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An Empirical Study on Effectiveness of Internal Auditing for Listed Firms inTaiwan Jung-Hua Hung National Central University

Hui-Lin Han National Central University

ABSTRACT: The function of internal auditing has become more and more important to thecompanies in Taiwan, because the market environment became more and more competitive,and several business crises happened recently. This study tries to identify the factors thataffect the effectiveness of internal auditing for listed firms in Taiwan. A sample of 210 listedmanufacturing firms was drawn. We mailed a different questionnaire to the management, thehead of audited department 1, and the head of internal auditing department of each company,and the overall response rates were 48%, 64%, and 70%, respectively.

Findings reveal that the factors that affect management’s perceiving effectiveness aremanagement’s attitude, controller’s attitude, the probability of internal auditors’ promotion,the implementation of performance evaluation, the establishment of job description, and thetraining and professional abilities of internal auditor. Secondly, the factors that affect auditeddepartment head’s perceiving effectiveness are internal auditor professional abilities, andthe combination of organization formalization and professional abilities. Finally, thefactors that affect the progress of annual auditing plan are management’s attitude,controller’s attitude, the organization position of internal auditing department in a company,the probability of internal auditor’s promotion, the implementation of performanceevaluation, the establishment of job description, the training and professional abilities ofinternal auditor, and the combination of organization formalization and the professionalabilities. The implications and limitations of these findings for the practice and theory ofinternal auditing are provided.

Key words: Internal auditing

1Audited department is every department in a company, except auditing department, because all of them must be audited by auditingdepartment.

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I. INTRODUCTION

Owner or management of a business cannot continue to have personal contact with or toknow everything about the business, as the business increases in size. Therefore, it isnecessary to delegate to achieve the objectives of a business effectively. However, it willcause agency problems between management and its subordinates, board of directors andmanagement, and minority investors and board of directors. Fortunately, we can use somecontrolling activities-such as auditing, formal control systems, budget limit,…etc.-tomitigate these problems(Jensen and Meckling 1976).

The objectives of this study are: (1) to explore the extent to which listed firms implementtheir internal auditing; (2) to identify the factors that influence the effectiveness of internalauditing; (3) to provide some suggestions, based on the results of this study, to industries andrelevant government departments.

Exploring how the listed firms implement their internal auditing and identifying whatkinds of factors influence the effectiveness of internal auditing are very important , becauserecently, some big companies had financial crises2 and the main reason was their internalauditing did not function well. In 1986, The Ministry of Finance in Taiwan issued “TheCritical Points of Establishing Internal Control Systems for Listed and Public Firms”, andasked all of the listed and public firms to refer to it when they set up their internal control andinternal auditing systems. Several years have passed since then, but we can still find some bigcompanies getting into trouble because of their bad internal control and internal auditingsystems. Do they face any problems in establishing and implementing internal control andinternal auditing systems? And how can the effectiveness of internal auditing be improved?We really need to address these kinds of questions, and then try to find the solutions for them.

The remainder of this paper is organized as follows. In the next section, a review ofstudies of the internal auditing and research hypotheses is provided. The methods and resultsof an empirical study are then reported. Finally, the implications and limitations of this studyare discussed.

II. LITERATURE REVIEW AND RESEARCH HYPOTHESES

The definition of internal auditing and objectives

According to the “Standards for the Professional Practice of Internal Auditing”, whichwas issued by The Institute of Internal Auditor, the definition of internal auditing is:“Internal auditing is an independent evaluation function in an organization, it examines andevaluates an organization activities, and provides services to the organization. It is a kind ofmanagement control, and works through measuring and evaluating the effectiveness of othercontrols.” In other words, internal auditing “controls” internal control. The objectives ofinternal auditing are: (1) appropriate control; (2) the reliability of information system; (3)assets protection; and (4) efficient use resources(McAvoy 1977). Thus, an internal controlsystem cannot function well without internal auditing.

2For example, a listed firm-Kung Nan company whose checks bounced; a commercial bank-Overseas Chinese Bank-operated derivativesimproperly. Both of them faced financial crises which had very negative impact on the whole society.

