THE IMPACT OF THE INTERNAL AUDIT FUNCTION ON THE EFFECTIVENESS OF FINANCIAL MANAGEMENT IN LOCAL GOVERNMENT

A CASE STUDY OF PALLISA LOCAL GOVERNMENT

ABSTRACT

The study was carried out at Pallisa local government which is a few kilometer from Tirinyi-Mbale high way with the overall objective of this study will to assess the impact of Internal Audit Function on Effectiveness of Financial Management in LGDs.  The objectives of the study included: to assess the functionality of the internal audit unit in Pallisa district, to assess the impact of the internal audit function on the effective and efficient management of funds in Pallisa district, to examine the challenges facing the internal audit function in Pallisa district.

Literature was reviewed based on the objectives of the study. The study adopted a cross section research design where quantitative and qualitative approaches of data collection methods were used while carrying out the study where questionnaires and interview guides were administered to 70 respondents drawn from management and staff of Pallisa district local government.

The study found out that the internal audit department staffs are qualified accountants which is an indication of their ability to understand and give appropriate responses to the questionnaire. The internal audit department staff are updated and informed about new developments in the profession. Trainings take place within a period of one year. The internal audit department staffs are effective and also relevant to the internal audit work in the district. Independence of internal audit affects the performance of the local government institution. The internal audit functions on effective fund management include Review of accounting system and related internal control, promote corporate governance, monitors the operations and recommending improvements is very important for any organization, improve on the management of the business environment and identifies any fraud. The challenges facing internal audit function include limited funds, underfunded, inefficient records; low salary level given to the staff lowers their motivation, lack of independence, inadequate specialized audit skills, and delays in preparation of financial information and non-compliant employees to audit procedures.

The researcher recommended that there is need for the internal auditors to continuously update themselves with the changing times and technologies and sharpen their skills. By applying skills to the most critical points, building personal and professional credibility and recognizing and responding to the needs, internal auditors can become indispensable thus speeding good governance and enhancing efficiency of internal audit.

CHAPTER ONE

• Introduction

This chapter presents background to the study, statement of the problem, purpose of the study, objectives of the study, research questions, scope of the study and significance of the study.

1.1 Back ground to the study.

Mannaseh (2007), defines an audit as “an independent examination of financial information of any entity whether profit oriented or not and irrespective of its size ,legal form with such an examination conducted with a view of expressing an opinion ” it  helps an organization accomplish it’s objectives by bringing systematic designed approach to evaluate  and improve the effectiveness of risk management , control and government process.

Sebbowa (2009), define “internal auditing is an independent, objective assurance and consulting activating designed to add valve and improve an organization’s operations .it helps an organization accomplish its objectives by brining a systematic disciplined approach to evaluate and improve the effectiveness of risk management the control and government process”, He further mentions the principles of internal audit to include, integrity ,objectivity, confidentiality and competency .

According to Visser and Erasmus (2009), internal Auditing control is commonly known as internal controls and in organization they are usually under the internal control system. Internal control in terms of accounting and auditing is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency reliable financial reporting and compliance with laws, regulations and policies.it is a means by which an organization’s resources are directed, monitored and measured. It plays an important role in detecting and preventing fraud and protecting the organization’s resources both physically (for example machinery and property) and intangible (for example reputation or intellectual property such as trade marks) and Internal controls serve a straight forward purpose to detect fraud and error (Kieso, 2010). Millichamp (2002) describe internal control as a whole system of controls established by management in order to carry on business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard its assets and secure as far as possible the completeness and accuracy of the records. Internal control is a managements  tool which  is important for non- profit  organizations which rely on public trust more than other organization, poor internal control lead to asset misappropriations, corruption ,organization fraud and fraudulent financial statements (Miller, 2005).

The 1995 constitution of Republic of Uganda (as amended), and the Local Government Act (CAP 243) have  devolved service delivery mandate to LGs .line ministries ,under this framework retained the mandate of setting national priorities ,standards regarding the delivery of service, support supervision and mentoring of Local Government . On the hand Local government have been by Law, preparing own development plans and mobilizing their locally raised revenues (LLRs), receiving releases from the Central Government to facilitate funding for recurrent expenditure and development. The government of Uganda is committed to reviewing local government financing. The Uganda auditor general is JOHN F.S. MUWANGA who reports to the parliament a bout the public accounts of the country and its financial statement.

The local government Act a mended (2002) section 91 provides that every district, Municipal council or town shall provide for an internal department in order to foster financial management. Its head is charged with preparing quarterly reports and submit item to the council giving a copy to the Local government Account Committee. As a means to enhance good performance the auditors should do their work professional skepticism and due care. It is argued that internal audit profession in public sector is highly misperceived by the majority of the stakeholders. They confuse by comparing the role of internal auditors and those of security guards and police when misappropriation of funds or fraud is reported. The major point here is that, internal audit in Uganda does not provide any additional value to the stakeholders (Baguma, 2013).

Internal Audit in the public sector is a tool implemented by management and other stakeholders (South Africa, 2000). The public Finance Management Act defines wasteful expenditure as that is made in vain and would have been avoided had reasonable care been exercised .the head of department together with the senior officials that compose the management team provide the leadership and direction necessary in achieving the goal derived from the legislative process and on institutions mandate.

