Ability of auditor’s assesment for internal control mechanisms in predicting accounting misstatements: The role of the auditor competence

The core of modern enterprise management systems is ameliorating corporate governance structure, good corporate governance structure is the fundamental element of improving efficiency of business management. Scientific and effective internal control system is a strong guarantee to achieving its goal. Internal control system made by management layer as a series of established rules, policies and procedures, is closely related to corporate governance and management. In this paper, we innovatively apply unascertained measure and information entropy method in the evaluation of internal control, providing a new perspective in the evaluation of business internal control.

Improving governance results in Ghana requires a culture of candour among public institutions. This paper tried to determine what extent do internal and external control systems foster accountability practices in public institutions in Ghana. The research also sought to assess the strengths and shortcomings of current control mechanisms, offering practical recommendations for improving institutional accountability and reinstating public trust in governmental operations. A comprehensive understanding of internal and external control mechanisms in Ghana's public sector is urgently required owing to the nation's particular challenges, including widespread accountability issues, corruption, and misappropriation of financial resources. The study adopted agency theory to underscore the propensity of public officials to pursue self-interest in the absence of sufficient control, complimented by stewardship theory, which posits that alignment with organisational objectives may improve ethical conduct around officials. Internal and external controls are essential for sustaining public confidence and averting corruption. Internal controls include management audits and performance evaluations, while external controls entail regulatory supervision by independent organisations, guaranteeing the effective and ethical utilisation of public resources. The study adopted a descriptive research design, utilising both quantitative and qualitative approaches. A non-probability sampling with purposive and convenience sampling technique was used. This was to ensure that knowledgeable people were selected by the judgment of the researcher. The population of the study was 5000 comprising senior management and non-managerial employees of public institutions. A sample of 300 respondents received the questionnaires with 259 (86.33%) returning same. The research used SPSS with Multiple Linear Regression via a stepwise model. The qualitative data using semi-structured interviews was transcribed with quotation marks into a text box. This study emphasised the significance of internal and external control mechanisms in enhancing accountability inside public institutions. Issues such as insufficient funding and political interference underscore the need of improving these systems. With overall R2 of 15.2% the Null hypothesis was rejected. The study concludes that both internal and external control mechanisms assist in regulating behaviour; nevertheless, political factors, insufficient training, and limited resources may render them almost ineffective. The apparent autonomy of external controls enhanced their efficacy in promoting accountability. The paper therefore, recommends enhancing Internal Control Mechanisms by allocating additional resources for training and innovative audit technology. Enhance External Oversight by augmenting the capabilities and independence of external auditing institutions to mitigate political meddling. And finally, the public's trust in accountability systems may be bolstered by the encouragement of transparency and integrity in reporting.

The Alignment of Internal and External Control Mechanisms: The Differential Market Valuation and Performance Effects in High-Growth Versus Low-Growth Industries

Culture Risk: An Exploratory Study of the Influence of Culture on Auditorss Evaluation of Internal Control and Assessment of Control Risk

Based on the analysis of the internal control theory of Listed Companies in China and the United States, it is found that there are some differences in the definition, objectives and elements of internal control between China and the United States. The analysis shows that the internal control of Listed Companies in China is generally effective from 2013 to 2017, but it is decreasing year by year. Comparing the operation of Chinese and American listed companies in 2017, it is found that there are still significant differences in performance and internal control early warning system of different industries. The empirical results show that corporate governance level, marketization, information disclosure, internal control evaluation and weak audit links are the main reasons for the performance differences between Chinese and American listed companies. Therefore, some reasonable suggestions are put forward to improve the corporate governance mechanism and internal control efficiency.

