ETHIO-LENS COLLEGE

FACULTY OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF INTERNAL AUDIT PRACTICE

(A CASE STUDY ON COMMERCIAL BANK OF ETHIOPIA, ADI-
HAWSI BRANCH, MEKELLE)

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING FOR THE PARTIAL FULFILLMENT OF AWARD OF BA
DEGREE IN ACCOUNTING.

PREPARED BY: TEDROS LILAY BERHE

ID.No:00542/10
ADVISOR: TESFAY GEBRU

JUNE, 2020
MEKELLE
Table of Contents Pages
CHAPTER ONE..............................................................................................................................3
1. INRODUCTION......................................................................................................................3
1.1 BACKGROUND OF THE STUDY......................................................................................3
1.2. Background of the organization............................................................................................4
1.3. Statement of the problem......................................................................................................5
1.4. Objective of the study...........................................................................................................6
1.4.1 General objective............................................................................................................6
1.4.2 Specific objective............................................................................................................6
1.5. Significant of the study.........................................................................................................6
1.6 Scope of the study..................................................................................................................7
1.7.Methods of data analysis.......................................................................................................7
1.8.Limitation of the Study..........................................................................................................7
1.9. Organization of the study......................................................................................................7
CHAPTER- TWO............................................................................................................................8
2. LITRETURE REVIEW...........................................................................................................8
2.1. WHY STUDY AUDITG?....................................................................................................8
2.2. BROAD DEFINITION OF AUDITING..............................................................................8
2.3. HISTORICAL DEVELOPMENT OF INITIAL AUDITING..............................................9
2.4. INTERNAL AUDITING IN ETHIOPIA...........................................................................10
2.5. THE DIFFERENC BETWEEN ACCOUNTING AND ADUTING.................................11
2.6. TYPES OF AUDITS..........................................................................................................11
2.7. TYPES OF AUDITORS.....................................................................................................12
2.8. INTERNAL AUDITING....................................................................................................13
2.8.1. OBJECTIVE OF INTERNAL AUDITING................................................................13
2.8.2 INTERNAL AUDIT FUNCTION................................................................................14
2.8.3. CHARACTERISTIC OF INTERNAL AUDIT...........................................................14
2.8.4. INTERNAL AUDITING ROLE IN CONTROL........................................................14
2.8.5. INDEPENDENCE, OBJECTIVITY AND COMPLIANCE.......................................15
2.8.6. RESPONSIBILITY OF INTERNAL AUDITOR.......................................................15
2.8.7. APPLICABILITY OF INTERNAL AUDITING........................................................16
2.8.8. BARRIERS TO SUCCESSFUL AUDIT RESULT....................................................16
2.8.9. AUDIT REPORTS......................................................................................................16

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 2.8.10. Contents of Report.....................................................................................................17
2.8.11. Format of Report........................................................................................................17
2.8.12. Nature of internal auditing.........................................................................................17
2.9. THE AUDIT PROCESS.....................................................................................................18
2.10. AUDIT PLANNING AND PROGRAM..........................................................................18
2.10.1. Audit planning...........................................................................................................18
2.10.2. Audit programmed.....................................................................................................20
2.11. THE USE OF SAMPLINGTOPERFORM TEST OFCONTROL...................................22
2.12. AUDIT EVIDENCE.........................................................................................................22
2.13. MATERIALITY AND ASSESSMENT OF AUDIT RISK.............................................25
2.13.1. Materiality..................................................................................................................25
2.13.2. Assessment of audit risk............................................................................................26
CHAPTER THREE.......................................................................................................................27
3.RESEARCH METHODOLOGY...........................................................................................27
3.1.Research Design..................................................................................................................27
3.2.Population of the study........................................................................................................27
3.3.Sample size and sample technique......................................................................................27
3.4. Data source and collection method.....................................................................................27

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 CHAPTER ONE
1. INRODUCTION

1.1 BACKGROUND OF THE STUDY

Auditing is a systematic process of obtaining and evaluating evidences regarding assertions

about economic actions and events to ascertain the degree of correspondence between those
assertion and established criteria and communicating the results to the interested users (konrath,
1999). As this definition implies auditing encompasses both an investigative process and a
reporting process. Like external auditing, internal auditing was introduced in 1941 when the first
internal auditing book by Z.Brinksas published and the Institute of Internal Auditors was
founded in 1941. The main objectives of internal auditing are to assist all members of
management in the effective discharge of their responsibility by furnishing them with analysis of
appraisals, recommendations and pertinent comments concerning activities reviewed.
Auditing is an important activity for all types of organizations where governmental, private
for profit, and any other. Auditing is a systematic process of objectively obtaining and evaluating
evidence regarding assertion about economic actions and events to ascertain the degree of
correspondence between the results to interested users.(F. messier,2009)
Internal audit is a mechanism by which an organization examines a business process to evaluate
its ability to comply with internal and external requirements. It is also very effective to
implement a discipline of continues improvement. Internal audit enable management to discover
what is really going on within the organizations which enables objectives discipline making and
enables managers to direct the resources towards the right issue, so that relevant stock holders
can implement corrective actions in a timely manner and determine the effectiveness of the
controls within process.
Internal auditors are performed by employees of the organizations functioning in a staff capacity
and reporting to the high level officers in the organizations. Internal auditing is essentially an
appraisal activity within an organization for the reviews of accounting, financial and other
operations as a basis for services to the management. By measuring and evaluating the
effectiveness of the organizational controls, internal auditing itself is an important managerial

