Cognitive mapping the topic of internal audit
Joseph
Kim-keung Ho
Independent Trainer
Hong Kong, China
Abstract: The topic of internal audit in
the subject of Accounting and Finance is complex. By making use of the
cognitive mapping technique to conduct a brief literature review on the internal
audit topic, the writer renders a systemic image on the topic of internal audit.
The result of the study, in the form of a cognitive map on internal audit,
should be useful to those who are interested in the topics of cognitive
mapping, literature review and internal audit
Key words: Internal
audit, cognitive mapping, literature review
Introduction
As a
topic in Accounting and Finance, internal audit is complex. It is thus useful
to employ some learning tool to conduct its study, notably for literature
review purpose. For a teacher in research methods, systems thinking and management,
the writer is specifically interested in finding out how the cognitive mapping
technique can be employed to go through a literature review on Internal audit. This literature review
exercise is taken up and reported in this article.
On the cognitive mapping exercise for
literature review
Literature
review is an important intellectual learning exercise, and not just for doing
final year dissertation projects for tertiary education students. On these two
topics of intellectual learning and literature review, the writer has compiled
some e-learning resources. They are the Managerial
intellectual learning Facebook page and the Literature on literature review Facebook page. Conducting
literature review with the cognitive mapping technique is not novel in the
cognitive mapping literature, see Eden and Simpson (1989), Eden, Jones and Sims
(1983), Open University (n.d) and the Literature
on cognitive mapping Facebook page. In this article, the specific steps
involved in the cognitive mapping exercise are as follows:
Step 1:
gather some main points from a number of academic journal articles on Internal
audit. This result in the production of a table (Table 1) with the main points
and associated references.
Step 2: consolidate the main points from Table 1 to come up with
a table listing the cognitive map variables (re: Table 2).
Step 3: link
up the cognitive map variables in a
plausible way to produce a cognitive map (re: Figure 1) on the topic under
review.
The next
section applies these three steps to produce a cognitive map on internal audit.
Descriptions of cognitive map variables on
the internal audit topic
From the
reading of some academic articles on Internal audit, a number of main points
(e.g., viewpoints, concepts and empirical findings) were gathered by the writer. They are shown in Table 1 with
explicit referencing on the points.
Table 1: Main
points from the internal audit literature and referencing
|
Main points from the internal audit
literature
|
Referencing
|
|
Point
1: "The interpretation of the audit role will depend on the adopted
perspective of the individual auditor and may consist of a combination of roles that includes:
·
Basic internal
auditing
·
Retail and branch
audits
·
Information
systems auditing
·
Investigations and forensic examination
·
Detailed analytical
review
·
Contract and large
engineering project audits
·
Internal audit
management and quality assurance
·
Corporate governance
and top management reviews
·
Specialist
compliance, disclosures, and financial statement auditing"
|
Pickett,
K.H.S. 2004. The Internal Auditor At
Work, Wiley.
|
|
Point
2: "The growing emphasis on corporate accountability has led to a drive
for more openness in the way private business and the public sector manage
and communicate their performance to key stakeholders. This, in turn, has led
to a search for mechanisms that may help promote the three linked concepts of
integrity, accountability, and transparency, commonly known as good corporate
governance.... One of the pillars of corporate governance relates to the
establishment of sound systems of audit and accountability.... The internal
auditor appears on the horizon to help review the system of controls that
address actual and perceived threats to an organization".
|
Pickett,
K.H.S. 2004. The Internal Auditor At
Work, Wiley.
|
|
Point
3: "... the internal audit process depends on a source of professional
staff who are able to achieve the demanding goal of balancing the task of
helping the customer develop good business systems with the need to provide
an objective assessment of the same customer's systems".
|
Pickett,
K.H.S. 2004. The Internal Auditor At
Work, Wiley.
|
|
Point
4: "It is a well-kept secret that in days gone by, many people found
themselves transferred to internal audit either by chance or because they
were not really suited to anything else..... Now, instead of being
"sent" to internal audit, many staff members are prepared to fight
for the chance to join the in-house audit team. The prospects can be very good, and there
is much scope for personal development and excellent rewards from a career in
internal auditing".