Pallisa district was created in 1991 and was formally part of the Tororo district. Pallisa boarders the districts of Mbale in the East, Kumi in the North, Kamuli in the West, Tororo and Iganga in the south and Soroti in the North West. Pallisa like other districts in Uganda has to implement internal audit function for its efficiency management of public funds.

Despite the aforementioned perspectives of the researchers regarding internal auditing in Uganda, there is no such study examining the impact of internal audit efficiency in the public sector just after the establishment of internal audit general division (IAGD). The study provides an opportunity to understand the extent to which Internal Audit Unit can strengthen control and minimize the mismanagement of public funds in LGAs by finding out the factors contributing to inefficient Internal Audit Unit. Also, it provides possible solutions following the amendment of Public Finance Act, 2004 and the establishment of Internal Auditor General Division.

1.2 Statement of the problem

Internal audit efficiency in the Local Government Districts (LGDs) in Uganda have performed poorly as 68 of LGDs and other many public offices have been reported to suffer massive theft and misappropriation of financial resources (CAG report, 2013). Despite the effective implementation of internal audit in the operations of local governments in Uganda, the problem is how fraud has persistent in most local governments. Therefore, the study seeks to assess the impact of Internal Audit unit efficiency on effectiveness of Financial Management in LGDs.

1.3 General objective

The overall objective of this study was to assess the impact of Internal Audit Function on Effectiveness of Financial Management in LGDs.

1.4 Objectives of the study.

The objectives of the study included the following:

1. i) To assess the functionality of the internal audit unit in Pallisa district.
2. ii) To assess the impact of the internal audit function on the effective and efficient management of funds in Pallisa district

• iii) To examine the challenges facing the internal audit function in Pallisa district.

• Research questions

1. i) What is the functionality of internal audit unit in Pallisa district?
2. ii) What is the impact of the internal audit function on the effective and effective management of funds in Pallisa district?

• iii) What challenges are facing the internal audit function in Pallisa district?
  • Scope of study.

This section highlights the boundaries to which the study will be divided into geographical, times and content scope.

1.6.1 Content scope

The research examined the impact of Internal Audit Function on Effectiveness of Financial Management in LGDs but specifically assessing the functionality of the internal audit unit, the impact of the internal audit function on the effective and efficient management of funds and the challenges facing the internal audit function.

1.6.2 Geographical scope.

The research was carried out at Pallisa council which is a few kilometer from Tirinyi Mable high way. The main department the research was carried was in audit department.

1.6.3 Time scope.

The research was carried out for period of four months that is to say from May to July 2017.

1.6 Significance of the study.

• The study will provide relevant information that future researchers with similar interests in the topic can use and will be able to use it.
• The study will enable the internal audit department at the Pallisa to know certain key ideal and information on how they can use the internal auditing control to properly manage public own research.
• The study will equip the researcher with confidence and knowledge that will be of use to me when pursuing future research studies.
• The study will highlight how the staff and management of an organization are very important in implementing of internal auditing control.

1.7 Definition of the key terms

1.7.1 Internal audit

Internal audit is an independent, objective assurance and consulting activity designed to add value and improve company’s operation. It helps an organization accomplish objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process (Savcuk 2007)

1.7.2 Financial Management

Financial management is defined as a planning, organizing, directing, controlling and prudent management of organizations financial resources, including its procurement and utilization of funds to maximize returns for its owners (or stakeholders).

1.7.3 Public Sector 

Institute of internal audit guide (2011), defines it in general terms, that public sector consists of governments and all publicly controlled or publicly funded agencies, enterprises, and other entities that deliver public programs, goods, or services.

CHAPTER TWO

LITERATURE REVIEW

• Introduction

This chapter presents an exploration of the various perspectives on the subject of internal audit function effectiveness and financial management of local governments. The review is based on the study objectives.

2.1 Definition of Internal Audit Function

The Institute of Internal Auditors (IIA) has provided an overarching definition of internal audit that influence the prominence of internal audit in organization. IIA (2011) defines internal audit as “Internal auditing 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.” This definition has expanded the role and responsibility of internal audit in an organization’s value creation process.

The relevance of internal audit functions in organizational setups recently cannot be overlooked. The rate of expansion of organisations coupled with the growth of complexities of internal control systems has made it imperative for organisations to establish internal audit function. Prawitt, Smith, and Wood, (2009), acknowledge the fact that as the result of the increase in accounting scandals in recent years, the internal audit functions has received impressive attention as an important contributor to effective corporate governance and financial reporting, because a high quality internal audit function focused on improving financial reporting through ensuring adherence to standards.

In light of this, many research studies were conducted in the area of internal audit until the Institute of Internal Auditors (IIA) recently caused a paradigm shift in the importance of internal audit function on audit effectiveness and achievement of organizational objectives through their definition.

This new phase of internal audit functions caused a lot of research studies on the factors influencing audit effectiveness and how audit effectiveness contributes to achievement of organizational objectives, especially in the public sector. Badara and Saidin (2013), agreed to this fact stating that, the importance of internal audit in an organizational setting, especially in regard to organizational objective achievement, enable various researchers to continue to show concern over its operation.

2.2 Functionality of the internal audit function

According to the Institute of Internal Auditors (2009), 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. As can be seen from the above definition, the objective of internal auditing not only includes involvement in governance but also highlights the importance of evaluating and improving risk management and control.