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control device (William, 1987). The role of internal auditing is to control the effectiveness and
efficiency of the operation, reliability of financial and management reporting, compliance with
laws and regulations and safeguarding of assets from risk and error of financial statements. It is
also used to perform their works freely and objectively. Internal auditing review operational
procedures to ascertain whether the results are consistent with established objective and
goal(Ahrens, Elder and Beasley, 2012).
The history of the development of internal auditing in Ethiopia dates back to about the middle of
the 1940s jest about the time when internal auditing was evolving as an organized profession in
the United States. Internal audit in Ethiopia had its early legislative root in the constitution of
1931s which authorized the establishment of an audit commission (Art.34) and the audit
commission itself was establish much rater by proclamation 69/1952 to audit the account of the
ministry of finance (MOFED,1997).
Therefore; an internal audit function can provide assurance to management that the
broad objective of internal control is being achieved. Internal audit encompasses the examination
and evaluation adequately and effectiveness of the organization. And this paper will measure the
effectiveness of internal audit based on the respondents’ answer to the examined determinants of
internal auditor’s competency, independence, objectivity, adequate management support, internal
assessment of internal audits activity and proper documentation.

1.2. Background of the organization

The state bank of Ethiopia was established in 1942 with on objectives the duties of both
commercial and central bank is 1963 established as Share Company to take over the commercial
banking activities of the state bank of Ethiopia. In 1974 revolution, commercial bank of Ethiopia
got its strength by emerging with privately own Addis Ababa bank. Since then it has been
playing significant role in the development end over the country.
The commercial bank of Ethiopia which is striving to embark in to world class commercial bank
hindering the state of the art and reliable service to its millions of customers both local and
abroad. This business strategy of the bank focuses in the stakeholders’ service.
On June 30, 2018 the number of branches reached above 1,280. Stretches across the length
breadth of the country. CBE combines a wide capital base with more than 33,000 talented and
committed employees. This makes it one of the reliable and strong commercial bank in its

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country and the regions. Its strong capital base above 67 years of reached experience in the
market and large branch network through the country enables the bank to accommodate large
demand for banking service.

1.3. Statement of the problem

Internal auditing practice is very important or effective to all to implement discipline and make
continuous improvement. Internal auditing is mechanism by which an organization examines a
business to evaluate its ability to comply with internal and external requirements. Good internal
auditing practice also enables managements to discover what is really going on within the
organization which enables objectives and decision making and the managers to direct the
resource towards the right issues. Internal auditing is examination of internal control system in
which it functions by measuring and evaluating effectives or other controls. On the other hand,
external auditors have responsibility to report on the truth and fairness of the accounts of the
company.
The absence of proper internal auditing in the organization leads many problems. The absence of
internal auditing practice in an organization primarily results in lack of the provision of
continuous assurance service. Therefore, the internal audit must be conducted in an ongoing
manner. Secondly, in achieving internal auditing practice the
Degree of independence for internal auditors is limited as internal auditors are employees of the
company they serve.
According to the study conducted by Biweded,(2014) he has explained that internal auditors
should be free from any intervention including government, client and any other party. Again
according to the study conducted by Earmyas(2015) he suggested that internal auditing has great
role in detection of errors and frauds and according (Arens, Elder and Beasley, 2012) internal
auditing review operational procedures to ascertain whether the results are consistent with
established objective and goal.In the similar title Tewlde, (2014)studied that internal auditing
practice of an organization influenced by management intervention.But, allthe above
researchersdid not focus on the role that internal auditing plays towards assuring efficiency and
accomplishment of the stated objectives. Then the researchers are motivated to conduct our study
on the role of internal auditing in accomplishment ofobjectives by considering in to account
efficiency.

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In view of points discussed above, the researcher wants to address the following research
questions so as to assess the strengths and weaknesses of internal auditing practices of CBE
Mekelle adi-hawsi branch.

• What is the importance of internal auditing for the branch?

• To what extent the internal auditors of the branch are objective and independent?

• How effective internal auditing contribute towards goal accomplishment?

1.4. Objective of the study

1.4.1 General objective

The general objective of the study is to assess the effectiveness of internal auditing practice of
CBE, Mekelle, Adi-hawsi branch.

1.4.2 Specific objective

The specific objectives of the study are:
 To assess limitation of internal auditing practices of the branch.

• To assess the performance of the internal auditors of the branch in terms of competence,
objectivity and independence.

• To examine the procedure of internal auditing practice of branch

• To assess the importance of internal auditing practicing the branch.

