Archive | October, 2013

Internal Audit Functions: Sorting the Wheat from the Chaff

10 Oct

2014 IJA_Probing

The purpose of this paper is to identify, examine and evaluate characteristics of an internal audit function (IAF) that help to distinguish between two groups of IAFs with sharply contrasting levels of perceived effectiveness. Based on survey data from 46 heads of internal audit (chief audit executives, CAEs) in private organizations in Germany, we differentiate IAFs that indicate varying and contrasting levels of internal auditing (IA) effectiveness. In doing so, this study plants the seeds for a potential general theory of IA effectiveness – a theory that may also have relevance in other countries. Extant theory highlights the multi-faceted aspects of IA effectiveness and these are considered in the study to sort its ‘wheat from the chaff’. We suggest four key dimensions or categorical blocks: organization, IA resources, IA processes and IA relationships. Within these dimensions, statistically valid discriminatory characteristics and features identified in the study include: the existence of an IA charter that is agreed by the board/audit committee (AC); possible career progression after a tenure in IA; some degree of co-sourcing and outsourcing of IA services; the level of training and professional qualification of IA staff and CAEs; the use of IA technology and risk-based IA; whether IA makes recommendations for improving the governance process and rates individual findings and grades the overall report; whether the CAE has appropriate access to the board/AC; whether the CAE benefits from senior management’s (SM) and the board/AC’s input to the IA plan; and the CAE’s informal contact with SM. Appropriately employed, a mix of these characteristics contribute to a theoretical grounding that may help explain IA effectiveness.

Lenz, R., Sarens, G. and D’Silva, K. (2013), Probing the Discriminatory Power of Characteristics of Internal Audit Functions: Sorting the Wheat from the Chaff. International Journal of Auditing. doi: 10.1111/ijau.12017