The main objective of this study was to examine the role and existence of internal control and accountability in NGOs of Buea Sub-division Cameroon. The study fol-lowed these research questions: What are the main concerns of governance in NGOs in the Buea Sub-division Cameroon? Among the identified items, which ones are more important? What is the implication of each item after analyzing? Two theories consti-tuted the theoretical framework of the current study, including the agency theory and stakeholder theory. The evaluation of internal control and accountability was con-ducted through interviews with managers, directors, accountants, and project manag-ers to reach a framework in questionnaires format in fifteen chosen NGOs. By con-ducting interviews 35 items were obtained and among them, 21 items were more em-phasized by the participants. These 21 areas were analyzed using percentage frequen-cy tables and bar charts by using SPSS to analyze internal control and accountability practices in NGOs in Buea Sub-division in Cameroon. The COSO model and HAP frameworks were applied as guidance for the whole procedures and analysis. The findings revealed that some components of internal control systems were not fully ac-tive. Nevertheless, most components like control environment, information, and communication, control activities, internal audit, segregation of duty, accounting knowledge and principles, internal control and accountability were actively being practiced which resulted in a considerable and positive influence on NGOs, noted by participants. The lack of a regulatory body and control by the local government to monitor the operations of NGOs and their ethical standards were noted as problems hindering accountability and reliable reports to stakeholders by the NGO sector in Buea Sub-division. This study has its own limitations as the small group of participants and bias of self-evaluation of critical elements of governance. The study ends with a recommendation for government and NGO management to employ personnel with sound knowledge of internal control and accountability that will follow up on the weaknesses identified in the system like political instability, monitoring, disclosure, and funding constraints in order to improve the existing internal control and ac-countability systems in Buea Sub-division Cameroon.

PurposeThis study aims to evaluate the moderating impact of corporate governance on the relationship between internal control mechanisms and financial performance.Design/methodology/approachThe study employs a structured questionnaire to collect data from 250 top managers of rural banks in the capital of Ghana. Cronbach alpha value and Fornell-Larcker tests were performed to assess the reliability and validity of the data used. The study adopted a partial least square structural equation model (PLS-SEM).FindingsThe results show that internal control and corporate governance both have a direct positive and significant impact on financial performance. Furthermore, the interaction of internal control and corporate governance also has a positive and significant impact on financial performance, thus confirming the moderating role of corporate governance in the relationship between internal control mechanisms and financial performance.Practical implicationsThis implies that organizations need to strengthen their corporate governance procedures to increase the efficiency of their internal control systems, which would ultimately lead to an improvement in their financial performance.Originality/valueThe present study innovates by assessing the moderating role of corporate governance in the nexus between internal control mechanisms and financial performance. This moderating effect assessment implies that corporate governance may not only affect the technical implementation of the internal control structures but will subsequently make an impact on the overall performance of the organization.

PurposeMotivated by the importance of gaining an understanding of the flow of transactions when assessing the effectiveness of internal controls for Sarbanes–Oxley Act (SOX) compliance, concerns raised by the Public Company Accounting Oversight Board (PCAOB) of audit firm deficiencies in these areas and auditors’ use of both narratives and flowcharts to document the flow of transactions, this article aims to examine the impact of auditors creating flowcharts versus narratives on auditors’ transaction flow understanding and internal control evaluation performance.Design/methodology/approachThis paper conducts a between-participants experiment examining auditor-created flowcharts versus narratives and different levels of documentation quality on auditors’ understanding of the flow of transactions and internal control evaluation performance.FindingsThis paper finds that auditors who create flowcharts gain a better understanding of the clients’ transaction flow and perform better on internal control evaluations than auditors who create narratives. Process results from a moderated-mediation model also show a moderating effect of quality and mediating effect of understanding.Practical implicationsThese findings inform PCAOB policy decisions and inspection efforts and audit firms’ quality and process improvement efforts by providing initial support for having auditors create flowcharts to improve their understanding of the flow of transactions and internal control evaluation performance.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the effect of auditor-created flowcharts compared to narratives on auditors’ understanding of the flow of transactions and internal control evaluation performance.

Internal control evaluation traditionally has been an integral part of an audit to provide an opinion on an entity's financial statements. Essentially, internal control evaluation is used to determine the substantive testing necessary to render an opinion on the financial statements. With the passage of the Foreign Corrupt Practices Act (FCPA) and recent proposals of the SEC, internal control evaluation has gained new impetus. These events may lead to the independent auditor being required to provide an internal control opinion separate from a financial statement audit. Consequently, the auditor may be required to aggregate the evaluation of system parts into a statement as to the performance of the system or major subsystem as a whole in addition to the reports currently made to management on the adequacy of internal control. Although mathematical models for internal control evaluation have been proposed, these have failed to receive acceptance by auditors. As an alternative to these models, this paper proposes the use of a procedure for aggregating the evaluation of parts of an internal control system employing the linguistic values commonly in use by auditors such as “strong,” “weak,” and “adequate.” The linguistic model (1) uses the theory of fuzzy sets to aggregate these common linguistic values and (2) returns a linguistic aggregate evaluation of the control system under review. A cash receipts and shipping control system is used in a numerical illustration and future research directions are proposed.

