Mekelle University

Collage of Business and Economics

Department of Accounting and Finance

Factors Affecting Internal Audit Effectiveness In wegagen Bank S.C

(The Case Of Head Office Unit and East Addis Ababa District Branches )

A THESIS PROPOSAL SUBMITTED TO THE MEKELLE UNIVERSITY,

FACULTY OF BUSINESS & ECONOMICS, DEPARTMENT OF
ACCOUNTING & FINANCE IN PARTIAL FULFILLMENTS OF THE
REQUIREMENTS FOR AWARD OF MASTER DEGREE IN ACCOUNTING
AND AUDITING

PREPARED BY: MESSAY AMEHA

ADVISOR: FITSUM (PHD)

JANUARY, 2025

ADDIS ABABA, ETHIOPIA

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 Declaration
As the signatory, I affirm that the thesis is entirely my own work. I have properly credited and
referenced all of the resources utilized in this work in accordance with globally recognized
standards. I am aware that failure to follow the rules of academic honesty and integrity, including
fabricating or misrepresenting any ideas or sources, will be enough justification for the College
to take disciplinary action. The College may also take legal action against the source if it is not
properly cited or acknowledged.

Name: Messay Ameha, IDNo/CBE/PE/146/11AA

Signature: ____________________________

Date: _______________________________

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 Certificate of Approval
I attest that, under my direction and supervision, Mesay Amaha completed this thesis work,
"Factors Affecting Internal Audit Effectiveness in Wegagen Bank S.C. the case of Head office
unit and East Addis Ababa District Branches," independently and that it hasn't previously served
as the foundation for the awarding of any degree at any other university or institution. It also
partially satisfies the requirements for the award of a Master's degree in Accounting and Finance.

Name and designation of advisor: Fitsum (PhD)

Signature of Advisor: ____________________

Date of Submission: _____________________

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 Certificate of Approval by Board of Examiners

In partial fulfillment of the requirements for the awarding of a Master's Degree in Accounting
and Finance, the undersigned certifies that we have read and hereby recommend to Mekelle
University, Department of Finance & Accounting, to accept the thesis submitted by Mesay
Amaha, entitled "Factors Affecting Internal Audit Effectiveness in Wegagen Bank S.C. the case
of Head office unit and East Addis Ababa District Branches."

_______________________________ ____________________

DEAN, GRADUATE STUDIES SIGNATURE

_______________________________ ____________________

ADVISER SIGNATURE

_______________________________ ____________________

INTERNAL EXAMINER SIGNATURE

______________________________ ____________________

EXTERNAL EXAMINER SIGNATURE

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 Endorsement
This thesis has been submitted to Mekelle University, Faculty of Business and Economics for
examination with my approval as a university advisor.

Fitsum (PhD) _____________________

Advisor Signature

Mekelle University, Tigray Region, Ethiopia, February, 2025

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 Acknowledgments

First and foremost, I want to honor and thank the Almighty God for all of his wonderful care and
support during my life. Second, I would like to express my gratitude to my advisor for his
insightful and helpful criticism, as well as his constant follow-ups and sincere advice at different
points during this work. Thirdly, my existence would not be conceivable without my cherished
parents, sister, and brothers, for whom I am incredibly grateful and appreciative. Fourth, I want
to thank my colleagues from the bottom of my heart for their unwavering, kind support, both
financially and morally. Finally, I would like to express my gratitude to my closest friends for
their priceless support and upbeat conversations, which really enhanced my success throughout
my stay in the college.

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 Abstract
Internal auditing is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. Also, it is a catalyst to improve an
organization’s governance, risk management and management controls by providing insight and
recommendations based on analyses and assessments of data and business processes (Institute of
Internal Auditors, (2016). The main purpose of this study is to assess factors affecting internal
audit effectiveness in Wogagen bank S.C. the case of Head office unit and East Addis Ababa
district branches. Both descriptive and explanatory research design will be used. A cross
sectional data will be collected using representatives of the sample respondents by using
convenience sampling techniques; there by 260 out of 741 survey questionnaires will be drawn
to collect from the sample respondents. The dependent variable is internal audit practices and
the independent variable is internal audit effectiveness. The selected independent variables were
namely audit quality, audit character, existence of audit committee, independence of internal
auditors, competency of internal auditors, organizational setting and top management support.
To analyze the collected data both descriptive statistics and SPSS analysis (inferential statistics
of multiple linear regressions) will be employed.

Keywords: Internal audit (IA), internal audit effectiveness (IAE), determinants of internal audit,
Wogagen bank S.C.

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 Acronym and Abbreviations

● ACCA: The Association of Chartered Certified Accountants

● CIA: Certified Internal Auditor
● IA: Internal Auditor
● IAA: Internal Audit Activities
● IAE: Internal Audit Effectiveness
● IAF: Internal Audit Function
● IAS: International Auditing Standards
● IIA: Institute of Internal Auditors
● ISIA: International Standards of Internal Auditing (Standards)
● SPSS: Statistical Packages for Social Scientists

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 Contents
Declaration..................................................................................................................................................1
Certificate of Approval................................................................................................................................2
Certificate of Approval by Board of Examiners..........................................................................................3
Endorsement...............................................................................................................................................4
Acknowledgments.......................................................................................................................................5
Abstract.......................................................................................................................................................6
Acronym and Abbreviations........................................................................................................................7
List of Tables.............................................................................................................................................10
List of Figure.............................................................................................................................................11
CHAPTER-ONE: INTRODUCTION.........................................................................................................1
1.1. Background of the study...................................................................................................................1
1.2. Statement of the Problem..................................................................................................................5
1.3. Research Questions...........................................................................................................................6
1.4. Research Objectives.........................................................................................................................6
1.5. Research Hypothesis.........................................................................................................................7
1.6. Significance of the study..................................................................................................................7
1.7. Scope of the study.............................................................................................................................8
1.8. Limitation of the study......................................................................................................................9
1.9. Organization of the study..................................................................................................................9
1.10. Definition of key terms...................................................................................................................9
CHAPTER TWO: REVIEW OF RELATED LITERATURE...................................................................10
2.1. Theoretical Review of Internal Auditing........................................................................................10
2.1.1. Agency Theory........................................................................................................................11
2.1.2. Institutional Theory.................................................................................................................13
2.1.3. Communication Theory...........................................................................................................13
2.1.4. Contingency Theory................................................................................................................14
2.1.5. Lending Credibility Theory.....................................................................................................15
2.2. Conceptual Reviews of Internal Audit............................................................................................17
2.2.1. Definitions of Internal Audit....................................................................................................17
2.1.2. Types of Internal Audit............................................................................................................19
2.1.3. Internal Audit Effectiveness (IAE)..........................................................................................22

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 2.1.4. Internal Auditing in Public Sectors..........................................................................................24
2.2. Empirical Review on The Effect of Internal Audit Practices (IAP) on Internal Audit Effectiveness
(IAE).....................................................................................................................................................25
2.2.1. The Effect of Organizational Setting on IAE...........................................................................25
2.2.2. The Effect of Top Management Support on IAE.....................................................................25
2.2.3. The Effect of Competency of Internal auditors on IAE...........................................................27
2.2.4. The Effect of Independence & Objectivity of IA on IAE.........................................................29
2.2.5. The Effect of Existence of Audit Committee on IAE...............................................................31
2.2.6. The Effect of Audit Work Quality on IAE...............................................................................32
2.2.7. The Effect of Approved Audit Characters on IAE...................................................................33
2.3. Conceptual Framework...................................................................................................................35
Figure 2.1: Conceptual framework............................................................................................................35
CHAPTER THREE: RESEARCH METHODOLOGY.............................................................................28
3.1. The Study Area...............................................................................................................................28
3.2. Research Design.............................................................................................................................28
3.3. Research Method............................................................................................................................29
3.4. Data Sources and Data Collection Instruments...............................................................................29
3.4.1. Data Sources............................................................................................................................29
3.4.2. Data Collection Instruments.....................................................................................................29
3.5. Data Analysis and interpretation techniques...................................................................................30
3.6. Sampling Design and Sampling Theory.........................................................................................30
3.6.1. Sampling Design......................................................................................................................30
3.6.2. Sampling Theory.....................................................................................................................31
3.7. Validity and Reliability of the Study..............................................................................................32
3.7.1. Validity of the Study................................................................................................................32
3.7.2. Reliability of the Study............................................................................................................32
Table 3.1: Cronbach’s Alpha value items..................................................................................................33
3.8. Model Specification........................................................................................................................34
3.8. Ethical Consideration......................................................................................................................34
References.................................................................................................................................................35
Appendix-I: Questionnaires (in English)...................................................................................................45
Appendix-II: Semi-Structured Interview...................................................................................................50

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 List of Tables

Table 3.2: Cronbach’s Alpha value items......................................................................................33

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 List of Figure

Figure 2.1: Conceptual framework................................................................................................35

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 CHAPTER-ONE: INTRODUCTION

1.1. Background of the study

IA is an impartial, objective assurance and consulting activity intended to enhance and improve
an organization's operations, according to the IPPF (2017). It helps a business achieve its goals in
a methodical manner and adheres to a suitable implementation procedure to evaluate and
improve the efficacy of governance, risk management, and internal control procedures. IAE
refers to how an IA assists an organization in achieving its objectives and adding value to
activities in a variety of ways. Its effectiveness has been the focus of research worldwide because
of the critical function that IA plays in an organization (Mihret and Yismaw 2007; Ahmad et al.
2009; Arena and Azzone 2009; Baharud-din et al. 2014; Alzeban and Gwilliam 2014; Sakour
and Laila 2015; Dellai and Omri 2016).

IA is essential to making sure that an organization's internal control system is capable of

handling the different risks and problems it encounters in the contemporary business world.
Through independent and objective assurance and guidance on the company's governance,
control, and risk management systems, IA assists the business in achieving its goals and
enhancing performance. But IA also needs to quantify and prove its own efficacy and efficiency,
as well as the quality of customer service it offers its stakeholders. This Practice Guide offers
instructions for setting up an internal audit performance measurement procedure, choosing and
utilizing key performance metrics, and tracking and reporting on internal audit's customer service
to its stakeholders (IIA, 2021). Internal audit plays a vital role in modern company governance,
serving as a lever for organizational performance and risk management in addition to being a
control and compliance tool (Mahouat et al., 2024). Its role in preserving stakeholder confidence,
transparency, and regulatory compliance is becoming increasingly crucial in a world where
economic systems are growing more intertwined and crises are happening more frequently (Ali
et al., 2022). International standards, like those released by the IIA in 2021, aim to standardize
procedures while highlighting the need to adapt these to the particular conditions of local
contexts. In this situation, public firms have a dual responsibility to satisfy the public's
expectations for public service and profits cited in (Gharrafi et. al., 2024).

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In a contemporary governance framework, efficient internal auditing is essential for public sector
organizations. For a number of reasons, internal auditing (IA) has become a more popular issue
in corporate governance in recent years. Among them are: By providing constructive criticism
and recommendations regarding the organization's state, internal audit helps the internal control-
risk management system improve organizational effectiveness and efficiency; reduces
informational disparities during decision-making; and serves as a vital internal assurance in the
business and financial reporting process of corporations (Soh and Bennie, 2011; Cohen and
Sayag, 2010; Mihret and Yismaw, 2007; Desalegn et. al., 2019; Turetken et. al., 2020; Meseret,
2016; Meskerem 2023; Wondwessen, 2019).

An independent, impartial assurance and consulting activity, internal auditing aims to enhance
and optimize an organization's operations. By offering insights and suggestions based on
evaluations and analyses of data and business processes, it also acts as a catalyst to enhance an
organization's governance, risk management, and management controls (Institute of Internal
Auditors (IIA), 2021). Internal audit is crucial for ensuring that resources are used effectively,
controlling theft, and preventing fraud and improper use of a company's resources. Internal
auditing uses organizational concepts to guarantee that a business grows and develops
efficiently, resulting in long-term financial stability. Poor use of internal auditing procedures
leads to organizational failure. The discipline of internal auditing has recently come to be
acknowledged as one of the key factors influencing the effective and efficient use of resources in
businesses worldwide. Major factors contributing to the present surge in demand for internal
auditing in many nations include the recent business failure (Pickett, 2010), the waste of public
resources, and the quick expansion of professional institutions (Mihret &Yismaw, 2007; (Cohen
& Sayag, 2010).

