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Thesis proposal

Topic: The role of internal audit in evaluating internal control over the management of joint stock

companies in accordance with the principles of corporate governance

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Thesis proposal

Abstract

The globalization of the economy has made internal auditing a crucial means through which the

management of joint-stock companies can assess their internal control. Corporate governance has also

received wider attention as it determines whether the companies will be successful or not. Internal audit

evaluates the internal control of the joint stock companies to avoid major accounting scandals which are as

a result of massive corporate failures. The paper also aims at evaluating the interaction between different

factors of corporate governance. The main aim of the paper is to examine how internal audit contributes to

internal control and corporate governance. The thesis proposal will also examine the corporate governance

factors such as the board of directors and internal audit process. Through an extended literature review, the

thesis paper provides an integrated conceptual framework for internal audit, internal control, and corporate

governance. The results of the research indicate that internal audit has a crucial role in the evaluation of

internal control and corporate governance of joint stock companies.

Introduction.

Internal audit is an integral part of internal control and corporate governance. Internal control of an

organization is affected by the personnel working in the organization, internal auditors, and business

enabling factors that might affect the firm. Factors affecting internal controls of joint stock companies

contribute to assurance that corporate objectives are realized. There are various lines of defense in which

joint stock companies may view internal control. One of the lines of defense that internal control of a

company may be evaluated is through the assessment of management and other personnel in the companies

with the task of ensuring effective internal control of the firm. Business enabling functions is another

important line of defense in which internal control standards can be evaluated. Internal auditors are also

important plays in the evaluation of control in accordance with corporate governance. Internal auditors

conduct an assessment of the internal controls and report the recommendations on the things that can be

implemented to enhance the operations.

Thesis proposal

A conceptual framework for internal audit.

Internal audit process in an organization is often considered as a monitoring function of the

accounting process. Historically, internal auditors are referred as the organization's watchdogs. Internal

auditors are necessary for an organization but are often deemed to be subservient to the achievement of

major corporate goals of the companies. According to the institute of internal auditors, internal auditing is

the independent appraisal function that is established in an organization to evaluate and examine the

activities of the organization. The process of internal auditing is an important managerial control device as

it is used to measure the effectiveness of the managerial control in the company.

Internal audit also plays an important role in the internal control of joint stock companies as it

provides a procedure that offers fundamental security to the business regarding the credibility of financial

operations of the company. The report by internal auditors in a company defines internal control within the

company and also describes a framework for internal control. A report by internal auditors of joint stock

companies also provide a criteria that can be used by the management to evaluate internal controls.

According to (Naciri, 2013), the process of internal auditing should also evaluate and contribute to the

process of risk management within an organization as well as control and corporate governance. This shows

that the focus of internal auditing shifts from value addition to ensuring a standard-driven approach to risk

management, internal control, and corporate governance.

The internal control of joint stock companies moves within the greater scope of management and

adds up value by offering a systematic and scientific way of improving the effectiveness of business

operations in the organizations. The role of internal auditing is not just controlling the order and rightness

of various financial affairs of business but also a process of adding up the value to a company. An effective

process of internal auditing creates a friendly internal control environment which in turn will lead to the

achievement of effectiveness and profitability of a business organization.

Thesis proposal

Internal audit and corporate governance in the joint stock industry.

According to the Institute of internal audit 2010, corporate governance is defined as the total

operations and control within a business organization. Corporate governance provides a framework in

which a joint stock company is organized, managed and controlled. Corporate governance has become

crucial over the years as it affects the firm's economic performance and the ability to achieve the firm’s

goals and objectives. Internal audit is crucial to corporate governance of a firm because it allows the firms

to access capital markets easily through the establishment of effective personnel in the management of the

companies. Successful corporate governance for joint stock companies allows the firms to access markets

and capital more easily which boosts the profitability of the business organizations.

Successful internal auditing process would provide a corporate governance platform with

mechanisms by which the stakeholders in the joint stock companies can exercise their control over the

corporate management to protect their interests. It is the role of the internal auditors within an organization

to provide internal control over the operations of the business to enhance corporate governance in which

the board of directors within the business organizations will lead to the success of the companies (Leung,

2012).

The scope of internal auditing involves the evaluation and examination of the effectiveness of the internal

control systems, risk management process and corporate governance. According to (Farrar, 2015), there are

different roles in which internal audit can lead to effective process of internal control and corporate

governance. One of the ways is by reviewing the appropriateness and reliability of t financial information

within the joint stock companies. It is the role of internal audit to review financial information of the

company to control financial scandals that occur as a result of corporate failure.

Another role of an internal audit that is crucial to ensuring internal control and corporate

governance is reviewing compliance of the companies using the plans, policies, and regulations laid down.