The relationships between internal auditors and board of directors

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Board of directors represents all stockholders to monitor management. However, most ofthe directors either are very busy or participate in daily operation of the company, therefore,they are not able to control management properly. As a result, nowadays, a lot of Americancompanies set up an audit committee to help board of directors to supervise management.The main responsibility of audit committee is monitoring financial reporting procedures,internal control system, and internal auditing and external auditing(Cook 1993). Most of theaudit committee members are outside directors, which can assure the objectivity of theirsupervising management(Menon and Williams 1994). Internal auditing department is animportant information source for audit committee, The Treadway Commission suggestedthat audit committee members and internal auditor should meet with each other regularly.The direct communication between them shows the independent position of internal auditorsin an organization, allows internal auditor to express their fair, impartial judgment andsuggestions, and increases the possibility of their suggestions being adopted(Verschoor andLiotta 1990).

In Taiwan, there are no audit committees in a company today, however, controller is avery similar position. According to Commercial Code of Taiwan, “A controller is electedfrom stockholders”,• “A controller cannot be director, manager or other employee in thesame company”, and “A controller can investigate a company’s operating and financialsituation at any time”. In addition, “The Critical Points of Establishing Internal ControlSystems for Listed and Public Firms” regulates that internal auditing department must handin the auditing report to controller to review. Finally, board of directors must have the right toselect and fire internal auditors, and to establish all kinds of guidelines for internalauditors(Morris 1978). The factors that influence the effectiveness of internal auditing

There are a lot of factors that influence the effectiveness of internal auditing. This studydivides them into environment and inside internal auditing factors, which are as follows.

Environment factors

Firstly, management attitude: management’s support is probably the most importantfactor in company environment(Stocks, Albrecht, Howe, and Schueler 1988). Theeffectiveness of internal auditing department mostly depends on management involvementand requirement3. Secondly, the attitude of board of directors: No. 7 of The Statements ofInternal Auditing Standards regulates that the head of internal auditing should communicatedirectly with board of directors regularly, and they should meet with each other withoutmanagement on the scene at least once a year, enhance the independence of internal auditing.Third, organization structure: if management provides internal auditing department with anindependent position inside an organization, it would have a positive influence on controlenvironment(Pushkin 1990).

3Management involvement and requirement means whether or not management uses auditing reports and takes the actions that internalauditor think is necessary.

The degree of autonomy and independence depends on the level internal auditor reports to,and internal auditing department should report both to audit committee and management in

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order to assure its autonomy and independence(Schroeder 1977). In addition, internalauditors and the audited activities should be independent of each other , and internal auditorsshould report directly to highest management(DeMarco 1980). Fourth, career planning:promotion opportunity is an important factor to attract excellent internal auditors(Schneider1970). An efficient internal auditing department should be regarded as a good place todevelop employees’ careers, because internal auditors can understand the whole operation ina company(Stock, Albrecht, Howe, and Schueler 1988).

The factors inside an internal auditing department

Firstly, the human resources policy of internal auditing department. It is related to whetheror not the limited internal auditors are used efficiently, and includes the following. (1)education and training: the education and training internal auditors received is an importantindicator of efficient internal auditors’ function(Stocks, Albrecht, Howe, and Schueler 1988).A good education and training should meet the department’s needs or objectives, so thatinternal auditing department has a well balance4(Schneider 1970). (2) people combination:people inside internal auditing department should have well balance and include anappropriate proportion of senior and inexperienced internal auditors. Thus, they can learnfrom each other and then the whole team can complete any different assignedmission(Schneider 1970). In internal auditing department, besides financial and accountingbackground auditors, more persons of different skills are needed to execute operatingauditing and provide consulting services(Vondra and Schueler 1993). (3) job description:internal auditing department should define its responsible areas and the necessary autonomyto reach its objectives, so that internal auditors can work according to the manual andenhance the probability of success(McAvoy 1977). Internal auditing regulations shouldinclude the objectives, authority, and report responsibility of internal auditing(Pushkin 1990).(4) performance evaluation: the performance evaluation of internal auditors includes twoparts; one is to evaluate internal auditors’ performance after completing every auditingactivity, and to review their salary raise and promotion opportunity once a year at least; theother is to evaluate the effectiveness for every internal auditing activity(Schroeder 1977).The performance of internal auditors can be evaluated by the head of audited department orby external auditors(De Lomba 1974).

Secondly, auditing planning. Auditing planning is to set up auditing objectives andstrategies. It can coordinate internal auditing objectives and company goals, and then helpinternal auditing department to reach maximum efficiency(McAvoy 1977). In designing anannual plan, internal auditing department can review all of the activities in a company. Inaddition, they must pay more attention to “risk” and audit risky areas morefrequently(Schroeder 1977).4 Well balance means in addition to having general professional abilities, such as audit report writing ability, internal auditors need to havesome other special professional abilities, such as computer auditing, so that the whole team can reach the highest professional level underlimited human resources.