According to Olga, (2017), an internal audit is now seen as a crucial component of management
and a necessary component of sound corporate governance. In recent years, technology
advancements, the complexity of legislation, and dynamic shifts in the global economy have led
to the development of new internal audit tools and development directions that enhance the
organization's value and assist management. Due to these characteristics, internal auditors are
now seen as having a wider range of skills and best practices that are tailored to the needs of the
workplace.

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Effectiveness according to Medhanit (2016) paper, turns into the primary factor influencing an
organization's success. Therefore, the business needs to choose certain actions that will benefit
them. In order to accomplish the objectives of their audit activity, the internal audit must be
successful. According to Adhista (2015), internal audit effectiveness is a metric used to assess if
the internal audit function can accomplish its objective. According to Dessalegn et al. (2009)'s
literature study, the dynamics that exist in internal auditing environments have an impact on the
efficacy of internal audits. Additionally, they contended that since the goal of internal auditing is
to help businesses accomplish their goals, there is a positive correlation between organizational
success and the degree of internal audit conformity with professional standards.

Effective internal auditing practices help organizations recognize business risks, implement the
necessary remedial measures, and eventually promote continuous development. If an internal
audit function has the following components, it may be a significant asset for enhancing public
trust in corporate governance and financial reporting: organizational independence, a formal
mandate (such as an approved audit charter), unrestricted access, adequate funding, competent
leadership, competent staff, an audit committee, stakeholder support, professional audit
standards, and a limited scope (Belay, 2007). A business needs to consider the variables that may
impact internal audit effectiveness in order to attain it (Adhista, 2015). As a result, the success of
internal audits is crucial to an organization's ability to accomplish its goals. Accordingly, both
public and private companies should ensure that their internal audits are effective in order to
accomplish their goals as efficiently as possible.

Over the last ten years, internal audit effectiveness has gained attention due to the critical
responsibilities internal auditors play in an organization's success and survival (Mu'azu and Siti,
2013). According to this study, rigorous research into the elements that enhance internal auditing
performance has been prompted by the rising significance of internal auditing as an economic
component. An effective internal control system is one that demonstrates specific traits that make
it easier to assess and enhance current internal control systems by pointing out areas where many
businesses' actual implementation of these rules frequently falls short. Internal auditors encounter
several obstacles from the organization they work for, despite their multiple responsibilities and
services to the corporation and the public/business interest.

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In their internal audit manual, the Ethiopian Ministry of Finance and Economic Development
(MOFED) (2013) listed a number of issues, including a lack of professional development, a lack
of independence, a lack of respect from management, the assignment of numerous tasks to
internal auditors and their disregard (conflict of interest), and more. In addition to the
aforementioned difficulties, a number of other factors influence the effectiveness of internal
audits, such as the lack of management support and a strategic plan, the independence of internal
auditors, the sufficiency and competency of internal audit personnel, the presence of approved
internal audit character, organizational setting, audit committees, and other factors.
According to Samuel (2023), effective IA activities provide an organization an edge because
they put them in a good position to identify potential business hazards and develop the best
corrective action plan to reduce those risks. Ineffective internal auditing, on the other hand,
results in expensive expenses that do not benefit the firm, badly designed auditing systems,
subpar management practices, and ultimately, the failure of the company's quality management
system. By addressing the problems that cause IA performance to decline, the company may
avoid such a breakdown by identifying the source of the issue. Additionally, Bender (2006)
proposed that assessing the variables that may affect internal auditing's efficacy could help
measure its effectiveness.

As per the Workneh (2024) study, over the past ten years, internal audit effectiveness has grown
in importance, according to Badara and Saidi (2014). This is due to the fact that internal auditors
are essential to the survival and prosperity of organizations. They asserted that in order to profit
from the internal audit service, the majority of businesses, both public and private, have set up
internal audit departments. Numerous disparities in internal audit effectiveness assessment and
methodology were revealed by these investigations. Additionally, there are theoretical
differences among researchers that analyze the efficacy of internal audits, and there seems to be
no agreement on the criteria used to measure internal audit effectiveness.

Therefore, this study's primary goal will be to examine and determine factors affecting internal
audit effectiveness in Wegagen Bank S.C. the case of Head office unit & East Addis Ababa
district branches.

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1.2. Statement of the Problem
Internal audit's importance has expanded to encompass a wider role as an internal consultant for
improved risk management performance, objective assurance, and raising the organization's
value (Tran Thi, 2018). With this objective in mind, academics have recently paid close attention
to internal audit effectiveness. Given the growing significance of internal audit's added value, it
is imperative to pinpoint the parts and components that contribute to this value. Finding the
factors impacting internal audit is essential for its effectiveness (Hella and Mohamed, 2016).
The auditing practice was impacted by several shifts and reasons. According to Ibid, the main
factors are: inadequate internal auditing, which results in improper functioning audit reports; a
lack of experience, competence, adequacy, independence, and objectivity in the organization; a
poor organizational setting; a lack of audit quality; a lack of proper approved audit character; a
lack of audit committees within the organization; and a lack of independence regarding the
preparation of it. The components of internal audit effectiveness have been the subject of several
researches. However, not much research has been done on Ethiopia's financial sector, which
plays a significant role in the nation's economy. Commercial banks, in particular, are currently
facing significant challenges from fraud and irregularities at all levels. Furthermore, the
researcher was unable to locate any relevant Ethiopian literature that examined evaluating the
impact of the audit committee in conjunction with the other important component of internal
audit effectiveness. Furthermore, because internal audit effectiveness is so crucial, scholars like
Mihret & Yismaw (2007), Cohen & Sayag (2010), Endaya & Hanefah (2013), and Shewamene
(2014) have called for more research on the topic, particularly using additional attributes of
internal audit effectiveness.
Therefore, by analyzing the effectiveness features of internal audits, worldwide standards for the
professional practice of internal auditing, and previous literature variables identified as key
factors, this study aims to close the gap in the literature. The elements impacting the success of
Ethiopian internal audits have not been sufficiently investigated. More research is needed to
validate the findings and examine additional factors that may influence internal audit
effectiveness in the Ethiopian banking industry, specifically Wegagen S.C., even though
management support and internal audit quality have been identified as significant effectiveness
drivers in previous studies. This study would provide valuable information about the specific
contextual elements that influence internal auditing's effectiveness in this situation.

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Thus, the main goal of analyzing a company's internal control is to provide the auditors with a
foundation for organizing the audit and deciding on the kind, date, and scope of the audit as well
as the scope of audit procedures in the account balance audit program. It is assumed that the
auditors have a notion of the job they wish to conduct and have produced a preliminary audit
program. Furthermore, it is often acknowledged that there is an issue with subpar auditing
procedures, which has a negative impact on the efficacy of organizational performance. As a
result, the researcher was very motivated to carry out this investigation. Therefore, by
determining the impact of internal audit variables on the efficacy of internal audit at Wegagen
Bank Sc, this study aimed to close this gap. By looking at the determinants of internal audit
practices (such as audit quality, audit character, audit committee, independence & objectivity of
auditors, competence of auditors, top management support, and organizational setting) as
independent variables and the IAE as dependent variables, this study aimed to close this
knowledge gap in private commercial banks.

1.3. Research Questions

The study tried to answer the following research questions.

1) Does the competency organizational setting affect internal audit effectiveness?

2) Is top management support closely related with internal audit effectiveness?
3) Does the independence and objectivity of internal audit have an effect on internal audit
effectiveness?
4) What is the direct relationship between competency of IA & internal audit
effectiveness?
5) Does the existence of an audit committee enhance internal audit effectiveness?
6) Is internal audit character directly affecting internal audit effectiveness?
7) Does audit work quality influence internal audit effectiveness?

1.4. Research Objectives

The main purpose of this research is to evaluate and determine the factors affecting internal audit
effectiveness in Wegagen Bank S.C. the case of head office unit & East Addis Ababa district
branches. In particular, the researcher was focused on the following specific objectives:

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 1) To examine the effect of organizational setting of internal auditor on effectiveness of
internal audit
2) To investigate the effect of top management support in achieving internal audit
effectiveness
3) To identify the effect of Independence and objectivity of internal auditors to the
effectiveness of internal audit.
4) To explain the effect of competency and the effectiveness of internal audit.
5) To describe the effect of audit committee existence to the effectiveness of internal
audit.
6) To identify the effect of having approved internal audit charter on internal audit
effectiveness.
7) To examine the effect of having audit work quality on internal audit effectiveness.

1.5. Research Hypothesis

Based on the review of existing literature, the following hypothesis of the study was formulated
as;

● H1: Organizational setting is positively & significantly related with internal audit
effectiveness in the study area.
● H2: Top management support has a positive and significant impact on the internal audit
effectiveness in the organization.
● H3: Independence & Objectivity of the internal auditors have positive & significant
impact on the internal audit effectiveness in the study area.
● H4: Competency of IA has a positive and significant impact on the internal audit
effectiveness in the organization.
● H5: Existences of Audit committees positively & significantly related to internal audit
effectiveness in the study area.
● H6: Internal audit character has positive & significant effect on internal audit
effectiveness in the organization.
● H7: Audit work quality has positive & significant effect on internal audit effectiveness in
the study area.

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1.6. Significance of the study
Studying IAE is crucial to reducing fraud and corruption in emerging nations like Ethiopia.
Finding the elements that impact IAE on Wegagen Bank Sc was the main goal of this study as it
was one of the foundations for raising IAE. The purpose of this study was to add to the body of
information regarding the applicability of IAE. Additionally, there is a dearth of literature on
IAE in Ethiopia, particularly when it comes to commercial private sector organizations like
banks, insurance companies, real estate companies, and micro and small businesses that are now
facing significant challenges from fraud and irregularities at all levels. Thus, the study adds to
the body of knowledge about internal audit effectiveness and related fields. Furthermore, anyone
conducting research on this subject will find this paper to be an extra source of reference
information. The research will be beneficial to scholars and professionals alike. Academicians'
comprehension of the elements impacting IAE will be further enhanced. It will assist
practitioners in resolving the practical issues that the IAE, particularly the Wegagen Bank Sc.
Authority is confronting. It is intended that the study's findings would result in recommendations
to improve any weak areas identified by the empirical survey.

1.7. Scope of the study

Conceptual/thematic scope; this study aims to explore and identify the factors influencing IAE
at Wegagen Bank S.C. To put it briefly, the scope is limited to the Wegagen Bank S.C. Head
Office units and East Addis Ababa district branches.

Methodological scope; the research design employed in this study will be mainly descriptive &
explanatory research design, the research method is mixed research and non-probability
sampling of convenience sampling method will be employed. The researcher decided to employ
a convenience sampling method because it is actually impossible to carry on a probability
sampling because there is no point in time during which all customers are available due to
different reasons and it is not possible to contact everyone who may be sampled.

Variable scope, this study is concerned in evaluating and determining the factors affecting IAE
in the banking industry, the case of Wegagen Bank S.C. Head office unit & East Addis Ababa
district branches. Hence, the dependent variable is IAE whereas, the independent variables (IVs)
are collectively called the internal audit practices dimensions (namely organizational setting, top

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management support, independence & objectivity of the internal staffs, approved audit character,
audit work quality, competency of internal auditors, existence of the audit committee within the
organization) will be principally assessed in this topic.

Geographical scope; The geographical delimitation of this study will be mainly restricted in
Addis Ababa city administration, Wegagen Bank head office located in the center of the capital
city and some selected east Addis Ababa district branches.

Time scope; this research will be conducted within the time frame work plan given by the
Mekelle University, Department of Accounting and finance from Jan, 2025- up to June, 2025.