|
Pickett,
K.H.S. 2004. The Internal Auditor At
Work, Wiley.
|
|
Point
5: "Traditionally, internal audit functions (IAF) have been established
to examine and evaluate internal processes, procedures and controls. In
contrast, external audit is more focused on providing assurance on financial
statements. While the roles of external and internal audit are distinct, there are many opportunities
for coordination and cooperation between the two functions which may yield
synergistic outcomes such as higher quality audits and economic
benefits".
|
Zain,
M.M., M. Zaman and Z. Mohamed. 2015. "The Effect of Internal Audit
Function Quality and Internal Audit Contribution to External Audit on Audit
Fees" Internal Journal of Auditing
19, Wiley: 134-147.
|
|
Point
6: "Professional auditing standards encourages external auditors to rely
on internal audit work; however, they also require external auditors to first
consider the quality of the IAF [internal audit functions] prior to relying on it. In particular, external
auditors may rely on the IAF if it is deemed to have sufficient objectivity
and competency".
|
Zain,
M.M., M. Zaman and Z. Mohamed. 2015. "The Effect of Internal Audit
Function Quality and Internal Audit Contribution to External Audit on Audit
Fees" Internal Journal of Auditing
19, Wiley: 134-147.
|
|
Point
7: "There is a paucity of research testing the effect of the interaction
between IAFQ [quality of internal
audit function] and IAF [internal audit functions] contribution to external
audit on audit fees".
|
Zain,
M.M., M. Zaman and Z. Mohamed. 2015. "The Effect of Internal Audit
Function Quality and Internal Audit Contribution to External Audit on Audit
Fees" Internal Journal of Auditing
19, Wiley: 134-147.
|
|
Point
8: "The contribution that internal auditors make towards assisting
external auditors in the financial statement audit process has gained renewed
attention... Much of this interest has been propelled by two key factors.
First, the continuing pressure on accounting firms to deliver services more
efficiently and to reduce audit costs motivates a better understanding of how
external auditors may optimise work completed by internal auditors. Second,
corporate governance developments have increased the focus on internal
control systems, and have identified the internal audit function as playing a
key role in assessing and improving the quality of such systems....
Consequently, the internal audit function has greater potential to aid the
external auditors in their audit planning, thus justifying further research
on the link between internal and external auditors".
|
Zain,
M.M., N. Subramaniam and J. Stewart. 2006. "Internal Auditors'
Assessment of their Contribution to Financial Statement Audits: The Relation
with Audit Committee and Internal Audit Function Characteristics" International Journal of Auditing 10,
Wiley: 1-18.
|
|
Point
9: "... the greater the objectivity, technical competence and quality of
work performance (i.e. the exercise of due professional care), the larger the
potential for internal auditors to contribute to the external audit".
|
Zain,
M.M., N. Subramaniam and J. Stewart. 2006. "Internal Auditors'
Assessment of their Contribution to Financial Statement Audits: The Relation
with Audit Committee and Internal Audit Function Characteristics" International Journal of Auditing 10,
Wiley: 1-18.
|
|
Point
10: "Audit committees assume important responsibilities with respect to
internal audit, such as reviewing the internal audit programme and ensuring
the adequacy of the scope of internal audit activities. As such, audit
committees have the potential to enhance the effectiveness of the internal
audit function, and this, in turn, has implications for internal auditors'
contribution to external audit work".
|
Zain,
M.M., N. Subramaniam and J. Stewart. 2006. "Internal Auditors'
Assessment of their Contribution to Financial Statement Audits: The Relation
with Audit Committee and Internal Audit Function Characteristics" International Journal of Auditing 10,
Wiley: 1-18.
|
|
Point
11: "Internal auditors must have a good understanding of the business
that the entity performs, in order to be able to monitor the situation and to
assess the changes to which the entity itself is subject. They must be aware
of the changes, help identify new risks the managers may face even though
managers are still responsible for identifying them".
