Empirical studies on audit independence in a Malaysian professional organizations

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According to Institute of Internal Auditor (IIA), internal auditing is as independent, objective assurance and consulting activity design 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. Internal Auditor's roles include monitoring, assessing and analyzing organizational risk and controls and reviewing and confirming information and compliance with policies, procedures and laws. For an effective system in the organization, the internal audit department has to work together with management and audit committee. Regarding to the internal control, an internal auditor has work as a savvy in-house cop not only in report problem but in suggestion regarding about the performance of the business. Therefore, internal auditors have to go through certain problems which arise by or from the management and audit committee. One of the major challenges face by internal auditor is Audit Independences.

In general, independences refer to the avoidance of situation which would tend to impair objectivity or permit personal bias to influence delicate judgment. Auditor independences refer to absence of influence or control in the matter of the auditor's conduct, action and opinion. This sentence related to auditor's ability to express their honestly and also impartially. Basically auditor independences are known as cornerstone for auditing because it is related to public trust in the attest function.

Audit independence can be categories into two, (1) independence in fact and (2) independence in appearance. According to Muatz and Sharaf, Independence in fact can known as the auditor's state of mind and his/her ability to maintain a proper attitude in the planning of his audit program the performance of his verification work and the preparation of the report. Independence in appearance (or perceived independence) refers to the public's or others' perceptions of the auditor's independence.

As been stated before, internal auditor has become the spotlight on the role that a robust internal audit system towards the effective governance, risk, compliance and quality management.

Some internal audit group are rising to the challenges by developing strong working relationship with the audit committee and collaborating with other risk monitoring groups in the organization. Internal audit function is to review the adequacy of the scope, functions and resources of the internal audit function as well as among others to consider the major findings of internal investigations and management's response. This description says that the internal auditor may not understand the power of their authority of the work.

Besides that in the management point of view, internal auditor is difficult to achieve independences because internal auditors are the employees of the organization and they are often asking to review the performance of the management and also other task. Moreover, the board of director ensures that the independence of the internal audit functions is maintain dual reporting relationship to management and the organization's most senior oversight group. The internal auditor should report to executive management for assistance in establishing support and administrative interface and typically to the audit committee for strategic direction, reinforcement and accountability. By this, the internal auditor has to combine with management to increase the importance of internal control activities in the organization. In certain situation, internal auditor's knowledge and skill are not accepted by the management which may raise concerns about a potential compromise of objectivity through a lack of independence.

Brief description of project objectives.

Objectives

Identify how audit independence can affect internal auditors in carrying on their duties in the professional organization.

Identify the problems of independence and objectivity appears in practice.

Identify the issues faced by internal auditor in conducting audit process that affect their independence.

How management have an impact on audit independence on internal auditors.

Solutions to overcome audit independence for internal auditors.

Scope

This research is base on internal auditor and their independence in the organization. Therefore, this research paper is mainly focus on organization in Malaysia. The scope of this research is to identify the threat of audit independence and analysis the significance.

Limitations

The limitation of the research is mainly because of time frame and also collecting primary data. Firstly, this research only has 8 months to conduct the research. Therefore, less information will be gathered during this timeline. Besides that, the limit for the research is focus on organisation in Kuala Lumpur.

Secondly, its difficulty to gather primary data because audit independence is a sensitive issue among the auditor's who are working in the organization. Therefore, face-to-face interview and questionnaire will be conduct for collecting the primary data but some interviewee might refuse to provide answer to the question because of the sensitiveness.

Significance

According to O'Mally (1993) the issues related to independence are threatening the survival of accounting firms of all sizes and indeed it has the power to destroy the accounting profession as a whole. It is therefore, vital that auditor maintain their independence and ensure that the provide a high quality of auditing to ensure the credibility of financial information not only for the purpose of reducing the number of corporate scandals but most importantly the survival of their profession and the development of healthy financial and capital market. Therefore the importance of this research is to provide better understanding about internal auditor and their independence in audit process. Besides that, it also analysis the independence of the internal audit function through it is relationship with management and the audit committee by full illumine the antecedents and outcomes of internal auditor independence and objectivity. Meanwhile, this research is to identify factor affecting auditor independence which practices in the organization.

Academic research being carried out and other information, techniques being learnt.

Book

Spencer, P, 2004, Internal Auditor at Work: Practical Guide to Everyday Challenges, John Wiley & Sons, Incorporated

Bavly, Dan A, 1999, Corporate Governance and Accountability: What Role for the Regulator, Director and Auditor, Greenwood Publishing Group, Incorporated.

O'Gara, John D, 2004, Corporate fraud: Case Studies in Detection and Prevention, John Wiley & Sons, Incorporated.