1.8. Limitation of the study

Due to the subject matter's high level of secrecy and restricted access, it was challenging to get
all pertinent information from the appropriate staff members and offices. In addition, some of the
limitations were the dearth of research studies and the availability of adequate, up-to-date
literature on the subject. Nonetheless, the researcher believes that readers will get some
insightful knowledge on the topic. The researcher overcame every obstacle, including financial
and time limitations, transportation issues to the district branches, the cooperation of respondents
and district branch managers, and similar triumphs by courtesy and patience.

1.9. Organization of the study

This study consists of five chapters. The first chapter deals with the introduction part, the second
chapter provides a literature review informing the reader of what is already known in this area of
study. It covers theoretical review, empirical review and the conceptual framework, the third
chapter discusses the methodology employed in the study, including, the research design, the
characteristics of the study population, sample and sampling techniques, data collection, and
statistical tools used in the study. The fourth chapter deals with data analysis and interpretations
i.e. discussion of findings. Finally, the fifth chapter contains summary, conclusions,
recommendations and suggestions for future research.

1.10. Definition of key terms

Internal audit (IA): (IAA, 2021) defined internal audit as the extent to which the set goals and
objectives are achieved.

9
Internal audit effectiveness: An effective internal audit function will add value and improve an
organization’s operations. The Oxford Dictionary defines effective as having an effect or being
able to bring about the result intended. Olga, (2017) defined effectiveness as the achievement of
the objectives and goals prescribed in the internal audit practices.

Competency of internal auditors; internal auditors apply the knowledge, skills and experience
needed in the Performance of internal auditing services Olga, (2017).

Independence & objectivity of internal auditors: Independence and objectivity are closely
related where the freedom from conditions that may threaten objectivity and no significant
quality compromises are made during rendering the audit service quoted in (Paape, 2007).

Top Management support: This is defined as all efforts provided by the top level management
to its internal audit function, geared towards attaining the goals and objectives of the internal
audit department, and the overall organizational goals. Olga, (2017)

Audit work quality: Internal audit quality requires auditors to carry out their role objectively
and in compliance with accepted criteria for professional practice, such that internal audit
activity will evaluate and contribute to the improvement of risk management, control and
governance using a systematic and disciplined approach (IIA, 2021).

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 CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1. Theoretical Review of Internal Auditing

Various theories have been formulated on internal audit concepts. These include Agency,
contingency, institutional theory and lending credibility theories discussed as follows as asserted
in Abraham (2015); Arefayne (2019); Meseret (2016); Meseret (2022); Meskerem (2023); Lidya
(2023); Wondwesen (2019); Victoria (2019); Fitsum (2017) papers as summarized as here under.

2.1.1. Agency Theory

Agency theory according to Adams (1994) cited in Abraham (2015) and Meseret (2016) paper
focuses on resolving issues in agency relationships between principals and agents, such as
shareholders and company executives. It addresses conflicts between principals' desires and
goals, and differences in risk attitudes between principals and agents. Agency theory can provide
richer research in the internal audit discipline, as it argues that internal auditing helps maintain
cost-efficient contracting between owners and managers. It can also explain the characteristics of
the internal audit department, such as its size and scope of activities. Agency theory can be used
to test whether cross-sectional variations between internal auditing practices reflect different
contracting relationships due to differences in organizational form. Overall, agency theory can
provide valuable insights into the internal auditing process and its role in maintaining cost-
efficient contracting between owners and managers.

Furthermore, according to Peursem and Pumphrey (2005) posit that internal auditors act as
agents and monitors for various internal audit users, including the board, audit committee, and
senior management. Inefficient boards or committees can lead to agency problems, making
senior management a significant influence. Internal auditors must perform audit processes at a
professional level, requiring education, certifications, experience, and other competencies.
Having qualified auditors and training programs can boost board and committee confidence in
auditor competence. By proving their duties, auditors can refute charges of neglect. The internal
audit department works under the supervision of the chief audit executive, who is responsible for
creating the plan, reporting findings, and following up on recommendations cited in Meseret
(2016).

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According to Abraham (2015) & Arefaine (2019) study, they elaborated that Jensen and
Meckling (1976) developed the agency hypothesis to explain how a company's owners and its
agents (management) interact. According to Jensen and Meckling (1976), agency costs result
from conflicts of interest caused by the separation of ownership and control. The agent creates
his own empire apart from the principal's in order to achieve personal objectives (Padilla, 2002).
To solve the agency's issue, the owner comes up with strategies to keep an eye on the
management's activities. Therefore, the internal audit function is one of the methods that will be
used to protect the owners' assets from theft and poor management (Peursem & Pumphrey,
2005).

As per Meseret (2016); Meseret (2022), agency theory focuses on resolving issues in agency
relationships between principals and agents, such as shareholders and company executives. It
addresses conflicts between principals' desires and goals, and differences in risk attitudes
between principals and agents. Agency theory can provide richer research in the internal audit
discipline, as it argues that internal auditing helps maintain cost-efficient contracting between
owners and managers. It can also explain the characteristics of the internal audit department,
such as its size and scope of activities. Agency theory can be used to test whether cross-sectional
variations between internal auditing practices reflect different contracting relationships due to
differences in organizational form. Overall, agency theory can provide valuable insights into the
internal auditing process and its role in maintaining cost-efficient contracting between owners
and managers.

According to Meskerem (2023) & Lidya (2023) study, Adams (1994) explained that the
appointment and performance of external auditors are explained and predicted by agency theory.
It offers a theoretical foundation for comprehending internal auditors' duties and obligations as
well as how organizational transformation impacts them. One definition of an agency
relationship would be a contract between the senior management of the business and its owner or
owners. Managers collaborate with the company as agents to carry out certain tasks on behalf of
owners, who give managers some decision-making power. In order to further their own agendas,
managers may abuse these powers. As a result, the presence of audit committees and both
internal and external auditors will help the business function better and guarantee that
management follows protocols when implementing its goals.

12
According to the Wondwesen (2019) & Victoria (2019) paper they stated that, in order to
maintain the integrity of a company's internal audit system, internal auditors are essential. They
serve as monitors and agents for a number of users, such as senior management, the board, and
the audit committee. Since top management has significant influence over the internal audit,
ineffective internal auditing might result in agency issues. Although they frequently work for
senior management, internal auditors also represent the board and audit committee since they are
trusted to assess the work of senior management. They could, however, be motivated to operate
against the board's interests for a variety of reasons, including monetary compensation, personal
connections, and senior management's influence on internal auditors' future positions and pay.
Information flows may become biased as a result, casting doubt on the board's confidence in the
impartiality of the internal auditors. Internal auditors must carry out audit procedures properly,
requiring training, certificates, experience, and other competences, in order to avert such hazards.
The board and audit committee may become more confident in the internal auditor's abilities if
they have these standards and training programs in place (Endaya & Hanefah, 2013).

2.1.2. Institutional Theory

According to Abraham (2015), Lidya (2023); Meskerem (2023) & Arefaine (2019), institutional
theory explains how organizational structures and practices are shaped by normative pressures,
including external and internal sources like laws and regulations. It has been used in various
studies in internal audit, such as Al-Twaijry et al. (2003), Arena & Azzone (2006), and Mihret et
al. (2010). Al-Twaijry et al. (2003) investigated internal audits in Saudi Arabia, while Arena and
Azzone (2006) focused on the development of internal audits in six Italian companies. Their
findings confirmed that the adoption and development of internal audit were impacted by
coercive, mimetic, and normative pressures. Arena and Azzone (2007) found that isomorphic
pressures significantly impact companies' support of internal auditing. Mihret et al. (2010) argue
that compliance with international standards for the Professional Practice of Internal Auditing
(ISPPIA) and organizational goal achievement have a positive relationship, which could evaluate
internal audit effectiveness. Institutional theory is a valid theory for internal audit effectiveness
in both developed and developing countries and it is relevant to be embedded in the development
of a research conceptual framework. (Endaya and Hanefah, 2013). Therefore, this study should
consider institutional theory for independent variable selection

13
2.1.3. Communication Theory
Abraham (2015) & Arefaine (2019), the Latin term "communicare," which means to make
common, is where the word "communication" originates, according to Lewis and Graham
(1988). Therefore, the act of establishing a shared meaning with an individual or group is called
communication. To put it another way, communication requires at least two persons, even
though one person can talk. According to Guo (2009), communication is the exchange of
information about a topic or issue and the development of a mutual understanding between at
least two people. This supports Davidson's communication theory's first two tenets. Hanefah and
Endaya (2013). A number of studies, including those by Davidson (1991), Quinn & Hargie
(2004), and Golden (2008), support the necessity of good communication skills in all
organizational roles, which aligns with the IIA's demands as the professional body responsible
for IA. Research by Smith (2005) and Lewis & Graham (1988) offered some suggestions for
enhancing these communication abilities. Prior research by Golen (2008) and Hahn (2008)
examined communication hurdles and strategies for overcoming them. Simultaneously, a number
of earlier research focused on organizational communication. These studies showed that
managers' and employees' interpersonal ties and effective communication have a significant role
in increasing productivity and profitability, which in turn results in better services and goods and
lower costs (Clampitt & Downs, 1993). The study of successful communication in internal
auditing is required by the IIA Standards and earlier research, thus the communication theory
should be taken into account in order to accomplish this goal. According to Davidson (1991), all
auditors may gain from understanding contemporary communication principles, and even
auditors who think they are skilled communicators should make a conscious effort to evaluate,
develop, and use their abilities. Three fundamental communication facts form the foundation of
Davidson's communication theory. These include the following: (1) communication is
unavoidable; (2) communication is a multifaceted phenomenon; and (3) conveyed messages are
not always received as cited in Lidya (2023).

2.1.4. Contingency Theory

According to Abraham (2015); Arefayne (2019) & Fitsum (2017), the definition of contingency
is "one thing depends on other things" while the definition of contingency theory is "it depends."
Audit functions can be flexibly organized and are task-oriented. Depending on the part of a
company being audited and the kind of business model, the functions might also differ

14
significantly. For this reason, auditors must carefully organize their inspections and take factors
into consideration in order to complete the task. The organization of an audit team may also be
analyzed using the contingency theory. Audit projects are usually assigned to audit team
managers. They then establish ad hoc audit teams for the projects, choosing auditors according to
their availability and subject-matter knowledge, which adds up to contingencies for each audit
assignment. Daft (2012), to get things done fast, audit teams combine structure and contingency.
Auditing projects can include a wide range of topics, including assessing conformity with
industry standards, examining corporate accounts, and evaluating manufacturing procedures. The
learning curve is lowered and the likelihood of mistakes is decreased by choosing auditors with
specific training or a certain set of skills in the field. When audit teams employ resources based
on experience and skill and when auditors are adaptable and can adjust to changes in the process,
the quality and results of audits are guaranteed.

According to Meseret (2016); Meseret (2022), contingency means: one thing depends on other
things‖ and ―Contingency theory means: it depends. Audit functions are task-oriented and can
be loosely structured. The functions also can vary considerably, depending on the area of a
company under audit and the type of business model, so auditors must carefully manage their
inspections and take variables into account to get the job done. The contingency theory also can
be applied to an audit team’s structure. Typically, audit team managers receive audit projects.
They then create ad hoc audit teams for the projects, selecting auditors based on expertise and
experience in the subject areas, and on auditor availability, all of which add up to contingencies
for any given audit project. Daft (2012), Audit teams use a mix of structure and contingency to
get the output rolling quickly. The subject of auditing projects can include such diverse areas as
evaluation of production processes, inspection of company accounts, and assessment of
compliance with industry standards. Selecting auditors with specialized training or those who
have a particular skill set in the subject area minimizes the learning curve and reduces
opportunities for errors. The quality and output of audits remain assured when audit teams use
resources according to expertise and experience, and when auditors are flexible and can adapt to
process fluctuations. For example, an auditor experienced in evaluating financial instruments can
be effective in an audit exercise of a bank or hedge fund, even when the financial instruments the
institution offers do not fit the typical mold (Davoren, 1994) cited in Abraham (2015).