|
Zaharia,
D.L., A. Lazar and D.M. Tilea. 2014. "The Role of Internal Auditor
regarding the Corporate Governance and the Current Crisis" Procedia Social and Behavioral Sciences
116, Elsevier: 4819-4823.
|
|
Point
12: "Internal auditors are promoters of the value added in terms of
avoidable losses because of their actions, but also of the values for which
they make efforts to generate savings and opportunities. To highlight
specific savings generated by the action itself of internal audit, auditors
must try to quantify the results achieved from the implementation of the
recommendations recorded in the internal audit report".
|
Zaharia,
D.L., A. Lazar and D.M. Tilea. 2014. "The Role of Internal Auditor
regarding the Corporate Governance and the Current Crisis" Procedia Social and Behavioral Sciences
116, Elsevier: 4819-4823.
|
|
Point
13: "... the aim of internal auditing is to identify and comprehend potential risks faced by a hospital and to examine and evaluate
the effectiveness of the internal control system, which was implemented to
control risks and financial safety. The underlying objective of an internal
audit is to support a unit's management in attaining their goals and in the
execution of their tasks by regular management control and evaluation of
public spending".
|
Szczepankiewicz,
E.I. 2010. "Internal audit as a management improvement tool in the
healthcare sector units" Pol. Ann.
Med. 17(1): 136-148.
|
|
Point
14: "In most organizations, both information systems [IS] and internal
audit functions are involved with
information security. The IS function has a primary responsibility for
designing, implementing and maintaining a cost-effective information security
program. Internal audit provides an independent review and analysis of the
organization's information security".
|
Steinbart,
P.J., R.L. Raschke, G. Gal and W.N. Dilla. 2012. "The relationship
between internal audit and information security: An exploratory
investigation" International
Journal of Accounting Information Systems 13, Elsevier: 228-243.
|
|
Point
15: "Despite the importance of and the value that may be derived from
the relationship between internal audit and information security, there has been no empirical research
investigating how well the two functions work together".
|
Steinbart,
P.J., R.L. Raschke, G. Gal and W.N. Dilla. 2012. "The relationship
between internal audit and information security: An exploratory
investigation" International
Journal of Accounting Information Systems 13, Elsevier: 228-243.
|
|
Point
16: "Internal audit supports the organization to achieve its objectives
by a systematic and methodical evaluation of the risk management, control and
management of the entity's processes and by making proposals on how to
strengthen their effectiveness".
|
Daniela,
P. and T. Attila. 2013. "Internal Audit versus Internal Control and
Coaching" Procedia Economics and
Finance 6, Elsevier: 697-702.
|
|
Point
17: "Internal auditing is an independent, objectively ensuring and
consulting activity, designed to create value and improve an organization's
operations. It assists an organization
in achieving its objectives by implementing a systematic and disciplined
approach to evaluate and improve its effectiveness of risk management and
control".
|
Daniela,
P. and T. Attila. 2013. "Internal Audit versus Internal Control and Coaching"
Procedia Economics and Finance 6,
Elsevier: 697-702.
|
|
Point
18: "Internal audit is a function of the control structure of the
entity. It should not be confused with the internal control structure of the
entity. The two departments are separate and independent, not being in a
subordination relationship".
|
Daniela,
P. and T. Attila. 2013. "Internal Audit versus Internal Control and
Coaching" Procedia Economics and
Finance 6, Elsevier: 697-702.
|
|
Point
19: "Internal auditors are permanent employees of the entity and are
directly subordinate to the entity's management or to the General
Shareholders Assembly".
|
Daniela,
P. and T. Attila. 2013. "Internal Audit versus Internal Control and
Coaching" Procedia Economics and
Finance 6, Elsevier: 697-702.
|
|
Point
20: "Internal auditing is increasingly recognized as a control mechanism
that assists management and the board of directors to accomplish corporate
objective..., as shown by the heightened requirements for internal auditing
in the post-Sarbanes-Oxley era.... Nevertheless, despite its rise as an
integral component of the corporate governance fabric of contemporary
firms..., internal auditing remains a neglected area of research".
