ASSESSMENT OF

INTERNAL AUDITING PRACTICE IN COMMERCIAL BANK OF

ETHIOPIA DUME BRANCH

BY: DANIEL DANSAMO ------- ID NO.

ADIVISOR: GEDAM G

JUNE, 2016

HAWASSA, ETHIOP
I
 CHAPTER ONE

INTRODUCTION

1 .1 Back ground of the study

The development of auditing is closely related to the development of organized

system accounting. The practice of auditing account is back to the early stage. In this
day audit was under taken mainly for state and public account .Different changes and
factors have been influenced the auditing profession in recent year. Technological
development bodies have system the auditing policy to ready examine its purpose
intention and methodology. Because of this the profession has change in auditing
method from detailed examination of individual transaction to use sampling
technique. Therefore, all those changes have affected the internal auditing
components of the profession (Ricchuite, 2003).
Proper internal auditing practice is a base for preserving the stability of any company.
Auditing as existed today can be associated with the introduction of large scale
production following industrial revolution during 18thC. The term audit means the
examination of account of business Concern by its employees specially appointed
personal. Internal audit is a service activity performed within the organization. It is an
independent evaluation and appraisal of various management processes. The data
audit is the evaluation and appraisal that is done on the basis of predetermined
objective standard (Ricchuite, 2003). Auditing is Superior internal control in nature,
since it reforms evaluation of effectiveness of the management (Arens, Leobbocke,
2003).
Throughout the 1940's and 1950's internal auditing in many organizations focused
only on financial and internal audit department was heavily analysis of financial
statement for management. Today internal auditing takes broader range of
responsibility as suggested in the definition of the internal auditing revised (Ricchuite,
2003). Therefore, this study was focuses on internal audit practice in Commercial
Bank of Ethiopia Dume Branch.

1
1. 2 Statement of the Problem

Internal audit is the examination of internal control accepted in which it function by

measuring and evaluating effectiveness of their organization historical.
It also reviews of operation and records under taken within business by specially
assigned staff .Further the absence of proper internal auditing in Commercial Bank of
Ethiopia Dume Branch lack of continuous quality service and leads to various
problems. These problems were loss of data, theft, corruption, overload of work, and
misstatement of monetary values (Shekher, 2003).
The theoretical problem achieving internal auditing is the degree of independency of
internal auditor. Since internal auditor is employee’s accumulation the organization
they limited independency of their role. That is reporting their degree is fact for
assistance of management has compliance angle policy should be achieved over
internal audit to do successful, also audit fraud by employees and lack of control over
asset. By not having adequate internal auditing activities, the company's will loss
substantial them of resources assurance have difficult to achieve it's intended
objective (Liksh, 2006).
All the above maintained point made the researcher to undertake study of this nature
here in this paper; the researcher wants to assess the existing internal auditing system.
However, so far few researchers were contacted research on assessing internal audit
practice on Commercial Bank of Ethiopia Dume Branch . The problem or the gap was
still not fulfilled. So, the researcher was tray to discover the problem of internal audit
practice of Commercial Bank of Ethiopia Dume branch.

1. 3. Objective of the study

1.3.1 General objective

The general objective of this study was to assess internal auditing practice in
Commercial Bank of Ethiopia Dume Branch.

2
1. 3 .2 Specific objective
 To assess the performance of internal audit in commercial bank of Ethiopia
Dume branch.
 To evaluate the procedures of internal auditing in commercial bank of
Ethiopia Dume branch.

 To identify the major factor that hinder the effectiveness of internal auditing
commercial bank of Ethiopia Dume branch.

1 .3.3 Research Question

1. What is the performance of internal audit in commercial bank of Ethiopia Dume
branch?
2. What are the procedures of internal audit in commercial bank of Ethiopia Dume
branch?
3. What are the major factors that hinder the effectiveness of internal audit system in
commercial bank of Ethiopia Dume Branch?

1.4 Significance of the study.

This particular research is expected to offer the following purposes. It is expected
that the findings of this research will give value to the researchers in case of
developing research experience to solve particular problem. Moreover, the
findings of this research will serve as a source of reference for future research and
help the company to take corrective action on the basis of suggested solutions or
recommendation.
1.6 Scope of the Study
This research will have wide scope concerning cash management practice. It will be
extended its whole purpose that exists in.