According to Cai Chun (2007) Independence is the essence of auditing. An internal auditor must be independent of both the personnel and operational activities of an organization. Otherwise, the integrity of the auditor‘s opinions, conclusions and recommendations would be suspect. So, independence is necessary for the effective achievement of the function and objective of internal audit. This independence is obtained mainly from two characteristics – organizational status and objectivity.

Haylas and Ashton (2002) in their effort to provide evidence on the effectiveness of particular audit techniques in detecting errors that affect the financial statements suggested that all intentional errors are concentrated in relatively few audits and these are fairly predictable by industry. The great majority of such errors affect income but the direction of effect may either be an understatement or over statement. Regarding the signaling of an error, they found that the large portion of financial statements errors are initially signaled by less rigorous audit procedures such as analytical review and discussions with the client. Client personnel problems such as inexperience, incompetence and insufficient knowledge and inadequate control follow up or reviews were found instrumental in causing the errors.

Esmailjee (2003) studied the internal audits of Nyayo Bus Service Corporation – a state corporation. He observed that cash receipts as well as cash disbursements bear fairly strong audits attributed to the fact that the government accounting system is still in operation. However, the payroll and the stores accounting systems had a lot to be desired. Regarding the Organizational chart, a lot of information was missing. The internal auditor was being underutilized as he was charged with the responsibility of performing routine control checks which were also performed by the examination section. This led to duplication of efforts and down playing of the internal auditor‘s effective role.

Glazer and Jaenike (2010) argued that performing auditing work according to internal auditing standards contributes significantly to the effectiveness of auditing. Standards for audits and audit-related services are published by the IIA (2008) and include attribute, performance and implementation standards. In general, formal auditing standards recognize that internal auditors also provide services regarding information other than financial reports.

In a study investigating the effects of internal control deficiencies on firms risk and cost of equity capital, Ashbaugh, Collins, and Kinney (2006) concluded that firms that disclose an internal control problem experience a significant increase in market-adjusted cost of capital and firms that subsequently improve their internal control systems exhibit a decrease in their market-adjusted capital. This study provides evidence that internal control risk matters to investors and those firms reporting strong internal audits or firms that correct prior internal control problems benefit from lower costs of equity capital beyond that predicted by other internal control risk factors.

Findings by Schneider and Church (2008) on the effect of auditor‘s internal audits opinion on loan decisions suggested that an adverse internal control opinion can underpin the assurance provided by unqualified opinion on financial statements taken as a whole and have a negative effect on lenders assessment. Adverse internal control opinion weakens the importance assigned to the balance sheet and income statement in lending decisions and that it reduces lenders confidence that financial statements are presented fairly in conformance with the generally accepted accounting principles. Khandawalla (2015) carried out a research on the relationship between the degree of competition and control. He concluded that the greater the degree of competition, the greater would be the need to control costs and evaluate whether actual performance meets the target performance expectations.

Control audits are designed to ensure that appropriate audits over systems and software are in place to ensure that internal audits and internal checks are functioning as designed, (Haylas and Ashton, 2002). Control audits can have features built into them to ensure that fraudulent truncations are flagged or made difficult, if not impossible, to transact. Control audits provide assurance that audits are working, but they do not necessarily detect fraud or corruption. Internal audits audit objectives relate to management‘s plans, methods, and procedures used to meet the organization‘s mission, goals, and objectives. Internal control includes planning, organizing, directing, and controlling program operations and the systems put in place to measure, report, and monitor program performance, (Esmailjee, 2003).

Detecting fraud is a challenging task. Perpetrators actively engage in deception in an attempt to conceal their behavior, auditors may have limited experience in fraud detection, and fraudulent activities are inherently unpredictable and difficult to detect (Kaplan et al., 2010; Nieschwietz et al., 2000). Hence, the organization would be optimally served by identifying and utilizing those individuals who, because they appear to share certain unique personality traits or characteristics, may be best suited to the fraud detection task.

Salih (2013) evaluated the internal audits of Ethiopian Airlines in Nairobi branch and concluded that the lack of segregation of accounting and custodian functions was the greatest weakness of the branch office. He argued that there is need to centralize cash receipts, establish an audit unit, separate accounting unit from sales section, separate duties of purchase activities and establish a perpetual inventory system for the tickets. He further emphasized that the existence of control is very crucial especially under today‘s condition with severe competition which place premium on reliable customers‘ services, on consideration of cash, on realization of capital assets and manpower and on other reduction costs.

Keitany (2000) in a study of internal audit control functions and its implications for risk assessment by the internal auditor: A case of quoted companies concluded that even though the extend of reliance on internal control is not sensitive to the strengths of audit departments, companies should not do away with it. This is because as a management tool it should assist management in its day to day operations and not necessarily of any relevance to the external auditor. This may be attributed to the fact that external auditor may have specific considerations which may be beyond the strength of internal audits. However, though the system of internal control was ranked as the most important factor in obtaining audit evidence other indicators followed. It therefore implies that once the auditor establishes the strength of the audit department, other risk indicators come into play notwithstanding the strength of internal control.

2.3 The impact of internal audit function on the effective and efficient management of public funds.

Government has the responsibility of instituting an effective internal audit that will keep it on track in actualizing its goals in stewardship toward public accountability. However, this has failed in the public sector .Rhahleh (2011), argue that there is council of overlapping control in the public sector and attention is not paid to such. Ajenjo (2011) argues that the duty of accountability is an inescapable element of governance.

