effect of internal audit on organizational performance of jordanian banks elkarim salim issa...

EFFECT OF INTERNAL AUDIT ON ORGANIZATIONAL PERFORMANCE OF JORDANIAN BANKS

1Research Scholar, Department of Commerce, Aligarh Muslim University, Aligarh.2Professor, Department of Commerce, Aligarh Muslim University, Aligarh.

1 2Abd Elkarim Salim Issa Albkour and Prof. Asiya Chaudhary

adherence to prescribed managerial policies. It helps an organization to accomplish its objectives and improve the effectiveness of risk management, control, and governance processes. The present paper is an endeavour to examine the effect of internal audit on organizational performance of Cairo Amman Bank, Arab bank, and Jordan Kuwait Bank. A sample of 145 employees has been selected for the study. Data have been collected through questionnaires and analyzed with the help of simple linear regression. The analysis of data revealed that there is a significant positive impact of internal audit on organizational performance in banks under study.

Internal audit, banks, organization, performance, regression.

Internal audit is an independent appraisal activity established in an organization to assist members of the organization in the effective discharge of their responsibilities. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls (Goodwin, 2003). 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 (Holt and DeZoort, 2009). Internal audit is an independent, material and consultancy activity, which adds value and improves the functioning of an organisation. Internal audit control comprises the plan of organization and all methods and measures adopted within a business to safeguard operational efficiency, and encourage adherence to prescribed managerial policies (Padia, et al. 2012). Internal audit is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of business, including internal check, internal audit and other forms of control (Goodwin and Kent, 2006).

Every business enterprise is expected to have a properly developed system of internal control which may include accounts control, standard of cost control, budgetary control, periodic operating reports, statistical analysis, personnel training programme and an internal audit staff. Various other forms of administrative checks and controls are sometimes included in internal control system. In short, it can be said that a system of internal audit includes all those measures adopted by a business enterprise to fulfill the

Keywords:

1. INTRODUCTION

ABSTRACT: Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It comprises the plan of organization and all methods and measures adopted within a business to safeguard operational efficiency, and encourage

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following objectives (Roussey, 2000).a. To avoid waste, inefficiency and fraud and to keep intact its resources;b. To attain highest type of accuracy and reliability in maintaining of the accounts and operating data;c. To encourage and measure how far the policy of the business is being implanted;d. To evaluate the efficiency of performances in all aspects of business activity; e. To provide aid in management planning.

Ahmad (2007) in the article entitled, “Auditors’ Compliance with International Standards in Audit” suggested that more attention should be paid by auditors towards compliance of audit standards to detect fraud in financial transactions. Hung & Han (2010) in the research paper entitled, “An Empirical Study on Effectiveness of Internal Audit for Listed Firms in Taiwan” evaluated the factors that affect the effectiveness of internal audit on 210 listed firms in Taiwan with the help of questionnaires. The findings revealed that internal auditor professional abilities, and the combination of organization formalization and professional abilities were factors that affect the effectiveness of the head of audit department. Kiabel (2012) in the study titled, “Internal Auditing and Performance of Government Enterprises: A Nigerian Study” examined the effect of internal auditing practices on the financial performance of government-owned companies in Nigeria through questionnaires. The study found no strong association between internal auditing practices and financial performance of selected government companies. Obert & Munyunguma (2014) in the research paper titled, “Internal audit perceptions and their impact on performance of the internal audit function” examined the factors causing negative perceptions of internal audit and the impact on the performance of the internal audit function. The study revealed that auditors failure to meet expectation gap, bad reputation of an auditor, the quality of audit staff, level of professional competence and the absence of independence and objectivity in internal audits were the factors affect internal audit. Dahir & Omar (2016) in the research paper entitled, “Effects Of Internal Audit Practice On Organizational Performance Of Remittance Companies in Modadishu, Somalia” evaluated the effect of internal audit practice on organizational performance of remittance companies in Modadishu, Somalia. The findings indicated that there was a significant positive relationship between internal audit variables and organizational performance of the selected companies.

