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ABSTRACT

 

Effective internal audit is an important and integral function of organizations that helps in achieving its objectives and protecting organization’s assets. Nonetheless, internal audit effectiveness has received little attention in the literature, especially in the context of developing countries such as Nigeria. This study examined the determinants of internal audit effectiveness in Kano state Ministries, Departments and Agencies. The study used Krejcie and Morgan to arrive at a sample size of 132 using the chief internal auditor and his deputy in each of the sampled Ministries, Departments and Agencies. The questionnaires prepared based on 5 Likert type scale and were distributed among the respondents. The data were analyzed using OLS multiple regression technique. The result revealed that independence of internal audit department has positive and significant effect on internal audit effectiveness of Kano State Ministries, Departments and Agencies. Management support for internal audit has positive and significant determinants on internal audit effectiveness of the Ministries, Departments and Agencies. However, competence of internal audit staff, size of internal audit department and relationship between internal and external auditors were also found to have insignificant influence on internal audit effectiveness. The study concluded that independence of internal audit department and management support for internal audit are the main factors that explained internal audit effectiveness of Kano state Ministries, Departments and Agencies. Therefore, regulatory authorities (Head of Service, Secretary to state government and ministry of finance) should work towards ensuring competent personnel in internal audit departments because the low level of professional qualifications and rapid rotation of employees to and from the internal audit department results in internal auditors (excluding directors) having low levels of experience in auditing. Based on the findings, the study recommended that the regulatory authorities should ensure effective monitoring of competence of internal audit staff and increase management support for internal audit of the state Ministries, Departments and Agencies.
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TABLE OF CONTENTS

