RESEARCH 2 (THESIS WRITING) 4-BSAcT

HOMEWORK NO. 2

SEÑAR, JOANNA RAE JULY 9, 2018

PROJECT TITLE
The Efficiency of Internal Auditing as a Tool for Improving
The Manufacturing Company’s Performance

CHAPTER TWO
REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presents the related literature and studies connected to the topic after the

thorough search done by the researchers. This will also present the synthesis of the art,

theoretical and conceptual framework to fully understand the research to be done.

Foreign Literature

For the past years, society’s modification and adaptation have affected the ways of

improving company’s performance. The use of management techniques and principles are known

to enhance the company and its condition. Many existing management techniques and principles

were all used to improve company’s performance.

Alphonce Hussein Muro in his article “Quick wins for public sector internal auditors in

Tanzania,” it is believed that Internal Auditing is an indispensable tool in improving productivity

in an organization. It is an independent, objective assurance and consulting activity designed to

add value and improve an organization's operations. It helps an organization accomplish its

objectives by bringing a systematic, disciplined approach to evaluate and improve the

effectiveness of risk management, control, and governance processes.

According to Woolf (1985), internal audit is an element of the internal control system set

up by the management of an enterprise to examine, evaluate and report on accounting and other

controls on operation. It exists either voluntarily or in certain circumstance because of statutory

requirements. Internal Auditing also provides means of uplifting company’s performance and

determines company’s weaknesses effectively. Since many companies encountered problems like

fraud, misappropriation of funds and lack of effective management and others that made people

asking if Internal Auditing plays its roles towards efficiency that improves company’s

performance. It has been also believed that the root cause of many companies’ poor performance

is the efficiency in discovering the management’s inefficiency.

With these sentiments gathered, it is helpful how the researchers will assess the efficiency

of internal auditing as a tool for improving company’s performance. Since it’s stated that internal

auditing is a tool for some years, it is also helpful for the researchers to evaluate the flaws of

internal auditing that affects company’s performance.

Local Literature

According to an online article from the website of SGV Philippines, The traditional role

of internal audit is undergoing a transformation. Integration involves reconsidering the scope of

internal audit’s role and responsibility, and the staffing of the internal audit function to ensure
that it has the right skills and resources to execute its new role. In the integration, the functions

and responsibilities of internal audit and ERM should remain separate.

According to the Institute of Internal Auditors (IIA), “internal auditing’s core role with

regard to ERM is to provide objective assurance to the Board on the effectiveness of the

organization’s ERM activities to help ensure that key business risks are being managed

appropriately, and that the system of internal control is operating effectively.”

Internal auditors are not, and cannot be, responsible for implementing or maintaining an

organization’s risk management and control processes. This is management’s key responsibility.

But internal auditors, acting in a consulting capacity, can assist management by challenging or

supporting their decisions on risk. Internal auditors, though, should never make risk management

decisions. Internal audit should also assist management, the board, and/or the audit committee by

monitoring the entire risk management framework, evaluating controls, examining compliance,

reporting findings, and recommending improvements (Sarmenta, 2010).

Foreign Studies

According to the research paper made in Department of Accounting and Finance,

Kenyatta University, Kenya, the researchers concluded that it is believed that the existence of the

internal auditing results in increased organizational financial performance.

According to Bejide (2006), internal audit service results to reduction in overheads,

efficiency improvement ways and uncovering of possible losses due to insufficiently safeguarded

company assets all of which lead to reduced profitability. According to Hermanson and

Rittenberg (2003), internal audit function existence leads to increased organizational

performance. Similar sentiments were raised by Prasad and Rao (2000), through their

observation that the internal auditor protects the organization from unethical practices and

irregularities due to their nature of acting as watch dogs. This ensures high levels of profitability

and productivity which are actually the organizational objectives. The study findings however

disputes the position stated earlier. The researcher found that the relationship between the

existence of an internal audit function and financial performance at the Kenya Meat Commission

was insignificant. This means, existence of internal auditing does not influence the profitability

of an organization.

In this related study, it focuses on the relationship between the internal auditing and

organizational financial performance which is closely related to this study being pursued. Since

this study being pursued by the researchers is about the improvement of company’s performance,

the related study that evaluated the effect of internal auditing to financial performance is helpful

for the researchers to assess the financial performance of the company chosen.

Another study searched is entitled, “The Impact of Internal Control Effectiveness and

Internal Audit Role toward the Performance of Local Government.” This study aimed to examine

the impact of the internal control effectiveness and internal audit role toward the performance of

local government. In this conclusion, the researchers concluded that Research on the impact of

internal control effectiveness and internal audit role toward the performance of local government

by 79%, either simultaneously or partially. Then the local government performance can be

achieved. This means that in order to improve the performance of local government required the

effectiveness of internal control and internal audit role.

 This is related to the study being pursued with a difference on a focus which is the local

government. Unlike in this study, the researchers will focus on a chosen manufacturing company

which is the Coca-Cola Company.

Synthesis of the Review of Related Literature & Studies

With the related literature and studies gathered, all of them focus on Internal Auditing and

its effects on their chosen companies evaluated. All used internal auditing as a tool with different

focus in different sectors of organization. Still, it is centered on how internal auditing affects

company or organization’s performance that made them connected to this study being pursued.

Bibliography

(2015, April 8). Retrieved from

https://www.tandfonline.com/doi/citedby/10.1080/1331677X.2015.1028245?
scroll=top&needAccess=true

Jagongo, N. W. (2017). Internal auditing and financial performance of public institutions in

Kenya: A case study of Kenya Meat Commission.

Sarmenta, R. G. (2010, September 6). Retrieved from SGV.Ph: http://www.sgv.ph/

%E2%80%9Cintegrating-internal-audit-with-enterprise-risk-management%E2%80%9D-by-
rebecca-g-sarmenta-september-6-2010/

Simangunsong, R. (2014). Retrieved from

http://iiste.org/Journals/index.php/RJFA/article/viewFile/12308/12709