1.9 Organization of the study.

3
The first chapter introduces the research study and highlights the general overview of
the Study. Chapter two focuses on reviewing literature on definition of terms,
concepts, Publications and scholarly articles on the study. The Chapter three focuses
on the Methodology of research, the researcher adopted covering the sample size and
techniques, methods of data collection, and methods of data analysis. Chapter four
presents time and cost budget.

4
 CHAPTER TWO

LITERATURE REVIEW

2. 1. Definition of Auditing

Many scholars and profession institutions in the field of define auditing in different
manner. According to William and water perspective on modern auditing books,
auditing is exercise whose objective is to enables auditor to expirees and opinion
about the fairness of the financial statement. In addition auditing is the accumulation
and evaluation of evidence about the quality of the economic entity to determine and
regard the degree of correspondence between the information and established standard
(Setter, 1980, p.10).
Auditing is systematic examination of financial statement and related operation to
determine adherence to generally accepted accounting prince piles management
polices as stated requirement (Meigas and Teal, 1989).
Auditing is the accumulation and evaluation of evidences about information to
determine and reporting the degree of correspondence between the information and
establishes criteria (Whittington and Pant, 1995).

2. 2 Definition of Internal Auditing

Different scholar and institute define internal auditing indifferent way. However, audit
definitions are almost similar in sense. According to the institute of internal auditor
define in the following manner. Internal auditing is an independent, appraisal
objective assurance and consulting activity designed to add value and improved and
organization operate. It helps an organization accomplished its objective by bringing a
systematic discipline approach to evaluate and improve the effectiveness of risk
management, control and governance process. Internal auditing is helpful to assist
member of an organization in the effective discharge of their responsibility (Atkinson,
1986, p.4).
Internal auditing is review of operation and records under taken within a business by
specially assigned staff (Meigas and Teal, 1989).It is review to evaluate the

5
correctness of records and the effectiveness of operation. The term internal audit has
been defined as independent approval of activity within an organization.

2 .3 Objective of Internal Auditing

According to (Whittington and pany, 1995)the objectives of internal auditing is use to

verify correctness and accuracy of financial statement and statistical records presented
to management common the effectiveness of internal control system and to suggest
ways to improve their system ', identify the authorities that responsible for
purchasing asset. It also helps to undertake managerial function of the organization
effectively.

Another objective of internal auditing is to axis member of the organization in

effective discharge of responsibility. Internal auditing is an independent appraisal
function established with an organization to examine and evaluate its activity as
service to the organization. To this end the internal auditing furnished them with
analysis appraise, recommendations course and interruption concerning the activity
reviewed (Engle T. J, 1999, p.118).

2 .4 Internal audit control

Meigas and Etal (1995), it provides the following benefit to the organization: the
internal audit activity shall assist the organization to maintain effective control
through evaluating their effectiveness and efficiency by promoting continuous
improvement ', reliability and integrity of financial and operational information and
compliance with laws and procedures.

2. 5 Nature of Auditing

Auditing is the process by which independent persons accumulate and evaluate

evidences about quantitative information and it is related to specify economic entity
for the purpose of determining and reporting on the degree of correspondent by
quintiles information and established criteria (Sharna, 2006).

6
2. 6 Characteristics of internal auditing.
 Auditors are company’s employee
 Review of company's activities in continues employee
 Have direct influence on the scope of external auditor activity.
 Primary concern is in serving the needs of the organization.
 Accountable for management
 Does not issue opinion to the general public.
 Working is sub divided primarily according to the operating function and line
management responsibility.

2 .7 Independency, Objectivity and compliance

Internal auditor should be independent of the activities they audit. Internal auditor is
independent when they can carry out their work freely and objectively, independent
permits internal auditor to render the logical and unbiased judgment essential to the
proper contact to audit it's achieved through organizational status and objectivity.

Objectivity is an independent mental attitude which internal auditor should maintain

in performing audit. Internal auditor are not subordinate their judgment on audits
matter to that of other. Objectively requires internal auditor to perform audit in such a
manner that they have all honest belief in their work product and that no significant
quality compromise are made internal auditor or not to be placed in situation In which
they fell unable to make objective judgment. Compliance with standard of contact and
policies internal auditor should comely professional standard of conduct the code of
the institute of internal auditor sets for standard of conduct the code calls for high
standard honest, objectivity, diligence and loyalty to which internal auditor should
conform (Hours. F. settler, 1990, p.354).