Internal control is a key institutional driver to performance Kiabel (2012), Baltasi and Yilmaz (2006), INTOSAI (2004), explain that internal control elements reflect locus of controls in the management mode of operation.

It requires organization to institute self-control adjustment as backed by organization’s structure and effective business process mechanism. However, literature discusses the deficient nature of the internal control system that is attainable in the public sector. For instance, Kiabel (2012) considers the assessment of internal Auditing practices of financial performance of government in government owned companies in Nigeria. Amudo and Inanga (2009) argue that effective internal control system is lacking in the public sector in Uganda.

Larry (2006), however argues that the importance of internal audit is seen in the conduct of the business in an orderly and efficient manner Abel (2002), look at the importance of internal controls as their way ofensuring adherence to the management policies and directives aimed at ensuring the smooth operation of the business. French (2002), views the importance of internal controls on the safeguarding of the organization, the set rules help the organization ensure sustainability and long usage of the employed in business.

With St Folks Lynch (2002), the objectives of the internal audit are to ensure adherence to the management  polices, management will have many polices in place e.g. personnel procurement , asset management ,stock valuation and many other expressed in the budget, long range forecasts  and cooperate  plans . Such adopted polices will be relevant to the auditor as it will be able to evaluate whether or not management is adhering with the set polices.

The management control guidelines (2002) attributes that internal  audit help organization to secure as far as possible the completeness and accuracy of the records .internal control promote timely preparation of financial information as a matter  of policy .internal controls require management to prepare financial statements for audit purposes.

Pandy (2009) says that internal controls prevent the loss of resources ensuring reliability of financial reporting and ensuring organizational compliance with laws and regulations. This helps to avoid the damage of organizational reputation and consequences. He further states that internal controls enable the mission of an organization to be accomplished and avoid surprises on the way.

2.4 Challenges faced internal audit function

In most organizations, some members of the senior management team view internal audit as threats to the achievement of their individual goals .in addition, some staff view internal controls as blockades against career progress. Consequently, the internal audit will be useful if management do not take appropriate actions to control resource mismanagement .if an organization is to achieve its objectives management needs to be supportive to the internal control system (Chepkorir, 2010).

Fish & Young (2012), inadequate qualified personnel.in order to effectively implement the management policies and procedures there is need to employ experienced personnel. The internal audit department must be highly committed and capable of producing timely reports identifying deviation, frauds, omissions, and other forms of management to take appropriate actions.

However , Uganda’s economy has faced a challenge qualified staff due to brain drain in search for greener pastures .in addition , the locally trained persons have  more theoretical knowledge with less skill for applying in an international trade organization (Chepkorir, 2010).

According Dumitrescu (2004), independence of the auditor’s .more frequently in application of internal controls, auditors are not independent from political and management pressures .this threatens the effective performance of auditors.

Control procedures may become inadequate due to changes in conditions and compliance with the procedures hence the conditions and compliance may decline (Chepkorir, 2010).

Gramling (2004), argues that human errors due to judgment of interpretation, misunderstanding, carelessness, fatigue. Most of the control procedures are devised in relation to the anticipated type of transactions and therefore may not be effective in relation to the usual or extraordinary transaction.

2.5 Conclusion.

Internal audit as noted from the different views form an important core in different organizations not only as the implementation and achievement of organizational objectives are concerned but also in the management of public funds especially in public entities .an organization that adheres to the key components of an internal audit system enjoys the benefits that accrue from maintaining proper control systems. Therefore organizations need to design their controls in such away that they are useable and can attain results.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the research design, study population, sample size, sampling techniques, data sources, data collection methods and instruments, data collection procedure, data analysis and presentation and limitation of the study.

3.1 Research design

The researcher used a cross sectional survey basing on the use of qualitative and quantitative data approaches that was adopted to examine the relationship between internal auditing and controls as an independent variable and management of public funds as a dependent variable.

• Study population

The study population was made up of 70 respondents including both the permanent staff and the contract staff.  The respondents were from the 9 departments of the Pallisa local government.

• Sample size

A total of 70 respondents were selected. Out of the 9 department of the council, the research focused on 7 of the departments because the 7 department are directly affected by the internal controls.

Table 3.1: Sample size

• Sampling techniques

The researchers used stratified random sampling during the study for the whole population. Each stratum contained respondent who were selected basing on their positions in the district.

• Data sources

The researcher collected data from both secondary and primary sources.

• Primary sources

This refers to data that was originally collected by the researcher and has not being used before by any one. The respondents of the organization were the basic sources of primary data and this data was obtained through the issuance of questionnaires to the different respondents selected in the sample and through the use of interviews.

• Secondary sources

The researcher obtained the secondary data from the company records and documents especially the auditor’s reports, budgets and cash flow statements. The data also obtained from internet, journals and abstracts from various scholars relating to the topic of discussion, from libraries and archived records of the council.

• Data collection methods

3.6.1 Questionnaire.

The researcher mainly used the semi-structured questionnaires which involved mainly closed – ended questionnaires .the questionnaires was self –administered.

3.6.2 Interviews

An interview is a conversation where questions are asked and answers are given. Interview refers to a one-on-one conversation with one person acting in the role of the interviewer and the other in the role of the interviewee. An interview guide was drafted with a set of questions that the researcher asked during an interview and this was structured (close ended) in nature. Interview guide was used by the study since the methods helps in the collection of more data as it allows the interaction of both the researcher and the respondents.