Third, professionalism. Internal auditing is a very complicated professional field, whichneeds a wide range of knowledge, experience, insight, and maturity, in order to execute itsauditing well.

Therefore, professional license, integrity, independence, objectivity, knowledge, and

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experience are all very important (DeMarco 1980). Communication ability is also veryimportant. Internal auditors should regard communication as the tool to manage therelationship with their customers5, in order to create mutual reliability, and furthermore, toreach organizational goals(Stein and Holcombe 1994). In a decentralized organization,internal auditors must have quick and correct access to the information system of theirorganization, so they need two special skills: understanding the computerized database oftheir company, and being a good communicator and motivator (Haley and Mckeon Jr. 1990).

Fourth, approach to auditing. Internal auditors can use behavioral science concepts, that is,power and situational leadership, to enhance the possibility of audited departmentsadopting their suggestions. Internal auditors’ power is their professional knowledge, andsituational leadership is to give suggestions according to the maturity of audited department,that is: use “telling” at low maturity, use “selling”, “participating”, and “delegating”6 atmid-low, mid-high, and high maturity, respectively(McKanna 1987). A timely, efficientreport process is very important to make internal auditors reach the highesteffectiveness(Schroeder 1977). The way to report should make internal auditorscommunicate effectively with their customers, including high-rank management, auditcommittee, operating supervisors, and external auditors(Vondra and Schueler 1993). Afteraudit activities end, internal auditors should discuss audit findings with audited departments,then write audit reports according to the discussion. The audit report should include auditeddepartments’ opinions, positive audited findings, suggestions, and audited departments’responses(Morris 1978).

The measurement of internal auditors’ performance

Internal auditors provide different services to the customers inside and outside anorganization, thus the customers usually put different emphasis on evaluating theirperformance. This is discussed as follows.

The performance measurement by inside organization of internal auditors

Because working papers and audit report cannot completely reflect the characteristics,behavior, and attitude internal auditors have while they are working, a questionnaire survey

5The customers of internal auditing department include management, audited departments, and audit committee.6Telling is internal auditors tell audited departments directly about how to execute correction; selling is internal auditors give auditeddepartments some suggestions or sell them some ideas, and analyze the advantages and disadvantages for all of the alternatives;participating is when audited departments have ability but lack motivation, internal auditors should make a two-way communication withaudited departments and make decisions to take corrective action against auditing findings; finally, delegating is when audited departmentsare self-confident, willing, and able to take responsibility, internal auditors only provide little direction and support.

is necessary. The questionnaire issued from the head of internal auditing department to thehead of audited departments should include: the professionalism of internal auditingdepartment, the time period of completing an auditing project, the extent to which auditresults meet the demand of audited department, and the degree to which the head of auditeddepartments accept audit results(Sears 1991).

Quantitative measurement shows the efforts the internal auditors have made, not the

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results they reach, therefore, qualitative measurement usually provides more usefulinformation. In general, performance measurement includes the percentage of audit activitiesstarted as time schedule, the percentage of audit report issued within ten days aftercompleting auditing, the percentage of direct labor hours on total available hours, and thepercentage of annual audit plans completed on time and within financial budget; qualitativemeasurement includes the satisfaction of high-rank management to audit area, the usefulnessof audit results to mid-rank management, the extent to which mid-rank management acceptsand executes the audit suggestions, and the extent to which management relies onmanagement information system to provide accurate and reliable information for decisionmaking(Richard 1993).

The performance measurement by external auditors of internal auditors

A questionnaire survey was mailed to experienced partners and managers inCPA(Certified Public Accountant) firms. After studying the results with Delphi method, theresearchers found that important performance measurements of internal auditors are asfollows. (1) competence: the understanding of internal auditors about company operation andprocedures, the educational background of internal auditors, the understanding of internalauditors about new auditing trends and skills, the existing in-job training plans, and thequality and quantity of internal auditing supervision and management; (2) objectivity: theindependence of internal auditing department, which levels the internal auditors report to, theability of internal auditing department investigating any activity inside a company, the extentto which high-rank management supports internal auditing job, and the appropriateness ofaudit areas; (3) performance: the extent to which high-rank management readily executesinternal auditors’ suggestions, the extent to which high rank management supports internalauditing job, the audit areas, the quality and quantity of internal auditing supervision andmanagement, and the extent to which audited departments accept the audit findings andsuggestions(Gibbs and Schroeder 1980). In addition, The Institute of Internal Auditors ofU.S.A. and other researchers also suggested some performance measurements aboutcompetence, objectivity, and performance aspects.