|
Mihret,
D.G. 2014. "How can we explain internal auditing? The inadequacy of agency
theory and a labor process alternative" Critical Perspectives on Accounting 25, Elsevier: 771-782.
|
|
Point
21: "According to agency theory, management introduces internal auditing
and other internal control mechanisms to signal to shareholders that management
is properly discharging its responsibility to maximize shareholders'
wealth.... Armstrong (1989) challenged
the internal consistency of agency theory on the grounds that it fails to
explain why this assumption of maximizing utility is sidelined when
third-party monitors - auditors - are
to be trusted while being appointed and remunerated by management".
|
Mihret,
D.G. 2014. "How can we explain internal auditing? The inadequacy of
agency theory and a labor process alternative" Critical Perspectives on Accounting 25, Elsevier: 771-782.
|
|
Point
22: "... agency theory arguments are based on the notion that
competitive markets underpin the contracts that establish capitalist-agency
relationships. This assumption renders the theory problematic for internal
auditing research because the demand for internal auditing is not market
driven, since internal audit reports are accessible to neither
shareholders nor the capital
market".
|
Mihret,
D.G. 2014. "How can we explain internal auditing? The inadequacy of
agency theory and a labor process alternative" Critical Perspectives on Accounting 25, Elsevier: 771-782.
|
With a
set of main points collected, the writer produces a set of cognitive map
variables. These variables are informed by the set of main points from Table 1.
These variables are presented in Table 2.
Table 2:
Cognitive map variables based on Table 1
|
Cognitive
map variables
|
Literature
review points
|
|
Variable 1: Drivers of interest in
internal audit
|
Point
2: "The growing emphasis on corporate accountability has led to a drive
for more openness in the way private business and the public sector manage
and communicate their performance to key stakeholders. This, in turn, has led
to a search for mechanisms that may help promote the three linked concepts of
integrity, accountability, and transparency, commonly known as good corporate
governance.... One of the pillars of corporate governance relates to the
establishment of sound systems of audit and accountability.... The internal
auditor appears on the horizon to help review the system of controls that
address actual and perceived threats to an organization".
Point
4: "It is a well-kept secret that in days gone by, many people found
themselves transferred to internal audit either by chance or because they
were not really suited to anything else..... Now, instead of being
"sent" to internal audit, many staff members are prepared to fight
for the chance to join the in-house audit team. The prospects can be very good, and there
is much scope for personal development and excellent rewards from a career in
internal auditing".
Point
8: "The contribution that internal auditors make towards assisting
external auditors in the financial statement audit process has gained renewed
attention... Much of this interest has been propelled by two key factors.
First, the continuing pressure on accounting firms to deliver services more
efficiently and to reduce audit costs motivates a better understanding of how
external auditors may optimise work completed by internal auditors. Second,
corporate governance developments have increased the focus on internal
control systems, and have identified the internal audit function as playing a
key role in assessing and improving the quality of such systems....
Consequently, the internal audit function has greater potential to aid the
external auditors in their audit planning, thus justifying further research
on the link between internal and external auditors".
|
|
Variable 2: Improve intellectual understanding
of internal audit
|
Point
7: "There is a paucity of research testing the effect of the interaction
between IAFQ [quality of internal
audit function] and IAF [internal audit functions] contribution to external
audit on audit fees".
Point
21: "According to agency theory, management introduces internal auditing
and other internal control mechanisms to signal to shareholders that management
is properly discharging its responsibility to maximize shareholders'
wealth.... Armstrong (1989) challenged
the internal consistency of agency theory on the grounds that it fails to
explain why this assumption of maximizing utility is sidelined when
third-party monitors - auditors - are
to be trusted while being appointed and remunerated by management".
