Impact of Risk Audit on Internal Control Implementation

Researcher: A. M.

Introduction

Following the financial crisis of 2008, the need to base audit on risk became even more evident and crucial, even as organizations around the world were severely affected in the wake of the crisis. Kasiva (2012) observes that the financial crisis of 2008 was as a result of organizations especially financial bodies taking on too much risk. Hence, there was the need to find a more effective way by which risks facing auditees can be mitigated.

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Risks have a way of directly or indirectly causing material misstatement(s) in audit reports which in turn tends to affect the credibility of the auditor, for the purpose of this study, the Ghana Audit Service. The capacity of a public sector organization (PSO) to mitigate risks has a lot to do with its internal control system. Internal control is a procedure that organizations use to guide them towards the realization of their set objectives (Nyarombe, Musau, & Kavai, 2015), which may range from efficiency and effectiveness in operations, veracity of financial reporting to compliance with relevant laws and regulations (COSO, 1992). In recent times, trepidations pertaining to accountability of organizations are gaining ascendancy in many developed and developing countries alike; thus, necessitating the need for appropriate risk based audit which comprises risk management and internal control system (Beekes and Brown, 2006).

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Griffiths (2005) defines Risk based Audit Methodology (RAM) as “a process, an approach, a methodology and an attitude of mind rolled into one” that serves as the framework that informs how auditing of financial statements is conducted (Messier (Jr.), 2014). The rationale behind risk based audit is to focus more of the audit resources on areas of greatest risk likely to cause material misstatements.

Problem Statement

In 2010, staffs of the Ghana Audit Service received training on the new audit procedure (i.e. risk based auditing) and then went on to adopt it in 2013. However, very little or no studies have been done on the impact of risk based method on implementation of internal control systems as well as auditing performance of the Ghana Audit Service.

It is widely perceived that there are a lot of inefficiencies in public sector organizations in Africa not excluding Ghana (Owusu, 2012). These inefficiencies lead to wastage of resources which affects the organization’s productivity and financial performance (Lewin and Johnson, 2000).

Objective

To determine the impact of risk based audit method on the implementation of internal control system within the context of the Ghana Audit Service.

Conceptual Framework (Adopted from Nyarombe et al., 2015)

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Key Findings

RAM appeared to have had the greatest impact on compliance with laws, regulations and contracts (4.12), followed by effectiveness and efficiency of operations (mean Likert score = 4.02), asset safeguarding (mean Likert score = 4.00) and Reliability and integrity of financial and operational information (3.80).

Not all adopted risk based audit practice significantly contributes towards the impact of RAM on implementation of internal control system;

Heavy adoption of a risk based audit practice does not necessarily translate into contribution towards impact of RAM on implementation of internal control system;

RAM appeared to have had the greatest impact on compliance with laws, regulations and contracts (4.12), followed by effectiveness and efficiency of operations (mean Likert score = 4.02), asset safeguarding (mean Likert score = 4.00) and Reliability and integrity of financial and operational information (3.80). However, further analysis revealed that RAM equally impacted on all the four variables underlying implementation of internal control systems (ANOVA, p = 1) – an indication of its comprehensive nature.

The challenges associated with execution of the risk based audit method emanates from four major areas: training of auditors, time, auditee entity and the risk based audit method itself. Data collected suggest that training received by auditors on the risk based audit method was not adequate.

Abstract

Following the financial crisis of 2008, the need to base audit on risk became even more evident and crucial, even as organizations around the world were severely affected in the wake of the crisis. Risks have a way of directly or indirectly causing material misstatement(s) in audit reports and affecting productivity and financial performance of organizations. This study therefore sought to determine the impact of risk based audit method on the implementation of internal control system within the context of the Ghana Audit Service. The study was essentially quantitative in nature and employed the empirical research design. Primary data was collected by questionnaire administration and was analysed using statistical software packages (SPSS). Data collected suggests that, on the whole, adoption of risk based audit (RBA) practices by the Ghana Audit Service is on sound footing as evidenced by a an overall mean Likert score of 4.10. Testing of compliance with the credit and personal procedures (mean Likert score = 4.52) was observed to be the most adopted RBA practice whilst putting together a risk register unique to the auditee organization registered the lowest adoption rate (mean Likert score = 3.40). However, it was observed also that not all adopted risk based audit practice significantly contributes towards the impact of RAM on implementation of internal control system. Moreover, a massive 98.3 % (n =59) of respondents said the introduced risk based audit methodology manual has influenced the effectiveness of auditing. Further analysis revealed that RAM equally impacted on all the four variables underlying implementation of internal control systems (ANOVA, p = 1) – an indication of its comprehensive nature. The challenges associated with execution of the risk based audit method emanates from four areas: training of auditors, time, auditee entity and the risk based audit method itself. It is also advised that auditors be provided sufficient training on the RAM so that they would be in a good position to help members of the auditee entity understand it.

Key terms
Internal control thesis

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Some References

Agbodohu, W., & Churchill, R. Q. (2014). Corruption in Ghana: Causes, consequences and cures. International Journal of Economics, Finance and Management Sciences, 2(1), 92–102. doi:10.11648/j.ijefm.20140201.20

African Union, AU. (2006). AU Section 314: Understanding the Entity and Its Environment and Assessing the Risks.

American Accounting Association (1972). Auditing. http://aaahq.org/, Retrieved on 10/11/2015

Ayagre, P. (2014). the Adoption of Risk Based Internal Auditing in Developing countries: the case of Ghanaian companies. European Journals of Accounting Auditing and Finance Research, 2(7), 52–65.

Castanheira, N., & Craig, R. (2009). Factors associated with the adoption of risk-based internal auditing. Managerial Auditing Journal, 25(1), 79–98. doi:10.1108/02686901011007315

Chartered Institute of Internal Auditors. (2014). Risk based internal auditing.

Kasiva, M. V. (2012). The impact of risk based audit on financial performance in Commercial Banks in Kenya. University of Nairobi.

Key Words
Internal control thesis

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