Research hypotheses

Drawing on these lines of research, we propose that activities both inside an internalauditing department and outside the environment of internal auditing have influence on theperformance of internal auditing department. The following hypotheses are proposed.

H1: Outside environment of internal auditing department has influences on theperformance of internal auditing department.

We expect the attitude of both high-rank management and controller to internal auditingdepartment, organization position of internal auditing department, and the opportunity forinternal auditors to be promoted, to all have positive influences on the performance ofinternal auditing department, because: (1) most of the performance of internal auditingdepartment is influenced by management involvement, demand, and support(Stocks,Albrecht, Howe, and Schueler 1988; Morris 1978); (2) the relationship betweenaudit committee and internal auditing department is the critical factor for internal auditing

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department to provide its organization with service successfully(Vershoor and Liotta 1990).The controller in Taiwan is similar to audit committee in U.S.A.; (3) the autonomy andindependence of internal auditing department have big influence on its performance(Schroeder 1977); (4) the opportunity for internal auditors to be promoted is an importantfactor to attract excellent internal auditors(Schneider 1970).

H2: The activities inside an internal auditing department have positive influences on theperformance of internal auditing department.

We expect the performance evaluation of internal auditors, the establishing and using ofjob description, the well balance of internal auditors, the education and training of internalauditors, taking risk into account while making audit plan, the audit attitude of internalauditors, and the competence of internal auditors, to all have positive influences on theperformance of internal auditing department, because: (1) evaluating the performance letsinternal auditors know how to improve their services(Sears 1991); (2) internal auditors canfollow the job description to enhance the possibility of success(McAvoy 1977); (3) the auditareas of internal auditors are very extensive, so well balance of internal auditors will haveinfluence on the performance of internal department; (4) continuing to improve internalauditors’ competence will be helpful to reach the objectives of internal auditing department;(5) in making annual audit plan, the most important thing to consider is risk. The higher therisk is, the more auditing activities are needed(Schroeder 1977); (6) if internal auditors helpaudited departments, as consultants, to solve their problems, it would make audit easier; (7)using behavioral science concept in auditing would make auditors’ suggestions moreacceptable(McKanna 1987); (8) the quality of internal auditing depends mostly on thecompetence of internal auditors(Morris 1977).

III. Method

To test the research hypotheses, a questionnaire was developed through interviews withpersons in industries and from articles appearing in Internal Auditor, Journal of Accounting

and Public Policy…etc.7. The questionnaire contains mainly three sections: (1) the insideactivities of internal auditing department, including human resources policy, risk factorconsideration, audit attitude, and suggestions related to maturity; (2) the outside environmentof internal auditing department, including high-rank management’s attitude, controller’sattitude, organizational position, organizational structure, and the possibility of promotionfor internal auditors; (3) the performance of internal auditing department, includingmanagement perceived performance, audited department head’s perception of performance,and the progress of annual audit plan. All of them were answered on a five-pointscale(strongly agree, agree, undecided, disagree, strongly disagree). We mailed a differentquestionnaire to the general manager, the head of audited department8, and the head ofinternal auditing department of each company.

The listed manufacturing firms was selected from the list issued by The Securities andExchange Commission of Taiwan. Of this list, troubled companies were excluded, giving atotal of 210 listed manufacturing firms for our mailing. The questionnaire was mailed in

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February 1995. Two weeks later a second request and questionnaire were sent to the listedfirms which had not responded to the first questionnaire; another two weeks later, a thirdwritten request and a telephone request were used to contact the listed firms which hadalready completed two of the three questionnaires9. As tables 1 through 3 indicate, thenumbers of the effective respondents of management, the head of internal auditingdepartment, and the head of audited department are 101, 146, and 134, respectively; theresponse rates are 48%, 70%, and 64%, respectively. Table 4 shows that the number of bothmanagement and the head of internal auditing department responding was 83, the number ofboth the head of audited department and the head of internal auditing department respondingwas 109, and the number of all of three departments responding was 69; the response ratesare 40%, 52%, and 33%, respectively10. Finally, the Cronbach Alpha coefficients of all itemsare more than 0.5.

