ASSESING THE PRACTICE OF INTERNAL AUDITING: IN THE CASE OF HOSSANA

ELECTRIC UTILITY

By: Tsegab Feleke

Advisor: Mesfin Dessie

A Research Proposal Submitted to the Department of Accounting and Finance, College of

Business and Economics, Wachemo University, in Partial Fulfillment of the Requirement of
BA Degree in Accounting and Finance.

Wachemo University

College of Business and Economics

Department of Accounting and Finance

December, 2024

Hossana, Ethiopia
Table of Contents
Acronyms...............................................................................................................................................2
CHAPTER ONE........................................................................................................................................3
1.INTRODUCTION..................................................................................................................................3
1.1. Background of the study.............................................................................................................3
1.2. Statement of the Problem..........................................................................................................4
1.3. Objective of the Study................................................................................................................6
1.3.1.General objective..................................................................................................................6
1.3.2.Specific objectives.................................................................................................................6
1.4.Research Questions.....................................................................................................................6
1.5.Significance of the Study.............................................................................................................6
1.6. Scope of the Study......................................................................................................................7
1.7. Limitation of the Study...............................................................................................................7
1.8. Organization of the Paper...........................................................................................................8
CHAPTER TWO.......................................................................................................................................9
2. LITERATURE REVIEW..........................................................................................................................9
2.1. Theoretical Literature.................................................................................................................9
2.1.1. The Concept of Internal Auditing.........................................................................................9
2.1.2. The Internal Audit Charter.................................................................................................10
2.1.3. The Independence and Objectivity of the Internal Auditor...............................................10
2.1.4. The Professional Proficiency of an Internal Auditor...........................................................11
2.1.5. Scope of Work of Internal Auditing....................................................................................12
2.1.6. The Performance of the Audit Work..................................................................................13
2.1.7. Management Support for Internal Audit...............................................................................14
2.1.8. Types of Audits Conducted by Internal Auditors...............................................................14
2.1.9. ERP Systems in Internal Auditing...........................................................................................17
2.2. Empirical Literature..................................................................................................................18
2.3. Research Gap............................................................................................................................21
CHAPTER THREE..................................................................................................................................22
3. RESEARCH METHODOLOGY.............................................................................................................22
3.1. Research Design........................................................................................................................22
3.2. Research Approach...................................................................................................................22
3.3. Population and Sampling Technique........................................................................................22
3.3.1. Population of the Study.....................................................................................................22
 3.3.2. Sample Size and Sampling Technique....................................................................................23
3.4. Type and Source of Data...........................................................................................................23
3.5. Method of Data Collection........................................................................................................23
3.6. Method of Data Analysis...........................................................................................................24
3.7. Ethical Consideration................................................................................................................24
CHAPTER FOUR....................................................................................................................................25
4. Work plan and time frame.........................................................................................................25
Months.................................................................................................................................................25
4.1 budget breakdown.................................................................................................................25
References...........................................................................................................................................27
Acronyms
APB Accounting Principles Board

CFO Chief Finance Officer

EEP Ethiopian Electric Power

EEPCO Ethiopian Electric power Corporation

EEU Ethiopian Electric Utility

IIA The Institute of Internal Auditors

MOF Ministry of Finance

MOFED Ministry of Finance and Economic Development

SPSS Statistical Package for Social Science

 CHAPTER ONE

1. INTRODUCTION
1.1. Background of the study
Internal audit is an age-old task and a successful means of management in numerous
organizations. It has been a known element of organizations in both the public and private
sectors and in most industries for many years. The Institute of Internal Auditors (IIA) defined
internal auditing as “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 (IIA, 2013, p. 2).”

According to Kiabel ( 2012), internal auditing is all-inclusive and accordingly is arranged in

the organization as a separate body responsible only to a high level of management. It is often
seen as an all-encompassing monitoring activity with duty to management for evaluating the
effectiveness of control techniques which encompass the duty of other functional managers.
Hence, the internal audit function is not limited to the task of any particular function inside an
organization.

According to Ebissa (2015 ), internal auditors are key employees of public offices who are
expected to work independently and objectively to enhance an organization's tasks and
services quality by keeping good internal control system, promoting accountability, evading
corruption, guaranteeing good corporate governance, and greater transparency. Mokono
(2018) also argue that the role played by internal audit and internal auditors make the practice
more centrally as an important part of public expenditure controlling that also encompasses
management controls and information communication processes. In addition, according to
Fabrina (2018), government organization performances have caught public’s attention and
become a current issue as the transparency of information can easily be accessed now a day’s
quest government’s performance (Febrina, 2018) The development of modern auditing
system, in Ethiopia was marked in 1942 with the issuance of Ministry of Finance directives
for public sector fund utilization.

The establishment of the office of the Auditor General in 1961 with successive improvements
of duties and responsibilities in 1979 and 1987 was another major development in public
sector auditing in the country. Then Ministry of Finance and Economic Development
(MOFED) or the now Ministry of Finance (MOF) has the authority to produce internal audit
manuals for use by all organizations that are solely or partially financed by the government
budget. The Ministry has issued a manual that encloses a code of ethics for internal auditors
and procedural guidance on the conduct of audits. Internal audit standards of the Ethiopian
Government, indicated in the manual, relatively in line with those published by The Institute
of Internal Auditors IIA (Mihret, 2007).