Title page Declaration- – – – – – – – – – i Certification – – – – – – – – – ii Dedication – – – – – – – – – iii Acknowledgement – – – – – – – – iv Table of Contents – – – – – – – – vi List of Tables – – – – – – – – – ix List of Figures – – – – – – – – – x List of Appendices – – – – – – – – xi Abstract – – – – – – – – – xii CHAPTER ONE: INTRODUCTION
1.1 Background to the Study – – – – – – – 1
1.2 Statement of the Problem – – – – – – – 4
1.3 Research Questions – – – – – – 7
1.4 Objectives of the Study – – – – – – – 7
1.5 Statement of Hypotheses of the Study – – – – – 8
1.6 Scope of the Study – – – – – – – 8
1.7 Significance of the Study – – – – – – – 9
CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction – – – – – – – – 11 2.2 Conceptual Framework – – – – – – – 11 2.2.1 Concept of Internal Audit – – – – – – 11 2.2.2 Concept of Internal Audit Effectiveness (IAE) – – – – 13 2.2.3 Measurement of Internal Audit Effectiveness – – – – 15 2.2.4 Dimensions of Internal Audit Effectiveness – – – -17 2.2.4.1 Competence of Internal Audit Staff – – – – – 17 2.2.4.2 Size of Internal Audit Department – – – – – 18 2.2.4.3 Management Support for Internal Audit – – – – 20 2.2.4.4 Relationship between Internal and External Auditors – – 23 2.2.4.5 Independence of Internal Audit Department – – – – 24 2.3 Review of Empirical Studies – – – – – – 25 2.3.1 Competence of Internal Audit Staff and Internal Audit Effectiveness – 25
2.3.2 Size of Internal Audit and Internal Audit Effectiveness – – 28
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2.3.3 Management Support for Internal Audit and Internal Audit Effectiveness 30 2.3.4 Relationship between Internal and External Auditors and IAE – – 32 2.3.5 Independence of Internal Audit and Internal Audit Effectiveness – 35 2.4 Theoretical Framework – – – – – – – 40 CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction – – – – – – – – 45 3.2 Research Design – – – – – – – – 45 3.3 Population of the Study – – – – – – – 45 3.4 Sample and Sampling Techniques – – – – – 46 3.5 Sources and Methods of Data Collection – – – – – 46 3.5.1 Validity and Reliability Test (Pilot Study) – – – – 47 3.6 Technique and Method of Data Analysis – – – – – 48 3.7 Variables Measurement and Model Specifications – – – 49 3.7.1 Variables Measurement – – – – – – 50 3.7.2 Model Specifications – – – – – – – 51 CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS 4.1 Introduction – – – – – – – – 52 4.2 Data Presentation – – – – – – – – 52 4.2.1 Analysis of Response Rate – – – – – – 52 4.2.2 Profile of Respondents – – – – – – – 53 4.2.3 Descriptive Statistics of Variables – – – – – 54 4.3 Correlation Analysis – – – – – – – 60 4.4 Robustness Test of Dependent and Independent Variables – – 60 4.5 Interpretation of Regression Results – – – – – 67 4.6 Test of Hypotheses and Discussion of Findings – – – – 69 4.7 Policy Implication of the Findings – – – – – – 73 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 Summary of the study – – – – – – – 75 5.2 Conclusion – – – – – – – – 76 5.3 Recommendations- – – – – – – – 77 5.4 Limitations of the Study – – – – – – – 78 5.5 Suggestions for future Research – – – – – – 78 References – – – – – – – – – 80
Appendices – – – – – – – – – 94
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LIST OF TABLES Table 3.1 Summary of Reliability Test – – – – – 48 Table 3.2 Variables Measurement – – – – – – 50 Table 4.1 Response Rate from Questionnaire – – – – – 52 Table 4.2 Demographic Profile – – – – – – 53 Table 4.3 Descriptive Statistics for Internal Audit Effectiveness – – 55 Table 4.4 Descriptive Statistics for Competence of Internal Audit Staff – 56 Table 4.5.Descriptive Statistics for Size of Internal Audit Department – 57 Table 4.6 Descriptive Statistics for Management Support for Internal Audit 57 Table 4.7 Descriptive Statistics for Relationship between Internal and External Auditor 58 Table 4.8 Descriptive Statistics for Independence of Internal Audit Department 59 Table 4.9 Correlation Matrix – – – – – – – 60 Table 4.10 Multicolinearity Test – – – – – – 61 Table 4.11 Normality Test – – – – – – – 62 Table 4.12 Factor Analysis (KMO and Bartlett’s for factor analysis) – 64 Table 4.13 Factor Rotated Components Matrix – – – – 65 Table 4.14 Summary of Total Variances Explained (CMB Test) – – 66 Table 4.15 Model Summary – – – – – – – 67 Table 4.16 Variable Coefficients – – – – – – 68 Table 4.17 ANOVA – – – – – – – – 69
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LIST OF FIGURES Fig. 2.1 Theoretical Framework – – – – – – 44 Fig, 4.1 Histogram for Normality Test – – – – – 63
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LIST OF APPENDICES Appendix i. Reliability/Validity Output for Pilot study – – – 94 Appendix ii. Descriptive Statistics – – – – – – 100 Appendix iii. Correlation Results – – – – – – 102 Appendix iv. Regressive Results – – – – – – 102 Appendix v. Common Method Bias Test (Variance) – – – 106 Appendix vi. Survey Questionnaire and Coding – – – – 110 Appendix vii. Raw Data for Reliability Test – – – – 111-113 Appendix viii. List of Kano State Ministries, Departments and Agencies 114-116 Appendix ix. Krejcie and Morgan Sample Size Table – – – 117-120 Appendix x. Raw Data of the Distributed Questionnaires – – 121-129

 

 

