Wednesday, 31 May 2017

Cognitive mapping the topic of internal audit

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.


No comments:

Post a Comment