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Usefulness Of Internal Controls In Achieving Value For Money

1289 words - 6 pages

The study by Wallace & Kreutzfeldt (1991) was among the first to demonstrate the importance
of the control environment in explaining the existence of an internal audit function. More
recently, Goodwin-Stewart & Kent (2006) provided evidence that the existence of an internal
audit function is related to the level of commitment to risk management. Recent case studies on
internal auditing in Belgium illustrate the importance of the control environment when studying
internal auditing practices. Sarens & De Beelde (2006a, 2006b) found that certain control
environment characteristics (e.g., tone-at-the-top, level of risk and control awareness, extent to
which responsibilities related to risk management and internal controls are clearly defined and
communicated) are significantly related to the role of the internal audit function within an
organization. The tone-at-the-top refers to a company’s ethical values, management’s philosophy
and operating style (Cohen et al., 2002) which are reflected by the company’s code of conduct or
code of ethics. Based on Sarens & De Beelde (2006), we assume that when the company pursues integrity and clear ethical values reflected in a formal code of conduct/ethics, the internal audit function will
take on greater importance. This is because the internal audit function is often seen as a way of
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translating and communicating the tone-at-the-top throughout the company (Sarens et al., 2009).
Therefore, management is more likely to invest in a relatively larger internal audit function.
The American Bar Association (ABA) directors’ guidebook states that “an important aspect of
the board’s responsibility, often referred to the audit committee, is oversight of the corporation’s
policies and procedures regarding compliance with law and significant corporate policies.”
Internal control systems not only contribute to managerial effectiveness but are also important duties of
corporate boards of directors. Accounting literature likewise emphasizes the importance of an
organization’s integrity and ethical values in maintaining an effective control system (Verschoor,
1999).
A focus on integrity and ethical values was the principal contribution of Internal Control—
Integrated Framework published by the Committee of Sponsoring Organizations of the
Treadway Commission (on fraudulent financial reporting.)
To trigger independence of auditors, the American Institute of Certified Public Accountants
(AICPA) Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 78. This
statement requires auditors to perform procedures on every audit to enable them to understand
their client’s control environment including integrity and ethical values. In other words, auditors
are specifically required to determine whether their clients’ ethical controls are operating. SAS
No. 78 points out that ethical values and other elements of the control environment permeate the
culture of an organization and affect the strength of a

Risk...

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