Public sector organizations are part of the public body which are partially or entirely financed
by government budget and concerned with provision of basic government services to citizens
(K. Odowa, 2015). Government Owned Companies are kind of public sector organizations
that are founded by the government with government as shareholders having shares in trust
for the overall taxpaying public. Hence, the participation of government in economic activity
is a worldwide phenomenon (Kiabel, 2012).

In Ethiopia, there are some studies conducted in public sector organizations. Ebissa (2015 )
undertook a study on the “Determinants of Internal Auditor's Effectiveness” in 30 selected
Ethiopian Public Sectors and (K. Odowa, 2015) studied Internal Audit Practice of Somali
Regional Government Public sector offices. Meanwhile, Kiabel ( 2012) conducted a study on
internal auditing standards and its practice in selected public enterprises of East Arsi Zone.
Similarly, Mihret (2007) made a study on internal audit effectiveness in Ethiopian public
higher education institute.

However, as far as the researcher’s knowledge is concerned, research examining the practices
of internal auditing has been negligible in government offices in Ethiopia. This research,
therefore, aimed at assessing the existing internal auditing practice by considering the
auditors’ proficiencies, the auditors’ independence and objectivity, scope of work of internal
auditing, audit charter, management support and Enterprise Resource Planning (ERP).

1.2. Statement of the Problem

In recent years, researchers and practitioners have widely discussed the need for internal
auditors of adding more value to their company’s operation and contributing to the
achievement of corporate objectives. According to Orma et al, (2012) this study was focused
on increasing attention on issues such as; performance evaluation and effectiveness of the
company’s internal auditing. Companies employ their own internal auditors to do both
financial and operational audits. Internal auditors focus on different areas. But the extent of
internal auditing may vary from one company to another (Arenas et al., 2012).
Ayneshet (2019) assessed the internal audit practice and its role in effective use of public
resource with reference to public bureaus in SNNPRS by employing a descriptive design with
qualitative research approach, The primary data collected from respondents in the selected
public bureaus of southern Ethiopia was analyzed by means of descriptive statistics through
SPSS version 20.0. The findings of the study showed that lack of expertise, lack of
management support, lack of opportunity for professional development, lack of information
technology facilities and lack of positive and supportive attitude toward internal controls,
restricted access to necessary audit evidence, and wrong perception towards the audit
function were main challenges of auditors’ work performance.

Alemayehu (2020) assessed the practice of internal audit in selected bureaus in SNNPRS by
employing descriptive research design. The data was collected via structured questionnaire
from 195 professionals in the bureaus selected through simple random and purposive
sampling techniques and analysis of the data was done through statistical software, SPSS
version 21.0. the findings of the study showed that lack of training, sufficient audit facilities,
management support, competent audit staff, adequate man power and presence of
interference by the higher officials were the major challenges of internal audit.

Mulugeta Hadgu (2018) assessed the internal audit practice in the United Bank S.C by
employing both quantitative and qualitative research approach. The data was collected
through questionnaire with both close and open-ended questions from fifty (50) respondents
selected by purposive sampling method. The quantitative data was analyzed using descriptive
statistics. The findings of the study showed that internal auditors were not free from
intervention in performing their duties and did not feel free to include any finding in their
audit report. In addition, there was lack of commitment by the management to implement
audit recommendations.

Most of the prior auditing researches presented inconclusive findings on the practice of
internal audit. The inconclusiveness of the findings might be a result of the different research
methodologies adopted by the reviewed empirical literature. In addition, most studies are
contextualized in different jurisdictions and regions which further widen the gaps in the
literature. Therefore, this research was aimed at filling this contextual gap by assessing the
existing internal auditing practice of Ethiopian Electric Utility by considering internal audit
charter, auditors’ proficiencies and due professional care, auditors’ independence and
objectivity, scope of internal audit work, and performance of the audit work, management
support and Enterprise Resource Planning (ERP).

1.3. Objective of the Study

1.3.1. General objective
The general objective of the study was to assess the internal audit practices in case of
Hossana Town Electric Utility

1.3.2. Specific objectives

Specifically; the research has the following objectives.

 To assess whether the audit charter (if any) clearly state the IA's responsibility, duty,
and scope of activities.
 To determine the extent of internal auditors’ independence and objectivity.
 To examine the scope and performance of the internal audit work.
 To assess the level of management support for internal audits and internal auditors’
level of proficiency.
 To determine the role of using ERP on the practice of the internal auditor's work

1.4. Research Questions

The research tried to answer the following questions.

1. Does the audit charter (if any) clearly state the IA's responsibility, duty, and scope of
activities?
2. Do internal auditors perform their duties objectively and independently?
3. What is the level of the performance of the internal audit work and to what extent the
IAF are broad, i.e., the scope of the internal audit work?
4. Do internal auditors have the required level proficiency and get sufficient support
from management?
5. What is the role of ERP on the practice of the internal auditing?

1.5. Significance of the Study

This research paper will contribute a body of knowledge on the practice of internal audit by
systematically and empirically documented in the Ethiopia context. Likewise, results reached
from this study are expected to give important messages to the management body in EEU on
the existing practice of internal audit. The findings of the study will also contribute to the
limited knowledge on the practice of internal audit by way of reference material. The study
can also benefit scholars and researchers on the practice of internal audit, directly or
indirectly, in terms of the research approach and can be used as an input for other researchers.
Finally, based on the conclusions to be drawn in this research, scholars from different fields
of study may use them as a stepping stone for further studies.

1.6. Scope of the Study

The scope of the study will be delimited geographically, conceptually, methodologically as
well as time.

Geographically, this study was intended to asses internal audit practice in Hossana Town
Electric Utility.

