THEORETICAL BACKGROUND
IA creates value added for the company either within the meaning of
Institute of Internal Auditors (IIA) opinion, the core function of the Internal Audit Function
(IAF) is the provision of impartial advice to the management with regard to risk
support the management in unveiling and controlling key risks and, moreover, ensure
the effectiveness of the internal control system and contribute to the avoidance of
critical developments and events within the company (Ge & McVay, 2005).
In every sense, corporate control and audit issues can be improved by a proper
valuation and collaboration with other governance bodies. Eulerich et al. (2013)
revealed that design of the IAF's integration into the corporate organization crucially
Based on 3,294 responses of the 2010 Common Body of Knowledge (CBOK) study
from 26 EU-member states, they proved the influence of the IA on the design and
Abdolmohammadi (2011) further found evidence that IAF plays a monitoring role in
corporate governance which is useful in assessing the current size of IAF and the role
that it can play in corporate governance. Through the provision of effective support to
important element of the companys internal corporate governance. It turns out also that
a supportive control environment has a positive impact on the relative size of the IAF,
However, because of the new orientation that IAF has acquired through dynamic
years and due to the presence of essential information asymmetries and conflicts of
interest between management and shareholders that lead to a risk of adverse selection
and moral hazard (Jensen & Smith, 1985), the traditional concept of principal-agent
must be incorporated with the two-staged model by Tirole (1986), where it also extends
management board which is responsible for the establishment and maintenance of IA.
On behalf of the management board, the IAF is assigned to supervise the boards
subordinate bodies and, among other things, evaluate the internal control system
(Schartmann & Lindner, 2006). Hence, the internal structure of the IAF and audit fields
audit and control units and optimally utilize this control function as the audit activities
establishment and adoption of controls to ensure and track whether IAF performance is
in line with its roles and objectives and controls are consistent with the organizations
measures in evaluating the IAF and if, they are, what performance measures they used
from the perspective of the internal auditors. The results of the study significantly
contributed to the literature by identifying the key performance measures for the IAF and
performance. It has revealed that these companies are using both quantitative and
The main objective of internal audit in the government, specifically in the local
safeguard government resources against waste, fraud, and inefficiency, to measure the
extent of the operating departments' compliance with government policy and to evaluate
the overall efficiency of the operating functions (Adams, 2004). Basically, internal
out that it is becoming more and more relevant in a context where an increasing number
In line with such, Mendoza (2008) in her paper stated that the Philippines does
not lack initiatives pertaining to internal auditing. As early as 1962, the Philippines
already had a law for internal auditing the Republic Act (RA) 3456 or the Internal
Auditing Act of 1962 .The Department of Budget and Management (DBM), together with
the Commission on Audit (COA), and the Internal Audit Office of the Office of the
President, has recently launched the Philippine Government Internal Audit Manual
Systems (NGICS) that was issued by DBM in 2008 (The Official Gazette, 2011).Budget
and Management Secretary Florencio B. Abad under Aquinos Presidency said the
issuance of the PGIAM will improve the roll-out and implementation of internal control
and internal audit systems in government institutions and stressed out how internal
The Internal Audit in the public sector faces a lot of challenges which inhibits the
functions ability to manifest its duties within the organization. Modibbo (2015), in his
study, cited three common problems relating to internal audit efficiency which exist in
authority.
Modibbo (2015) believed that in order for an internal audit to be effective, all the
features of internal audit (independence, reporting, audit plan, structure, resources etc.)
should all be put in place. Also, in the research conducted by Sahdan et al. (2007), it
has been concluded that there exists a continually increasing failure and
audit is in both public sectors and private sectors. Thus, with such finding, it
emphasized and signaled the great importance of internal audit to both sectors.