1. To examine the impact of internal audit on organizational performance of Cairo Amman Bank. 2. To investigate the impact of internal audit on organizational performance of Arab Bank. 3. To analyze the impact of internal audit on organizational performance of Jordan Kuwait Bank.

Ho : There is no significant impact of internal audit on organizational performance in Cairo Amman Bank.1

Ha : There is a significant impact of internal audit on organizational performance in Cairo Amman Bank.1

Ho : There is no significant impact of internal audit on organizational performance in Arab Bank.2

Ha : There is a significant impact of internal audit on organizational performance in Arab Bank.2

Ho : There is no significant impact of internal audit on organizational performance in Jordan Kuwait Bank.3

Ha : There is a significant impact of internal audit on organizational performance in Jordan Kuwait Bank.3

2. REVIEW OF LITERATURE

3. OBJECTIVES OF THE STUDY

4. HYPOTHESES OF THE STUDY


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5. RESEARCH METHODOLOGY

6. HYPOTHESIS TESTING

The researcher applied simple random sampling to collect data with the help of well designed questionnaire set on a five point Likert-scale (5-highly satisfied to 1-highly dissatisfied) from the employees of banks under study. In this way, the size of sample is 145 employees. Moreover, linear regression has been applied as the statistical tool to measure the impact of internal audit on organizational performance through Statistical Package for the Social Sciences (SPSS) 18 version. Internal Audit is the independent variable whereas organizational performance is the dependent variable.

Ho : There is no significant impact of internal audit on organizational performance in Cairo Amman Bank.1

Ha : There is a significant impact of internal audit on organizational performance in Cairo Amman Bank.1

Table 2: Model Summary of Internal audit and Organizational performanceCairo Amman Bank

Table 2 shows the linear regression analysis of internal audit and organizational performance. R

Table-1 : Sample Size

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Banks Selected Questionnaires

Distributed Rejected Accepted Sample Size

Cairo Amman Bank 80 27 53 53

Arab Bank 80 33 47 47

Jordan Kuwait Bank 80 35 45 45

Total 240 95 145 145

Fig.1: Research Model

Internal

Audit Independent

Variable

Organizational

Performance

Dependent Variable

Model R R Square Adjusted R Square Standard Error

1 0.918 0.843 0.823 1.8961

square shows the amount of variation in one variable (organizational performance) that is accounted by another variable (internal audit). The above table shows the value of R square is 0.843. It means 84.3 percent variation in organizational performance is explained by the Internal audit and the rest of the variation (1-R2) is an unexplained variation in organizational performance due to variables that has not been considered in this model.

Table 3: Regression Coefficients- Cairo Amman Bank

Table 3 shows the results of regression coefficients. The value of unstandardized beta coefficient on the variable internal audit is 0.611 which is an indication of positive impact of internal audit on organizational performance. It shows that one unit change in internal audit bring 0.611 unit change in organizational performance. Nevertheless, the significant value is less than 0.05 at 95 percent confidence interval. Therefore, the null hypothesis is rejected and it can be said that there is a significant impact of internal audit on organizational performance in Cairo Amman Bank.

Ho : There is no significant impact of internal audit on organizational performance in Arab Bank.2

Ha : There is a significant impact of internal audit on organizational performance in Arab Bank.2

Table 4: Model Summary of Internal audit and Organizational performanceArab Bank

Table 4 shows the linear regression analysis of internal audit and organizational performance. R square shows the amount of variation in one variable (organizational performance) that is accounted by another variable (internal audit). The above table shows the value of R square is 0.811. It means 81.1 percent variation in organizational performance is explained by the internal audit and the rest of the variation (1-R2) is an unexplained variation in organizational performance due to variables that has not been considered in this model.