This paper examines some policy issues related to the interaction between internal and external corporate control mechanisms—board dismissals and takeovers—by focusing on the information aggregation and other effects related to this interaction. We model the functioning of corporate control mechanisms as an example of a multilayered principal‐agent relationship in which shareholders delegate the task of monitoring management quality to the board and rely on the external takeover market to provide additional disciplining of the manager as well as of the board. This gives rise to two effects: (1) a substitution effect, whereby the takeover market partially substitutes for board dismissal of the manager, leading to greater lenience toward the manager by a board acting in the shareholders' best interest, and (2) a kick‐in‐the‐pants effect, whereby the board is stricter with the manager because it may be dismissed by a successful acquirer who views it as lax. The interaction of these two effects leads to various implications about the behavior of boards and potential acquirers. In particular, a well‐functioning internal control mechanism (the board) does not obviate the need for external control (takeovers). Moreover, somewhat counterintuitively, there may be a greater incidence of takeovers when the internal control mechanism is working well than when it is not.

This paper describes a case approach for teaching internal control evaluation (ICE) using an Excel spreadsheet patterned after software from Grant Thornton LLP (Grant) named INFOCUS. Although INFOCUS is not used or supported anymore by Grant, it was used for many years in training and development for ICE theory and application at the firm. Grant allows use of their software and approach for classroom use. From a conceptual pedagogy perspective, this approach is still applicable to current practice standards and guidelines for ICE and provides a systematic application to help students take the role of an auditor to document the accounting system, document the controls, select key controls, and make the preliminary control risk assessment. The case and spreadsheet application can also be applied to the COSO 2013 Framework focusing mostly on Risk Assessment, Control Activities, and Monitoring Activities to internal control systems. The spreadsheet application can accommodate cases that provide differing company sizes and levels of automated control environments for internal audit and management perspectives. This case and spreadsheet application provides students an opportunity to deeply understand and analyze the accounting processes, the internal controls, and the interrelationships between the processes and controls. Exposure to such a case and spreadsheet application helps prepare students to successfully complete internal control evaluations in the “real world.”

PurposeThis paper aims to explore whether an internal auditor’s evaluation of internal control deficiencies are influenced by the party with primary influence over the internal audit function and by the type of internal control deficiency.Design/methodology/approachA behavioral experiment is conducted with internal auditors as participants in a 2 × 2 between-subjects factorial design.FindingsResults indicate that internal auditors are less likely to evaluate a pervasive control deficiency related to “tone at the top” as a material weakness than a process-specific control deficiency. Furthermore, internal auditors are somewhat less likely to evaluate a process-specific internal control deficiency as a material weakness when management has primary influence over the internal audit function than when the audit committee has primary influence. It is also found that the best practice of internal audit oversight (i.e., primary oversight of internal auditors by the audit committee) may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal control.Research limitations/implicationsLimitations of this research include lack of economic consequences (e.g. future pay and job loss) associated with the internal control decisions made by the participants; less concise information provided to the participants than would generally be available to them; and lack of generalizability of the findings beyond the specific company setting and internal control scenario portrayed in the case materials.Practical implicationsNot evaluating a pervasive control deficiency related to “tone at the top” as a material weakness seems to not fully align with relevant professional guidance and can possibly result in inaccurate internal information about the quality of internal controls. Furthermore, having an internal auditor’s evaluation of a process-specific internal control deficiency influenced by the party with primary influence over the internal audit function would not appear to align with relevant professional guidance. Finally, primary oversight by the audit committee of the internal auditors may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal controls and, thus, possible communication of inaccurate internal control information.Originality/valueThis study is the first to address whether the party with primary influence over the internal audit function influences an internal auditor’s evaluation of internal control deficiencies.

Illuminating the Limits of Auditor Accountability Through a Historical Review of Internal Control Evaluation

Internal control evaluation is one of the most important steps of audit. For conducting this step properly internal control evaluation models are used. Every model has its own advantages and disadvantages. Pros and cons of the most popular internal control models, audit standards used in the biggest countries of the world, researches in the field of effective internal control evaluation are analysed in this article. Structure of internal control evaluation is provided. It enables to connect advantages and dilute disadvantages of the most commonly used internal control evaluation models.

With regard to the development of internal controls, there is lack of an index system of internal control evaluation for listed company. This largely constrains the study progress of listed company's internal control evaluation. To indicates the necessity of construct internal control evaluation system incorporate with the present condition of internal control for listed companies. Then construct the internal control evaluation system which applicable for listed companies. Finally verify reliability and validity of the index system, use AHP to determine weights of each index.