15
2.1.5. Lending Credibility Theory
According to Abraham (2015), like agency theory, the lending credibility thesis contends that
audited financial statements can increase stakeholders' faith in management's stewardship (Letza,
1996; Volosin, 2007). Groups like shareholders, managers, creditors, employees, and the
government are all part of the business world. All shareholders, regardless of size, depend on
yearly reports that highlight management effectiveness and financial reporting. Appointed by
shareholders, auditors present findings to customers with the goal of evaluating the performance
and financial status of the business. The auditor's report lessens deceptive accounting practices
and gives shareholders peace of mind about the security of their investments. The basic purpose
of an audit is to assess the accuracy and dependability of a company's financial statements by
determining their trustworthiness. This protects the company's reputation in the marketplace and
minimizes deceptive accounting practices.

According to this idea, the main purpose of the audit is to give the financial statements more
legitimacy. According to this perspective, credibility is the service that the auditors are offering
their clients. The components of audited financial statements are thought to boost the trust that
financial statement consumers have in the numbers that management has provided. Users are
thought to profit from the enhanced credibility; these benefits are usually thought to be that when
investment decisions are founded on trustworthy information, their quality improves.

Audited financial statements, according to Volosin (2007), can increase stakeholder confidence
in management's stewardship. Groups like shareholders, managers, creditors, employees, and the
government are all part of the business world. All shareholders, regardless of size, depend on
yearly reports that highlight management effectiveness and financial reporting. Appointed by
shareholders, auditors present findings to customers with the goal of evaluating the performance
and financial status of the business. The auditor's report lessens deceptive accounting practices
and gives shareholders peace of mind about the security of their investments. The purpose of
audits is to assess the accuracy and dependability of a company's financial statements by
evaluating their trustworthiness. This idea, which is comparable to the agency theory, aids in
guaranteeing the accuracy and equity of the company's financial reporting.

According to Abraham (2015), who cited Volosin (2007) in his book, the lending credibility
thesis is comparable to the agency theory and asserts that audited financial statements can

16
increase stakeholders' trust in management's stewardship. The many organizations that are
impacted by or involved in the financial reporting obligations of the regulatory authorities make
up the business world. They include the government, employees, management, creditors, and
shareholders, among others. Annual reports are primarily sent to shareholders, which includes
both huge organizations like banks and insurance companies as well as people with relatively
minor stakes. The financial reporting and management's performance that have an obligation to
act in the best interests of investors are often the basis for their choice. The company's
shareholders choose the auditor, who then presents his findings to his clients. Commenting on
how properly the firm portrays its financial status and performance is the goal of the auditor's
report. In addition to helping to curb the use of deceptive accounting techniques intended to
present the business in a more positive light, this should reassure shareholders that their
investment is safe. In essence, the audit is a procedure intended to assess the accuracy of data in
a business's financial accounts (Letza, 1996).

2.2. Conceptual Reviews of Internal Audit

2.2.1. Definitions of Internal Audit

According to Meskerem (2023), auditing is an objective, systematic and independent
examination of accounts which are conducted by a professionally qualified person. Auditing can
be simply classified as internal and external auditing. The common definition of auditing is a
systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those assertions
and established criteria and communicating the result to interested users Ayitenew & Lakech,
(2018).

According to (IIA, 2021), IA is an impartial, independent assurance and consulting activity

intended to enhance and optimize an organization's operations. Through the use of a methodical,
disciplined methodology to assess and enhance the efficacy of risk management, control, and
governance procedures, the IA activity assists an organization in achieving its goals. This
definition states that the primary responsibilities of internal auditors are to provide assurance to
the organization and engage with the corporate governance management team. Internal auditors
can offer assurance services by offering their independent opinions and conclusions about the
organization's operation, function, system, and well-being. They can also offer consulting

17
services to the organization by providing advisory services in response to specific requests from
engagement clients.

As per Meskerem (2023) and Meseret (2016), in order to carry out their responsibilities
efficiently, internal auditors need to be cognitively and behaviorally capable. To perform the
complete spectrum of audits, a professional workforce with the requisite training and expertise is
needed. The minimal continuing education standards established by their individual professional
associations must be followed by auditors. The effectiveness of the auditor in establishing a
methodical and disciplined strategy to assess and enhance risk management, control, and
governance procedures is determined by their competency.

According to Mulalem (2020), who quoted Pickett (2010), IA is an independent, consultative,

and objective-oriented activity. Its goal is to improve an organization's operations and provide
value. By using a methodical, disciplined approach to assess and enhance the effectiveness of
risk management, controls, and governance procedures, IA helps a company reach its goals. As a
value-adding service, IA offers an impartial assessment of a company's operations and controls
to try to ascertain the accuracy and reliability of the information; make sure that organizational
risks are identified and reduced; make sure that laws and regulations are followed; make sure
that resources are used effectively and economically; and, finally, make sure that a company's
goals and objectives are met.

According to Hella & Mohammed (2016), internal auditing is a systematic and disciplined
approach used to evaluate and improve risk management, control, and governance processes
within an organization. It helps achieve its objectives by ensuring the right operation of business
systems and achieving firm goals. Internal auditors are forward-looking individuals who
understand business systems and provide assurance services to the organization's management.
They provide independent opinions and conclusions on the organization's operation, function,
system, and wellbeing. They also offer advisory services based on client requests, providing
consulting services to the organization. This shift from traditional to contemporary definitions
highlights the broad scope of internal auditing and its role in helping organizations achieve their
overall objectives.

18
IA practice has recently come to be acknowledged as one of the key factors influencing the
successful and efficient use of resources in businesses worldwide. IAs are sets of rules and
guidelines that safeguard an organization's resources, produce accurate financial reports,
encourage adherence to legal requirements, and accomplish successful and efficient operations.
In addition to accounting and reporting, these systems also relate to the organization's internal
and external communication processes. They include protocols for managing funds received and
spent by the organization, creating appropriate and timely financial reports for officers and board
members, conducting the annual audit of the organization's financial statements, assessing
employees and programs, keeping track of real and personal property inventories and their
locations, and putting personnel and conflict of interest policies into place Amare (2023).

Furtherly, the recent corporate failure as Pickett, (2010), points out that the wastage of public
resources and the rapid growth of professional institutions are the major contributors towards the
increased current demand of internal auditing in different countries.

2.1.2. Types of Internal Audit

According to (Pickett (2010) and other previous studies, the following is a summary of the
various types of audits which will generally be conducted in an organization:

2.1.2.1. Operational/Performance Audit

As per Arens, (2010), operational audit evaluates performance of a particular function or
department to assess its efficiency and effectiveness. Financial data may be used, but the primary
sources of evidence are the operational policies and achievements related to organizational
objectives. Internal controls and efficiencies may be evaluated during this type of audit. Some
areas of operational audits include: organizational structure, processes and procedures, accuracy
of data, management and security of assets, staffing, and productivity. An operational audit is a
review of any parts of an organization operating procedures and methods for the purpose of
evaluating efficiency and effectiveness. Because of many different areas in which operational
effectiveness can be evaluated it is impossible to characterize the conduct of a typical operational
audits cited in Medhanit (2016). Furthermore, according to Hawa (2016), These audits examine
the use of resources to determine if resources are being used in the most effective and efficient
manner to fulfill the organization’ mission and objectives.

19
2.1.3.2. Compliance audit
Compliance Audit evaluates an area’s adherence to established laws, standards, regulations,
policies, and procedures. Compliance audits are done because of a policy or statutory
requirement. While the audit is done for regulatory reasons, the objectives are still to ensure
adequate control over an important internal process (Hella & Mohammed, (2016). Moreover,
according to Pickett (2010), the purpose of a compliance audit is to determine whether the audit
is following specific procedures or rules set down by some higher authority. A compliance audit
for private business includes determining whether accounting personnel are following the
procedures prescribed by the company controller, reviewing wage rates for compliance with
minimum wage laws, or examining contractual agreement with banks and other lenders to be
sure the company is complying with legal requirements. Results of compliance audits are
generally reported to someone within the organization unit being audited rather than to a broad
spectrum of users. As per Hawa (2016), these audits determine if entities are complying with
applicable laws, regulations, policies and procedures. Examples include federal and state laws,
and Trustee policies and regulations. These audits determine if entities are complying with
applicable laws, regulations, policies and procedures. Examples include federal and state laws,
and Trustee policies and regulations (Meseret, 2016) quoted in Samuel (2023).

2.1.3.3. Financial audit

The statements of financial status, revenue, and cash flows, along with any supporting footnotes,
are the financial statements that are most frequently included, according to Hailemariam (2014).
To ascertain if commitments, authorizations, and the receipt and distribution of monies are
appropriately and accurately documented and reported, these audits also examine accounting and
financial activities. This kind of audit also assesses whether there are appropriate controls over
cash and other assets, as well as if there are sufficient process controls over resource acquisition
and use. Moreover, according to Fitsum (2017), defines financial audit as an unbiased,
historically focused assessment carried out to vouch for the dependability, correctness, and
fairness of financial data. Making sure that the department, unit, or area's financial activity is
fully and properly reflected in the relevant financial reports is the main goal. In order to ascertain
if commitments, authorizations, and the receipt and distribution of funds are appropriately and
accurately documented and reported, these audits examine accounting and financial operations.

20
According to Meseret (2016), Hawa (2016), and Hella & Mohammed (2016), this kind of audit
also assesses whether there are appropriate controls over cash and other assets as well as whether
there are sufficient process controls over the acquisition and use of current resources.

2.1.3.4. Follow-up audit

A follow-up audit's objective is to review management's action plans and the audit's
recommendations from the previous audit to see if corrective measures were implemented and
are effective or whether circumstances have changed to call for alternative measures. Follow-up
Audits are carried out around six months following the release of an internal or external audit
report. They are intended to assess the remedial measures implemented in response to the audit
concerns mentioned in the first report (Olga, 2017).

2.1.3.5. Investigative audit

These audits ascertain if organizations are adhering to relevant laws, rules, policies, and
processes, according to Zulkifli (2014). Trustee policies and state and federal statutes are two
examples. Audits of Information Systems (IS): These audits examine how automated information
processing technologies are used by individuals as well as their internal control environment.
System input and output, processing controls, backup and recovery strategies, system security,
and computer facilities are often assessed during audits.

An investigative audit is one that is conducted after a department or individual is suspected of

engaging in unusual or questionable behavior. The purpose of fraud and financial irregularity
audits is to confirm the presence and extent of alleged fraud and financial irregularities. Usually,
it focuses on particular facets of a department's or person's job. According to Mereser (2016),
Meskerem (2022), and Fitsum (2017), investigations are carried out to ascertain the extent of
loss, evaluate control weaknesses, and offer recommendations for corrective actions. These
investigations may be requested by the President, the Board of Trustees' audit committee, or
other senior members of the organization's management in response to a tip from the hotline, or
at the Director's discretion.

2.1.3.6. IT audit

21
IT Audit is evaluating controls related to the institution’s automated information processing
systems. The information technology audit function develops audit programs to assess, evaluate
and make recommendations to management regarding the adequacy of internal controls and
security inherent in an organization’s information systems, and the effectiveness of the
associated risk management. The goal is to ascertain that IT systems are safeguarding assets,
maintaining data integrity and efficiently operating to achieve business objectives (Winston,
2016). According to Hawa (20160), these audits review the internal control environment of
automated information processing systems and how people use these systems. The audits usually
evaluate system input, output; processing controls; backup and recovery plans; system security;
and computer facilities. These audits review the internal control environment of automated
information processing systems and how people use these systems. The audits usually evaluate
system input, output; processing controls; backup and recovery plans; system security; and
computer facilities. (Meseret, 2016) cited in Samuel (2023).

2.1.3.7. Management audit

Management Audit Also called performance audit, are internal consulting projects. Because an
internal audit is an activity independent of management, it is often an excellent resource to
provide independent and objective insight on the efficiency of business processes. Management
can request internal auditors to review a business process, organization, or strategy and the
auditors do not have to worry about backlash from management. A common management audit
is a review of organizational structure, such as having an internal audit look at how
administrative work is divided among divisions and if there are opportunities to be more efficient
(Zhang, 2017).