Conceptually, the study assessed the internal audit practice of Ethiopian Electric Utility in
Hossana Town Electric Utility with respect to internal audit charter, auditors’ proficiencies
and due professional care, auditors’ independence and objectivity, scope of internal audit
work, performance of the audit work, management support and Enterprise Resource Planning
(ERP). And the participants audit experts in Hossana Town Electric Utility because they are
directly involved in the audit work.

Methodologically, descriptive survey design was employed to study the problem. It is

because the method is believed to provide precise information concerning the internal audit in
government sectors related to practice.

1.7. Limitation of the Study

Although EEU operates throughout the regions of the country, this study is limited to the
assessment of internal audit practice in Hossana Town Electric Utility. Even if, the findings
of this study would have had paramount importance if more employees had been included in
the research, for employees who live in different regions may have different opinion towards
internal audit practice in EEU. However, due to time and financial constraints, it was not
possible to broaden the study to see the relationship between city branches and outlying
branches on internal audit practice in EEU. As a result, employees in the case area branches
were only taken as the subject of the study.

1.8. Organization of the Paper

This study was organized in to five chapters. The first chapter will have introductory part of
the study that contains several parts including background of the study, statement of the
problem and research questions of the study. Chapter two addresses review of related
literature such as issues to be addresses by literature review, theories and conceptual
framework. Chapter three covers the research methodology part constituting the research
design, approach and method as well as research population and sampling. Chapter four will
contain results and discussions of the study; whereas, Chapter five addresses summery,
conclusions and recommendations.
 CHAPTER TWO

2. LITERATURE REVIEW
2.1. Theoretical Literature
2.1.1. The Concept of Internal Auditing
The Institute of Internal Auditors (IIA) issued an International Professional Practices
Framework (IPPF) which includes the Definition of Internal Auditing, Code of Ethics,
International Standards for the Professional Practice of Internal Auditing (hereafter: the
Standards), Position Papers, Practice Advisories, and Practice Guide (IIA, 2013). The IPPF,
particularly the Standards constitute guidance for internal auditors worldwide to perform
internal auditing activities in a professional manner (Whittington and Pany, 2008).

The concept of internal auditing is contained in the definition of internal auditing as follows:
“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 (IIA, 2013, p. 2).”

This definition of internal auditing was first officially published in June 1999 by the IIA
(Nagy, A.L. and Cenker, W.J., 2002). The definition and the Standards are the authoritative
references for the internal auditor in undertaking the practice of internal audit
(Abdolmohammadi, M.J., 2009).

The definition clearly mentions the aims of internal auditing as to add value to the entity by
improving the information quality for decision-making (Bou-Raad, G., 2000). For this
purpose, it needs to involve the internal auditor in all operations of the organization to create
and maintain an effective internal control by providing assurance and consulting activities
(Bou-Raad, G., 2000). These activities must be conducted in an independent and objective
manner (Brody, R. and Lowe, D.J., 2000) (Siddiqui, J. and Podder, J., 2002). Furthermore,
the activities of an internal audit include risk management, and control and governance
processes that are carried out using a consultative approach and focus on efficiency and the
effectiveness of operation (Bou-Raad, G., 2000). Consequently, current practice of internal
audit requires an internal auditor to have broad competence. Thus, the definition of internal
auditing contains some important components, such as the independent and objective nature
of the internal auditing activities, the scope of work, the performance of audit work and the
professional proficiency of the internal auditor. These and other elements are presented as
follows.

2.1.2. The Internal Audit Charter

Internal audit charter is defined by the IIA as “a formal written document that defines the
activity’s purpose, authority and responsibility. The charter should be (a) establish the
internal audit activity’s position within the organization; (b) authorize access to records,
personnel and physical properties relevant to the performance of managements; and (c)
defined the scope of internal audit activities” (Chartered Institute of Internal Auditors, 2017).

Additionally, an internal audit charter typically includes the responsibilities of the IA in broad
terms, the standards followed by the IA; and the relationship between the IA and the audit
committee. It may also define access to the information (documents, records, systems, and
personnel) necessary to perform and reach conclusions on the work, and it is a vehicle for
asserting that there are no unreasonable limitations on the scope of the auditor work.
According to (Van Peursem, 2005), the presence of a strong Charter adds an official and
respected layer of authority to the position of Internal Audit in the company. It is also an
important feature of insuring success in achieving the independent status of an Internal Audit.
Furthermore, according to (Van Peursem, 2005) the existence of audit charter in organization
influences senior management to flow the recommendations of the internal auditor
(Hailemariam, 2014).

2.1.3. The Independence and Objectivity of the Internal Auditor

Despite contrary arguments on the operation of dual functions of internal audit - as the
assurance provider and also a consultant - independence of internal auditing is a key concept
(Hughes, P., 2004). The independence of the internal auditor provides an effective internal
audit service for management, since it gives an objective and unrestrained evaluation,
provides an audit report and audit recommendations (Mihret, D.G. and Yismaw, A.W., 2007).

Independence is defined as “the freedom from conditions that threaten the ability of the
internal audit activity to carry out internal audit responsibilities in an unbiased manner” (IIA,
2013). Scholars interpret the independence of the internal auditor from different angles.
Independence can mean that the internal auditors are free from conflicting duties, free from
the intimidation of top management (such as limitations on audit scope, audit procedures,
time restrictions, personnel management process, and resources (Peursem, V.K., 2004), free
from the activities being audited and personnel involved (Bou-Raad, G., 2000). Being
independent means that the internal auditors are able to express their opinions without any
prejudice or threat to their position (Sawyer et al., 2003).