2. 8 Responsibility of Internal Auditor

7
The same responsibility if internal auditors are as follows

 Responsible for evaluating design and effectiveness of compliances

function
 Develop long range audit plan for organization
 Audit of new management arras to evaluate internal control system.
 Review internal administration and accounting control to safeguard
resources and ensure compliances with laws and regulations.

2. 9. Generally accepted auditing standards (GAAS)

Auditing standard is guide line to aid auditor in fulfillment of their professional

responsibility in the audit of historical financial statement. They include consideration
of personal quantity such: competence, independence, reporting requirement and
evidence (Meigas and Etal, 1989).
2. 10 Principles of establishing internal audit
Independent status: the internal audit department should have an independent status
in organization.
Scope of audit: The scope of internal audit department must specified in
comprehensive manner to the extent of practicable in fact the department must have
the authorities to investigate financial angle over phase of organization activity
(Meigas and Etal, 1989).
2. 11 Advantage of internal auditing
Internal audit provides the following advantage. Such as: prevention of errors and
frauds ', early detection of errors and frauds ', continuous review of internal control
system ', assurance regarding accuracy of books and accounts to ensure correctness of
records (Meigas and Etal, 1989).

8
2. 12 Disadvantage of Internal of internal auditing
Internal audit provides the following limitations. Thus are: Extra cost, the cost of
running internal audit department is very high ', biased opinion, ‘the internal audits
departments’ employee are the paid staff of the organization. In most cases they have
to work according to the direction of the management and so it is not expected that
they have provide biased opinion about financial statement and possibility of
becoming the effective: If the employee of the internal audit department (Megs and
Etal 1989)

2 .13 Principles of Auditing

Principles of independence: The audit work should independent from account and
the auditor should examine the book of account the dependently.
Principles of objectivity: The audit work should based on evidences
Principles of full disclosure: The employer's client should make all proofs
explanation and auditor should declare clearly the result his examination.
Principles of Materiality: it has always been fundamental to the whole process of
accounting (Arens and Loebbock 2003).

2.14 Audit procedure

According to (Arens and Loeb bock, 2003) the audit has the following procedures.
They are:

Physical Examination: is usually means to identify by physical observation.

Confirmation: is equality of by which an auditor obtains written statement from
outside companies.
Reperformance: repletion of client’s criteria routines such as adding and posting
called performance sometime repletion of clients is refers to as computation.
Inquiry - questioning management and employees about matter of accounting is
inquiry.
Observation- reviewing client’s activity or location is called observation.

2.15 Operating Area of Internal Audit

9
Internal auditing operates in the following areas: The establishments of an adequate
accounting system and related control is the responsibility of the management which
demand proper attention The internal audit function is often assigned to specific
responsibility of the management for reviewing the accounting system and related
Accounting control to monitoring their operation and suggesting improvement.

Examination of effectiveness of the operation generally the external auditor are

interested in the result of such audit work only when it has an important bearing on
the reliability if financial record
Physical verification: The internal audit is generally included examination and
verification of physical existence examination for management of financial and
operating information.

2 .16 Essential elements of Internal Audit

Independence: The internal audit is carried out by independent personnel

Staffing: The internal audit unit should be adequate stuffed according to their number,
grades and experience.
Relationship: Internal auditor should foster five working relationship and has to
natural understanding with management.
Due care: Internal auditor should have much skill care and judgment that they should
be technically up to date', known ledged, honesty and integrity.
Evidence: The internal auditor must have similar standard for evidences.
Reporting: The internal auditor most produces timely and accurate report to
management on regular basis.
Specific audit planning: The basis of the objective of the organization and internal
audit of the organization internal auditor should prepare the audit program in order to
cover the specified task that assigned by management.
System control: The internal auditor must verify the operation of the system (Peny
and Meigas, 1989).

10
 CHAPTER THREE
3. Research Methodology
3.1 Research Design
The study will be used descriptive method. Descriptive design is preferred because of
as it helps to show accurately the characteristics of a particular situation.
3.2 Population and Sampling Technique
The population of this study is employees and department heads of credit
management, account section and international banking.
3.3 Sources of Data
In the study primary and secondary data will be used. Primary sources will be
collected from those employees and manager of the bank. The secondary sources that
will be considered includes: books, annual reports, related websites, and other related
materials.
3.4 Method of Data Collection
The data will be collected using both open and close ended questioners. In addition
oral interviews and discussions will be also carried out to gather additional
information on the targeted issues.
3.5 Data Analysis Method
Data will be analyzed by using tables, percent and frequencies supporting discussion
and interpretation.