1.5. Significant of the study

The primary significance of this study is used to fulfill the requirement of bachelor arts of degree
in accounting and finance. Furthermore, the study is expected to identify the use of internal
auditing and internal controls of the business enterprise. Proper function of the audit works

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creates awareness and roles of the benefit of internal auditing practice in the general and
particularly; in Adi-hawsi branch.
This study helpsauditors of the organization to know their role in the organization and can be
further used as reference for other researchers as a source for further investigation. Finally itcan
show that the internal auditing helpful in the achievement of the organization in safeguarding of
assets, comply with laws and regulations and present quality management reports.

1.6 Scope of the study

The research study will focus on the assessment of the internal auditing practice in cbe, mekelle,
and adi- hawsi branch.

1.7.Methods of data analysis

The data that is to be collected from the two sources will be analyzed using descriptive analysis
method. Using percentage and tabulation, to maintain the research work easily and minimize
usage of time. This method also helps the researcher to draw basic conclusion on the study and
enable to make valuable recommendation based on the finding. The questionnaire both close and
open ended because to obtain necessary and sufficient information.

1.8.Limitation of the Study

While conducting the study the researcher will have different constraints or limitations that affect
the researcher to conduct the study properly. Of these constraints the most are listed as follows;

Lack of detail research experience

 While conducting this study the study researcher faced many problems such as time
pressure to collect adequate information and data for the study.
 Some of the respondents may not give response sincerely.

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  Limited amount of finance for the study.

1.9. Organization of the study

The study will be organized in to five chapters. The first chapter involves about background of
the study, background of the organization, statement of the problem, objectives of the study,
significance of the study, scopes of the study and limitations of the study. The second chapter
deals with related empherical and theoretical literature review of the internal auditing. The third
chapter deals with the methodology of the study .The fourth chapter consist of data analysis and
interpretation and the last chapter describes the summary, conclusion, recommendation and also
findings of the study.

CHAPTER- TWO
2. LITRETURE REVIEW

2.1. WHY STUDY AUDITG?

Why should advance account student study audit?

1. Many accounting students study auditing either in public accounting, private industry or
government. These student need to avoid technical expertise and to understand the
theoretical concepts (ethical, legal and other) underlying the practice of auditing.
2. Most people in the business world very on the service of auditors. Investors in equity and
debt securities very on financial statements and other financial information that are given
enhanced credibility by audits. Business manager very on auditors to add credibility to
the internal information they use to make a wide verity of decision. Because of this
reliance, these individuals need an understanding of the audit function.
3. The study of auditing develops skill that can be used in a number of businesses and
government displaces. Students learn to obtain an understanding of financial control,
assess risk and evacuate evidence.
4. Auditing is a pervasive part of business and government. Therefore, accounting students
who are employed in private industry or with a government agency will likely work with
auditors in some capacity. The ability to understand the tasks of auditors will enhance
their ability to work with them.
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2.2. BROAD DEFINITION OF AUDITING

Auditing in a broad sense may be defined as a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to ascertain the
degree correspondence between these assertions and established criteria and communicating the
results to interest users.
The world assertion has a special meaning in auditing. It refers to representations by
management that is embodied in financial statement component, record, system. Here are
examples of two assertions of an organization.
1. Financial statements represent fair measurements of the economic events and business
transactions that affect the organization during a certain period of time.
2. The computerized accounting system used by the organization is efficient and reliable.
Both assertions are made by the organization through its counting process, which collects
summarize, classifies and report business data. Each assertion is made through different part of
the organization’s accounting process and is audited in a different way.
The first assertion is made through the financial statements. The auditor determines whether
statements meet the established criterion, which is most cases, is whether they are fairly
presented in conformity with generally accepted accounting principles.
The second assertion is made through the computerized accounting system. The auditor
determines whether the charters tic of this system meet the criteria of efficiency and reliability.
Example: auditors perform an audit of a company’s financial statements. They discover that
several significant accounts are not stated in accordance with generally accepted accounting
principles. The auditors reject management’s assertion that their financial statements are fairly
stated.
Auditors assess a company’s computerized accounting system. They discover that, because of
defective programming incorrect bill are sent to customers. The auditors reject management’s
assertion that their computerized accounting system is efficient and reliable.
According to the institute of internal auditor (IIA) 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 accomplish its objective
by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk

9
management, control and governance process. Internal auditing is helpful to assist member of the
organization in the effective discharge of their responsibilities (Atkinson, 1986,p.4).

