Moderator effect –
Zscore (Characteristics) x
.061 .027 .151**
Zscore (Management )
.518 .539

Adj. .509 .527

.518 .022
F 59.551*** 42.943***
F change 59.551*** 5.210**
Df (2,111) (3,110)
Note: Level of significant: *p <0.10, **p<0.05, ***p<0.01