The independence of internal auditing comprises organizational independence (also known as

the organizational status of an internal audit department within the overall organization) and
objectivity of internal auditors when they undertake audit works (Suwaidan, M.S. and
Qasim, A., 2010). Meanwhile, the objectivity refers to “a state of mind in which biases do not
inappropriately affect assessments, judgments, and decisions” Bailey et al. (2003, p. 235).

According to the scholars, there are various important factors relate to the independence of
internal auditing as follows: Support from top management in terms of providing sufficient
financial support as well as qualified and experienced staff (Mihret, D.G. and Yismaw, A.W.,
2007), permitting the auditors to think freely, and assuring the implementation of
recommendations (Sawyer et al., 2003).

Delivery of internal audit reports to the highest management level, the board of directors and
the audit committee, in an unrestricted way (Sarens, G., 2009) . Ensuring internal auditors
have unlimited access to all necessary information when undertaking audit activities, such as
all physical reality, records and people (Sawyer et al., 2003), all activities, decisions and
projects of the Chief Executive Officer (CEO), Chief Finance Officer (CFO) and other top
executives (Hughes, P., 2004). The internal auditors must be free from conflicts of interest.
There must also be a qualified audit committee (Bou-Raad, G., 2000). The internal audit unit
should be located in the higher hierarchy of an organization as these results in direct
responsibility to the board of directors (Bou-Raad, G., 2000). The functions of internal audit
and its responsibilities should be contained in the Internal Audit Charter (Hughes, P., 2004).

2.1.4. The Professional Proficiency of an Internal Auditor

The IIA (2013, p. 19) describes professional proficiency as follows: “Knowledge, skills, and
other competencies is a collective term that refers to the professional proficiency required of
internal auditors to effectively carry out their professional responsibilities.”

Alzeban et. al. (2013) mentioned that qualified internal auditors are required to execute audit
duties. In this matter, scholars have diverse standpoints on the components of the internal
auditor’s competence. Desai et al. (2010) and Tarr (2002) consider the educational level and
professional experience as essential factors of the competence of internal auditor, whilst
(Obeid, O., 2010) agrees but includes training as an additional important element of
competence. Other scholars such as (Mulugeta, S., 2008), Odar et al. (2006) use professional
certifications and continuing professional development as indicators of the competence of
internal auditor. (Pickett, S., 2000) identifies professional qualifications, knowledge sharing
between experienced senior auditors and junior auditors, external seminars as training media,
and reliance on experts as creating an internal auditor’s competence. Al-Twaijry et al. (2004)
state that the operations, processes and procedures of a company as well as the quality and
quantity of supervision conducted by the internal audit department determine the competence
of an internal auditor.

The competence of an internal auditor should cover: accounting and auditing knowledge
(Dittenhofer, M., 2001); communication skills (Dittenhofer, M., 2001); various technical
skills (Siddiqui, J. and Podder, J., 2002). The ability of the internal auditors who undertake
monitoring and improving of risk management and internal control systems will be
determined by their education level, their work experiences, professional certifications,
training and development programs completed, behavioural skills, as well as technical skills
(Sarens, G., 2009).

2.1.5. Scope of Work of Internal Auditing

The scope of works cannot be separated from the functions of internal audit. The expanded
scope of work reflects the evolved functions. The extended internal audit’s works as well as
functions are contained in the definition of internal auditing issued by IIA. The definition
demonstrates that there are three major domains of internal auditing which consist of internal
control, risk management and governance process (IIA, 2013). For this range of works, the
functions of internal auditing cover being both provider of assurance services and consultant
as indicated by the definition (IIA, 2013). Moreover, there is a specific function in the
governance context which is known as the agent of change (Burnaby et al., 2009).

As presented in the previous section, government regulations and professional bodies, such as
the IIA, had an impact on the expanded functions of the internal audit. The functions of
internal audit and its scope of work have been expanded to cover more activities (Cohen et
al., 2004). Traditionally, internal audit functions focused mainly on compliance, monitoring,
and examining the performance of line managers. However, the new functions give emphasis
to improve corporate performance, link to risk management and help managers understand
the potential obstacles in achieving a company’s goals (Matyjewicz, G. and D’Arcangelo, J.
R., 2004). Furthermore, Committee of Sponsoring Organizations (COSO) stresses the
specific scope of internal audit on “... the examination and evaluation of the adequacy and
effectiveness of the organization's system of internal control and the quality of the
performance in carrying out assigned responsibilities” (COSO, 2011). (Chambers, A. D. and
Odar, M., 2015) argue that internal audit scope should go beyond compliance, governance,
risk management and internal control processes. The internal auditors should consider “the
quality of the inputs to, and the outputs from these processes, and to identify and report any
unacceptable levels of risk” (Chambers, A. D. and Odar, M., 2015).

2.1.6. The Performance of the Audit Work

The internal audit activities should be performed with a systematic and disciplined approach
as presented in the definition of internal auditing (IIA, 2013). A systematic process of
auditing consists of a number of steps, namely audit planning, examining and evaluating
information from fieldwork, reporting findings and following up the audit recommendations
(IIA, 2013). These stages are general guidelines provided by the Standards for the internal
auditors to carry out the auditing activities. Similarly, Sawyer et al. (2003) states that internal
auditors should follow the Standards by performing a number of actions. Firstly, the head of
internal audit department must supervise the entire auditing process, from planning to
completion. Secondly, all the audit works should be documented in the audit working papers
including the evidence of follow-up procedures and disposition of deficiency findings.
Thirdly, the conclusions drawn within the audit reports should be backed by comprehensive
supporting documents and also competent, sufficient, and relevant evidence. Finally, there
should be an archival system for the working papers. It is important to plan, control and
record the work of internal audits, and internal auditors may use these processes to determine
audit priorities, set objectives and audit resources (William et al., 2001).