2.3. HISTORICAL DEVELOPMENT OF INITIAL AUDITING

It is a normal for any nativity to become into being as a result of emerging need. To understand
better the nature of the activity which currently exist some know something about changing
conditions in the past which create the needs for that activity.
The changes in the field of internal auditing reflect the emergent changes in the concept and
techniques of baseness and government service delivery. New approach in global competition,
business process reengineering security, advances in the technology have created the challenges
of development new and more relevant in approaches in the concept and practice of internal
auditing. In spite of its earlier existence the internal auditing did not emerged as recognized field
of professional practice until the 1940s, when the factors influenced its development as
distinguished profession. In the first place, the rapid development and sophistication of business,
government service and the development of statutory audit brought about strengthened demand
on management and board to ensure that assets properly safe guarded, result are consistent with
established objective, programs and operation goals are achieved as planned. The second factor
which becomes potent force in the development internal auditing profession is establishment of
the institution of the internal auditing (IIA) in 1941 in New York. Despite this, the first official
pronouncement of internal auditor (IIA) was issued in 1947.

2.4. INTERNAL AUDITING IN ETHIOPIA

The history of the development of internal auditing in Ethiopia dates back to about the middle of
the 1940s jest about the time when internal auditing was evolving as an organized profession in
the United States. Internal audit in Ethiopia had its early legislative root in the constitution of
1931s which authorized the establishment of an audit commission (Art.34) and the audit
commission itself was establish much rater by proclamtion 69/1952 to audit the account of the
ministry of finance.
The period of 1950s marked the introduction of a budgetary system in government. The
enouncement of an annual public budget in 1955 for the first tie mint history of the country us a
system of financial Administration based on the annual budget with all its attendant requirement

10
for strengthen internal control in budgetary agencies. This entailed the formation of internal audit
as an integral part of the budgetary internal control system. Presently, government has taken the
initiative to improve same enumerated weakness and recognize and strengthen the internal
auditing practice both in private and public sector enterprise to this effect only government did
provide from necessary frame work by the financial administration profanation of federal
government (proclamation 57/1997) as well as directive issued by the ministry of finance and
economic development but also taking measure to recognize and strengthen in eternal auditing in
these organization (MOFED, 1997).

2.5. THE DIFFERENC BETWEEN ACCOUNTING AND ADUTING

Accounting is a process that generates information in the form of financial statements and other
financial data. The accounting function is the responsibility of the company’ managements
auditing is the process that evaluates the information and produce cohesions with respect to this
information in according to the criterion used to make the evaluation.
Example: accountants compile business data on products shipped to customers, use dollar
measurement to record these shipments are credit sales, summarize and classify credit sales, and
prepare financial statements reflecting these credit sales.
Auditors do not record, summarized or classify any of these transactions. They gather and
evaluate evidence and draw conclusions as to whether these credit sales have been fairly
reflected in the financial statements.

2.6. TYPES OF AUDITS

Auditing is a narrower sense may be defined by classifying its according to the objective of the
auditing function performed.
Financial statements audit
Financial statement audit is the gathering of evidence on the finances statement assertions of any
entity and using such evidence to determine whether the assertion adheres to generally accepted
accounting principles or another comprehensive basis of accounting. This type of audit is
discussed throughout most of the text makes use of a process called affectation. As used in

11
financial statement, auditing attestation refers to an independent and competent person
communicating an opinion or judgment as to whether an entity’s financial statement assertions
crossroad in all significant respects with established criterion (usually generally accepted
accounting principles). An independents CPA’S audit of commercial business’s financial
statement is an example.

Compliance audit
The purpose of compliance audit is to determine whether a person or an entity has adhered to
laws and regulations. The criteria could be a law prohibiting bribes or a code and accompanying
regulations (such as the internal revenue code and regulations.) the audit of an income tax turns
is a prime example of a compliance audit in which the IRS is determining a person or an entity’s
adherence to tax regulations.
Operational audit
Operational audit full within the broad definition of an audit however, the criteria against which
management’s assertions are measured differ from the type of audit emphasized in this text, the
American institute of certified public accountant (AICPA) special committee on operational and
management auditing describes operational auditing as “a systematic review of an organization’s
activates (or a stipulated segment of them) in relation to specified objectives for the purposes of
assessing performance, identifying opportunities for improvement of further actions.”
A review of a company’s computerized accounting system, assessments of its efficiency and
reliability, and recommendations for improving the system would constitute and operational
audit.

2.7. TYPES OF AUDITORS

Auditing can also be classified according to the affiliation of the individual or group that
performs the audit. This classification overlaps the classification by objective.
External auditors
External auditors are certified public accountants (CPAS) who are independents of the
organizations whose ascertains or representations are binge audited. These independents CPAS
after their audit services on a contractual basis the majority of audits performed by external

