1.1. BACKGROUND OF THE STUDY
Internal audit is an independent, material and consultancy activity, which adds value and improves the functioning of an organization. It aids the organization to achieve its aims by means of a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and the management process. Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It serves as an important link in the business and financial reporting processes of all organizations. Internal auditors play a key role in monitoring a company’s risk profile and identifying the areas to improve risk management. Their aim is to improve organizational efficiency and effectiveness through constructive criticism (Goodwin, 2009). Internal audit control comprises the plan of the organization and all methods and measures adopted within a business to safeguard operational efficiency, and encourage adherence to prescribed managerial policies. It has five main components namely verification of written records, analysis of policy, evaluation of the logic and completeness of procedures, internal services, and stafing to assure that they are efficient and appropriate for the organization’s policies, and reporting recommendations for improvements to management (Hutchinson & Zain, 2009) . Internal Audit has become an indispensable management tool for achieving effective control by detecting the weaknesses in management operations. Internal auditing provides a basis for correcting deficiencies that have eluded the first line of defense before these deficiencies become uncontrollable or are exposed in the external auditor’s report (Sarens & De Beelde, 2006).
Internal audit is a broad term which means a number of checks and controls exercised in a business to ensure efficient and economic working. Internal audit is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of business, including internal check, internal audit and other forms of control. It involves a sort of vigilance and direction over important matters like budget and finance, purchases and sales and internal administration by the management; for example, in case of proprietary concern, such a control would be exercised by the proprietor while the case of a joint stock company, it would come from the directors. Thus, it may be stated that internal audit provides a measure for the management to obtain information, protection, and control which is quite important for the successful working of a business organization (Collier & Gregory, 2012). Globally, financial scandals have been witnessed triggering reaction for tighter regulation and enhanced standards for accounting and corporate governance (Sarbanes & Oxley, 2 2009). In America, scandals such World.com and Enron in year 2009 where investors lost over $180 billion led to enactment of Corporate and Auditing Accountability and Responsibility Act (Sarbanes & Oxley, 2009). These major financial scandals were caused by poor internal control systems including weak corporate governance which the Sarbanes Oxley Act of 2009, tried to address. In South Africa, the effects and implementation of the King II Report on audit practices on organization performance have not been clearly measured or the results reported. However, this is contributed by failure of regulatory bodies providing little guidance on how these evaluations should be performed. He suggests that this process should be customized for individual companies and that it cannot be a case of one size fits all (Mahadeva, 2009). The internal audit is very crucial inside a company that the internal audit is regarded as the main element in the application of accounting systems which in turn, helps in evaluating the work of the company.
The internal audit is considered as the strength of business accounting as it is the section that records all businesses related to the sector. The effectiveness of internal audit helps in developing the work of the company because the financial reports reflect the internal audit unit’s quality. The financial and corporate strategy of a company is underpinned by effective internal systems in which the internal audit has an important role in raising the reliability of the internal control system, improving the process of risk management and above all, satisfying the needs of internal users. The internal audit encourages and enhances the system of responsibility that the executive directors and employees have towards the owners and other stakeholders (Eighme & Cashell, 2009). A viable internal audit functions is one of the most grounded devices to screen and improve corporate performance. Cohen (2009) pointed that internal auditing practices is a crucial part of corporate performance in both private and public sectors. Internal control refers to the measures founded by an association in order to guarantee achievement of the substance’s targets, goals and operations. These are terms and conditions employed by a firm in guaranteeing that organizations exchanges are prepared in the suitable way to maintain a strategic distance from waste, burglary and abuse of organization assets. Therefore, the study seeks to examine the effects of the internal audit on corporate performance, a case study of two selected manufacturing companies in Abia State.