11
 4. Time and cost Budget
No Months Task
1 February Back ground research and literature review
2 March Research design planning
3 April Data collection and preparation
4 May and June Data analysis
5 July Writing and presentation

5. Cost Budget
No Item Cost/birr
1 Transportation 500
2 Paper 100
3 Total 600

12
 References

 Arens and Leobbocke, Auditing and Internal approach (2003), 7th edition.

 Atkinson principles of Auditing (1995), 6th edition.

 David N. Richiute, Auditing and assurance service (1998), south western

publish

 Engle J.J Auditing and Internal approach (2002), 6th edition.

 Hours F.setter Auditing and corporate finance (1990, p.354).4th edition

 S.D Sharma, principles of auditing 2006, 2nd edition.

 Sheker, Principles of Auditing,(2003) Vikas publishing

 Weiter B.Meigas and etal principles of auditing ,(1998 )8th edition

13
 APPENDIX

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
QUESTIONNARIES
Dear Sir,
The aim of this questionnaire is to gather data about internal auditing practice in
Commercial Bank of Ethiopia Dume Branch. The information you provide in
response to the item in the questionnaire will be used as part of the data needed for the
study of assessment of internal auditing practice in case of CBE Dume Branch.
I would like to assure that the information you provide will be used for academic
purpose. Your involvement is regarded as a great input to the quality of the research
result.
Your truthful and thoughtful response is valuable.

QUESTIONS TO FILLED BY MANAGER

PART ONE: PERSONAL PROFILE

The following questions prepared to get general information. Please respond by
putting (X)
1. Sex Male Female
2. Age
A. 20-25
B. 26-30
C. 31-35
D. Above 36
3. Educational background
A. Diploma
B. Degree
C. Masters and above
4. Year of experience

14
 A. 1-2 years
B. 3-4 years
C. 4 Years and above
PART TWO: THE FOLLOWING QUESTIONS ARE PREPARED TO GET
SPECIFIC INFORMATION.
PLEASE RESPOND BY PUTTING (x)
1. Does the bank follow proper internal auditing procedure?
YES NO
2. If your answer for question No one is no, what is the reason?
____________________________________________________________
____________________________________________________________
______________________________
3. Is there internal control structure?
YES NO
4. If your answer for question No three is no what is the reason, justify
____________________________________________________________
____________________________________________________________
______________________________
5. How do you rate the quality of internal auditors?
Excellent Fair
Very good Poor
Good
6. Do you implement the internal audit recommendation?
YES NO
7. If your answer on question No. six is no, what is the reason?
8. Do you think that there are problems on the internal audit assessment?
YES NO
9. If your answer for question No. eight is yes, state some of the problems
____________________________________________________________
____________________________________________________________

15
 ______________________________
10. Do you think that the internal audit procedure forms are adequate to
perform the internal audit?
YES NO
11. If your answer on question No. ten is no, what is the reason justify
____________________________________________________________
____________________________________________________________
______________________________
12. How do you rate the effectiveness of internal auditing system?
Excellent Fair
Very good Poor
Good

16
 APPENDIX II

QUESTIONS TO BE FILLED BY AUDITOR

1. Do you think internal audit work performed based on annual audit plan?
Yes no
2. Did the internal auditor work for only when negative thinks are rise?
Yes no
3. If your question No. two is yes state some justification
-------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
4. Is there proper internal audit control system in CBE Dume branch?
Yes no
5. Do you have job description that specific duties and right of internal auditor?
Yes no
6. Is there some example of audit finding?
Yes no
7. If your question NO .six is yes states some of the finding...
…………………………………………………………………………………………
……………………………………………………
8. For whom internal auditor is responsible?
For bank manager
For board of director
For head office
For vice branch manager

Interview question for employees

1. Are the internal audit perform procedure properly

17
2. Is there adequate and competent internal audit in the organization?
3. Do you believe that auditor of OIB have enough audit experience?
4.What is the problem of internal audit procedure practice in OIB fitche branch?

18