12
auditors are financial statements audit, although this group may perform all audit described in
previous section.
Internal auditors
Internal auditing is “an independent appraisal function established within an organization to
examine and evaluate its activities as a service to the organization”. Internal auditors (who may
also be CPAS but not independents contractors) are employee of the organization whose
activates appraise. Measure can be taken, however to give these auditors some independence. In
many campaniles internal auditors report directly to the audit committee of the board of directors
Internal auditors perform both compliance and operational audits for the companies and
measure the degree to which various functions of their organization adhere to stated managerial
policies, such as appraisals for their organization’s computerized accounting system.
Government auditors
Member of local, state and federal government units audit various organization functions for a
Varity of reason, such as the following.
1. local and state government units audit business to determine whether sales taxes have
been collected and remitted according to stipulated laws or regulations (a type of
compliance audit )
2. the internal revenue service audits corporate and individual income tax return to
determine whether in comes taxes have been calculated according to the applicable law
or interpretations of these laws(another type of compliance audit)
3. The general accounting office (GAO) which reports to the U.S congresses audit various
programs functions activities and organizations of the federal execution breach. Such
audits include.
A, financial audits that deforming wetter
1, financial information is presented in accordance with established criteria
2, the entity has adhered to financial compliance requirements and
3, the entity’s internal control is suitably designed & implemented.
B, performance audits (a type of operational audit) that review for efficiency and economy
in the use of resources
(DONALD H.TAYLOR & G>WLIIAM GLEZEN P-6)

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2.8. INTERNAL AUDITING

Internal auditing is independent appraisal activities in an entity it can undertake financial,

compliance, and operational audits.

2.8.1. OBJECTIVE OF INTERNAL AUDITING

The objective of internal auditing is to axis member of organization in the effective discharge of
their responsibility. Internal auditing is an independent appraisal function established with in an
organization to examine and evaluate its activity as service to the organization. To this end
internal auditing furnished them with analyses appraises, recommendations coursed and
interruption concerning the activities reviewed. The member of the organization assisted by
internal auditing includes these in management and the bound of an refer internal auditor a
responsibility to both, providing them with information about the adequacy and effectiveness of
the organization system of internal control and the quality of preference the information
furnished to each may differ informant and details depending up an the requirement and request
of management and the board (Engle T.J, 1999, P.118).

2.8.2 INTERNAL AUDIT FUNCTION

The internal audit function should have organizational independence and should operate under a
charter that grant the right carry out all activity necessary to accomplish the following objective
evaluation of the performance of various functional unit with the organization, especially
interims of operating efficiency and the implementation of controls designed to achieve optimum
result. The verification of the reliability and integrity of the operating and financial information
on which the various controls that have management and other must rely in performing their
responsibility.
A good practical list is that the internal audit activity partially or completely achieved, the
regular company operation would on for the time being in the normal manner. To the extent that
the internal auditing group is charged with day to day activity has simply taken place of regular
accounting or other operational responsibility.
The base role of internal audit is to provide assurance about financial and non financial
information and method for control. Therefore internal audit should be kept distinct from other
function engaged in analyzing and reporting on program is performance (G.Braithwaite,
1989,pp.2-5).

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2.8.3. CHARACTERISTIC OF INTERNAL AUDIT

 Auditor are company employee.

 Review of company activities is continuous.
 Have a direct influence on the scope of exfernal euditor activity.
 Primary concern is in serving the needs of the organization.
 Accountable for management and does not issue opinion to the general public.
 Working is subdivided primary according to operating function and line management
responsibility.

2.8.4. INTERNAL AUDITING ROLE IN CONTROL

Internal auditing often described as a control which function by examining and evaluating the
adequacy and effectiveness of other control. It serves to explain much of internal auditing to day
and also provides a central concept around which focus tract a vision of the professions principal
role in the future (Bigg and daves, 1980, P.53).
The concern of internal auditor with control grocers is both of immediate and long term interest.
The auditor should respond to that interest by focusing his/here effect on great understanding of
control probably needs to be more clearly acknowledged by the profession since it account so
much work being done by internal editing to day.
A major port of the management process has to do with control. This every manager has an
important responsibility to develop a program of control that will most effectively contribute the
kinds of performance of which he/she is in change. This control grogram consists of the over all
control effort covering the activities over which he/she is responsible and the individual control
effort which together comprise the total control efforts (Robert M. Atkisson, 1986, p. 323).

2.8.5. INDEPENDENCE, OBJECTIVITY AND COMPLIANCE

Internal auditor should be independent of the activity they audit internal auditor are independent
when they can carry out their work freely and objectively, independence permits internal auditor
to render the logical and unbiased judgment essential to the proper conduct to audits its is
achieved through organizational status and objectivity. Objectivity is an independent mental
attitude which internal auditor should maintain in performing audit. Internal auditor are not to
subordinate their judgment on audits matters to that of others. Objectivity requires internal
auditor to perform audit in such a manner that they have all honest belief in their work product

15
and that no significant quality compromises are made internal auditors or not to be placed in
situation in which they fell unable to make objective processional judgment. Compliance with
standard of conduct and policies internal auditor should comely with processional standard of
conduct. The code of the institute of internal auditor set for standard of conduct the code calls for
high standard honest, objectivity, diligence and loyalty to which internal auditor should conform
(Hourd F. Settler, 1990, p. 354).

2.8.6. RESPONSIBILITY OF INTERNAL AUDITOR

The same responsibilities of internal audit are as follow:-

 Responsible for evaluating design and effectiveness of compliance function

 Develop long range audit plan for organization.
 Audit of new management areas to evaluate internal control system.
 Review internal administrative and accounting control to safeguard resource and ensure
compliance with laws and regulation.