2.1.3.8. Grant & Contract Audit

These audits may be performed with respect to any function, activity, department, or unit of the
organization and may include all types of contracts; e.g., federal and private grants and contracts,
construction contracts, and professional service contracts. Grant and contract audits are designed
to evaluate the contracting process, compliance with the provisions of grants and contracts, and
third-party contractual performance cited in Winston, (2016).

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2.1.3. Internal Audit Effectiveness (IAE)
Furthermore, internal audit effectiveness was described by IIA (2021) as "the degree (including
quality) to which established objectives are achieved." Accordingly, the capacity of an internal
auditor to accomplish predetermined goals within the company is what is meant by internal audit
effectiveness. Since a number of factors affect the efficiency of internal audits, previous
research has used a variety of ways to examine their efficacy. What are appropriate and reliable
metrics for assessing the department's efficacy is the other question that has surfaced in relation
to internal audit effectiveness.

Various scholars have defined effectiveness. For example, Arena and Azzone (2009) defined
effectiveness as "the capacity to obtain results that are consistent with the target's objective."
Dittenhofer (2001) views effectiveness as the ability to achieve the goals and objectives.
Similarly, a program can be considered successful if its results align with its goals (Mihret,
2010). Various experts have provided varying interpretations of "effectiveness." Internal audit
effectiveness, for instance, has been defined by Arena and Azzone (2009) as the ability to
achieve results that are consistent with the goals, Dittenhofer (2001) as the ability to achieve the
goals and objectives, and the Internal Audit Institution IIA (2010) as the degree (including
quality) to which particular goals are achieved. Because internal auditors are essential to an
organization's survival and development, internal audit effectiveness has drawn more attention in
the last 10 years. The growing importance of internal auditing as an economic component has led
to systematic research into the factors that improve internal auditing performance.

According to Mihret & Yismaw (2007), an internal audit function is considered effective if it can
accomplish the specified aims or objectives. Effective internal auditing is "the degree (including
quality) to which established objectives are achieved," according to IIA (2021). According to
Meseret (2023), internal audit effectiveness is the internal auditor's capacity to accomplish
predetermined goals within the company. The efficacy of internal auditing (IA) is a novel
concept that has gained special attention in the audit literature as a result of the evolution of IA.
To be a crucial part of good governance, the internal audit function must effectively overcome
the problem of effectiveness. Explaining the idea of IA effectiveness and identifying the crucial
elements that go into creating the "added value" of IA are crucial in this context (Hella &
Mohamed, 2016).

23
Finding the most appropriate and pertinent way to gauge internal audit's efficacy and efficiency
as well as the amount of progress it has made toward accomplishing its goals and objectives is a
major problem. Internal audit must discover solutions to challenging questions, such as whether
approach is more relevant and effective for evaluating and monitoring internal audit
performance. There is currently no agreement among studies about the optimum framework for
internal audit effectiveness or the elements impacting internal auditing and how it may be
quantified. This could have something to do with the hypotheses not receiving enough attention
(Endaya & Hanefah, 2013).

Institution of Internal Audit, (2021) defined internal audit effectiveness “as the degree (including
quality) to which established objectives are achieved. Mizrahi and Ness Weisman (2007) give
their own definition which is in line with the ability of the internal auditor intervention in
prevention and correction of deficiencies and they finally defined internal audit effectiveness as
“the number and scope of deficiencies corrected following the auditing process.” Therefore,
going by the above definitions of effectiveness and audit effectiveness, it’s clear that internal
audit effectiveness means the same thing because they all have a central target which is ‘the
ability of achieving established objectives.

Effectiveness, according to Arena & Azzone (2009), is "the capacity to obtain results that are
consistent with the target's objective." "The extent to which an internal audit office meets its
supposed objective or the extent to which it meets the intended outcome" is the definition of
internal audit effectiveness. From the perspective of internal audit, he outlined the traits of an
efficient internal audit unit. Effective internal audit conducts an impartial assessment of
operating and financial systems and processes, helps the organization reach its objectives,
requires management's commitment to carry out recommendations, and offers helpful
suggestions for enhancements when needed. It is also negatively impacted by management's
neglect, which in turn has an adverse effect on the audit attribute.

The metric used to assess whether the internal audit function can accomplish its objective is
called internal audit effectiveness (Adhista, 2015). Despite this, the efficacy of internal audits
tends to differ by nation and organizational level. Given the resources and other tools that might
help achieve these goals, management of businesses should have a clear goal for internal auditors
to accomplish. Although systematic and usually reliable methods may be used to assess the

24
success of an internal audit unit, it is argued that the effectiveness of an IA unit depends on the
expectations of key stakeholders.

2.1.4. Internal Auditing in Public Sectors

According to Gharafi et al. (2024), IA is a basic management tool in organizations, especially
public corporations, where it is essential for enhancing governance and transparency (Sundgren
& Sjöberg, 2016). According to the IIA (2017) states that the goal of IA is to assess governance,
internal control, and risk management procedures while making suggestions to increase
organizational efficacy. Internal audit, in particular, seeks to enhance management processes
continuously and boost public trust in the use of public resources in Moroccan public firms
(Benazzouz & Oumhani, 2021). According to earlier research, IA in publicly traded
organizations has a number of difficulties, such as a shortage of skilled human resources, suitable
technology, and institutional support (El Mghari & Louzir, 2018). Furthermore, internal conflicts
of interest and political pressure might lower the IAE in the public sector (Zarrouk, 2019)

2.2. Empirical Review on The Effect of Internal Audit Practices (IAP) on

Internal Audit Effectiveness (IAE)

2.2.1. The Effect of Organizational Setting on IAE

The organizational profile, internal organization, and status of internal audit within the
organizational structure are all considered aspects of the organizational setting. Other aspects
include the internal audit office's budgetary status, the quality of its internal organization, the
presence of sound established criteria to evaluate auditee practices, and the organizational
policies and procedures that direct auditee operations. In order to provide management with a
successful internal audit service, organizational independence is crucial because it creates an
environment that allows for the objective and unrestricted evaluation and reporting of findings
without interference from the audited units. The efficacy of audits would be increased by
expanding the area of services by auditing a greater number of systems and activities with
suitable risk analysis. Accordingly, organizational context can have an impact on the efficacy of
internal audit (Mihret and Yismew, 2007). Organizational settings do affect internal audit
effectiveness, according to research by Medanit (2016) and Hawa (2016) (Wondwessen, 2019).
The idea of independence is ambiguous and unpredictable as different individuals have different

25
definitions and interpretations of it (Wines, 2012). However, as cited in Abraham (2015),
"independent" relates to the idea of being unaffected by management when internal auditors
carry out audit operations and release audit reports (Belay, 2007; MoFED, 2004). Thus, the
following hypothesis will be posited:

● H1: There is a positive & significant relationship between organizational setting and
internal audit effectiveness in the study area.

2.2.2. The Effect of Top Management Support on IAE

According to a Gharrafi (2024) study, the efficiency of these duties is greatly influenced by top
management support, especially when it comes to internal auditing. One of the most important
external elements influencing the efficacy of internal audits is the degree of support from senior
management, as noted by Bednarek (2018). This notion is supported by Al-Twaijry et al. (2003),
who claim that management support and internal auditing quality have a major beneficial
influence on the organization's internal auditing success. Onumah and Yao (2012) assert that
critical tasks including monitoring internal control, evaluating risk, analyzing regulatory
compliance, and reviewing operational operations are made possible by unambiguous top
management support. The exploratory study conducted by Cohen and Sayag (2010) aimed to
develop a conceptual understanding of internal audit effectiveness in firms. They created a model
of internal audit effectiveness's determinants as well as a scale to gauge it. The scale created for
this investigation has high psychometric qualities, according to the results. According to
correlation and regression studies, the primary factor influencing the efficacy of internal audits is
top management support, with organizational independence of internal audit also having some
bearing. Both the public and private sectors had the same predictive impact. The success of
internal audits was largely explained by the research model.

There are a lot of factors affecting the internal audit effectiveness. The study conducted by
Mihret & Yismaw (2007) investigated the internal audit service of a large public sector higher
educational institution; by identifying factors influencing internal audit effectiveness by
considering four interrelated factors: internal audit quality, management support, the
organizational setting and attributes of the auditee. They concluded that internal audit quality and
management support have strong influence. However, organizational setting and auditee
attributes do not have a strong impact on internal audit effectiveness.

26
To a large extent, internal audit is as useful as management allows it to be. The study of
Abdulaziz and Nedal (2013) revealed that the Internal Audit Department suffers due to less
support from Senior Management. If internal audit issues report which are critical of certain parts
of the organization and management takes no action for political reasons, this would only serve
to undermine the internal audit function and reduce its performance. Simultaneously, ISPPIA
highlights the importance of the relationship between internal audit and senior management and
how management can support internal audit. The management support is almost crucial to the
operation and internal audit; because all other determinants of IA effectiveness derive from the
support of top management, given that hiring proficient IA staff, developing career channels for
IA staff, and providing organizational independence for IA work are the results of decisions
made by top management (Cohen and Sayag, 2010).

Effective internal auditing depends on management's willingness to implement audit

recommendations and assist them in bolstering IA (Greaves, 2017). According to earlier
research, the IA audit process is likely to fail and waste time and money if management does not
approve, support, and promote it (Zulkifli et al., 2014). Numerous elements that contribute to the
interaction between internal audit and senior management have been examined in reports that
have emphasized the relationship's critical relevance (Alzeban & Gwilliam, 2014). Generally
speaking, the degree of management support for the auditing process will determine how well
the IA function performs. They must acknowledge that the IA process is an as vital and
significant activity as any other process in the

According to Strakova et al. (2021) quoted in Workneh (2024), demonstrated that managers of
enterprises increasingly look for new methods to manage and run their business. The support and
commitment of management also are important factors to improve the effectiveness of internal
audits. Strong support of management for the work of internal auditors and the audit process
makes for the success of the internal audit function. It is accepted that the internal audit process
is an important activity in comparison with any other process within the organization. Some
researchers indicated that with a lack of management approval, support and encouragement, the
internal audit process is likely to be a time-consuming failure and a waste of money. Thus, the
study will develop the following hypothesis.

27
 ● H2: There is a positive & significant relationship between Top management support and
internal audit effectiveness in the study area.

2.2.3. The Effect of Competency of Internal auditors on IAE

According to Mihret & Yismaw (2007) in today’s dynamic business environment, it is
imperative that internal auditors are qualified as they should be thorough in their knowledge of
business, systems, developments and other business topics. They should be able to interpret what
works and what doesn't, the strengths, weaknesses of standards, code systems and procedures.
Appropriate staffing of an internal audit department and good management of that staff are keys
to the effective operation of an internal audit. An audit requires a professional staff that
collectively has the necessary education, training, experience and professional qualifications to
conduct the full range of audits required by its mandate (Al-Twaijry and Gwillian, 2003).
Auditors must comply with minimum continuing education requirements and professional
standards published by their relevant professional organizations and the IIA (2021).

According to Samuel (2023), staff competence is an important key to the effectiveness of the
internal audit activities (AlTwaijry et al. 2003; Alzeban & Gwilliam 2014). The International
Standards for the Professional Practice of Internal Auditing (ISPPIA) highlights the importance
of an internal audit team who possesses the knowledge, skills, and other competencies necessary
to perform their responsibilities (ISPPIA, Standard 1210). Indeed, internal auditors must
collectively have the necessary education, professional qualifications, experience and training to
be able to add value and improve the organization's operations (Mihret & Woldeyohannes 2008;
Ali &Owais 2013).

As per Workneh (2024), the competence of internal auditors is the most important factor
affecting the effectiveness of all internal audit activities (Al-Twaijry et al. 2003; Alzeban and
Gwilliam 2014). Previous studies pointed out that competence of internal auditors is an
important variable affecting internal auditor effectiveness. Al-Matarneh (2011); Mihret and
Woldeyohannis (2008); and Ali and Owais (2013) suggested that measurements of the
competence of internal audits are based on necessary education, professional qualifications,
experience and the number of training hours of an internal auditor, as well as the continued
updating of professional training.