Point
22: "... agency theory arguments are based on the notion that
competitive markets underpin the contracts that establish capitalist-agency
relationships. This assumption renders the theory problematic for internal
auditing research because the demand for internal auditing is not market
driven, since internal audit reports are accessible to neither
shareholders nor the capital
market".
|
|
Variable 3: Effective internal audit
practices
|
Point
1: "The interpretation of the audit role will depend on the adopted
perspective of the individual auditor and may consist of a combination of roles that includes:
·
Basic internal
auditing
·
Retail and branch
audits
·
Information
systems auditing
·
Investigations and forensic examination
·
Detailed analytical
review
·
Contract and large
engineering project audits
·
Internal audit
management and quality assurance
·
Corporate governance
and top management reviews
Specialist compliance, disclosures, and financial statement auditing"
Point 3: "... the internal audit process depends on a source of
professional staff who are able to achieve the demanding goal of balancing
the task of helping the customer develop good business systems with the need
to provide an objective assessment of the same customer's systems".
Point 5: "Traditionally, internal audit functions (IAF) have been
established to examine and evaluate internal processes, procedures and
controls. In contrast, external audit is more focused on providing assurance
on financial statements. While the roles of external and internal audit are distinct, there are many opportunities
for coordination and cooperation between the two functions which may yield
synergistic outcomes such as higher quality audits and economic
benefits".
Point 6: "Professional auditing standards encourages external
auditors to rely on internal audit work; however, they also require external
auditors to first consider the quality of the IAF [internal audit functions]
prior to relying on it. In particular,
external auditors may rely on the IAF if it is deemed to have sufficient
objectivity and competency".
Point
9: "... the greater the objectivity, technical competence and quality of
work performance (i.e. the exercise of due professional care), the larger the
potential for internal auditors to contribute to the external audit".
Point 10: "Audit committees assume important responsibilities
with respect to internal audit, such as reviewing the internal audit
programme and ensuring the adequacy of the scope of internal audit
activities. As such, audit committees have the potential to enhance the
effectiveness of the internal audit function, and this, in turn, has
implications for internal auditors' contribution to external audit
work".
Point 11: "Internal auditors must have a good understanding of
the business that the entity performs, in order to be able to monitor the
situation and to assess the changes to which the entity itself is subject.
They must be aware of the changes, help identify new risks the managers may
face even though managers are still responsible for identifying them".
Point 12: "Internal auditors are promoters of the value added in
terms of avoidable losses because of their actions, but also of the values
for which they make efforts to generate savings and opportunities. To
highlight specific savings generated by the action itself of internal audit,
auditors must try to quantify the results achieved from the implementation of
the recommendations recorded in the internal audit report".
Point
13: "... the aim of internal auditing is to identify and comprehend potential risks faced by a hospital and to examine and evaluate
the effectiveness of the internal control system, which was implemented to
control risks and financial safety. The underlying objective of an internal
audit is to support a unit's management in attaining their goals and in the
execution of their tasks by regular management control and evaluation of
public spending".
Point
14: "In most organizations, both information systems [IS] and internal
audit functions are involved with
information security. The IS function has a primary responsibility for
designing, implementing and maintaining a cost-effective information security
program. Internal audit provides an independent review and analysis of the
organization's information security".
Point
16: "Internal audit supports the organization to achieve its objectives
by a systematic and methodical evaluation of the risk management, control and
management of the entity's processes and by making proposals on how to
strengthen their effectiveness".
Point
17: "Internal auditing is an independent, objectively ensuring and
consulting activity, designed to create value and improve an organization's
operations. It assists an organization
in achieving its objectives by implementing a systematic and disciplined
approach to evaluate and improve its effectiveness of risk management and
control".
Point
18: "Internal audit is a function of the control structure of the
entity. It should not be confused with the internal control structure of the
entity. The two departments are separate and independent, not being in a
subordination relationship".
Point
19: "Internal auditors are permanent employees of the entity and are
directly subordinate to the entity's management or to the General
Shareholders Assembly".
|
|
Variable 4: Learn from internal audit
practices
|
Point
15: "Despite the importance of and the value that may be derived from
the relationship between internal audit and information security, there has been no empirical research
investigating how well the two functions work together".
Point
20: "Internal auditing is increasingly recognized as a control mechanism
that assists management and the board of directors to accomplish corporate
objective..., as shown by the heightened requirements for internal auditing
in the post-Sarbanes-Oxley era.... Nevertheless, despite its rise as an
integral component of the corporate governance fabric of contemporary
firms..., internal auditing remains a neglected area of research".
|
The next
step is to relate the cognitive map variables to make up a cognitive map on internal
audit. The cognitive map and its explanation are presented in the next section.