2.8.7. APPLICABILITY OF INTERNAL AUDITING

The development of internal auditing has to a major extent been centered in the business
organization. This ties continuous in the exacting literature of the profession and the convenient
treatment of problems with work of business organization. The need for internal auditing exist in
all type of organization when the completeness of activities, the volume of transaction and
dependence on large number of people to exist in some combination to create operational
problem (Arens, 1991, p. 154).

2.8.8. BARRIERS TO SUCCESSFUL AUDIT RESULT

The most common barriers for the some achieve successful audit result because of the following.
Conflicting goals management and auditor:
One of the most common barriers to successful audit results internal auditors face of
understanding of management goals and the ensuring conflicts that rise.
Absence of full range of technical competence:
The absence of some form of legal requirement for technical competence has put internal
auditing in jeopardy. Areas that could be affect by the absence of technical competence are
morale in the audit staff, the conclusion drown, making decision and corporate objectives at
whole.
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Neglect of the most important phase of the study:
Internal audit the title analysis found in the observations focuses on easily identifiable area corn.
This neglect have been the direct cause for audit failure.
Neglect of internal audit of fundamental communication:
Neglect to communicate clearly with the entity audited poor communication of audit results has
coursed the down failed of some audit and led to a negative misconception about auditor
(G.Braith woite, 1989,p.230).

2.8.9. AUDIT REPORTS

Its objectives is to pursue management to take premedical action. Report must be written with
very great care after full consideration of the subject matter. Generally reports can be divided
into four main categories based on the time report will be issued. First, the report prepared by the
internal audit staff after their visit to a function unit, second, periodical report prepared which
summarizes the main audit finding and recommendations for the period under consideration,
third, report on the results of special investigation, and enquires, fourth, an annual audit report.

2.8.10. Contents of Report

Contents of report is impossible to be dogmatic as to the contents of internal audit reports it
suggested. However, that part form a brief general reference to the work to work perfumed.
Report should deal with matters a rising from the audit result of investigation. The types of error
disclosed the defects revealed in systems and the reason which allowed afraid to be perpetrated
are the essential matter on which information is required (Arens and Loebbecke, 1997, pp.34-
37).

2.8.11. Format of Report

The format of the audit report is important and a well drafted will contribute in large to the
optimization of its usefulness. The report should be inserted in standard folder and should be
appropriately headed. To fully understand what is going on an audit report, one must analyze the
following varies components. Introductory: The purpose of introductory paragraph is to provide
the reader to understand and accept what is contained in the conclusion. It includes letter of
transmittal, report title table of contents and back ground, objective and scope.
Main body: - refers to audit report selection where the finding are discussed and principal work
is performed.

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2.8.12. Nature of internal auditing
The term independent appraisal activity is used to describe internal auditing is itself a control
that operates by explaining and evaluating the adequacy and effectiveness of other controls.
Independence is such an important aspect of internal auditing that the third section of the
statement is deviated to it.
Objective and scope – organization create internal auditing to serve as benefit eh
organization. The broad objective of internal auditing is to provide assistance to members of the
organization in effective meeting their responsibilities. Assistance may take the form of counsel
or recommendations, analysis or information one goal of internal auditing should be to achieve
effective control that is worth its scope. The scope of internal auditing includes.
 Reviewing the reliability and integrity of financial and operating information
 Reviewing systems established to ensure compliance with polices, plans, procedures,
laws and regulation and determining compliance.
 Reviewing means of safeguarding assets
 Appraising the economy and efficient of resource usage
 Reviewing operations or programs to ascertain whether results are consistent with
established objectives and goals.
In describing the nature of internal auditing, the statement of responsibilities of internal auditing
indicates that and internal auditor examines controls. The scope of internal auditing limits an
internal auditor’s responsibilities for examining and evaluating performance to responsibilities
specifically assigned to the purpose of this statement is to provide in summary form general
understanding of the responsibilities of internal auditing.
(Tack E.KIGER, GAMES H.SCH ENIER, Auditing p-864-866)

2.9. THE AUDIT PROCESS

Although specific audit procedures vary from one engagement to the next, the fundamental steps
which follow planning of the audit process are essentially the same in almost every engagement.
1. Obtain an understanding of internal control sufficient to plan the audit
2. Assess control risk and design additional tests of controls.
3. Perform additional test of controls.
4. Reassess control risk and design substantive tests.