Table 5: Regression Coefficients- Arab Bank

Table 5 shows the results of regression coefficients. The value of unstandardized beta coefficient on

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2 0.905 0.811 0.805 2.4518

Model-1 Unstandardized

Coefficients

Standard

Error t value P Value

(Constant) 2.654 2.118 51.844 0.998

Internal Audit 0.611 1.574 -5.697 0.000


Coefficients

Standard


(Constant) 1.986 2.087 13.789 0.285

Internal audit 0.483 1.807 -2.477 0.004

the variable internal audit is 0.483 which is an indication of positive impact of internal audit on organizational performance. It shows that one unit change in internal audit bring 0.402 unit change in organizational performance. Nevertheless, the significant value is less than 0.05 at 95 percent confidence interval. Therefore, the null hypothesis is rejected and it can be said that there is a significant impact of internal audit on organizational performance in Arab Bank.

Ho : There is no significant impact of internal audit on organizational performance in Jordan Kuwait Bank.3

Ha : There is a significant impact of internal audit on organizational performance in Jordan Kuwait Bank.3

Table 6: Model Summary of Internal audit and Organizational performanceJordan Kuwait Bank

Table 6 shows the linear regression analysis of internal audit and organizational performance. R square shows the amount of variation in one variable (organizational performance) that is accounted by another variable (internal audit). The above table shows the value of R square is 0.776. It means 77.6 percent variation in organizational performance is explained by the internal audit and the rest of the variation (1-R2) is an unexplained variation in organizational performance due to variables that has not been considered in this model.

Table 7: Regression Coefficients- Jordan Kuwait Bank

Table 7 shows the results of regression coefficients. The value of unstandardized beta coefficient on the variable internal audit is 0.394 which is an indication of positive impact of internal audit on organizational performance. It shows that one unit change in internal audit bring 0.394 unit change in organizational performance. Nevertheless, the significant value is less than 0.05 at 95 percent confidence interval. Therefore, the null hypothesis is rejected and it can be said that there is a significant impact of internal audit on organizational performance in Jordan Kuwait Bank.

Internal audit is an independent, objective assurance and consulting activity designed 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 audit control comprises the plan of organization and all methods and measures adopted within a business to safeguard operational efficiency, and encourage adherence to prescribed managerial policies. From the above analysis, it has been concluded that internal audit has a positive impact on organizational performance in Cairo Amman Bank. Similarly, internal audit has a positive impact on organizational performance in Arab Bank. As far as the impact of internal audit on organizational

8. CONCLUSION

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Coefficients

Standard


(Constant) 2.0063 2.568 22.546 0.487

Internal audit 0.394 1.207 4.641 0.002


3 0.881 0.776 0.754 1.9874

performance of Jordan Kuwait Bank is concerned; there is a positive impact. Therefore, on the basis of above discussion, it can be concluded that internal audit has a positive impact on organizational performance in banks under study.

a. The auditors must be provided some standards against which they can compare performance. b. There is need for the internal auditors to continuously update themselves with the changing times and technologies and sharpen their skills. It brings high efficiency in internal audit. c. The management of commercial banks should also install latest ICT audit software’s in the enterprises which enhances fast delivery of services and detection of frauds. Internal auditors should be fully trained on how to use the software‘s and fresher courses should also be provided in this regard.

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9. SUGGESTIONS AND RECOMMENDATIONS

REFERENCES

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Performance+of+Government+Enterprises:+A+Nigerian+Study+By+Bariyima+David15.Obert, S. & Munyunguma, I.N. (2014). Internal audit perceptions and their impact on performance of the internal audit function. IOSR Journal of Business and Management, Vol. 16, Issue 5. Ver. IV, 81-85. Available at: www.iosrjournals.org 16.Padia, et al. (2012). Internal audit Function, current status and perception of outsourcing. African Journal of Business Management, Vol. 6, 11828 – 11838. 17.Roussey, R.S. (2000). A case for Global corporate governance rules: An Auditor perspective. International Journal of Audit, Vol. 4, 203 – 211. 18.Sarens, G. and De Beelde, I. (2006) The Relationship between Internal audit and Senior Management: A Qualitative Analysis of Expectations and Perceptions. International Journal of Audit, Vol. 10, 219 – 241. 19.Simons, R. (1987). Accounting Control Systems and Business Strategy: An Empirical Analysis. Accounting, Organizations and Society, Vol. 15 No. 4/5.

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effect of internal audit on organizational performance of jordanian banks elkarim salim issa...

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