CHAPTER ONE

INTRODUCTION
1.1 Background to the study
There is a general consensus among policy makers, academician and professionals all around the continent on the desire for governments to put greater effort to prudent management of public financial resources. The reason is recognized, government makes the biggest sole business entity and their nature of spending through its various ministries, agencies and departments arouse lots of economic functions. Sagacious management of financial resources in the public sector has become even more important in the wake of the economic recession that many nations are currently facing. Achieving public financial prudence requires the system of financial control, including accounting control, to be sound and effective. Sound financial control helps an organization to minimize risks to which it is exposed to. It also encourages decision makers’ confidence in the reliability of financial information, it reduces the likelihood of fraud and error in financial information and also helps to ensure that all transactions are properly authorized and complied with applicable regulations, policies, procedures and laws. The main actors who make the financial and accounting systems of government work are the accountants and internal auditors. The public sector accountant has the responsibility of bringing systematic arrangements which assist regulators in the work of the services of its institutions while the internal auditor has among other duties, the complementary work to examine if management actually provides the services effectively. The internal auditor has to further assure himself that the accounts presented have been prepared in accordance with statutory and constitutional requirements, laws, regulations and proper accounting practice have been carried out in their compilation.
The increasing size and the complexity of public sector in recent years, particularly after the global financial crisis of 2007, have correspondingly increased the relevance of internal audit. As a relevant constituent of both corporate and good governance, internal audit ensures effective and sound services to the public at giveaway price that gives the organization a profit for future
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sustainable operations (Institute of Internal Auditors – IIA, 2011). It also represents a major determinant in enacting the quality of the internal control system in public sectors. This underscores why the effectiveness of internal audit is considered not only critical but necessary for the improvement of public sector funds management. Internal audit effectiveness points to the quality of accomplishmentand describes whether internal audit function is accomplishing in a satisfactory manner. The literature has documented five complementary dimensions of internal audit effectiveness. The dimensions, which have become popular in most internal audit effectiveness study are: competence of internal audit staff, management support for internal audit,size of internal audit department, relationship between internal and external auditors and independence of internal audit staff (Al-Tawaijry, 2004; Institute of Internal Audit (IIA), 2006; Mihret&Woldeyohanmis, 2008, &Mulugeta, 2008). Competence of staff is an important constituent in effective internal audit functions (IIA, 2006). Competence has been known as indices of reliance on the internal auditor’s work by external auditors (Al-Tawaijry, 2004). It is seen in terms of staff professional, educational, continuous development and experience in the field of internal audit. The nexus between staff competence and effectiveness of internal audit work has been well documented in the literature. In addition, internal audit department needs to be provided with enough resources, materials as well as human, to be able to perform its responsibilities appropriately. The resources are what represent the size of the internal audit department. Prior studies have suggested that the effectiveness of internal audit may be higher when there is capable and sufficient number of staff in the department. Previous studies suggested a gap between adequate number of staff and capacity of an internal audit department in accomplishing its duties effectively (Mihret&Woldeyohanmis, 2008, Mulugeta, 2008).
In any government establishment which is finance by any of the three tiers of government namely, Federal, State and Local government, such organizations known as public sector organizations engage in business activities that are not profit oriented but rather service oriented.
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They provided basic amenities like good roads, good education, health care facilities, electricity and water for the benefit and usage of the public. There is therefore a need for sound internal control system, internal audit and even a statutory audit for proper fair and judicious use of the funds that are allocated to them. In Nigeria, there have been persistent comments in the press and electronic media about brazen acts of fraud, misappropriation and embezzlement of public funds in the public sector organizations. According to Olowokere (2001) as well as Unegbu and Kida (2011), improper recording of accounts have accounted for the spate of irregularities and some acts usually perpetrated by staff and management. The problem, which to a large extent has been linked to weak internal control system, is said to have permeated the three tiers of government across Nigeria. Despite the outcry, there are still no national corporate governance guidelines that inform public sector on how to control their internal audit departments. In irony of the developed countries, there are no foreign internal audit professional bodies such as the IIA in Nigeria (Alhsadi, 2007). Public Sectors in Nigeria are therefore left to establish their own guidelines on the practice of internal audit. In a bid to addressing the problem, in April 2010, the Kano State Government probed Local Government chairmen on how funds from the Federation’s excess crude oil account were expended. Upon discoveries, about 10 Local Government chairmen were invited by the Economic and Financial Crimes Commission (EFCC), for allegedly misappropriation of over N900 million excess crude oil funds allocated to the various Local Government councils (Sunday Trust, February, 2010: 9). Even with that discovery and the attribution of the problem to lack of sound and adequate internal control mechanism, internal auditors do not have formalize professionalism, moral principles and standards for professional competent in the state. Moreover, there are no professed examination requirements as well as professional training programs specified for the persons becoming internal auditor in Nigeria.