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5. Perform substantive tests and complete the audit.
6. Form an opinion and issue the audit report.
(Meigs, Whittington, Pany, and Meigs.p, 134-135)

2.10. AUDIT PLANNING AND PROGRAM

2.10.1. Audit planning

International auditing guidelines “basic principles governing an audit” states: the auditor
should plan his work to enable him to conduct an effective audit in an efficient and timely
manner. Plans should be based on knowledge of the clients business.
Plans should be made to cover among other tings
a. Acquiring knowledge of the client’s accounting, system, policies and internal control
procedures.
b. Establishing the expected degree of reliance’s on internal controls.
c. Determining and programming the nature, timing and extent of the audit procedures to
be performed: and
d. Co- ordination the work to be performed.
Importance of audit planning
It has been correctly stated that audit planning is the key an effective and efficient audit.
Effectives results in the attainment of the main audit objective without undue risk efficiency
enable the auditor to achieve maximum practical utilization of not only of his own audit staff but
also, where ever practicable, of the clients accounting and internal audit staff. In other words
effectiveness and efficiency are achieved b/c proper planning of an audit assignment.
i. Identifies and establishes intended means of a deriving audit objective with reference to
the specific audit.
ii. Assists in the proper direction and control of work.
iii. Helps to ensure that potential problems are promptly identified and critical aspects of the
audit are given due attention and
iv. Helps to ensure that the work is completed without undue delays and snags in the
performance of audit procedure.
More than ever proper planning of audit work has become one of the most significant
aspects of contemporary auditing.

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Factors to be considered when planning and audit
Following are given some of the important factors that an auditor should take in to
consideration when planning an audit.
A. What are the audit objectives in connection the particular audit? This will enable the
auditor to determine the nature of audit procedures to be under taken, in order to form
and opinion on the financial statements.
B. Which are the properties matters requiring attention? By way of examples, matters rose in
preview year’s audits, changes institutors’ requirements and requirements of professional
bodies, change in client’s business activates and accounting and internal control systems
etc are some of the preparatory mutters which have an important bearing on the type of
audit procedures to be under taken.
C. What should be the sequence to the various audit procedure to be under taken.
It is important to determine in advance as for as practicable, the precise time when each
audit procedure must be started and completed. This will enable the creditor to divide the
work among the various audit staff, thus avoiding the passivity of was tag due to audit
staff not being available as a result of their use the employees the client organization or
by other members of the audit team.
D. By what time should the audit be completed and report submitted? This will enable the
auditor to plan interim audits and where necessary, to work over time to complete the
audit in time.
Stage in audit planning
Each audit will have to be tailored to the unique of the client. Hence the extent of planning
will vary according to the size and complexity of the specific audit, the auditor preview
experience with the client if any and his knowledge of the client’s business this indicates that
it may not be possible to lay dawn any hard and fast rules concerning the steps to be followed
on planning an audit. Never the less the following stages of audit planning may act as a
useful guide.
a) Preliminary arrange
b) Knowledge of the client business
c) Other sources to obtain knowledge of the client business
d) Development of an overall audit plan

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2.10.2. Audit programmed
Closely related to the development of all audit plans is to draft an audit programmer setting forth
the procedures that are to be performed in order to implement the plan. As a matter of fact, a
written audit program is an important tool for the communication of audit directions to audit
staff. It is advisable to include in the programmer the audit objectives for each area.
It should be so designed that it complies with generally accepted auditing standards and that
procedures contained therein are in accordance with the requirement and circumstances of the
particular engagement.
Advantages and disadvantages of audits programs
A planned audit program generally serves a guide for carrying out an organized audit procedure.
But it is important that similar work viewed from two different angles is not repeated. For
instance, it would be sheer waste of time if the verification of ledger postings against the sales
day book is duplicated by including this work under the section of work regarding the sales day
book postings to the sales ledger and under that regarding the sales ledge itself. Also, an audit
programmed should not be rapid; rather it should be flexible to suit developing circumstance as
the audit progresses.
Advantages of program
1. It provides a clear set of instructions to the audit staff concerning the work to be done no
this would be of particular value to less experienced staff.
2. it acts as a means to control the proper execution of audit work
3. Since definite instructions are laid down, junior audit staff may need less supervision.
4. it place clear cut responsibility for each procedure. Since the person completing a
particular task required signing or initialing the programmed for that part of the work
done by him, it provides a clear record of the work carried out and by whom.
5. it promotes the division of work among the audit staff in an organized manner
6. it results in proper routine and sores time
7. it emphasizes the essential procedures for each audit
8. duplication of work is a voided
9. omission of important work is avoided
10. It serves as a guide in succeeding years.

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 11. evidence of work done is available in the event of any subsequent action against the
auditor
12. it facilitates the review by audit manager or senior auditor
13. it assure adherence to auditing standards and the application of generally accepted
accounting principles
14. Preparation of an audit program forces the audit staff to consider the reasons for
performing various procedures.
Disadvantage of program
1. The audit may become to medicinal. Thus there is the danger that variations in the
working of the client organization may be over looked
2. small parts may be executed without regard to the whole scheme particularly where a
number of audit staff are involved
3. the responsibilities of eh in charge auditors is limited to the programs
4. independent constrictive thinking may be deterred and initiative may be stilted
5. There may be a tendency to hurry up work in order to complete a required schedule.
6. Client staff may become aware of standard audit routines (e.g. counting of petty cash on
arrival) and this may facilitate frond.
In spite of the disadvantages listed above, an audit program has now been recognized as a
medium for having an organized audit. Of course, the audit programs should be flexible
enough to suit developing circumstances during the course of audit.
(SHEKAR&SHEKHAR p-47-49)