A cognitive map on internal audit and its
interpretation
By
relating the four variables identified in Table 2, the writer comes up with a
cognitive map on internal audit, as shown in Figure 1.
These
cognitive map variables, four of them
altogether, are related to constitute a systemic image of internal audit. The
links in the cognitive map (re: Figure 1) indicate direction of influences
between variables. The + sign shows that an increase in one variable leads to
an increase in another variable while a -ve sign tells us that in increase in
one variable leads to a decrease in another variable. If there no signs shown on the arrows, that
means the influences can be positive or negative. Readers are referred to the Literature on internal audit Facebook page
for more information on the topic.
Concluding remarks
The
cognitive mapping exercise captures in one diagram some of the main variables
involved in internal audit. The resultant cognitive map promotes an exploratory
way to study internal audit in a holistic tone. The experience of the cognitive
mapping exercise is that it can be a quick, efficient and entertaining way to
explore a complex topic such as internal audit in Accounting and Finance. Finally,
readers who are interested in cognitive mapping should also find the article
informative on this mapping topic.
Bibliography
1.
Daniela, P. and T.
Attila. 2013. "Internal Audit versus Internal Control and Coaching" Procedia Economics and Finance 6,
Elsevier: 697-702.
2.
Eden, C. and P.
Simpson. 1989. "SODA and cognitive mapping in practice", pp. 43-70,
in Rosenhead, J. (editor) Rational
Analysis for a Problematic World, Wiley, Chichester.
3.
Eden, C., C. Jones
and D. Sims. 1983. Messing about in
Problems: An informal structured approach to their identification and
management, Pergamon Press, Oxford.
4.
Literature on cognitive mapping Facebook page, maintained by Joseph, K.K. Ho (url address:
https://www.facebook.com/Literature-on-cognitive-mapping-800894476751355/).
5.
Literature on internal audit Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.internal.audit/).
6. Literature on
literature review Facebook page, maintained by Joseph, K.K. Ho (url address: https://www.facebook.com/literature.literaturereview/).
7. Managerial intellectual learning
Facebook page, maintained by Joseph, K.K. Ho (url address:
https://www.facebook.com/managerial.intellectual.learning/).
8.
Mihret, D.G. 2014.
"How can we explain internal auditing? The inadequacy of agency theory and
a labor process alternative" Critical
Perspectives on Accounting 25, Elsevier: 771-782.
9.
Open University. n.d.
"Sign graph" Systems Thinking
and Practice (T552): Diagramming, Open University, U.K. (url address:
http://systems.open.ac.uk/materials/T552/) [visited at April 10, 2017].
10. Pickett, K.H.S. 2004. The Internal
Auditor At Work, Wiley.
11. Steinbart, P.J., R.L. Raschke, G. Gal and W.N. Dilla. 2012. "The
relationship between internal audit and information security: An exploratory
investigation" International Journal
of Accounting Information Systems 13, Elsevier: 228-243.
12. Szczepankiewicz, E.I. 2010. "Internal audit as a management
improvement tool in the healthcare sector units" Pol. Ann. Med. 17(1): 136-148.
13. Zaharia, D.L., A. Lazar and D.M. Tilea. 2014. "The Role of Internal
Auditor regarding the Corporate Governance and the Current Crisis" Procedia Social and Behavioral Sciences 116,
Elsevier: 4819-4823.
14. Zain, M.M., M. Zaman and Z. Mohamed. 2015. "The Effect of Internal
Audit Function Quality and Internal Audit Contribution to External Audit on
Audit Fees" Internal Journal of
Auditing 19, Wiley: 134-147.
15. Zain, M.M., N. Subramaniam and J. Stewart. 2006. "Internal
Auditors' Assessment of their Contribution to Financial Statement Audits: The
Relation with Audit Committee and Internal Audit Function Characteristics"
International Journal of Auditing 10,
Wiley: 1-18.