7B.P. Sears, “How Effective Are Your Audits?” Internal Auditor, February 1991, pp.30-31; N. Morris, “How Does Your AuditDepartment Rate?” Internal Auditor, October 1978, pp.69-77; K. D. Stocks, Albrecht, W. S., Howe, K. R. and Schueler, D. R.,“What Makes an Effective Internal Audit Department?” Internal Auditor, April 1988,pp.45-49; Verschoor, C.C., and J. P. Lioota,“Communication with Audit Committee,” Internal Auditor, April 1990,pp.42-47; K. Menon, J. D. Williams, “The Use of AuditCommittees for Monitoring,” Journal of Accounting and Public Policy, 13, 1994, pp.121-139; R. G. Schroeder, “How to Audit InternalAuditing,” Internal Auditor, August 1977, pp.21-25; V. F. Demarco, “Recruiting and Developing Internal Auditors,” Internal Auditor,February 1980, pp.53-57; A. B. Pushkin, “The Impact of the Internal Audit Function on the Auditor’s Consideration of the InternalControl Structure,” The Woman CPA, Summer 1990, pp.9-13; P. Richard, “Measuring Internal Audit Performance,” AustralianAccountant, May 1993, pp.21-23; T. F. McKanna, “How to Win Friends and Mostly Influence People?” Internal Auditor, April 1987,pp.49-51; W. S. Albrecht, J.D. Stice, K. D. Stock, “What Do Internal Auditors Need to Know?” Internal Auditor, October 1993,pp.56-59.8We chose operating department as the audited department, because, in general, this department is the main source of revenues and ismore risky than other departments, therefore, it is the focus of auditing.9For example, in the case of one company whose management and the head of audited department had responded to the questionnaires,but the head of internal auditing department had not yet, we sent a third request and called by telephone to the head of internal auditingdepartment.10The number of all of three departments responding is also included in two other categories, so the total response rate exceeds 100%.

IV. Results

From the basic statistics of responses, we found : most (62%) of the internal auditingdepartments belong directly to general manager, second(16%) and third(7%) to presidentand general manager office, respectively; most of the audit reports were sent to generalmanager(86%), audited department(70%), and controller(62%)11; 37% of the internalauditors have non-auditing duty; the audit committee function were executed bycontroller(39%), general manager(33%), and the head of financial department(20%); theways they train their internal auditors were lectures by The Institute of InternalAuditors(IIA)(92%), lectures by consulting company(61%), and lectures by experiencedemployees(58%); the existing training contents mentioned most were auditingpractice(88%), understanding the operation of inside the company(71%), andaccounting(65%); the recommended future training contents mentioned most werecomputer auditing(71%), tax(30%), and communication skills(25%); most (76%) of therespondents have less than 5 internal auditors; the three factors most influencing annualaudit planning were the requirement of Securities and Exchange Commission(79%),direction from management(64%), and risk(62%); the ways of suggestion mentioned mostwere discussion with audited department(88%), audited department proposing correctionalternatives(57%),and internal auditors providing suggestions directly(41%); finally, thetraining hours per auditor per year were mostly below 30 hours. The above statistics show

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most of the respondents’ internal auditing departments have autonomy and independence,however, some of the internal auditors have non-auditing duty. Audit committee functionis mainly executed by controller and general manager. In training, the respondents dependon IIA most, and they should pay more attention to computer auditing in order to adapt tothe new high-tech environment. In planning annual audit, the Securities and ExchangeCommission has major influence on them. Finally, most of them prefer to discuss withaudited department and then give their suggestions.

Under H1, we expected that the outside environment of internal auditing departmenthas influences on the performance of internal auditing department; under H2, we expectedthat the activities inside an internal auditing department have positive influences on theperformance of internal auditing department. We surveyed the performance of internalauditing department from three aspects: management-perceived performance, auditeddepartment head’s perception of performance, and the progress of annual audit plan. Thenwe regressed performance in each aspect on the variables of outside environment and theactivities inside an internal auditing department. The results are as follows:

Management-perceived performance and variables of outside environment and theactivities inside an internal auditing

In this stage, the data we analyzed are that management and the head of internalauditing department had both responded, and are 83 replies altogether. Tables 5 and 6 showthe results of simple regressions. Table 5 indicates that high-rank management’sattitude(p<.01), controller’s attitude(p<.01), and promotion opportunity(p<.1) have

11This is open choice, everyone can choose two or more items, so the total percentage could exceed 100%.

significant influences on the performance of internal auditing department. It implies that ifhigh-rank management and controller of a company put emphasis on the value of internalauditing, and if there is good career planning which provides a lot of promotionopportunities for internal auditor, then internal auditing department can attract a lot ofexcellent employees and motivate them. As a result, internal auditing department canprovide management with good auditing services. Table 6 indicates that performanceevaluation(p<.001), the establishment and use of job description(p<.01), education andtraining(p<.01), and professionalism(p<.05) have significant influences on theperformance of internal auditing department. It implies that the following factors can helpinternal auditors to provide management with good services: evaluating internal auditors’performance regularly makes controlling internal auditing department easier; establishingand using job description make auditing execution more efficient and effective; educatingand training internal auditors continually and enhancing their professionalism.