3.7 Validity and Reliability of data

In order to ensure validity of data collected in this study, the research reduced on the random errors and constantly referred to the objectives that are set and to focus on deviations comings, and for reliability the researcher made ensure that the data obtained was accurate and represented the respondents in the study.

• Research procedure

After successfully completing and submitting the research proposal to the supervisor from the institution. The researcher obtained an introductory letter from the institution that enabled her to obtain a placement in the district where she carried out the research from, this introductory letter also enabled her to introduce herself to the respondents and collected data without arousing suspicion. The researcher also designed the research instruments for collecting the data.

• Data analysis, interpretation and presentation

• Data analysis

The data obtained was categorized, coded and entered into the computer where it was sort and edited to detect and eliminate errors that occurred. Ms-excel was use to analyze the data to reveal the relation ship between the two variables.

• Data interpretation

The data was interpreted basing on the results that were obtained after the use of Ms-excel and results was table form.

• Data presentation

The data was presented in form of frequency tables, graphs and pie charts.

3.10 Limitations of the study

Obtaining accurate, objective and more especially information considered sensitive from the target respondents was problem.

The study involved costs such as transport to and fro the field communication, stationery and printing of the research work.

The time factor was another challenge since the study required a lot of time to be conducted; yet the researcher has other key commitments.

CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND INTERPRETATION OF FINDINGS

4.0 Introduction

This chapter provides for the study findings, the interpretation of the findings and presentation. The chapter presents the findings in line with the set objectives:

4.1 Characteristics of Respondents

This aspect of the analysis deals with the characteristics of the respondents of the questionnaires.  The results obtained are presented below;

Table 4.1: Distribution of   Respondents by Sex

Figure 4.1: Shows the percentage distribution Respondents by Age

Source: Primary data

From the  above illustrations, results indicate that  respondents between age 31-40 years  were  the majority (43%), this  was  followed  by 26-30 years  (33%),  20-25  years (14%)  and  the least was (7%)  45 years  and  above. The percentage was 100% because all the questionnaires were returned. Most respondents had more valuable knowledge and possessed more in-depth experience concerning the study under investigation. This is an indication that respondents were well distributed in terms of their age.

Table 4.2: Distribution of   Respondents by Sex

Source: Primary Data  

Figure 4.2: Distribution of   Respondents by Sex

From the table 4.2 and figure 4.2 above, male respondents formed the highest percentage (61%) compared to the female with only 39%. Most of the respondents were male mainly because they were willing to provide the information required and vast experience in relation to the study topic whereas the least number of women showed that there were few females who are directly involved in the management. This is an indication that both genders were involved in this study and thus the finding of the study did not suffer from gender bias.

Table 4.3: Showing the marital status of the respondents

Source: Primary data

Figure 4.3: Showing the marital status of the respondents

The findings indicated that 73% of the respondents were married and only 27% were single which implies that data was mainly from responsible and credible respondents hence its reliability.

Table 4.4. Shows the distribution of respondents by Education level

Source: Primary data

Figure. Shows the distribution of respondents by Education level

From the table 4.4 and figure 4.4 above the highest education level of the respondents was degree at 47.2%, followed by diploma at 35.7% and other education qualification accounted for 15.7% while masters was the least with 1.4%. This revealed variations in the findings in that respondents with tertiary and university level of education showed more validity in the role of internal audit function on effectiveness of financial management. This is an indication that most of the respondents focused in this study had university degrees as their highest level of education.

Table 4.5: Showing duration the employees have worked in the firm

Source: Primary data

Figure 4.5: Showing duration the employees have worked in the firm

The findings in the table 4.5 and figure 4.5 above show that 60% of employees had worked in the firm for over 5 years which therefore is an indication of low labor turnover, 30% had worked for the period between 3-4 years and only 10% had been in the firm for a period less than 2 years. This implies that the data was obtained from respondents who had gotten experience and were also more familiar with the variables. This means that majority of the respondents had served for a considerable period which indicates that most of the respondents had vast knowledge which could be relied upon by this study.

4.2 Functionality of Internal Auditing

The study sought to assess the functionality of the internal auditing function. Results were obtained and are presented below;

4.2.1 Professional qualification

Table 4.6: Professional qualification

Source: Primary data

Figure 4.6: Professional qualification

From Table 4.6 and figure 4.6 indicate that, 63 (90%) mentioned CPA, 5 (7.1%) have chartered with ACCA and 2 (2.9%) mentioned CA qualification. This means the major qualification required by staff is CPA.

4.2.2 Technical Competence

Table 4.7: Technical Competence

Source: Primary data

Figure 4.7: Technical Competence

From table 4.7 and figure 4.7 above, all respondents 70 (100%) mentioned yes. This implies that the internal audit department is competent. The technical competence of the internal auditor is one of the factors that influence the effectiveness of internal audit.

4.2.3 Training Opportunities

Table 4.8: Training Opportunities

Source: Primary data

Figure 4.8: Training Opportunities

From the table 4.8 and figure 4.8 above, out of the 70 respondents, 100% (n=70) agree that the institution provide training opportunities for the internal audit staff. This shows that the internal audit department staff are updated and informed about new developments in the profession. Majority of the respondents also agree that these trainings take place within a period of one year.