Furthermore, the two greatest inhibitors to efficient and effect operations are the lack of
audit personnel and audit personnels lack of appropriate skills and competency for the
tasks required and expected of them (Sahdan et al., 2007). In support to the various
studies aforementioned, Ogechi (2013) concluded in her paper regarding the challenges
of internal audit in Nigerian public sectors that the internal control system is not effective
enough to detect the incidence of fraud among public officials and consequently, this
has a negative effect on the efficiency of the internal audit function. On top of that, the
lack of numbers of audit personnel, insufficient funds and lack of segregation of duties
in the internal audit department is also a hindrance to the effectiveness of the internal
audit in the Nigerian public sector (Ogechi, 2013). Having enumerated a catalogue of
some of the impediments that the internal audit function faces, Nwannebuike and
Nwadialor (2016) have enumerated the following, to remedy some of the problems, and
these includes:
1. The recruitment process for internal audit staff should be thorough and
Davies (2001) states in his research that in the public sector, internal audit seems to
be having a facelift, in the sense that there has been an increased emphasis on
corporate governance and public reporting has placed the internal auditor into a more
focused position. With regard to the important role of internal audit in corporate
governance, Davies (2001) elaborated that far more authorities now either had an audit
before. Further, IIA (2012) remarked that governance principles are critical to the public
sector since the latter holds coercive powers over citizens and economic enterprises,
and thus they must enact protections to ensure fairness and accountability in the use of
such powers and in the delivery of the expected services. Good public governance
requires fair and impartially enforced laws and regulations (IIA, 2012). In a nutshell,
Over the years, the role of internal auditors inside the organization has
progressed. But until now, there are still some who struggle to prove their relevance and
necessity within the organization (Palfi & Bota-Avram, 2009). The perceptions and
expectations of other organizational parties affect the value of Internal Audit Function.
Expectations of other organizational parties affect the value of Internal Audit Function.
Research by Sarrens & De Beelde (2005) concluded that the top management and
audit committee have high expectations for the IAF. However, it was pointed out by
Gupta (2004) that line managers have negative perceptions about the IAF. Furthermore,
Gupta (2004) expressed that line managers are unwilling to cooperate with the IAF and
that they are afraid that the works of the internal auditors would divulge their faults and
errors.
Inasmuch as internal audit can add significant value to the entity, it is perceived
that management and internal auditors have a close relationship with each other
(Shamsuddin et al., 2015). That is why; it is necessary and important for public sector
The IAF has also been acknowledged because of its unique role in risk
management. Further, IAF has been recognized to reduce risks, improve control risks,
lessen fraud risks, reduce opportunistic behaviors and perform other non-financial
statement related task within an organization (Ege, 2015; Prawitt, et al., 2009). The
study conducted by Coetzee & Fourie (2009) regarding the role of internal audit function
in terms of risk, concluded that the perceptions of Chief Executives (CE) and
Chairperson of Audit Committee (CAC) should increase with regard to the value that IAF
can provide, which is an indication that the IAF has been expected to provide greater
The internal audit plays a valuable role to an organization and its functions and
roles are said to have made a great impact to overall performance. This might not be
made certain to the senior management. Thus, Coetzee & Fourie (2009) conducted a
study to know whether the perceptions of the senior management, including the audit
committee, on the value that IAF can provide corresponded to the activities that it
Research by Khoury (2011) stated that internal auditing in the public sector
past events to various types of management. But in recent times and due to modern
money and efficiency in the delivery of services. Larger and more complex operations
demand greater competency and professionalism from internal auditors to minimize and
manage risk (Khoury, 2011). Ever more larger and complex systems require greater
competitiveness, thus internal audit has had to become ever more professional
(Gansberghe, 2005).
each department who have the primary responsibility of supervising their staff.