Journal

Jenny Stewart, Nava Subramaniam, (2010) "Internal audit independence and objectivity: emerging research opportunities", Managerial Auditing Journal, Vol. 25 Iss: 4, pp.328 - 360

L.J. Abbott, Y. Park, S. Parker, (2000) "The effects of audit committee activity and independence on corporate fraud", Managerial Finance, Vol. 26 Iss: 11, pp.55 - 68

Nur Barizah Abu Bakar, Abdul Rahim Abdul Rahman, Hafiz Majdi Abdul Rashid, (2005) "Factors influencing auditor independence: Malaysian loan officers' perceptions", Managerial Auditing Journal, Vol. 20 Iss: 8, pp.804 - 822

Lloyd Yang, Alan Dunk, Alan Kilgore, Qingliang Tang, Z.Jun Lin, (2003) "Auditor independence issues in China", Managerial Finance, Vol. 29 Iss: 12, pp.57 - 64

Abu Thahir Abdul Nasser, Emelin Abdul Wahid, Sharifah Nazatul Faiza Syed Mustapha Nazri, Mohammad Hudaib, (2006) "Auditor-client relationship: the case of audit tenure and auditor switching in Malaysia", Managerial Auditing Journal, Vol. 21 Iss: 7, pp.724 - 737

Rocco R. Vanasco, Clifford R. Skousen, L. Roger Santagato, (1997) "Auditor independence: an international perspective", Managerial Auditing Journal, Vol. 12 Iss: 9, pp.498 - 505

Philip Law, (2008) "An empirical comparison of non-Big 4 and Big 4 auditors' perceptions of auditor independence", Managerial Auditing Journal, Vol. 23 Iss: 9, pp.917 - 934

Brief description of the materials/methodologies needed by the proposal.

This research is known as exploratory research because it is focus on the information gathered from research. The main sources of information are from secondary data will be collected from various sources such as journals, book and also website. The information which gathered from secondary is from the related area on the literature review for further findings. Next is the primary data collection. The method will be using is the face-to-face interview and questionnaire.

The main form data collection is trough face-to-face interview and also questionnaire. The reason for face-to face interview is to have an observation of the interviewees. In other words, is to understand the body language and also easy to record the verbal responses of the interviewees.

Most of data would be derived from face-to-face interview. The interview was conduct with the internal auditors working in internal audit department. Even thought, most of data is collected by interview but there are certain issue or question cannot be asked directly because audit independence is a sensitive issue among the auditor's.

Therefore, questionnaire is the second method in conducting the survey. The question will be deliberately open-ended to enable interviewees to express their understanding in their own words. This also will help to understand the individual perceptions and experiences. Questionnaire question is base on the (1) scope and perceived value of internal audit, (2) type of activities (3) organization attitude to internal audit and (4) the present and future challenge and potential for change.

Brief description of the evaluation and analysis proposed for this project.

Deliverables

The outcome of this research is to identify the factors which are threat to audit independence and analyse the significance. This will help the auditor to prevent involve in the management decision making. Besides that, it also help internal auditor to indentify the factor which become the threat to audit independence.

This would also provide empirical information to all internal auditors in order to avoid future threat to independence issues. Also it will evaluate the effectiveness of potential safeguards for internal auditors including restrictions. On the other hand it will determine an acceptable level of independence risk such as the risk that the auditor's independence will be compromised.

The internal auditors are also expected to be unaware of the benefits of programs and assistance provided by various parties to help them in overcoming the difficulties in threat to independence. Also it will Increase the scope of internal auditors. Furthermore it identifies the methods internal auditors require to overcome independence issues.

Hypothesis of the research

The expected result from this research is that it would benefit the internal auditor, management and also audit committee. The hypothesis testing would prove that whether certain factors would affect the quality of auditing. This research would anticipate that there is a relationship testing would be the relationship between internal auditor and audit independence. Other hypothesis testing would be the relationship between internal auditor and management and audit committee. This is to identify the threat face by internal auditor by this to factor.

Illustration of how this project will benefit the future employability.

This research will benefit all auditing industries. Also corporate firms will be able to benefit from this research because it will encourage and provide the awareness of importance of enhancing audit quality and methods to independent issues with regard to internal auditors. Students who hold Accounting and Finance degree would work as an internal auditor because auditing work could allow the internal auditors to gain a wide range of experience in their related field of work. This research would greatly help the fresh auditors who have experience at all to gain an insight challenges to independence. As the world is changing, auditors who are regarded as a "watchdogs" as said by Zarinah Anwar (2009), need the knowledge and expertise to spot potential threat in regard to independence. Based on the subjects that I have studied, I believe that this research would also benefits the board of directors, executive and non-executive directors, audit committees, internal auditor of the company would greatly benefit from this research. Also it will benefit researcher to identify the threat to independence for internal auditor as the researcher go in to working environmental.

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