4.2.4 Degree of Effectiveness and relevance of the internal audit function

Table 4.9: Degree of Effectiveness and relevance of the internal audit function

Source: Primary data

Figure 4.9: Degree of Effectiveness and relevance of the internal audit function

From table 4.9, 100% (n=70) of the respondents agrees that the internal audit department staff are effective and also relevant to the internal audit work in the district.

4.2.5 Independence of Internal Audit

Table 4.10: Independence of Internal Audit

Figure 4.10: Independence of Internal Audit

The study sought to establish the extent to which Independence of Internal Audit affect the performance of local government. From the findings 80% indicated yes, 20% of the respondents indicated no.

4.3 Impact of internal audit function on effective management of funds

The study sought to examine the impact of internal audit function on effective management of funds. Results were obtained and are presented below;

4.3.1 Does Internal auditing play any role in proper management of funds

Table 4.11: Does Internal auditing play any role in proper management of funds

Source: Primary data

Figure 4.11: Does Internal auditing play any role in proper management of funds

From table 4.11 and figure 4.11 above, all respondents 70 (100%) mentioned yes. This implies that the internal auditing plays a role in proper management of funds in the institution.

4.3.2 Impact of internal audit function on effective management of funds

Table 4.12: Impact of internal audit function on effective management of funds

Source: Primary Data

Figure 4.12: Impact of internal audit function on effective management of funds

According to the research findings, 32 (45.7%) of the respondents noted that compliance with laws and regulation for example procurement laws. They stressed that the establishment of an adequate accounting system was the responsibility of management which demands proper attention on continuous basis. They stated that the internal audit function was often assigned specific responsibilities by management to reviewing the accounting system and related internal controls.

The respondents further cited out that completeness and accuracy of the records as cited by 4 (5.7%). They believed that such systems identify, assemble, analyze, calculate, classify record, summarize and report transactions and other events. Therefore the management of an enterprise needs an accounting system in order to assist it in controlling the business, safeguard the assets, preparing financial statements and complying with legislation and other regulatory.

Based on the research findings, (10) 14.29% of the respondents noted that internal audit promoted timely preparation of financial information. This explanation recognizes according to the respondents that there are risks within any organization and that risk can’t be avoided, but only managed.

According to findings from the respondents, the majority 16 (22.9%) of the respondents noted that auditing helps in detecting frauds and errors thus reliability of financial reporting.  The respondents cited out that organizations with an internal audit function were more likely than those without such a function to detect fraud within their organizations. They further examined that organizations that relied solely on outsourcing for their internal audit function were less likely to detect fraud than those that undertake at least part of their internal audit function themselves. This provides evidence that internal audit adds value through improving the control and monitoring environment within organizations to detect fraud. These findings suggest that keeping the internal audit function within the organization is more effective than outsourcing that function.

Other respondents noted that auditing helps to improve on timely service delivery. The findings showed that the internal auditor conduct surprise checks on sensitive assets which are desirable and portable to prevent their misuse through unauthorized access. However based on the respondents views, to enable the internal auditor to conduct his independent reviews and appraisals he should enjoy the corporation of everyone in the company and for this to be, he should report to the highest level of authority in the organization for example a committee of broad status is necessary to facilitate his independent review and to make them more efficiently adopted to situations.

4.4 Challenges facing internal audit function

The study sought to examine the challenges facing internal audit function. Results were obtained and are presented below;

• The department is underfunded
• There is lack of efficient records
• Low salary level given to the staff lowers their motivation
• Non-compliant employees to audit procedures
• Delays in submission of documents when needed for auditing

CHAPTER FIVE

DISCUSSION, CONCLUSION AND RECOMMENDATION

5.0 Introduction

This chapter contains discussion of the study findings, conclusions, recommendations and suggestions for further studies. The discussion of the study findings, conclusions and recommendations were done in accordance with the study objectives as follows.

5.1 Discussion of findings

5.1.1 Functionality of Internal Auditing

From findings, audit department staffs are qualified accountants which is an indication of their ability to understand and give appropriate responses to the questionnaire. The technical competence of the internal auditor is one of the factors that influence the effectiveness of internal audit. The institution provides training opportunities for the internal audit staff. This shows that the internal audit department staff are updated and informed about new developments in the profession. Trainings take place within a period of one year. The internal audit department staff are effective and also relevant to the internal audit work in the district. Independence of Internal Audit affect the performance of the local government institution.

The study findings are in line with Institute of Internal Auditors (2009) that argued that 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. As can be seen from the above definition, the objective of internal auditing not only includes involvement in governance but also highlights the importance of evaluating and improving risk management and control.

They are also in line with Haylas and Ashton (2002) who in their effort to provide evidence on the effectiveness of particular audit techniques in detecting errors that affect the financial statements suggested that all intentional errors are concentrated in relatively few audits and these are fairly predictable by industry. The great majority of such errors affect income but the direction of effect may either be an understatement or over statement. Regarding the signaling of an error, they found that the large portion of financial statements errors are initially signaled by less rigorous audit procedures such as analytical review and discussions with the client. Client personnel problems such as inexperience, incompetence and insufficient knowledge and inadequate control follow up or reviews were found instrumental in causing the errors.

5.1.2 Impact of internal audit function on effective management of funds

According to the research findings, internal audit function influences the fund management by compliance with laws and regulations for procurement laws. Manasseh (2004) stressed that the establishment of an adequate accounting system was the responsibility of management which demands proper attention on continuous basis. The respondents stated that the internal audit function was often assigned specific responsibilities by management to reviewing the accounting system and related internal controls.

