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 A Research project Submitted in partial fulfillment of the
requirement for the award of MBA Degree in Accounting
and Finance.

Assessment of Role & Challenges of Internal Auditing to

Promote Good Governance:
(The Case of Borena Zone Selected Governmental Organizations in Yabello City)

BY: Habtamu Wondyifraw Oliye

Mar, 2016
DILLA, ETHIOPIA
 CHAPTER 1. INTRODUCTION

1.1 Background of the Study Area

• For most of it history, internal auditing served as a
simple administrative procedures comprised mainly
of,
checking documents,
counting assets, and
reporting on past event to various types of
management.
 Cont…
 But in recent times, a combination of forces has led to a
quilt revolution in the profession.
 Governments moving forward democracy must
demonstrate principles of good governance, by increasing;
o Accountability in the use of public money
o Efficiency in the delivery of services to public, and
o Deploying Scarce resources more efficiently & effectively to
minimize & manage risk.
• The principal of good governance relies on,
– the activities of agent &
– objective evaluation of the accuracy of the agent’s accounting.
 Cont…
 The audit then reports on whether;
 the agent used the resource in accordance with the wishes
of the principal, &
to ensures the accountability of public authorities forwards
public monies raised and spent by them to implement
policies & programs approved by the legislatures.
The public sector auditor has among other duties,
the commentary role to examine whether
management actually performs those activity
effectively & efficiently.
 The purpose of this research project

• To investigate internal audit as a tool for

improving public sector risk management,
control and governance process, and
make recommendation on this particular
concern.
 1.2 Statement of the problem
• Well performing IAF is considered as one of the
strongest means in order to monitor & promote
good governance system in a company.
• Good governance is considered as major tools for
implementing strategy of a company (Belay, 2011).
• Auditing generally & IA particularly as an integral
part of the finance structure of public organizations
facing many challenges to add value to advance
good governance.
 Cont…
• In study conducted in Nigeria in keno state by (Unegbu and
Kida,2013), a custard complaint in the sector is that IAD is
–too understaffed &
–under resourced generally to be fully effective.

• There exist a lot of arrears of work due to;

Inadequate staffing of IAD.
Inadequate knowledge of electronic data processing (EDP) and computer for efficient
auditing of computerized systems.
Most of the public sector management working papers do not provide adequate
documentation, &
Staff of the IAD is not well remunerated and it makes them to lack interest in their
work.
 According to the surveys conducted by the
office of the Auditor General of Ethiopia …
• Internal Auditing work was severely limited to low level
financial and compliance audits, pre-audit & Non-audit work.
• The prevalence of such limited scope of work of internal
auditing was attributed to number factors, which included;
o The low level education, training and experience of internal auditors,
o The lack of management awareness about the functions and
contributions of internal auditing,
o The prevalence of weak internal control systems in organizations in
which internal audit is an integral past,
o The absence of a professional organization to career for the
professional development of internal auditing in the country for a long
tone. (MoFED-Internal Audit Manual, 2013)
 Cont…
• In general, Internal auditing recoveries for inept
public sector good governance & performances.
• Ethiopia as a developing economics and Oromia region
Borena zone in particular has to gather its resources for
effective developmental utilization to achieve national,
regional and zonal development objectives;
• Hence, it is essential to study the role & challenges of
internal audits, in order to use IA as instrument for
promoting public good governance & performance.
 Cont…
• Therefore, this project paper focuses on
internal audit role in public sector risk
management, control & governance process
using selected governmental organization in
Oromia region Borena Zone as a case study.
 1.3 Research Questions
At the end of the study the research projects try to
give answer the following research questions:

1. What is the role of internal auditing in public sector governance?

2. What is the role of internal auditing in public sector control?
3. What is the responsibility of internal auditing function in public
sector- risk management namely prevention, detection &
reporting of fraud or corruption?
4. What are major challenging factors that bottleneck IA to
enhance good governance and how they are ranked by auditors?
 1.4 Objectives of the Study
General objective
• To assess the role & challenges of internal auditing in selected public organization
to enhance good governance.
Specific Objectives
i. To identify the role of internal auditing in public sector governance.
ii. To identify the role of internal audit in public sector control
iii. To identify the role of internal auditing function in the public sector risk
management.
iv. To identify major challenging factors that bottleneck internal audit not to
enhance good governance and to explore regarding the ranking of these major
challenging factors.
v. Based on final findings, to offers some recommendations on ways of
strengthening internal audit function to ensure good governance & improve
performance.
 1.5 Significance of the Study
• There is the need for the IA to be effective so as to
create improvement in the government
organizations.
• Positive improvements in the public sector will
definitely benefit the citizenly of the Ethiopia.
• In addition, it helps the concerned governmental body to
engage in further efforts to improve;
the ethical climate,
accountability, and
integrity of their respective organizations:
 1.6 Scope and limitation of the Study

Scope of the Study

• The project is limited to ten selected IAD of
governmental organization in borena zone Yabello
city;
 Limitations of the Study
 Auditors who are participating in audit work are
not volunteers to give fully information because
they fear that to be take action against them.
 Shortage of time to collect sufficient data
 It is time delay while waiting for response.
 Financial constraints
 Hence, to overcome these bottlenecks:

 The respondents were assured that their

responses are kept confidential.
 To overcome the time constraints, additional
manpower support and other logistic assistance
will be required from the Zonal administration.
 To solve financial constraints, the Zonal
administrations were asked for additional
financial assistance and it becomes successful.
 CHAPTER - II: RESEARCCH METHODOLOGY

3.1. Introduction
• To deal with the research problems and to
answer the research question, the researcher
used descriptive methodology of research,
which is one type of qualitative research
methodology.
3.2. Data sources
• This study used both primary and secondary
sources of data
3.3. Sampling Method

• The researcher used non probability sampling methods.

Judgmental (purposive) method is used
• According to PEFA Assessment of Oromia regional state
report on page 64 (2010) there are totally 34 regional
bureaus in Oromia region and those bureaus has their own
office in zonal level.
• The study has selected from 34 zonal offices, only 10
zonal offices IAD auditors those who are willing to
participants & provide the richest information as
sampled unit.
 Name of sampled organizations’ & responding rate

Name of the organizations Number of No. of Response

Questionnaires Questionnaires Rate
Distributed Collected  
 
Borena Zone Finance & Economic development office 10 8 80%
Borena Zone Education office 4 4 100%
Borena Zone Revenue Authority 5 4 80%
Borena Zone Youth affair office 4 4 100%
Borena Zone Road Authority 4 4 100%
Borena Zone Trade & Industry office 3 2 66%
Borena Zone Women’s, & Children affairs office 2 2 100%
Borana Zone Transport Office 2 2 100%
Borena Zone Rural Land & Environmental protection 3 2 67%
office
Borena Zone Marketing & cooperative Office 3 3 100%
Total 40 36 90%
 Methods of Data Collection
Primary Data collected through
 Structured questionnaires distributed to Auditors, and
 by observations of some internal auditing work activities.
Secondary sources materials, like written documents such as
reports written by internal auditors,
internal audit manuals,
books, were used
journals,
magazines &
internet sources
 3.5. Methods of data analysis
• In this study, the researcher used both
quantitative and qualitative data analysis
method.
• Questionnaires collected were statistically
processed by SPSS V17 & Microsoft excel.
• Furthermore, the finding are presented using
charts, tables and graph by ranking challenging
factors of internal audit and followed by
discussions, conclusion and recommendations.
CHAPTER - III: SUMMARY OF FINDINGS,
CONCLUSIONS & RECOMMENDATIONS
 3.1. Summary of Findings

Role of IA in Governance
• From this study it is believed that Internal Audit’s
effectiveness is directly tied (significantly correlated)
with quality of the management support to IA Role,
the quality of overall Governance processes &
quality of Ethics program.
• Therefore Despite the fact that, reform of IA during
2006/07 from pre-audit to post audit by training
internal auditors at regional level, IAF is less than
effective.
 Cont…
• The current situation of the IAF in the study
units are more of traditional type that
emphasizes on Auditing financial & regularity
compliance rather than addressing broader
management and Governance issues that basis
for risk selection of Audit area.
• This might resulted for less satisfactory
Performance Management and Accountability.
Role of IA in Control