28
Competency can be related to the ability of an individual to perform a job or task properly based
on the educational level, professional experience and the effort of the staff for continuing
professional development. Auditors’ competency determines the effective auditing in the
organization (Zulkifli, et.al., 2014). Alzeban and Sawan (2013) have mentioned that internal
auditors should be adequately qualified and in possession of all requisite skills and knowledge to
carry out responsibilities related to audit duties. Internal auditors must possess appropriate
knowledge, skills and other competencies necessary for undertaking their personal
responsibilities. Internal audit department, as a whole, also needs to have or attract the required
knowledge, skills and other capabilities and competencies for meeting its responsibilities.

Auditors competency contributes to the ability of the auditors to perform the systematic and
discipline audit approach to improve the effectiveness of internal audit. IA can effectively carry
out their duty in the public sector if there are enough IA personnel with required competencies.
This competence intern depends on educational level, professional experience, continuous
training, and the effort of the staffs for continuing professional development (Mihret and
Yismaw, 2007). Thus, the study will develop the following hypothesis.

● H3: There is a positive & significant relationship between Competency of internal

auditors’ and internal audit effectiveness in the study area.

2.2.4. The Effect of Independence & Objectivity of IA on IAE

According to the International Standards for the Professional Practice of Internal Auditing
(ISPPIA) Standard 1100 requires that the internal audit department must be independent and
internal auditors must be objective in achieving their work to add value to the organization.
Standard setters have emphasized the importance of independence and objectivity of internal
auditors. ISPPIA defined Independence and Objectivity as: “The internal audit activity must be
independent, and internal auditors must be objective in performing their work.” They interpret
objectivity as: an unbiased mental attitude that allows internal auditors to perform engagements
in such a manner that they believe in their work product and that no quality compromises are
made. Objectivity requires that internal auditors do not subordinate their judgment on audit
matters to others cited under Mu’azu (2014).

29
According to Samuel (2023), there is no universally accepted definition or interpretation of
independence, hence the idea is ambiguous and unclear (Wines, 2012). But for the purposes of
this case study, independent means that internal auditors conduct audit operations and release
audit reports without any management interference (Ahmad & Taylor, 2009; Belay, 2007;
MoFED, 2004). The credibility of auditors is largely based on their independence; if auditors
were not independent in both appearance and actuality, investors and creditors would not have
much faith in them. The foundational presumptions of independence of appearance and
independence of thought provide auditors' assurance services their worth and legitimacy (Wines,
2012; Stewart and Subramanian, 2010).

According to Workneh (2024), claims that even in cases when the auditor is an employee of the
company, specialized authorities and standards-setting organizations have consistently
underlined the value of the auditor's independence and objectivity to the caliber of IA. When an
internal audit is independent, it indicates that there are no risks to their safety or their capacity to
conduct their work impartially; in other words, they are self-sufficient in their duties and are not
swayed by financial or personal considerations. Objectivity and independence are frequently
used interchangeably. Providing services to management, the audit committee, and finally the
CEO is just one of the levels of reporting that ISPPIA 1100 (2017) illustrates allows for
independence and impartiality.

ISPPIA and the IIA suggest that such independence can be gained by means of reporting to
levels within the organization that allow the internal audit department to perform its
responsibilities free from interference; avoiding conflict of interests; having direct contact with
the board and senior management; having unrestricted access to records, employees and
departments; the appointment and removal of the head of internal audit not being under the direct
control of executive management and not performing non-audit work. The factor that may affect
the effectiveness of internal audit activities is the need for organizational independence and
objectivity which can allow the audit activity to conduct work without interference by any party.
The independence and objectivity of internal auditing is with respect to both assurance services
and consulting for the organization. Independence and objectivity are closely related where the
freedom from conditions that may threaten objectivity and no significant quality compromises
are made during rendering the audit service quoted in Paape (2007).

30
Being independent is the freedom from the control and direct influence of line management. This
definition is important to the extent of audit work and enhances internal audits objectivity and
integrity. Internal auditors should be independent from the activity they are auditing.
Independence allows internal auditors to perform the impartial and unbiased judgments to the
proper conduct of audit and achieved through organizational status and objective.

Independence of internal audit is considered by Zhang et al. (2007) as a determinant of internal

audit effectiveness. Cohen and Sayag (2010) also argue that organizational independence of
internal audit affects internal audit effectiveness. Auditor independence has long been considered
as the key driver of the audit function. Without independence, internal audit simply becomes a
part of the management team, losing its ability to offer a fresh perspective (Yee et al., 2008). (Al-
Twaijry Et al.2003).

Abu-Azza (2012), Cohen (2010), Haimon (1998) and (Mihretet al. (2010), found that internal
auditor independence positively related to perceived IA effectiveness. The few researchers that
have examined this issue have found that the greater the independence and objectivity of internal
audit department, the greater the internal auditor’s effectiveness. Similarly, a survey conducted
by Mihret et al. (2010); Cohen and Sayag (2010); Abu-Azza (2012) found that organizational
independence was positively related to the auditing quality and the auditees’ evaluations,
coupled with objectivity, organizational independence contributes to the accuracy of the
auditor’s work and gives employers confidence that they can rely on the results and reports.
Zulkifli, Alagan and Mohd (2014) result of the study there were significant positive relationships
between independence and objectivity. Thus, the study will develop the following hypothesis.

● H4: There is a positive & significant relationship between Independence & Objectivity of
internal auditors’ and internal audit effectiveness in the study area.

2.2.5. The Effect of Existence of Audit Committee on IAE

The Audit Committee of the Board of Directors gives one very widespread thing of company
governance. An Audit Committee could be very powerful not only in supplying objective
oversight of the accounting of a corporation, however additionally in assisting to line an ethical
tone at the top‖ (Locatelli, 2002). An audit committee in an organization improves the
independence of the internal audit of an organization. (Deborah, 2004) the internal audit function

31
of a company should learn a sufficient status within the organizational structure to enable better
communication with senior management and to ensure independence of internal audit from the
audit quoted in Meskerem (2023).

Internal auditors, as agents of the organization members, need their support. The existence of an
effective audit committee in the organization enhances internal audit independence and also
reduces senior management interferences either in internal audit scope or its performance
(Endaya and Hanefah, 2013). The internal auditor’s risk-driven efforts provide critical inputs to
other governance participants, including the audit committee and management. In developed
countries, the audit committee has the role of a mediator between the management and internal
audit. This makes the role of management support less important than in developing countries,
where audit committees are new. This issue is controversial even in developed countries, the
executive management is directly in a position, or indirectly through the audit committee, and it
affects to a certain degree the nature of work of the internal audit. When the management
considers the internal audit function as positive, then the function is likely to be more effective
Alzeban and Gwilliam, (2014).

As reported by studies in the past, there is a linkage between the audit committee and the
effectiveness of internal audit. For instance, can be seen in the study by George et al., (2015)
Further, studying the linkage between audit committee’s quality, Audit committee is also
examined in some studies as available associated with internal audit effectiveness. In line with
the study, focusing on 364 Italian companies, Arena and Azzone (2009) point out that internal
audit’s structural characteristics may influence its effectiveness. The results also imply that
internal audit effectiveness increases when the audit committee is involved in the internal
auditor’s activities.

Mu’azu (2014) did a study on the audit committee to give empirical evidence about the influence
of the audit committee on internal audit. Riham (2013) audit committees can be viewed as a key
safeguard mechanism for internal auditors in managing their professional objectivity. Winston
and George (2016) the study concluded that there was a significant statistical relationship
between the organizational independence of the audit committee and effectiveness of the internal
audit.

32
Similarly, Seif (2017) The result of the study confirmed the prior IA effectiveness research, the
study found a strong relationship between Audit Committee, and effectiveness of IA. A number
of researchers have provided studies regarding the effectiveness of internal audit with specific
emphasis on the effects of management support, independence of internal auditors, management
perceptions, competent internal audit staff and the availability of internal audit charter. The fact
that effective IA can contribute to the significant impact to the quality of management has raised
the interest for researchers to explore this matter. The effectiveness of internal audit greatly
contributes to the effectiveness of each auditee in particular and the organization at large. Thus,
the following hypothesis will be posited:

● H5: There is a positive & significant relationship between Existence of audit committee
and internal audit effectiveness in the study area.

2.2.6. The Effect of Audit Work Quality on IAE

Internal audit quality requires auditors to carry out their role objectively and in compliance with
accepted criteria for professional practice, such that internal audit activity will evaluate and
contribute to the improvement of risk management, control and governance using a systematic
and disciplined approach IIA (2004). This is important not only for compliance with legal
requirements, but because the scope of an auditor’s duties could involve the evaluation of areas
in which a high level of judgment is involved, and audit reports may have a direct impact on the
decisions or the course of action adopted by management. Greater quality of IA work –
understood in terms of compliance with formal standards, as well as a high level of efficiency in
the audit’s planning and execution – will improve the audit’s effectiveness.

Furthermore, to this, internal audit quality is examined as one of the variables associated with
internal audit effectiveness by Mihret and Yismaw (2007) they did their research on the public
sector of Ethiopia, and their findings indicate that internal audit effectiveness is affected by the
internal audit quality, along with the support of management, the organization environment and
the characteristics of the organization. Similarly, in recently, examining one hundred and eight
Israeli organizations, Cohen and Sayag (2010) also considered the quality of internal audit work
as a factor of internal audit effectiveness. Along with the above Alzeban and Gwilliam (2014)
emphasize the impact of internal audit quality to internal audit effectiveness.

33
According to Workneh (2024) paper, Cohen & Sayag (2010) and Dejnaronk et al. (2016) showed
that performing an audit in accordance with internal audit standards affected the effectiveness of
the internal audit. Mihret & Yismaw (2007) performed research which examined the impact of
internal audit quality on the effectiveness of internal audits. These studies showed that the
quality of an internal audit influences the effectiveness of the internal audit. Cohen and Sayag
(2010) pointed out that the quality of the audit was evaluated by the annual audit plan, the areas
audited and regular follow-up with an internal audit. Thus, the study will develop the following
hypothesis.

● H6: There is a positive & significant relationship between Audit work quality and internal
audit effectiveness in the study area.

2.2.7. The Effect of Approved Audit Characters on IAE

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 management; and (c) define the scope of
internal audit activities” (IIA, 2001). 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 noun reasonable limitations on the scope of the auditor
work. The charter should clearly identify and record any limitations and alter to actual or
potential changes on internal and external conditions that affect its ability to provide internal
control assurance from a forward looking perspective (O. Regan.2002). Different authors have
explained the presence of a defined audit charter in organizations will help auditors to be
effective. For instance, O. Regan (2002) concludes that a well drafted charter is an important
ingredient for the IA effectiveness. It helps to direct the efforts of audit staff and defines what the
board can expect on the assurance it requires on internal control from an IA.

Extraordinarily, Van Peursem (2005) added that the presence of a strong charter adds an official
and respected layer of authority to the position of IA in the company. It is also an important
feature of ensuring success in achieving the independent status of an IA. Furthermore, the
existence of an audit charter in an organization influences senior management to flow the

34
recommendations of the internal auditor (Van Peursem, 2005) which in turn affects IA
effectiveness as cited in Fetu, (2016).

More so, Endaya & Hanefah (2016), investigated the direct relationship between internal
auditors’ characteristics and IAE, and the moderating effect of senior management support.
Standard multiple regression and moderated multiple regression were applied, and the data were
collected from 114 members of Libyan Association of Accountants and Auditors by using
personally administered questionnaires. The findings revealed that internal auditors’
characteristics have a significant impact on internal audit effectiveness and senior management
support has a moderating effect. The findings would encourage Libyan organizations to
concentrate on the issue of internal audit effectiveness, and will strengthen the capacity of
internal auditing in public organizations.