The internal audit function also does the completeness and accuracy of the records. Rick Hayes (1999) believed that such systems identify, assemble, analyze, calculate, classify record, summarize and report transactions and other events. Therefore the management of an enterprise needs an accounting system in order to assist it in controlling the business, safeguard the assets, preparing financial statements and complying with legislation and other regulatory.

Internal audit promoted timely preparation of financial information. Based on Apostolou, Hassell, Webber and Sumners (2001) timely preparation of financial information is vital for the internal audit department to ensure efficient fund management.

According to findings, internal audit function helps in detecting frauds and errors thus reliability of financial reporting.  The respondents cited out that the Audit and assurance study manual (2007), organizations with an internal audit function were more likely than those without such a function to detect fraud within their organizations. The respondents further examined that organizations that relied solely on outsourcing for their internal audit function were less likely to detect fraud than those that undertake at least part of their internal audit function themselves. This provides evidence that internal audit adds value through improving the control and monitoring environment within organizations to detect fraud. These findings suggest that keeping the internal audit function within the organization is more effective than outsourcing that function.

Internal audit function helps to improve on timely service delivery. The findings of KPMG Fraud Survey (2004) showed that the internal auditor conduct surprise checks on sensitive assets which are desirable and portable to prevent their misuse through unauthorized access. However based on the respondents views, to enable the internal auditor to conduct his independent reviews and appraisals he should enjoy the corporation of everyone in the company and for this to be, he should report to the highest level of authority in the organization for example a committee of broad status is necessary to facilitate his independent review and to make them more efficiently adopted to situations.

5.1.3 Challenges facing internal audit function

Findings reveal that the challenges facing internal audit function include limited funds, underfunded, inefficient records, low salary level given to the staff lowers their motivation, lack of independence, inadequate specialized audit skills, delays in preparation of financial information and non-compliant employees to audit procedures. These findings are in line with (Chepkorir, 2010) who stated that in most organizations, some members of the senior management team view internal audit as threats to the achievement of their individual goals .in addition, some staff view internal controls as blockades against career progress. Consequently, the internal audit will be useful if management do not take appropriate actions to control resource mismanagement .if an organization is to achieve its objectives management needs to be supportive to the internal control system. Also Fish & Young (2012) stated inadequate qualified personnel.in order to effectively implement the management policies and procedures there is need to employ experienced personnel. The internal audit department must be highly committed and capable of producing timely reports identifying deviation, frauds, omissions, and other forms of management to take appropriate actions.

5.2 Conclusion

The internal audit department staffs are qualified accountants which is an indication of their ability to understand and give appropriate responses to the questionnaire. The internal audit department staff are updated and informed about new developments in the profession. Trainings take place within a period of one year. The internal audit department staff are effective and also relevant to the internal audit work in the district. Independence of internal audit affect the performance of the local government institution. The internal audit functions on effective fund management include Review of accounting system and related internal control, promote corporate governance, monitors the operations and recommending improvements is very important for any organization, improve on the management of the business environment and identifies any fraud. The challenges facing internal audit function include limited funds, underfunded, inefficient records, low salary level given to the staff lowers their motivation, lack of independence, inadequate specialized audit skills, delays in preparation of financial information and non-compliant employees to audit procedures.

5.3 Recommendations

5.3.1 Policy Recommendations

There is need for the internal auditors to continuously update themselves with the changing times and technologies and sharpen their skills. By applying skills to the most critical points, building personal and professional credibility and recognising and responding to the needs, internal auditors can become indispensable thus speeding good governance and enhancing efficiency of internal audit.

The management should keep organizing seminars and workshops whereby these internal auditors would be trained frequently by experts either internally or externally. Internal Auditors must have sufficient proficiency and training to carry out the tasks assigned to them. The auditor’s work must be carefully directed, supervised and reviewed. The amount of supervision required corresponds to the experience and skill of the auditor.

The head of the internal audit department should be responsible to the management/board in the organisation with sufficient authority to promote independence and to ensure broad audit coverage, adequate consideration of audit reports, and appropriate action on audit recommendations.

The management should also procure the latest ICT audit software‘s. This would enhance fast delivery of services and detection of frauds or any mischief in this field. Internal auditors should be fully trained on how to use the software‘s and fresher courses should also be increased in this regard. Frequent upgrading of the software‘s should be done to keep abreast with the changing technology.

5.3.2 Recommendation for Further Studies

This research recommends a similar study to be done but concentrate on the parastatals and government ministries.

There is need for a study to be conducted to determine the challenges facing internal audit in commercial banks, this will help in enhancing the internal audit in the commercial banks in Uganda and thus positively affecting their performance.