Consequently, their perception as to the value provided by the provinces internal audit
whether public resources are managed responsibly and effectively to achieve intended
results, auditors help public sector organizations achieve accountability and integrity,
improve operations, and instill confidence among citizens and stakeholders (Goodson et
al., 2012). Internal auditors which are the focus of this study and also the key employee
of public offices, are expected to work independently and objectively to enhance high
quality of public services, achieve good internal control system, avoid corruption, ensure
Various theories are used to support the perceived value of internal audit function
as seen through its roles in the organization. As written by Garitte (2015), he defined the
value of internal audit through its abilities to tell whether or not the company is poorly
managed, to identify the areas where the critical risks are being poorly managed or not
identified, and to determine if the company objectives are being met. The roles of the
internal audit function may differ depending on the needs of a particular entity. However,
its roles in the government may differ from its roles in the commerce and industry.
Internal Auditors Global (2012) has strengthened the value of internal audit in the
public sector by justifying the inherent need for internal audit in the government by
stating that the inherent risks in the principal-agent relationship between the
government and the public are reduced through effective audit activities. The
organizations said that as the public needs a third party to attest the credibility of the
governments assertions, the higher is the perceived value of internal audit functions
within the government. Not only did the IIA (2012) provided the roles of oversight and
insight of government activities but had also supplemented other perceived roles of
activities that are interrelated with the other government entities and are essential to the
On the other hand, the rapid change that is happening in the business sector has
forced the internal auditors to evolve from their traditional roles. KPMG (2007) has
management, it must be able to open new doors of opportunities. In one of its published
advisories, KPMG (2007) has provided three new roles that could help the internal audit
internal audit tasks means that it must be sovereign in a way company management
should never influence its work, information, conclusions, and evaluations. In this way
the internal audit report becomes a means of communication between internal audit and
company. In addition, Odoyo et al. (2014) found out that the core role of internal audit in
the effectiveness of risk management. When internal auditing extends its activities
beyond this core role, it should apply certain safeguards, including treating the
Internal audit determines the reliability, reality, and integrity of financial and operational
The perceived value of an internal audit function (IAF) may be different among
defined by Garitte (2015), the value of internal audit is the ability to tell whether or not
the company is poorly managed, to identify the areas where the critical risks are being
poorly managed or not identified, and to determine if the company objectives are being
met. In the situation of any government, the need for internal auditors in the public
sector is justified by the risks in the principal-agent relationship between the government
(agent) and the public (principal). These risks are being reduced through effective audit
determine whether internal controls are well designed and properly operated (PGIAM,
2011). Because of these risks, the Department of Budget and Management created the
internal audit function in the government as mandated under Republic Act No. 3456 or
the Internal Auditing Act of 1962, as amended by Republic Act No. 4177.
This research study is anchored based on the roles of the internal audit function
Government Internal Audit Manual (PGIAM). PGIAM (2011) gives the five functions or
roles of the internal auditors in the Philippine government setting. It involves advising
and operations audit, conducting management and operations audit of the government
functions, programs, projects, activities with outputs and determining the degree of
compliance for each, & reviewing and appraising systems and procedures,
Lastly, they perform other related duties and responsibilities as may be assigned or
designated.
Review and
appraise systems
and procedures,
organizational
structures, and Analyze and
Conduct accounting-related evaluate
management and documents and management
operations audits of practices deficiencies and
functions and assist top
determine the management by
degree of recommending
compliance realistic courses of
action
Advise the
Department Functions/Roles of Perform other
Head/Heads of Government Internal related duties and
Agency on all Auditors
Auditors responsibilities as
matters relating to [PGIAM]
[PGIAM] may be assigned or
management
(DBM, 2011) designated
control and
operations audits
The main concern of this study is the perceived value of IAF in Cebu Provincial
Capitol. The conceptual framework shows the process on how the researchers will
determine the proposed improvements that will increase the operating managements
perceived value of IAF. The primary respondents of this research were the line or
operating managers and IAF personnel of Cebu Provincial Capitol. The researchers
conducted survey questions related to the problem of the study and also to know the
perceptions of the respondents about IAF. Further, the answers from the respondents
were gathered for the classification of data in order for the researchers to process the