The criteria for a successful audit consist of the auditee considering the audit findings, and
following up the audit recommendations. Therefore, the IIA (2013) recommends the chief
audit executive to “establish a follow-up process to monitor and ensure that management
actions have been effectively implemented or that senior management has accepted the risk
of not taking action”. The attitude to ignore the audit recommendations could be caused by
the perception among management that internal auditing is a barrier to achieving
organizational goals and in this case such a perception may be detrimental to the company
(Flesher, D.L. and Zanzig, J.S., 2000).
 2.1.7. Management Support for Internal Audit
Top management support is very critical for the proper functioning of the internal audit
department (Dellai, H. & Omri, M.A.B., 2016). Internal auditing definitions encompass good
governance which depends to a large extent on the professionalism of top management to
ensure effective internal audit function (Alzeban, A. & Gwilliam, D., 2014). With the support
of top management, internal auditors can obtain sufficient resources to execute their duties
and responsibilities, and the internal audit function can employ qualified staff and provide
continuous training and development (Alzeban, A. & Sawan, N., 2013).

Previous studies have argued that management support is very crucial for the objective of the
internal audit department to be achieved. For instance, Ahmad et al. (2009) found that
management support was the second most important determinant of IAE within the
Malaysian public sector, after sufficiency of the auditing staff. (Mihret, D.G. and Yismaw,
A.W., 2007) found management support as the most important factor influencing effective
internal auditing. (Alzeban, A. & Gwilliam, D., 2014) found that senior management support
was the most important factor influencing the effectiveness of internal auditing in Saudi
public sector organizations. They noted that the effectiveness of internal auditing would be
improved by hiring trained and experienced staff and providing sufficient resources.

2.1.8. Types of Audits Conducted by Internal Auditors

According to (IIA, 2013) variety of audits are performed in the review of sector programs
and resources. These audits include.

Operational Audits: For Adriana (2007), an operational audit invariably referred to as a

value for-money audit or performance audit. It helps to determine whether the objectives of
the programs or activities were carried out in an economical, efficient, and effective manner.
According to Arens et al. (2012), such types of audits assess the efficiency and effectiveness
of any part of an organization’s operating procedures and methods. At the entirety of an
operational audit, management normally expects hints for enhancing operations. For
example, auditors would possibly examine the performance and accuracy of processing
payroll transactions in a newly mounted laptop system.

On the other hand, Mahbuba state (2012) Performance Audit is the evaluation of the
economy, efficiency, and effectiveness with which a central authority employer makes use of
its sources to perform its obligations and the results of its operations in the atmosphere. At
the crowning glory of an operational audit, control commonly expects hints for enhancing
operations. i. Economy and efficiency (Management) audit – The appraisal of control overall
performance from the maximum green factor of view. Tewodros (2014) further noted that the
subject matter of operational audit is defined by the audit objectives and audit questions. It
may be specific programs, entities or funds or certain activities, existing situations as well as
non-financial or financial information about any of these elements. Now a days, operational
audit is an independent profession, which is playing a significant role in the management of
organizations and states policy.

Financial Audits: Arens et al. (2012) explained that as businesses increase in complexity, it
is no longer sufficient for auditors to focus only on accounting transactions. An integrated
approach to auditing considers both the risk of misstatements and operating control intended
to prevent misstatements. Accordingly, Nusrat (2012) mentioned that a financial audit helps
to give an opinion on whether the financial statement prepared by the public sector agencies
shows a true and fair view of the financial state.

Synonymously, Arens et al. (2012) said monetary audit as its miles carried out to decide
whether or not the monetary statements (the facts being verified) are stated in accordance
with specified standards. The auditors must also have a thorough understanding of the entity
and its environment. This knowledge consists of information of the client's enterprise and its
regulatory and working environment, such as outside relationships which suppliers,
customers, and creditors. The author additionally considers the client's enterprise techniques
and tactics & essential fulfillment elements associated with the one's techniques. Based on
IIA, Tewodros (2014) described the financial audit as a financial position, performance, cash
flow, or other recognized, measured and presented in financial statements. The issue count
statistics is the economic statements.

Compliance Audits: According to Arens et al. (2012) compliance audit carried out to decide
whether the audit is following precise processes, rules, or guidelines set through a few better
authorities. Effects of compliance audits are usually mentioned to control, in preference to
doors users, due to the fact control is the number one organization worried with the volume
of compliance with prescribed processes and guidelines.

As Nusrat (2012), a compliance audit helps to examine and review the transactions and
activities of departments or agencies to determine whether they have conformed to all laws
and policies. Besides, Tewodros (2014) protracted the subject matter of a compliance audit as
it was defined by the scope of the audit. It can be activities, economic transactions, or
information. The consequences and the suggestions of the audit performed are supplied inside
the audit report, that's communicated to stakeholders, others accountable for governance and
the overall public, and have to mirror the contribution of the IAS to suitable governance.