Failure to review compliance with the agreed plans and regulations could have an adverse impact on the

Thesis proposal

operations of the companies. The internal auditors also have the role of safeguarding and verifying the

existence of corporate assets which are often misappropriated by the leadership of the companies if not well

monitored.

An internal audit of a company should also review the internal operations of the company to ascertain that

the results are consistent with the goals and objectives of the company. The report of internal audit should

highlight how the company is working towards achieving its aspirations and also provide recommendations

to the company. Internal audit should also assist the board of directors of the company in reviewing specific

operations of the organizations.

There exists a correlation between internal auditing and corporate governance. Joint stock

companies have the responsibilities of making sure that the process of internal auditing within the

organizations is conducted concerning plans and regulations to enhance corporate governance within the

organizations. Like internal auditing, internal control and corporate governance affect all forms of economic

activities that happen in joint stock companies. As a result, internal auditing and corporate governance have

become a public concern. The international guidelines show that internal audit and corporate governance

have a significant effect on the performance of the joint stock companies.

The role of internal auditing within a business corporation with respect to corporate governance

can be realized by demarcating the relationship between internal auditing and the primary components of

corporate governance. One of the key players in corporate governance of the joint stock companies is the

board of directors. It is the role of internal audit in aiding the companies to achieve their goals and

objectives. The board of directors has the responsibility of ensuring the internal controls within the

organizations are in order, and the organizations meet its objectives. With the help of the internal audit, the

board of directors use the report and recommendations provided by the internal audit to determine the areas

where the organizations need to focus more. The board of directors also use the internal audit in measuring

and evaluating the internal controls or the companies. This makes the process of internal auditing crucial to

Thesis proposal

the managerial operations of the joint stock companies in accordance with the principles of corporate

governance.

According to (ECIIA. & Schartmann, 2014), there are different ways in which internal auditing contribute

to the principles or corporate governance. One of the ways is by bringing best practice regarding risk

management and internal control processes to the audit committee. If the audit committee implements the

best practices, the joint-stock companies will bring about corporate governance.

Another way through which internal auditing contribute to corporate governance is through the

provision of information about any fraudulent processes and financial irregularities that might affect the

companies. This is the role of internal audit that ensures that irregularities and financial fraud within

business organizations are eliminated to enhance corporate governance. Corporate governance leads to the

achievement of the organization's goals and objectives. The audit committee also conducts frequent reviews

on its practices to ensure that the activities are consistent with the leading practices (Leung, 2012).

The audit committee is an important aspect that strengthens the process of internal auditing within

an organization. The audit committee assists the company in providing an independent and supportive

environment that would create corporate governance. Although the internal audit is crucial in internal

control and corporate governance, it is important for the joint stock companies to conduct an external audit

that improves corporate governance within the organizations. An external audit would ensure that the

process of internal audit is properly done. An external audit would strengthen the effectiveness of internal

audit and corporate governance (Farrar, 2015).

The process of internal audit also evaluates internal control and enhance corporate governance by

reviewing the companies’ code of conduct and ethics policies that need to be followed by the personnel

working in those organizations. Ethics policies followed by personnel are designed by the board of directors

of the companies to provide a simple of achieving the organization's goals and objectives.

Thesis proposal

Internal auditing is increasingly becoming oriented to the role of advising the management of

business organizations on internal control processes in accordance with the principles of corporate

governance. Internal auditing is a crucial stage that joint stock companies ought to recognize. This is

because the role of internal audit is fundamental to the success of the organizations. Internal audit has the

responsibility for strategic risk oversight within a business organization. The board of directors of the joint

stock companies would, therefore, be required to define clear accountability of risk within the companies

to ensure that the organizations remain focused on their goals and objectives.

According to (the UK code of corporate governance, 2010), internal audit has the role of monitoring

and reviewing the effectiveness of the internal audit activities. This code of corporate governance shows

how internal audit plays an important role in evaluating internal control in accordance with the principle of

corporate governance.

Conclusion.

This paper has established a positive relationship between internal audit and corporate governance.

The paper has stated the role of internal audit in evaluating internal control over joint stock companies in

accordance with the principles of corporate governance. Internal audit stipulates the key governance

mechanisms that ensure the process of internal audit and internal control are successfully conducted. The

paper which is focused on the joint stock industry also shows how risk management in the process of

internal audit is crucial in ensuring corporate governance.

Thesis proposal

References

Farrar, J. H. (2015). Corporate governance: Theories, principles & practice. Melbourne: Oxford University

Press.

ECIIA. & Schartmann, B. (2014). The Role of Internal Audit in Corporate Governance in Europe: Current

Status, Necessary Improvements, Future Tasks. Berlin: Erich Schmidt Verlag.

Leung, Robertson & Institute of Internal Auditors. (2012). The role of internal audit in corporate

governance & management. School of Accounting and Law, RMIT University

Naciri, A. (2013). Internal and external aspects of corporate governance. Place of publication not

identified: Routledge.

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