Role Of Internal Auditing

Internal auditing has become an important part of corporate governance. Internal auditors are tasked with protecting an entity’s assets and producing reliable accounting reports used in decision-making processes. However, the most vital role of today’s internal auditor is testing the efficiency and effectiveness of all aspects of an entity’s operations (e.g., financial and nonfinancial; In’airat, 2015). According to In’airat, the components of corporate governance must cooperate with each other to ensure the efficiency of a functioning business. These components of corporate governance include, but are not limited to, the audit committee, internal auditor, executive management, financial management, and external auditors. Of these components,

In’airat argued that the perceived levels of the independent variables (i.e., internal audit, internal control, and the external audit) would influence the perceived levels of fraud (i.e., dependent variable). The results of his quantitative research showed that internal audit proved significant at p = .01. In addition, In’airat found that, although the respondents perceived the existence of each component was important, the perception of effectiveness and implementation of these controls were low. Therefore, In’airat concluded the simple existence and implementation of corporate governance was not enough to reduce fraud. However, when the components of corporate governance are effectively established, reduction of fraud levels is

(2015) examined the nature of financial statement fraud in a globalized market and found that typically management was the perpetrator of the fraud. In an international marketplace, it is still common to compensate managers with a fixed salary and a bonus based on company performance (Dimitrijevic et al., 2015). Compensating organizational managers based on company performance creates a potential risk, in that management may place self-interest before the best interests of the entity, which can lead to undesirable consequences, such as financial statement fraud (Dimitrijevic et al., 2015). Most frauds involved the income statement’s revenues and expenses, which management easily concealed (Albrecht, Holland et al., 2015; Dimitrijevic et al., 2015). False revenues included such activities as fictitious invoices, recognizing revenue in advance or postponing revenue recognition, and duplicated posting of invoices. False expenses included such activities as aggressive asset write-offs, increase/decrease depreciation expenses, improper capitalization, and deferring costs into another accounting