Table 7 shows the results of multiple stepwise regression. This regression includedvariables performance evaluation(p<.01), controller’s attitude(p<.01), education andtraining(p<.05), and auditing attitude(p<.15), and explained about 27% of the variance inmanagement-perceived performance . It implies that both inside and outside environment

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have some factors influence which have a significant on the performance of internalauditing department. In addition, some variables, that are significant at .01 level in simpleregression, are insignificant in multiple stepwise regression, for multicollinearity reason.

Audited department head’s perception of performance and variables of outsideenvironment and the activities inside an internal auditing

In this stage, the data we analyzed are that the head of audited department and the headof internal auditing department had both responded, and are 109 replies altogether. Amongall of the variables in Tables 8 and 9, only professionalism(p<.01) is significant. Table 10shows that the multiple stepwise regression included the variables ofprofessionalism(p<.01), the establishment and use of job description(p<.05), and educationand training(p<.1), and explained about 47% of the variance in audited department head’sperception of performance. Of the three variables, the sign of variable professionalism ispositive, as we expected. It means that the more the professionalism auditors have, thebetter the performance the audited department perceives. However, the signs of the othertwo variables in the regression are opposite to what we expected. The possible reasons are:the contents of job description, or the ways internal auditors execute the job description,cannot meet the demand of audited department and need to be reviewed and improved; thecontents and the approach to education and training also need to be adjusted to meet thedemand of audited department.

The progress of annual audit plan and variables of outside environment and theactivities inside an internal auditing

In this stage, the data we analyzed are only the head of internal auditing departmenthad responded, and are 146 replies altogether. Tables 11 and 12 show the results of simpleregression. In table 11, all of the variables are significant at .05 level at least. It means thatpositive management and controller attitude to internal auditing job, high organizationalposition of internal auditing department, and a lot of promotion opportunities for internalauditors would enhance the progress of annual audit plan. Table 12 indicates that thevariables of performance evaluation, the establishment and use of job description,education and training, professionalism, and risk consideration are all significant at .05level at least. It implies that all of them had positive influences on the progress of annualaudit plan. In addition, table 13 shows the results of multiple stepwise regression. Wefound that this regression included the variables of management attitude to the internalauditing job(p<.01), organizational position of internal auditing department(p<.05), andprofessionalism (p<.05), and explained about 17% of the variance in performance. Itimplies that both inside and outside internal auditing department have some factors whichinfluence the progress of annual audit plan.

V. Discussion

Most previous literature on internal auditing discussed mainly what the internal auditorsshould do and how they should do it, and included very few empirical studies. In this paper,we reviewed much relevant literature and formed a theoretical framework, then tested thehypotheses on some listed manufacturing firms in Taiwan.

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Our results show that, on average, regular performance evaluation of internal auditors,positive attitude of controller to internal auditing job, and well-designed education andtraining of internal auditors are useful to enhance the management-perceived performance.Secondly, professionalism is helpful to increase the audited department head’s perceptionof performance. However, in this test we found the variables of establishment and use ofjob description, and education and training had significantly negative influences on theperformance, which contradicted our expectation. It may imply that both establishing andusing job description and education and training did not work well and need to be improved.It is very important, because internal auditors do need audited departments to cooperate inorder to execute their auditing successfully. Third, positive management attitude to internalauditing job, high organizational position of internal auditing department, andprofessionalism are useful to the progress of annual audit plan. According to the aboveresults, we found that some factors both inside and outside internal auditing departmenthad significant influence on the performance of internal auditing department, thus ourevidence partially supports H1 and H2.

The attitude of audited department is closely related to the success or failure of internalauditing. However, very few factors had significant influences on audited departmenthead’s perception of performance. Thus all companies need to review their indicators ofperformance evaluation, the contents and the ways of using job description, and educationand training. In addition, in behavioral aspect, audit attitude and suggestion according tothe maturity of audited department are two new fields which need to be improved.