In a similar vein, Alzeban & Gwilliam (2014) contended in their study that the efficacy of
internal audit is positively correlated with the competence, independence, management support,
size, and interaction between internal and external auditors of IA personnel. Furthermore, Hella
& Mohamed (2016) discovered that the sector of the business, management support for IA, the
independence of internal audit, the objectivity of internal auditors, and the use of IA as a
management training ground all had a beneficial impact on IAE. In addition to the
aforementioned, Seif (2017) found that previous studies on IA effectiveness had found a
substantial correlation between IA quality, IA team competency, audit committee, top
management support, and IA independence and effectiveness.

However, Shewamene (2014) looked into the factors that affect the effectiveness of internal
audits in a few Ethiopian public sector offices and discovered that management support, the
presence of sufficient and skilled internal audit personnel, and the availability of an approved IA
charter all contributed to the effectiveness of internal audits. Although they were not statistically
significant, the other two variables—management perspective and internal auditors'
organizational independence—had a favorable relationship with internal audit effectiveness.
Hawa (2016) discovered that the effectiveness of internal auditing is influenced by competency,
independence, management support, and organizational context. Thus, the study will develop the
following hypothesis.

35
 ● H7: There is a positive & significant relationship between Approved audit characters and
internal audit effectiveness in the study area.

2.3. Conceptual Framework

Based on the previous research works such as Meskerem (2023); Mihret & Yismaw (2007);
George, et al. (2015); Hella & Mohamed (2016) and Seif (2017); Workneh (2024); Meskerem
(2023); Samuel (2023); Aklilu (2022); Amare (2023); Meseret (2022), in light of the above
theoretical literatures and empirical review, the conceptual framework model will be developed
to show how the series of independent variable (IA practices) namely the audit quality, audit
character, audit committees, independence of IA, competence of IA, management support, and
organizational setting are related with the dependent variable internal audit effectiveness (IAE).
The researcher proposed the model in figure 2.1 to predict how the antecedents of independent
variables influence the overall impact on effectiveness of internal auditing.

Figure 2.1: Conceptual framework

Independent Variables= Internal Audit Practices

Organizational setting H1 (+) DV=IAE

(OS)

Top Management H2 (+)

Support (TMS)

Competency of Internal
Auditors (CIA) H3 (+)
Internal Audit
Effectiveness (IAE)
H4 (+)
Independence &
Objectivity of Internal
auditors (IOIA)
H5 (+)
Existence of Audit
Committees (EAC)

H6 (+)
Audit work Quality
(AWQ)
36
 H7 (+)
Approved Audit
Characters (AAC)

Source: Developed based on literature reviews (2025).

37
 CHAPTER THREE: RESEARCH METHODOLOGY

3.1. The Study Area

As per the annual report of Wegagen Bank (2023), Wegagen Bank S.C. was established on June
11, 1997. The bank came into being with 16 visionary founding members who recognized the
critical role that financial institutions would play to create a sustainable economic development
and raised an initial capital of birr 30 million and a paid up capital of birr 2.3 billion. The
number of shareholders reached 3,199 while the total capital (including paid-up capital, share
premium and legal reserves) reached over Birr 6.9 Billion as at June 31, 2023. The Bank has a
network of 410 branches of which 165 are in Addis Ababa and the remaining are located in other
cities and towns of the country. The bank currently has 2.5 million numbers of customers in
Ethiopia of which 621,567 numbers of customers are found in Addis Ababa. The vision of the
company is to be one of the ten most reputable and competent banks in Africa by the year 2025.
The mission statements of the company include optimizing the stockholder value through
sustainable growth and profitability; provide a wide range of innovative and customer focused
Banking products and services; boost operational excellence by employing state-of-the-art
information Technology; be the employer of choice by creating a conducive working
environment wherein employees achieve their career aspirations and the core values of the
company include Honesty, integrity and loyalty; Service Excellency; professionalism; learning
and innovation; employee satisfaction; respect and dignity; social responsiveness; good corporate
governance and equal employment.

Vision; Aspiring to be a champion of excellence in banking business in Ethiopia.

Mission; Maximize stakeholders’ value by providing diversified banking services through

competent and motivated employees, and up-to-date technology.

Core Values

● Teamwork; We collaborate and work collectively to meet our common goal We promote
and support a diverse, yet unified team
 ● Integrity; We do the right thing, even when no one is watching, we keep our word and
honor our commitments We maintain confidentiality and privacy of all stakeholders

● Innovation; We adapt and respond rapidly to changes We encourage creativity and new
ideas

● Responsiveness; We provide prompt and convenient customer service

3.2. Research Design

According to Kothari (2004), research design is essential to guarantee that the various research
activities go smoothly and that research is as successful as feasible, providing the most
information with the least amount of loss of time, money, and effort. Research design is the
process of establishing guidelines for data collecting and analysis that strike a balance between
procedural efficiency and study aim relevance. The study design, which is really the conceptual
framework that directs research, includes the strategy for gathering, measuring, and analyzing
data. Consequently, a descriptive and explanatory research strategy will be used in this
investigation. While explanatory research is used mainly to investigate the influence of
independent variables over dependent variables, descriptive research allows the researcher to
make investigations with predictions, narration of events, and conclusions based on the
information obtained from relatively large and representative samples of the target population. In
order to examine and ascertain the impact of independent variables—that is, the factors that
affect the efficiency of internal audits—on the dependent variables (IAE) shown in the
conceptual framework, this study employed a combination of descriptive and explanatory
research designs. For this study, a descriptive research design will be used to describe the current
state of affairs during the study period, while explanatory research will be used to investigate the
impact of independent variables (internal audit practices as stated in the conceptual frameworks)
on dependent variables (internal audit effectiveness). This is mainly because descriptive and
explanatory research types enable the researcher to conduct investigations using predictions,
event narration, and drawings.

3.3. Research Method

The research methodology used in the study was mixed. Many researchers now use a blended
strategy to lessen the shortcomings of both qualitative and quantitative methods. One drawback
of qualitative design is that the knowledge generated might not be applicable to other individuals
or situations (i.e., the findings might be specific to the small number of participants in the study);
the findings are more susceptible to the biases and peculiarities of the researcher, etc. Another
flaw in quantitative design is that the knowledge generated could be too general and abstract to
be applied directly to particular local circumstances, settings, and people (Kothari, 2004). Based
on pragmatic knowledge claims, a mixed research strategy tries to address the shortcomings of
both quantitative and qualitative approaches.

3.4. Data Sources and Data Collection Instruments

3.4.1. Data Sources

For this investigation, both primary and secondary data sources will be used. The majority of the
primary materials are obtained via suitable, organized surveys. Interviews with the organization's
management will be conducted to support the questionnaire survey. To support the findings of
primary data for a succinct explanation of the discussion of findings section with such arguments
from the prior literature, secondary sources of data were collected from various books, journals,
websites, empirical evidence, and documents pertaining to the issues under study.

3.4.2. Data Collection Instruments

Questionnaires, interviews, document analysis, and field observations with checklists prepared
for the variables (internal audit techniques) are essentially the data gathering tools. Wegagen
Bank S.C. workers were given structured questionnaires to complete, managers were given semi-
structured interviews, and, lastly, document analysis was done using checklist observation for the
triangulation approach. Common research instruments that are used to gather data, particularly
primary data, include observation, questionnaires, and interviews. Consequently, questionnaires,
interviews, and observation will all be used in this study.

3.5. Data Analysis and interpretation techniques

Data processing and analysis is an important part of the whole survey operation. Descriptive and
inferential statistics of correlation and regression analysis will be used to analyze the collected
data. Regression analysis will be used to know by how much the independent variables’ (audit
quality, audit character, audit committees, independence & objectivity of auditors, organizational
setting, management support, auditor’s competency) influenced the dependent variable
(effectiveness of IA). To test the direct effect of the independent variables on the dependent
variable, the researcher will use multiple linear regression. The reason behind choosing multiple
linear regression for the study is the data collection tool prepared in the form of Likert scale
where a series of minimum four or more mutually inclusive Likert items are combined into a
single composite score/variable and analyzed at the interval measurement scale (Boone &
Boone, 2012). Correlation analysis is also conducted to measure the strength of the association
between the dependent & independent variables. More so, descriptive analysis is also used for
the demographic factors and for the raised total questions. The results of semi- structured
interview questions are analyzed qualitatively. Tools like tables and percentage are used and data
analysis will be performed by using SPSS Version20 software.

3.6. Sampling Design and Sampling Theory

3.6.1. Sampling Design

According to Cresswell (2009), A sample design is a specific strategy for selecting a sample
from the sampling frame. It describes the method or approach the researcher would use to choose
a few sample units from which conclusions about the population are derived. A component of
statistical practice that deals with the selection of individual observations meant to provide some
insight into a population of interest is sampling design. Each observation assesses one or more
attributes, particularly for statistical inference. Survey weights must frequently be applied to the
data in order to account for the sample design when an observable entity is counting in order to
differentiate between items or people. Practice was guided by the findings of statistics and
probability theory. Therefore, the sampling design (sampling frame and sampling units) required
in this study encompassed all employees, internal auditors, managers of the Wogagen bank SC.
Head office unit and some selected East Addis Ababa district branches.

3.6.2. Sampling Theory

According to Kothari, (2004), the sampling theory is basically of two types. These are non-
probability sampling and probability sampling. For the purpose of this study the researcher will
use a non-probability sampling of convenience sampling method to select the samples from the
available population. The researcher decided to employ a convenience sampling method because
it is actually impossible to carry on a probability sampling because there is no point in time
during which all employees of the bank are available due to different reasons and it is not
possible to contact everyone who may be sampled. In order to determine respondents of the
questionnaire, the researcher classified the workers into those who fill the questionnaires and
those who reply to the interview. Accordingly, those who fill the questionnaires and respond to
the interviews are the employees & managers of the organization respectively.
The sampling technique involves non probability convenient sampling from all employees of the
organization where all have the same information concerning the issues. Then questionnaires
were distributed for each sample. In order to determine the sample size as those of studies used
similar to the one you plan. The measurement of sampling error is usually called the ‘precision
of the sampling plan’. If we increase the sample size, the precision can be improved. But
increasing the size of the sample has its own limitations viz., a large sized sample increases the
cost of collecting data and also enhances the systematic bias. Thus, the effective way to increase
precision is usually to select a better sampling design which has a smaller sampling error for a
given sample size at a given cost. In practice, however, people prefer a less precise design
because it is easier to adopt the same and also because of the fact that systematic bias can be
controlled in a better way in such a design (Kotari, 2005).

The target population of Wegagen Bank SC. There Are 741, 520 from Head office unit and 221
from East Addis Ababa district branches employees. According to Cresswell (2009) the sample
size determination depends on the availability of finance and time and not necessarily on the
entire population. To arrive at a good estimate of the sample size in any particular conditions
sampling theory has little help. Hence because of time and financial constraints, from the total
population of 741 employees of the bank, 260 respondents are drawn to collect the necessary
data using the following simple formula. Where n= the sample size, N= the population size and
e= the margin of error= (0.05). In the East Addis Ababa district of Wegagen Bank there are
about 46 branches (Wegagen Bank annual report, 2024). The sample size is determined based on
the following simplified formula (Yemane, 1967).

Where, n= sample size, and N is the total population size, which is 741, e = the level of precision
(acceptable error) and its value is 0.05. Accordingly, the sample size for the study was calculated
as shown below:
(N ) 741 741
n= 1+ N (e ¿¿ 2) ¿
n= 1+ 741(0.05)
2
n=
2.85
=260

The researcher has prepared and administered a total of 260 questionnaires to collect the primary
data from employees of the selected branches according to the proportionality sample in the
study.

3.7. Validity and Reliability of the Study

3.7.1. Validity of the Study

According to Kothari (2004), validity is the most critical criterion and indicates the degree to
which an instrument measures what it is supposed to measure. Validity is the extent to which
differences found with a measuring instrument reflect true differences among those being tested.
The following steps will be taken to ensure the validity of the study: all items applied to measure
constructs will be adopted from validated sources from literatures, data will be collected from the
all employees of the bank to determine the valid information and data will be initially cleaned for
potential non-response, invalid answers, or any incomplete questionnaires. The content validity
of this research study is the extent to which a measuring instrument provides adequate coverage
of the topic under my study and the instruments contain a representative sample of the universe.
3.7.2. Reliability of the Study
Reliability refers to whether an instrument can be interpreted consistently across different
situations. Reliability differs from validity in that it relates not to what should be measured, but
instead to how it is measured. The test of reliability is another important test of sound
measurement. A measuring instrument is reliable if it provides consistent results. The quality of
reliability is satisfied by an instrument adopted from validated sources from literature. Hair et.
al., (2010) and Cohen (2013) stated that an alternative measure of reliability as internal
consistency is the Cronbach’s Alpha, and also frequently referred to as the Alpha coefficient of
reliability.