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Considering strategic economic importance of Kano state given its population size and number of MDAs, a study of internal audit effectiveness and the factors that affect it in the state is deemed desirable. This research therefore focused on the determinants of internal audit effectiveness in Kano state MDAs. 1.2 Statement of the Problem Internal audit function is an integrated part of the finance structure of public sector organizations. A usual grief in public sector is that internal audit units is too overstaffed and under resourced generally to be fully effective. Another complaint often put forward relates to inadequate knowledge of development in internal auditing that will lead to competence of staff. It is also believed that, especially in developing nations, internal auditors, being employees in public sector do not have the liberal to exercise the unbiased and independent manner of an auditor as this is not the case in the private sector (IIA, 2011). Management support is envisaged in supporting the process of auditing by achieving the indispensable transport, assets, if required, furnishing training, educating auditors with new technology and procedures, budgeting funds for certification and other facilities that facilitate the internal auditing works (Goodwin, 2004). It is believed that management support have a far-fetched outcome on internal audit effectiveness on public sector. Mihret and Yismaw (2007), Mihret and Woldeyohannis (2008) and Mihret (2009) all shows that management support comprises the answers to internal audit finding and the devoir to improve internal audit which has significance influence on internal audit effectiveness. It is in view of this that Institute of Internal Audit (2011), emphasized that internal auditors should engage senior management support of the board to perform their work without hindrance and free from interference.
The relationship between the externaland internal auditor also reflected a crucial and relevant factor that affects internal audit effectiveness. The work of Arena and Jeppesen (2010) shows that the relationship between the internal auditor and external auditor becomes intellectual area, where
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external audit, as the superior professional, controls the knowledge-based of internal auditing but allows internal auditors to practice internal audit as the profession provided. This as well have impacts on the value of internal audit which can improve the organizations through lesser external audit fees (Al-Twaijry, Brierley&Gwilliam, 2004; Haron, Chambers, Ramsi& Ismail, 2004; Zain, Subramaniam& Stewart, 2006; Ho& Hutchinson, 2010; Prawitt, Smith & Wood 2012;). While internal auditors contribution to work, carried out by external auditors (Burnaby & Klein, 2000), external auditors as well as assisting in the development of internal auditors by working as a recruitment market and selection of internal auditors (Al-Twaijry et al., 2004; Arena, Arnaboldi&Azzone, 2006). This means that the extent and nature of relationship between internal auditor and external auditors would go a long way in determining internal audit effectiveness of Kano State MDAs. Moreover, the independence of internal audit staff is an important drive-in of the auditor role and an element of internal audit effectiveness (Chartered Institute of Public Finance and Accountancy (CIPFA), 2003). Although, emphasis has been on external audit independence, professionalize establishment and standard-setters have placed heavy weight on internal audit of private and public sector.
However, value-adding role of the internal audit presumes effective and sound internal audit (Mihret et al., 2010). In view of this, studies have been conducted in different jurisdictions to confirm the presumption. These studies which are mainly foreign, documented mixed and inconclusive results due to largely environmental factors and methodological differences, most of the studies were carried out in Asia and Europe and documented qualitative method, but this study is carried out in Nigeria and documented quantitative method. The studies have mostly focused on internal auditor independence (Christopher, Sarens& Leung, 2009; Stewart &Subramaniam, 2010) while few others dealt with internal audit effectiveness (Al-Twaijry, Brierley&Gwilliam, 2003; Mihret&Woldeyohannis, 2008; Yee, Sujan, James & Leung 2008; Mihretet al., 2010). However,the
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effectiveness of internal audit mostly concentrated on whether external auditors utilize or rely on the work of internal auditors (Cohen &Sayag, 2010). The few that departed from that approach covered two to three dimensions of internal audit effectiveness instead of the five components documented in the literature as given by ISPPIA established by IIA. As these studies were conducted in countries other than Nigeria with recognised cultural and environmental dissimilarity as well as unlikeness findings, it is necessary for similar study to be carried out in Nigeria, Kano State in particular. In addition, the fact that the studies referred to have documented mixed and inconclusive findings, the need for another study using data from Nigeria becomes obvious to bridge the gap. For example, studies such as those of Coram, Ferguson and Moroney (2008) and Mihret et al., (2010) and Yismaw (2007) and Yee et al. (2008) shows that independence of internal audit possess a positive relationship with internal audit effectiveness while Daruish (2004) documented negative association between independence of internal audit effectiveness. Furthermore, with reference to the poor rating of Nigeria by the Transparency International in terms of corruption indices (2011), a study on effectiveness of internal audit becomes necessary and imperative. In Nigeria, there have been few empirical researches regarding internal audit effectiveness (Unegbu& Kida, 2011, Tijjani 2003, Danbatta 2004, Badara&Saidin 2013, Owolabi&Dadu 2011, Ogbada, Orok&Esang 2009, Nuruddeen 2009, Oshisami 1992, Daniel 1999, Adams 2002, Sokunbi 2011, Amadikwa 2011, &Awoyemi 1989). Most of the researches available are exploratory and conceptual in nature with neither data nor analysis that will lead to recommendations. The few empirical studies concentrated on either auditors’ independence or relationship between external audit and internal audit and size of internal audit. Few of the studies covered management support and staff competence despite the strong relationship that exists between these factors and internal audit effectiveness.