There is need for a study to be conducted on the roles and challenges of internal auditing in the banking industry in Uganda

REFERENCES

1. Agrawal, A., J.F. Jaffe, and J.M. Karpoff.(2008). Management turnover and governance changes following the revelation of fraud. Journal of Law and Economics (forthcoming).
2. Apostolou, B. A., J. M. Hassell, S. A. Webber and G. E. Sumners.(2001).The relative importance of management fraud risk factors. Behavioral Research in Accounting 13: 1-24.
3. Auditing and assurance study manual (2007)- institute of chartered accountants of England.
4. Belson, K. (2005). WorldCom head is given 25 years for huge fraud. The New York Times 14 July, p.A.1.
5. Birkett, W. P., M. Barbera, B. Leithhead, M. Lower and P. Roebuck.(2009). Internal Auditing: The Global Landscape. Institute of Internal Auditors’ Research Foundation. Florida.
6. Blue Ribbon Committee.(2009). Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees.New York, NY, New York Stock Exchange.
7. Carcello, J. V., D. R. Hermanson and K. Raghunandan.(2005). Factors associated with U.S. public companies’ investment in internal auditing. Accounting Horizons 19 (2): 69-84.
8. Carey, P., A. Craswell and R. Simnett.(2000). Voluntary demand for internal and external auditing by family businesses.Auditing: A Journal of Practice & Theory 19 (supplement): 37-51.
9. Committee of Sponsoring Organizations of the Treadway Commission (COSO).(1992).
10. Dechow, P. M., R. G. Sloan and A. P. Sweeney. (2006). Causes and consequences of earnings manipulations: An analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13 (1): 1-36.
11. Goodwin, J. and P. Kent.(2004). Factors affecting the voluntary use of internal audit.Working Paper, Queensland University of Technology.
12. Gramling, A. A., M. J. Maletta, A. Schneider and B. K. Church.(2004). The role of the internal audit function in corporate governance: A synthesis of the extant internal auditing literature and directions for future research. Journal of Accounting Literature 23: 194-244.
13. Institute of certified public accountants of Uganda magazine (October-december 2012)
14. Institute of Internal Auditors (IIA) (2009).Definition of Internal Auditing.Altamonte Springs, FL, IIA.
15. Internal Control – Integrated Framework. New York: COSO.
16. KPMG.(2004),Fraud Survey 2004.KPMG.
17. Lysons& Farrington (2006); Purchasing and Supply Chain Management, 7th edition
18. Metro.Co.Uk/2012/10/09/top-ten-types-of-Fraud
19. Muguzi (2005); Corrupt Public Procurement, civil society should be involved more in following up corrupt officials. Newsletter 3/2005 August, Northern Uganda
20. Public Oversight Board (POB). (2008). In the Public Interest: Issues Confronting the Accounting Profession. Stamford, CT: Public Oversight Board.
21. Public Oversight Board.(2008). Issues Confronting the Accounting Profession. Stamford, CT: POB.
22. Rick Hayes (2009) – Principles of Auditing an international perspective, mcGraw Hill publishing company.
23. Savuth (2012). Procurement fraud and corruption practices
24. US Securities and Exchange Commission –Investor.gov
25. Wu (2003); corruption in chine-effects on economic development and remedial policies.

APPENDICES

APPENDIX I: QUESTIONNAIRE

DEAR RESPONDENT,

I am Ajulong Betty a student of MTAC, pursuing a diploma in accounting and finance. As part of the requirement for the completion of my course, I am carrying out a study on “the impact of internal audit function on effective of financial management, a case of Pallisa district. You have been selected to be part of this study; the success of this study therefore depends on your kind cooperation. You are kindly requested to answer the questions below according to the best of your understanding. The information given will be treated with utmost confidentiality and used strictly for academic purposes.

Kindly tick and/or fill in

Section A- BIO DATA

1. Age

18-22                           23-27              28-35                           36-40               Above 40

2. Sex:

Male                            Female

3. Marital status:

Single                          Married                     other (Specify)…………………..

4. Educational background:

Degree                         Masters                       PhD                 other (specify)…………………

5. What is your position?

Auditor                        Accountant                  Others (specify)………………………………

6. How long have you worked in this organization?

Less than 1 year                      1-5years                                  6-10years

Above 11 years

Section B: Functionality of Internal Auditing in an Organization

7. What professional qualifications are required for staff?

CA                              ACCA                         CPA                            others Specify ………….

8. The technical competence of the internal audit department in Pallisa district.

Yes                              No                   Not Certain

9. Are there training opportunities in internal audit department in the district?

Yes                              No

10. On a scale of 1-10, rate the degree of effectiveness and relevance of the internal audit function in the district?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

11. Does the internal audit department possess any independence in their operations?

Yes                              No

Section C: Impact of internal audit function on effective management of funds

12. In your own opinion, does internal Auditing play any role in fund management?

Yes                              No

13. If yes, what role do you think Internal auditing plays in fund management?

Compliance with laws and regulations for example procurement laws

Detecting frauds and errors thus reliability of financial reporting

Timely preparation of financial information

Timely service delivery

Completeness and accuracy of the records

Others specify………………………………………..

14. What is your general comment on the role played by internal auditing function in fund management?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

Section D: Challenges facing internal audit function

15. What challenges are facing the internal audit function in the district, if any?

………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

THANK YOU FOR YOUR TIME

APPENDIX II: INTERVIEW GUIDE

1. Do the staff poses desirable training & qualification/technical competence?
2. Do they do their expected work to the required level or they leave out a lot to be desired?
3. Are there training opportunities in internal audit department in the district?
4. What is the degree of relevance of the function to the need of the municipality and the public?
5. What is your general comment on the role played by internal auditing function in fund management?
6. Are staff given refresher courses, conferences and workshops to improve on their knowledge of the internal audit function.
7. What challenges are facing the internal audit function in the district?

THANK YOU FOR YOUR TIME