The Cronbach’s Alpha provides a coefficient of inter-item correlations, that is, the correlation of
each item with the sum of all the other relevant items, and is useful for multi-item scales. In this
study, Cronbach’s Alpha will be used to measure the internal consistency of the items used.
Based on the idea proposed by Hair et. al., (2010) the higher the Cronbach’s Alpha value, the
higher the internal consistency and based on their suggestion proposed if the Cronbach’s Alpha
value is higher than 0.70, then it shows that the reliability of measurement is high. All items
applied to measure constructs will be adopted from validated sources which have an acceptable
internal consistency. According to Hair et. al., (2010) the general consistency of the entire scale
agreed upon lower limit for Cronbach’s Alpha is 0.70 (see table 3.1 below).

Table 3.1: Cronbach’s Alpha value items

S. Variables of the study No. of items

N

1 Organizational Setting (OS) 5

2 Independence and objectivity (IO) 5

3 Competency of Internal Audit staffs (CA) 5

4 Management Support of Internal Audit (MS) 5

5 Existence of Audit Committee (EAC) 5

6 Approved internal audit character (AC) 5

7 Audit Work Quality (AQ) 5

8 Internal Audit Effectiveness (IAE) 10

Average score 45

Source: Survey (2025)

3.8. Model Specification

To identify the relationship between dependent & independent variable, multiple linear
regression model is estimated using internal auditing effectiveness as the dependent variable and
determinants of internal auditing (audit quality, audit character, audit committees, organizational
setting, independence of auditors, competency of auditors, management support) as the
independent variables. The model is stated as follows:
 Yi = β0 + β1X1i + β2X2i +… + βnXni + εi
Where, Yi = dependent variable for ith observation;
Xi = independent variable for ith observation;
β0 = the Y- intercept;
βn = regression coefficient;
εi = error term for ith observation.

Accordingly, the above basic regression model is rewritten in terms of the variables used in this
research’s conceptual framework as follows:

IAE = β0 + β1AQ + β2AC + β3AC* + β4CA + β5IOA+ β6MS+ β7 OS+ εi

Where, AQ= Audit quality (dependent variable)
AC=Audit character (independent variable)
AC*=Audit committees (independent variable)
CA= Competence of internal auditors (independent variable)
IOA = Independence & objectivity of IA (independent variable)
MS = Management support (independent variable)
OS= Organizational setting or independence
IAE= Internal audit effectiveness

3.8. Ethical Consideration

Ethics are the rules or guidelines for behavior that set right from wrong. They aid in
distinguishing acts that are acceptable and inappropriate. Why do ethical issues in research matter
so much? First, ethical norms guard against data fabrication and falsification, which advances the
main objective of research—the search for knowledge and the truth. Additionally, ethical
behavior is essential for collaborative work because it fosters an atmosphere of mutual respect,
trust, and accountability among researchers. According to Fouka & Mantzorou (2011), research
ethics are crucial in our day-to-day activities and demand that researchers preserve the dignity of
their subjects and properly disseminate their findings.
According to Rebecca (2014), Cooper and Schindler (1998) claim that the aim of research ethics
is to guarantee that no one is hurt or has unfavorable effects from research operations. In order to
encourage candor and openness, respondents were kept anonymous. Since the respondents are
not compelled to provide their names or other personal information, it is important to underline
the importance of anonymity. In no way does the researcher attempt to sway the respondents'
answers to the surveys. The purpose of the research should be made clear to the participants, and
the organization and the participants will be informed of the study's goals in order to secure
consent.

As for myself, I wanted to make sure that everyone who would benefit from this planned study
knew that I would always be completely honest and sincere in telling the facts as I know it and
not in a way that would mislead or deceive them. In order to give each respondent my full
attention, I treated them with politeness, civility, tolerance, and acceptance of their opinions
regarding my surveys and interviews without showing any bias. Presenting the poll findings
under the guise of equity and justice required me to be completely accountable, respectful of the
cause, and self-restrained.
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 Appendix-I: Questionnaires (in English)

FACULTY OF BUSINESS AND ECONOMICS

SCHOOL OF GRADUATE STUDIES
DEPARTMENT OF ACCOUNTING AND FINANCE
Structured-Questionnaires
Dear Respondents:

The objective of this questionnaire is to explore information regarding factors affecting internal
audit effectiveness the research is conducting for the partial fulfillment of Master of Business
Administration in Accounting and Finance at Mekelle University. The questionnaires are
distributed to Wogagen bank S.C. employees in Head office unit & East Addis Ababa district
branches. The results of the study are expected to contribute to evaluate and determine the effect
of internal audit practices on internal audit effectiveness in Wogagen bank. Therefore, your
honest and genuine participation by responding to the questions is highly appreciated. Your
answers are completely confidential. Your name will not be written on this form, and will never
be used in connection with any of the information you tell me.

Thank you in advance for your support and participation

With best regards,

Mesay Amha

Cell phone: +251-911-852-604

Email address: mesayamha80@gmail.com

Part I: - General Information of respondents

Instructions: Please tick () from the alternatives that are most applicable answer to you in respect of each of the f

1. Sex: A) Male B) female

2. Age: A. 20-30 B. 31-40 C. 41-50 D. 51-60
3. Academic Qualification (Educational background)
A. College Diploma B. Bachelor’s Degree C. Master’s degree D. PhD degree
4. Professional certification (if any):
A. Certified Internal Auditor (CIA)
B. Certified Public Accountant (CPA)
C. Certified Management Accountant (CMA)
D. other (specify) _______________
5. Field of study:
A. Accounting and Finance C. MBA
B. Economics D. Other Specify ________________
6. IA department staffing: A. Sufficiently staffed B. Moderately staffed C. Poorly staffed
7. Experience: A. 1-5 years B. 6-10 years C. 11-15 years D. 16-20 years E. Above 21

Part-II: General Questions related to research questions

The table below consists of a

list of items to be rated based on your level of agreement, please indicate a tick

mark on each statement of your agreement in the box corresponding to a number from 1 to 5 which rep

in the table below. The values of scales are 5= Strongly agree (SD), 4= Agree (A), 3=
Neutral (N), 2= Disagree (D), 1= Strongly Disagree (SD).

Strongly disagree (1) Disagree Medium (3) Agree (4) Strongly agree (5)
(2)
N Stro Ag M Dis Strongl
o ngly ree edi agr y
. Agre u ee Disagre
e (4) m (2) e (1)
Measurement Variables
(5) (3)

A Organizational Setting of Internal Audit (OS)

1 The internal audit function of the bank is given a

sufficiently high status in the organizational structure.

2 Internal audit department has an adequate budget given the

amount of auditing work planned.

3 There is a complete internal audit policies and procedures

to guide internal audit work.

4 The bank use sound established criteria to evaluate

auditees' practices

5 The internal audit department is large enough to

successfully carry out its duties.

B Independence and objectivity of internal audit (IO)

1 Internal audit staff is sufficiently independent in

performing their professional obligations and duties

2 Internal audit staff does not assess specific operations for

which they were previously responsible

3 Internal audit staff has free access to all information,

departments and employees in the organization

4 Internal auditors feel free to include any audit finding in

their audit work and directly report to responsible body

5 Internal audit provides reports to the board of directors

(audit committee)

C Competency of Internal Audit staffs (CIA)

1 Internal auditors have a deep professional knowledge on

the overall activities of the department.
2 The bank audit department or division has progressed in
terms of appropriately qualified or professional staff.

3 Internal auditors are proactive (controlling a situation

rather than just responding).

4 Internal auditors attend educational seminars for

continuous training

5 There is communication between internal auditors and

auditees

D Management support of Internal Audit (MS)

1 Management take timely corrective action based on

internal audit recommendations

2 Senior management is aware of internal audit’s needs/

basic resources/

3 Internal audit department has sufficient staff to

successfully carry out its responsibilities

4 Senior management provides sufficient support and

encouragement for training and developing the internal
audit staff.

5 There is management commitment to strengthen internal

audit division

E Existence of Audit Committee (EAC)

1 The audit committee adopts the internal audit department

strategy and plans

2 The chief audit executive actively involved with the audit

committee

3 The audit committee reviews the internal auditors’ reports

and take immediate action

4 The existence of audit committee enhances internal audit

independence

5 The audit committee reports to the board of directors that

 allows the internal audit to achieve its responsibilities.

F Approved internal audit character (IAC)

1 The purpose and authority of internal audit charter is in

line with “Standards for the Professional Practice”
formulated by the Institute of Internal Auditors

2 The Charter clearly defines internal audit's role in

evaluating and contributing to the development of risk
management, control and governance processes Internal
audit’s role in relation to any fraud related.

3 The Charter defines the nature and scope of the assurance

and consulting services provided to the organization
(including any assurances provided to parties outside of the
organization) that it can provide independent and objective
assurance.

4 An internal audit Charter defines the purpose, authority

and responsibility, within the organization, consistent with
the Definition of Internal Auditing, the code of ethics and
the Standards

5 The internal audit character clarified obviously

G Audit Work Quality (AWQ)

1 The annual audit plan is determined completely by the

internal auditor.

2 Auditing is conducted on areas which are very significant

to the organization

3 The internal audit is able to cover all organizational units

and all issues.

4 The responses from parties which are being audited are

submitted in written form and their response is relevant
and comprehensive.

5 There is regular follow-up by the internal audit staff to

examine actions taken to correct the problems found.
H Internal Audit Effectiveness (IAE)

1 Internal audit is performed in accordance with the IIA

Standards (ISPPIA)

2 Internal audit makes appropriate recommendations for

improving the organizational processes

3 Internal audit evaluate and improves the effectiveness of

risk management and governance process

4 Internal audit assesses that organizational missions are

consistent with organizational objectives

5 Internal audit assesses that risk responses are appropriate

and align with the bank’s risk appetite.

6 Internal audit reviews the effectiveness and efficiency of

operations and programs

7 Internal audit communicates timely the engagement results

8 Internal audit establishes a follow-up process to ensure that

corrective actions have been effectively implemented

9 Internal audit evaluates the potential for the occurrence of

fraud and how the organization manages fraud risk

10 Internal audit reviews the reliability and integrity of

financial information

Please suggest if you face any kind of idea in evaluation of internal audit effectiveness in your
bank that is not addressed in this questionnaire.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________.

Thank you for your support and participation (concerted effort)!!

 Appendix-II: Semi-Structured Interview

FACULTY OF BUSINESS AND ECONOMICS

SCHOOL OF GRADUATE STUDIES
DEPARTMENT OF ACCOUNTING AND FINANCE

Semi-structured Interview Questions

Dear respondents, the purpose of this interview is to gather data regarding the Effect of Internal
Audit Practices on Internal Audit Effectiveness in Wegagen Bank Sc. Head office unit. The study
is purely for academic purpose and thus does not affect you in any case. Your honest, sincere,
timely response is duly acknowledged for the success of the study. Therefore, I kindly request
you to respond to each question item carefully.

1. Does your bank have the practice of internal auditing?

2. What kind of internal audit practice is carried out in your office as a department?

3. How do you manage & evaluate the process of internal auditing activities in your bank?

4. In your opinion, to what extent does good internal audit with the employee result in
organizational internal audit effectiveness?
5. In your view, how the process of internal audit practices enabled you in building
organizational audit effectiveness in your bank?

6. How much do you think that the acts of employees of the bank, especially those on the
internal audit staff, affect the level of effectiveness of internal audit?
7. In your suggestion, how do you rate the bank’s willingness in practicing the internal
audit?