In Kano state, to the researcher’s knowledge, this is the first known effort to carry out an empirical study on determinants of internal audit effectiveness in the State‟s MDAs. In view of the
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foregoing, this research study attempts to fill the research gap identified in the literature by extending its analysis to cover all the five dimensions of internal effectiveness documented in the literature given by ISPPIA established by IIA.
1.3 Research Questions
The study attempts to provide answers to the following research questions:
i. To What extent does the staff competence of internal audit a determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)?
ii. To What extent does the size of internal audit a determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)?
iii. To What extent does the management support for internal audit a determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)?
iv. To what extent does the relationship between internal and external auditors a determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)?
v. To What extent does the independence of internal audit a determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)?
1.4 Objectives of the study
The overall objective of this study is to determine internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs). The specific objectives are to:
i. Examine the determinant of internal audit staff competence on internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)
ii. Assess the determinant of internal audit size on internal audit effectiveness in Kano State Ministries, Departments on Agencies (MDAs)
iii. Examine the determinant relationship between management support for internal audit on internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)
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iv. Assess how the relationship between internal and external auditor affect internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)
v. Examine the effect of independence of internal audit on internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs)
1.5 Statement of Hypotheses To achieve the objectives of the study, the following hypotheses are formulated for testing: H01: Staff competence of internal audit is not a significant determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs) H02: Size of internal audit is not a significant determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs) H03: Management support for internal audit is not a significant determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs) H04: Relationship between internal and external auditors is not a significant determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs) H05: Independence of internal audit is not a significant determinant of internal audit effectiveness in Kano State Ministries, Departments and Agencies (MDAs). 1.6 Scope of the study
The study focused on determinants of internal audit effectiveness in Kano state Ministries, Departments and Agencies (MDAs). Kano state MDAs were chosen considering the strategic economic importance of Kano state given its population size and number of MDAs. Internal audit effectiveness being the construct is operationalized by the following dimensions: Competence of internal audit staff, Size of internal audit, Management Support for internal audit department, Relationship between internal and external auditors and Independence of internal audit. The variables were chosen considering the fact that they are strictly having diverse characteristics and
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this is because the effectiveness of internal audit department depends on the contribution of the stakeholders involved such as management, internal auditors, external auditors, government and other professional and regulatory bodies. The study used data from primary source only. The data, which are quantitative in nature, extracted from respondents through self-administered questionnaire to comply with the stated research objectives, as responses were coded using five likert scale ranging from 1 (strongly disagree) to 5 (strongly agree). 132 structured questionnaires were distributed to the sampled MDAs chief and deputy chief internal auditors out of which 129 were returned and used for our analysis. 1.7 Significance of the study The findingof this study is theoretically and practically beneficial to stakeholders such as policymakers, legislators, managers of public funds, academic researchers and investors. The research suggests ways and mechanisms of improving internal audit accountability and transparency of operations in Kano state MDAs based on the empirical results of each of the variables of the study. The finding for each of the different dimensions of internal audit effectiveness points to the area(s) where policymakers, legislators and managers of public fund need to either consolidate or strengthen in order to have sound internal system. In addition, this study would give aid to stakeholders to realise their role and responsibility in facilitating independence and effective internal audit in the State‟s MDAs. They may use the findings and recommendations of this research to improve staff competence, review upward or downward the size of internal audit unit, increase management support and enhance relationship between internal and external auditors. The study also offers managers of public funds, policymakers and investors the opportunity to know and understand perceptions of internal auditors in the State‟s MDAs regarding each of the factors that affect internal audit effectiveness. This means the study will serve as a policy input for both administrators and managers of public entities in the State.
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Theoretically, the dearth of research in the areaway of internal audit effectiveness in Nigeria, particularly Kano state makes the study a reference material for future researchers. The study provides empirical evidence on internal audit effectiveness in Kano state MDAs. This means future researchers could build on the findings of this research work in conducting similar studies within the Nigeria’s framework using similar or different methodology.

 

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