The general manager, the head of internal auditing and the head of audited departmentof each company were supposed to fill out the questionnaires, and if they let other peopledo it, it would cause some biases in conclusion. In some cases, this did in fact occur, whichleads to the main limitation in this research.

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References

Cook, J. M., “The CEO and The Audit Committee.” Chief Executive. April 1993,pp.44-47.

DeMarco, V. F., “Recruiting and Developing Internal Auditors.” The InternalAuditor. February 1980, pp.53-57.

Gibbs, T. E. and Schroeder, R. G., “External Auditor Criteria for Valuating InternalAuditing Departments.” The Internal Auditor. December 1980, pp.34-42.

Haley, D. C. and Mckeon Jr., J M., “Decentralized Operational Auditing-theEffective Use of the Internal Audit Function.” The Mid-Atlantic Journal ofBusiness. 26(2), Winter 1990, pp.81-89.

McAvoy, A. S., “How to Improve Productivity in Internal Auditing.” The InternalAuditor. October 1977,pp.63-66.

McKanna, T. F., “How to Win Friends and Mostly Influence People.” The InternalAuditor. April 1987, pp.49-51.

Menon, K. and Williams, J. D., “The Use of Audit Committees for Monitoring.”Journal of Accounting and Public Policy. 13, 1994, pp.121-139.

Morris, N., “How Does Your Audit Department Rate?” The Internal Auditor.October 1978, pp.69-77.

Pushkin, A. B., “The Impact of the Internal Audit Function on the AuditorConsideration of the Internal Control Structure.’ The Woman CPA. Summer1990, pp.9-13.

Richard, P., “Measuring Internal Audit Performance.” Australian Accountant. May1993, pp.21-23.

Schneider, A., “Selecting and Developing Internal Auditors.” The Internal Auditor.October 1970, pp.51-59.

Schroeder, R. G., “How to Audit Internal Auditing.” The Internal Auditor. August1977, pp.21-25.

Sears, B. P., “How Effective Are Your Audits?” The Internal Auditor. February 1991,pp.30-31.

Stein, J. and Holcombe, M., “Managing Organizational Relationships.” The InternalAuditor. April 1994, pp.20-24.

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Stocks, K. D., Albrecht, W. S., Howe, K. R., and Schueler, D. R., “What Makes anEffective Internal Audit Department?” The Internal Auditor. April 1988, pp.45-49.

Verschoor, C. C. and Liotta, J. P., “Communication with Audit Committees.” TheInternal Auditor. April 1990, pp.42-47.

Vondra, A. A. and Schueler, D. R., “Can You Innovate Your Internal Audit?”Financial Executive. March/April 1993, pp.34-39.

Table 1Questionnaires mailed and returned

Items Mailed Returned Incomplete EffectiveManagement questionnaires

Number 210 106 5 101

Percentage 100.00 50.48 2.38 48.10Director of audited department

Number 210 137 3 134

Percentage 100.00 65.24 1.43 63.48

Director of internal auditing

Number 210 157 11 146

Percentage 100.00 74.76 5.24 69.52

Table 2Each firm has either two or three respondents

Items mailed Respondents from management Respondents from auditeddepartment Respondents from all and director of internal auditing and director ofinternal auditing three departmentsNumber 210 83 109 69

Percentage 100.00 40.49 51.90 32.85

Table 3Simple regressions of outside environment variables on management perceived performance

Variable Coefficient Standard deviation T- statistic P-value

Intercept 26.443 3.108 8.51 .000Management attitude .566 .221 2.56 .012

Intercept 29.300 1.549 18.92 .000Controller attitude .619 .182 3.41 .000

Intercept 31.997 2.837 11.28 .000Organization position .146 .177 .821 .414

Intercept 29.562 2.621 11.28 .000Promotion opportunities .740 .402 1.84 .070

Table 4Simple regressions of inside activities of internal auditing on management perceived performance

Variable

CoefficientCoefficient

Standard deviation

T .268t T-statistic

P-value

Intercept 27.564 1.889 14.59 .000Performance evaluation .422 .114 3.70 .000

Intercept 21.847 4.209 5.19 .000Establishment and use of descriptions .869 .292 2.98 .004

Intercept 35.030 1.315 26.63 .000Combination of people -.162 .260 -.62 .535

Intercept 24.897 3.217 7.74 .004Education and training .474 .160 2.96 .004

Intercept 22.517 5.869 3.84 .000Professionalism .263 .131 2.01 .048

Intercept 30.951 4.142 7.47 .000Risk consideration .379 .467 .81 .420

Intercept 32.761 6.397 5.12 .000Auditing attitude .121 .508 .24 .812

Intercept 29.816 4.038 7.384 .000Suggestions dependingon the maturity ofaudited department .562 .504 1.12 .268