Information Systems Audits: Information system audit is a part of the overall audit process,
which is one of the facilitators for good corporate governance, Ron (1999) described it as a
process of collecting and evaluating evidence to determine whether a method of amassing
and comparing the proof to decide whether a computer system (statistics system) safeguards
asset, continues records integrity, achieves organizational desires successfully, and consumes
sources efficiently. Information structures are the lifeblood of any massive business. Auditing
information requires separate technical skills that permit an auditor to identify machine
weaknesses and issues. An information systems auditor combines the analytical skills of an
auditor with the technology expertise of information technology.

According to Arens et.al (1999), information system audits review the internal control
environment of automated information processing systems and how people use these systems.
The audit typically assesses the controls used to backup and restore system input and output.

Internal Control Reviews. According to the Committee of Sponsoring Organizations of the

Tread way Commission (COSO), internal control is a process affected via way of means of
an entity’s board of directors, management, and different personnel, designed to offer
affordable guarantee concerning the fulfillment of targets regarding operations& reporting.
According to Nusrat (2012), the best way for a company to ensure that its internal control
system is operating efficiently is with an internal control review. An inner management
evaluation highlights vulnerabilities in a company’s inner management surroundings and
identifies procedures that may be strengthened.

According to RSM (2021), an internal control review is a typical evaluation of inner

manipulates device and its adequacy of enterprise vicinity in an employer to deal with the
applicable risks. Through manipulate review, an employer’s assets are directed, monitored,
and measured in a powerful manner. An inner management evaluation highlights
vulnerabilities in a company’s inner management surroundings and identifies procedures that
may be strengthened.
Arens et.al (2012) stated these audits focus on components of major business activities, such
as payroll and benefits cash management involve and equipment grants and contracts for
physical and financial protection.

2.1.9. ERP Systems in Internal Auditing

Currently, accounting and auditing are fundamental elements for their organizations, so the
IT resources, which help both the accountant and the auditor in their daily work, have been
developed and improved with the aim of standardizing their procedures, as well as reducing
audit risk. As an example, ERP (Enterprise Resource Planning) systems have become
imperative when the organization's goal is to improve organizational performance and
increase competitiveness in the economy. ERP systems are able to promote changes in the
organizational structure, always with the aim of improving the quality of accounting
information to assist the decision making of managers and stakeholders (Santos, Carlos
Alberto Ferreira dos, 2018).

ERP can have a positive impact on auditing, namely (Mosweu, Olefhile, and Mpho Ngoepe,
2020): ERP environment may improve auditor’s ability to identify suspicious activities and
determine fraud; more effective and fast audit processes; ERP systems assist in the reduce of
audit report latency; reduction of fraud because of the existence of continuous audit
functions; compatibility with international auditing standards; integrated audits rather than
separate audits since one of the advantages of ERP is that it is an integrated system that unites
all of the enterprise's divisions into one.

Moreover, studies have shown that digital records created in ERPs, such as digital accounting
implementation, remain authentic to facilitate financial auditing processes and accomplish
audit performance (Barros, Cátia, and Rui Pedro Marques, 2022). The ERP systems are also
considered important to provide continuous assurance services to organizations, namely by
monitoring operations in real time, identifying the irregular transactions, ascertaining of
fulfilling of rules and detecting processing errors (Barros, Cátia, and Rui Pedro Marques.,
2021), considered very important for the improvement of the internal audit (Alsurayyi,
Amjaad I, and Sulaiman A. Alsughayer., 2021).

The positive impact on business performance caused by the adoption of current ERP systems
continues to be noticed and studied empirically (Marsudi, Almatius, and Rilo Pambudi,
2021). An organization can enhance the operational performance of its internal audit
department using an integrated effective ERP system (Bender, Benedict, Clementine
Bertheau, and Norbert Gronau., 2021).

2.2. Empirical Literature

Internal auditing is undertaken in dissimilar legal and cultural settings; within companies that
differ in purpose, size, complexity, and structure; and by individuals inside or outside the
organization. So, the differences may affect the practice of internal auditing in each
environment (IIA 2012). In line with this, the previous studies reviewed hereunder are from
different settings.

Ayneshet (2019) assessed the internal audit practice and its role in effective use of public
resource with reference to public bureaus in SNNPRS by employing a descriptive design with
qualitative research approach, The primary data collected from respondents in the selected
public bureaus of southern Ethiopia was analyzed by means of descriptive statistics through
SPSS version 20.0. The findings of the study showed that lack of expertise, lack of
management support, lack of opportunity for professional development, lack of information
technology facilities and lack of positive and supportive attitude toward internal controls,
restricted access to necessary audit evidence, and wrong perception towards the audit
function were main challenges of auditors’ work performance.

Zinabu Gebru et. al. (2021) examined the law and practice related challenges which
government internal auditors are encountering in executing their duties in Tigray Regional
State. The primary information was collected from 40 internal auditors through detailed
questionnaire and interview with some internal audit process owners and bureau heads and/or
deputy heads. The study indicated that the major challenge was less management support
provided to the Internal Audit Units. Absence of other IA effectiveness factors like
Independence and Competence were also found as challenges.

The study by (Utami, 2016), attempted to show how external pressures of coercive,
normative and mimetic shape the practical works of internal audit in an Indonesian public
State-Owned Enterprises. The study engaged primary data collection through semi-structured
interviews from internal auditors within the internal audit department of State-Owned
Enterprise, including the head of the internal audit unit. Besides, official available data and
direct observations made during company visit were also employed and qualitative analysis
was employed to analyze collected data. The results of the study revealed that the internal
audit unit of the State-Owned Enterprise reacted to the regulations by officially adopting the
regulations in the Internal Audit Charter (Charter) and the existence of formal and informal
coercive, mimetic and normative pressures applied to the internal audit unit.