• From the finding it is observed that management control system of

organizations under survey are somewhat weak or it is find to be less than
effective.
• The other important finding of this project work is that none establishment
of soft controls , such as;
Conflict-of-interest policy;
Gifts,
Entertainment and Favors policy,
Policy code on Dealing with Outside People and Organizations, outside activities, and
Confidentiality policy.
• The finding ranked the existence of a formal and comprehensive ICF
as the most important measure for the enhancement of IA contribution to
preventing, detecting and reporting F&C.
Role of IA in Risk Management

• The result of this study indicate the existence of mechanism by which

public servant & third part (e.g., customers and suppliers) may report
suspected fraud or corruption, but the problem is protection is not
provided to those who report suspected fraud or corruption.
• The other major finding of the project work indicates that for
more than half of the survey participants, current
procedures in place in their office for preventing and
combating F&C are not sufficient.
• So respondent’s auditors are calling for more work on
preventing and combating F&C.
 Cont…

• The finding has identified the top five effective measures that
are important measures for Prevention, Detection and
Reporting of F & C. such as;
– Firstly establishments of A control framework which would mention
internal control as a key means for preventing fraud and/or corruption,
– Secondly advanced training in performance and risk-based auditing,
– Thirdly A periodic evaluation of the system in place, in the organization
for preventing, detecting and reporting fraud and/or corruption,
– Fourthly, Design a system of joint undertakings with other body on the
subject of fraud and/or corruption and
– Fifthly, a clearer mandate for IA function which would include the
responsibility to evaluate the risks of fraud and/or corruption in the office
respectively.
Challenging Factors of IA

o Finally, from overall ranking of challenging factors by auditors

under this study project, it can inferred that all auditors who
participated in this study call first of all measures ,their true
independence & objectivity,
Professionalism,
Commitment to change from management for audit work,
Stakeholder support,
Use of technology to work smarter,
Professional audit standards,
Incentives to internal auditors and
Audit committee or similar unit respectively are required in order to able
IAD provide value added services & enhance good governance .
 3.2. Conclusion

• In Ethiopia, IA standards in the blue print internal audit manual, this is

closely similar to IIA standards, is advocate many key roles IAD required
to play in governance, control and risk management ;
• whereas the actual role of IA in organization under study is deviate
from what it is necessary to be as ideally expected by the public’s who
appointed the Government .
• Therefore, IAD to reports on whether the government used the
resources in accordance with
– the wishes of the society,
– add value to wards good governance and
– to resolve its persistent challenges
 still it is loudly called for true reform, regardless of the 2006/07 national
wide IA reform of Ethiopia.
 Cont…
• IA can have a significant positive effect on the organization’s
ethical atmosphere through a variety of activities.
• To this end, the IAD to play important role in governance, Risk
management & Management control itself need before all most
importantly.
• If the management performance of IA is more satisfactory &
effectively functioning, it can be one of the key cornerstones of
effective good governance by providing Assurance & consulting
services on:
risk management,
control, and
governance process within an organization
 RECOMMENDATION
As weak form ICS is identified it is suggested to
concerned body to establish a fully fledged and
unified internal control framework, with a
strong emphasis on;
 IT Audit,
 Strengthening Risk Management culture &
 Ethics awareness and training , and also is
necessary for any anti-fraud or anti-corruption process
with wider control environment of “soft controls”
including Codes of Ethics/Conduct and F&C.
 Cont…

• IA can have a significant positive effect on the

organization’s ethical atmosphere through a
variety of activities.
• To achieve these, Internal auditors must have
appropriate professional qualifications in order to
be able to,
 evaluate F&C
 control risks, and
 detect F&C alerts as part of the execution of the work
plan.
 Cont…
To make IAF more effective & add value to
promote good governance, it is recommended
that it require
better support from stakeholder,
higher quality of overall governance,
higher quality of Ethics program,
better Fraud & corruption Prevention Program,
and also
better communication as precondition.