Table 5The stepwise regression of outside factors on management perceived performance

Variable Coefficient Standard deviationR2 increment F- value P-value a

Intercept -.091 .097 -- .89 .349Performance evaluation .249 .105 .145 13.69 .000Controller attitude .312 .105 .069 7.03 .010Education and training .261 .113 .040 4.21 .044Auditor attitude -.265 .174 .022 2.63 .109

a Variables where p<.15 entered this regression as an independent variable.

Table 6Simple regressions of outside environment variables on the performance perceived by audited department

Variable CoefficientStandard deviation T-statistic P-valueIntercept 33.512 4.287 7.82 .000Management attitude .111 .191 .58 .561

Intercept 34.249 1.858 18.44 .000Controller attitude .216 .216 1.00 .321

Intercept 34.523 3.409 10.13 .000Organization position .092 .210 .44 .664

Intercept 35.559 3.076 11.48 .000Promotion opportunities .065 .467 .14 .889

Table 7Simple regressions of inside activities of internal auditing department on the performance perceived by audited department

Variable Coefficient Standard deviationT-value P-valueIntercept 33.404 2.351 14.21 .000Performance evaluation .162 .142 1.14 .256

Intercept 35.256 4.995 7.06 .000Establishment and use of description .050 .342 .15 .884

Intercept 38.159 1.594 23.95 .000Combination of people -.472 .316 -1.49 .138

Intercept 38.603 2.453 15.74 .000Education and training -.298 .269 -1.11 .271

Intercept -4.645 5.711 -.81 .418Professionalism .894 .125 7.15 .000

Intercept 39.912 5.241 7.62 .000Risk consideration -.439 .581 -.76 .452

Intercept 33.214 7.572 4.39 .000Auditor attitude .218 .594 .37 .714

Intercept 40.690 4.712 8.64 .000Suggestions depending on the maturity of audited department -.586 .580 -1.01 .315

Table 8The stepwise regression of outside factors of internal auditing on the performance perceived by audited department

Variable Coefficient Standard deviation R2 incrementF-value P-value a

Intercept -.594 .102 -- 83.650 .712Professionalism .630 .065 .434 51.054 .000Establishment and use of description -.163 .063 .031 6.264 .014Education and training -.152 .091 .014 2.834 .095

a Variables where p<.15 entered this regression as an independent variable.

Table 9Simple regressions of outside environment variables of internal auditing department on the progress of annual audit plan

Variable Coefficient Standard deviation T-statistic P-valueIntercept 8.710 1.540 5.65 .000Management attitude .545 .110 4.94 .000

Intercept 14.722 .802 18.37 .000Controller attitude .185 .093 1.98 .050

Intercept 11.543 1.327 8.70 .000Organization position .2951 .083 3.57 .001

Intercept 12.944 1.264 10.24 .000Promotion opportunities .514 .194 2.65 .009

Table 10Simple regressions of inside activities of internal auditing on the progress of annual audit plan

Variable Coefficient Standard deviationT-value P-valueIntercept 12.858 .973 13.21 .000Performance evaluation .215 .060 3.58 .001

Intercept 9.642 1.876 5.14 .000Establishment and use of description .458 .130 3.54 .001

Intercept 16.280 .683 23.83 .000Combination of people -.014 .136 -.10 .918

Intercept 13.102 1.530 8.56 .000Education and training1 .159 .077 2.07 .041

Intercept 6.240 2.784 2.24 .027Professionalism .229 .062 3.60 .000

Intercept 10.665 2.293 4.65 .000Risk consideration .619 .255 2.43 .016

Intercept 16.960 3.169 5.35 .000Auditor attitude -.060 .250 -.24 .814

Intercept 14.336 2.068 6.93 .000Suggestion depending on thematurity of audited department .233 .254 .92 .361

Table 11The stepwise regression of outside environment factors on the progress of annual audit plan

Variable Coefficient Standard deviation R2 increment F-value P-value a

Intercept -.128 .096 -- 1.76 .187Management attitude .291 .089 .141 22.63 .000Organization position .186 .082 .016 2.77 .098Professionalism .133 .068 .016 2.80 .096

a Variables where p<.15 entered this regression as an independent variable.