Alemayehu (2020) assessed the practice of internal audit in selected bureaus in SNNPRS by
employing descriptive research design. The data was collected via structured questionnaire
from 195 professionals in the bureaus selected through simple random and purposive
sampling techniques and analysis of the data was done through statistical software, SPSS
version 21.0. the findings of the study showed that lack of training, sufficient audit facilities,
management support, competent audit staff, adequate man power and presence of
interference by the higher officials were the major challenges of internal audit.

Mulugeta Hadgu (2018) assessed the internal audit practice in the United Bank S.C by
employing both quantitative and qualitative research approach. The data was collected
through questionnaire with both close and open-ended questions from fifty (50) respondents
selected by purposive sampling method. The quantitative data was analyzed using descriptive
statistics. The findings of the study showed that internal auditors were not free from
intervention in performing their duties and did not feel free to include any finding in their
audit report. In addition, there was lack of commitment by the management to implement
audit recommendations.

Fikirte (2022) assessed the internal audit practice in Ethiopian Food and Drug Authority
using descriptive research design. The data was collected through questionnaire and interview
from 91 respondents selected by judgment sampling technique. The quantitative data was
analyzed using descriptive statistics. The findings of the study showed that lack of sufficient
resource, inadequate size of the audit department, absence of taking immediate corrective
action against the internal audit comments and inadequate budget to accomplish activities per
plan are the major challenges of the internal audit unit.

Tadesse (2018) assessed the internal audit practices in selected public sectors in Oromia
special Zone around Finfinnee. The study employed descriptive research design and data was
collected through questionnaire and interview from 120 respondents. The quantitative data
was analyzed using descriptive statistics. The findings of the study showed that conflicts in
reporting responsibilities and lack of continuous professional development opportunities are
the major problems on the internal audit practice.
K. Odowa (2015) conducted research on internal audit practice of Somali Regional
Government Public sector offices of Ethiopia showed that organizational policy authorizing
internal audit and reporting follow up are in line with IIA’s standards. However, auditee
cooperation to the internal audit staffs is low, audit planning is not considered under
organizational risk profile, independence and objectivity of internal auditors are impaired and
quality assurance is not carried out that leads ineffectiveness of internal audit. Besides, there
is low support of management and other organs on the role of internal audit function in good
governance, rotating internal audit assignment and employment decisions in internal audit.

Kedir, H., Seyom,A. and Gemeda,A. (2014) studied internal auditing standards and its
practice in selected public enterprises of East Arsi Zone, Ethiopia. The result shows that
competency of internal auditors in education and experience is in line with IIA standards and
the internal audit activities comply with institute of internal audits. Besides, that majority of
the respondents responded that they are working as per internal auditing standards. In
addition, internal auditing is not detached from functional area to guarantee its independence
and the enterprises internal auditing has no quality assurance program and that internal audit
is planned on the basis of the enterprise’s risk profile in order to eliminate or minimize the
prevalent risk in the enterprise.

Mesud Mohammed and Mohammed Adem (2019) evaluated the internal audit practice of 10
Afar regional public sector offices in which total of 50 questionnaires were distributed. The
researchers also used purposive sampling technique and collected primary data through
questionnaire and interview. The responses gotten were encoded in to SPSS 16.0 and
analyzed using descriptive approach. The findings of the study showed that the scope of
internal audit was restricted only to financial activities, there was no suitable environment for
independency of internal auditors, policy for hiring and training, experience, professional
certification of internal auditors and management support to internal audit was not good
except compliance of audit work and fairness of budget allocation, there is no clear and
understandable internal audit charter.

Tesfaye ( 2014) studied commercial banks of Ethiopia’s internal auditing practice and assess
whether its performance is effective and efficient. The study found out that there is a problem
of getting continuous training on internal auditing by force of interest and the auditor may
violate the principle of auditor's independence in conducting audit work. The major risks
faced by internal auditors are lack of experience, lack of management respect and opportunity
for professional development.

2.3. Research Gap

The review of literature presents inconclusive findings on the practice of internal audit. The
inconclusiveness of the findings might be due to that most of the studies are conducted in
different organizations with different settings which contextualize the findings in the
reviewed literature. For instance, the study conducted by Mengesha (2021) on “internal audit
practice in the case of KAKI PLC Addis Ababa, Ethiopia” reported poor management
support whereas the study conducted by Alemu (2022) on “Assessment of Internal Audit
practice efficiency in Private Commercial Banks of Ethiopia” revealed that management
gives the necessary support to internal auditors retained at private commercial banks.

Research conducted by Tewodros (2016) reveals that insufficient auditors’ knowledge, lack
of qualified staff and scarcity of facilities were the challenges on the practice of internal audit
faced by commercial banks in Ethiopia. Whereas, research conducted by Arefayne (2019) on
the factors affecting internal audit effectiveness in the case of Ethiopian Insurance companies
reported that competence of IA teams, quality of IA was strong.

Therefore, this research was aimed at filling this contextual gap by assessing the existing
internal auditing practice of Ethiopian Electric Utility (EEU) by considering internal audit
charter, auditors’ proficiencies and due professional care, auditors’ independence and
objectivity, scope of internal audit work, audit, and performance of the audit work,
management support and Enterprise Resource Planning (ERP).
 CHAPTER THREE

3. RESEARCH METHODOLOGY
3.1. Research Design
A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure.
In fact, the research design is the conceptual structure within which research is conducted; it
constitutes the blueprint for the collection, measurement and analysis of data (Kothari, 2004).

For the purpose of this study, descriptive survey design was used. This is because the
researcher intended only to describe the internal audit practice related to the independence
and objectivity of internal auditors, proficiency of internal auditors, scope of work of internal
auditing, performance of the audit work, management support and Enterprise Resource
Planning (ERP) in Internal Audit Departments of EU at Hossana Town.

3.2. Research Approach

In this study both qualitative and quantitative (mixed) research approach was applied. The
rational of using such mixed strategies was to gather data that could not be obtained by
adopting a single method (Creswell, 2003). It was proved to be suitable for this research that
used structured questionnaire to collect data, depend on small sample size and results would
be presented and analyzed using statistical methods. Thus, to attain the objective of the study
and answer the research questions; the researcher adopted both quantitative and qualitative
(mixed) research approach to know the existing internal audit practices in Internal Audit
Departments at Hossana Town.

This study focused more on quantitative approach to answer the research questions and used
some qualitative information to know existing internal audit practices in Internal Audit
Departments at Hossana Town.

3.3. Population and Sampling Technique

3.3.1. Population of the Study
Statistical population of the study consisted of audit experts at Hossana Town. All audit
experts and managers at Hossana Town Electric Utility (EU) were the target population of
this study. Unit of analysis was related with the population (specific population) that will be
used to collect data. Thus, the units of analysis for this study were audit experts in at Hossana
Town EU office.

3.3.2. Sample Size and Sampling Technique

The sample size and sampling techniques play a great role for the accuracy and validity of the
information gathered. This study will be used census method as a sampling technique. Census
is the method of statistical enumeration where all members of the population are studied.
Therefore, the sample size of the study included all audit experts and managers in EU at
Hossana Town office. And also all were taken as sample respondents on the basis of
purposive sampling.

3.4. Type and Source of Data

The study used both primary and secondary data. The primary data was collected from the
sample participants through questionnaires. Secondary data was collected from published and
unpublished documents, journals/articles and annual reports, to support the facts acquired
through primary data. After taking into consideration the number of potential respondents in
the sample size along with the information required to meet the research objectives the
research instrument is decided on a well-designed questionnaire.

3.5. Method of Data Collection

The main data gathering instruments was questionnaire. Data was collected through self-
administered questionnaire prepared based on literature review and the International
Standards for the Professional Practice of Internal Auditing to address the research questions.
The items/statements on the questionnaire use a five-point Likert scale. The Likert scale was
used whereby the respondents asked to rate a particular issue on a scale that ranged from
strongly disagree to strongly agree. The rating scale had an even number of choices ranging
from a scale of one to five. The scale used in the questionnaire was based on a 5-point Likert
scale (with 1= strongly disagree, 2= disagree, 3= neutral, 4=agree, 5= strongly agree) for each
close-ended question. The questionnaire was prepared in English language in which the
respondents could easily understand. The item in the questionnaire comprises close-ended
items. The physical questionnaire was administered to the respondent in their office at the
end of their work, whereby questionnaires are handed out to respondents for self-completion
and returned to the researcher immediately. Their participation was voluntary and completely
anonymous.
 3.6. Method of Data Analysis
The collected data will be changed and interpreted in to meaningful information, figure and
statement. So, data was analysed, processed and interpreted according to the nature of data.
Statistical Package for Social Science (SPSS) software version 26 was used to analyse and
present the data through the statistical tools used for this study. Descriptive statistics was
used to examine the demographic profile of the respondents and the opinion of the
respondents on the variables used to assess the internal audit practice.

The result will presented by tables, mean and standard deviation to give a condensed picture
of the data. Interpretation of the results of mean and standard deviation the scales were
reassigned as follows to make the interpretation easy and clear.

3.7. Ethical Consideration

Artal and Rubenfeld (2017) defined research ethics as the dos and don’ts when conducting
research. They are therefore observed to ensure that harm on research subjects is minimized
and benefits are maximized and they involved respecting human dignity and confidentiality.
Study participants signed informed consent and the researcher obtained introduction and
authorization letter from Wachemo University, College of Business and Economics,
Department of Accounting and Finance, to show that the researcher is a bona fide student and
a research permit from at Hossana Town EU. The researcher ensured that all references in the
document were correctly cited in acknowledging the previous researchers. Additionally, the
responses were kept confidential and no disclosure shall be made except with the authority of
the respondent.
 CHAPTER FOUR
4. Work plan and time frame

Table 1 showing work plan

No Activities Months
Sep Oct Nov Dec Janu Feb Mar Apr May Jun July
e
1 Title Selection  

2 Agreement of 

Title
3 Proposal 

development
4 Submission of 

proposal
5 Data collection
6 Organization 

of data
7 Data 

Analysis
8 Research 

Writing
9 Submission of 

Research
10 Presentation of 

research


 4.1 budget breakdown

Table 2 showing Budget breakdown

No Description Measurement Quantity Unit Cost Total Remark

Cost
1 Telephone Minute 60 1 60
Fees
2 Paper Yam 3 700 2100
3 Pen Number 5 20 100
4 Transportation Km 1km 10 10
Cost
5 Internet Hour 24 25 600
6 Photocopy Paper 70 3 210
7 Printer Paper 70 4 280
8 Miscellaneous 10,000
Expense
9 Total 13,300

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