2.11. THE USE OF SAMPLINGTOPERFORM TEST OFCONTROL

Sampling cannot be used for tests of controls that involve inquiries observation, and walk
through. Nor would sampling be applicable to a test that requires inspection, of 100% of the
document.
To properly implement sampling tongues for test of controls the auditor should give proper
consideration to the ff factors.
1. identification- test of controls on which sampling can be used
2. definition- the definition of a deviation from an internal control procedure and condition
that indicate whether a deviation has or has no reoccurred

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 3. definition- how a population is defined
4. selection- d/t methods available to select the sample
5. determination- factors to consider in determining the sample size
6. performance- how to perform the sampling plan
7. Evaluation- how to evaluate the sampling result. (p-286)
(DONID H. TAYLOR & G>WILLIAM GIEZEN p-286)

2.12. AUDIT EVIDENCE

The term audit evidence in its context refers to information obtained by the auditor in arriving at
reasonable conclusions on w/c he bases his opinion on the financial statements. Sources of such
audit evidence include the accounting system and underlying documentation of the entity, its
tangible assets its mgt and employees its customers its suppliers and other third parties who have
dealings with or knowledge of the entity or its activities.
Sufficient appropriate audit evidence
Sufficient and appropriateness are interrelated and apply to evidence obtained from both
compliance and substantive procedures. Sufficiency implies the measure of the quantity of audit
evidence obtained: appropriateness implies the relevance and reliability of audit evidence
normally; the auditor finds it necessary to rely on evidence that is persuasive rather than
conclusive. It may become necessary for his to obtain evidence form d/n sources or of a d/n
nature in support of the same assertion or conclusion.
The auditor evidence should, in total, enable the auditor to form an opinion on the financial
statements. In forming such an opinion it is neither feasible nor possible for an auditor to
examine each and every item of the information, available to him. The usual procedure is to
select a few representative items or transaction or events. Here the auditor will have to exercise
his professional judgment other a careful study of the circumstances in the particular case in
deeding as to what may be considered as sufficient appropriate audit evidence necessary to
achieve the required level of assurance.
The auditor’ judgment as to what constitutes sufficient appropriate audit evidence is influenced
by such factors as
a) The auditor’s knowledge of the business of the client organization and the industry in
which of operates;

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 b) The degree of risk misstatements through errors or irregularities the risk in turn may be
affected by
I, the nature of the item
II, His adequacy of internal control
III, natural of the business carried on by the client organization
IV, situations which may exert an unseal pressure on management including
Possible management bias
V, the financial position of the client organization
c) The materiality of the item in relation to the financial statements taken as a whole
d) The experience gained during previous audits as to the reliability of the management and
staff of the client organization and of its recurs;
e) The extent of irregularities revealed during the course of performing audit procedures
including fraud or error which may have been found and
f) Material variances in comparative figures of working ratios for the previous year or for
similar organization in the same industry.
Methods of obtaining audit evidence
Audit evidence is obtained through one or more of the following technique of audit testing. The
timing of performing them will be dependent, in art; upon the periods of time during whit the
audit evidence sough is available.
a) Inspection-this consists of reviewing or examining records and documents, or physical
verification of tangible assets.
b) Observation-this consists at looking at an operation or process or a procedure being
performed by other with a view to determining the manner of its performance.
c) Enquiry & confirmation- enquiry consists of seeking relevant information form
knowledgeable persons inside or outside the entity enquiries may be formal or informal,
written or oral.
Confirmation consists of the response of an enquiry to corporate information
contained in the accounting records. For instance, it is a normal auditing procedure to
roughest confirmation of bank balances, debtor balances, etc by direct communication with
the bank, debtors, etc

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 d) Computation- this consist of checking the arithmetical accuracy of source documents an
accounting records or of performing independent conclusion. Independent computations
made by the auditor often provide an important source of audit evidence.
e) Analytical review- this consist of studying significant ratio, trends and other statistics and
investigating unusual or un expected fluctuations and items and expected fluctuations
which fail to accord. Various types of ratio changes and trend analysis have become
recognized in recent year as important audit tools. Whether the data meet the test of logic,
reasonableness and normality is just as significant as whether type they are documentary
evidence.
(SHEKHAR & SHEKAR p- 31-35)

2.13. MATERIALITY AND ASSESSMENT OF AUDIT RISK

2.13.1. Materiality
Materiality is an essential consideration in determining the appropriate type of report for a given
set of circumstances. For example, if a misstatement is immaterial relative to the financial
statement of the entity for the current period it is appropriate to issue an unqualified report.
 The magnitude of an omission or misstatement of accounting information that, in the
light of surrounding circumstance, make it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the
omission or misstatement the auditor’ responsibility is to deter line whether financial
statement are materially misstated. If the auditors determine that there is a material
misstatement, he or she will bring it to the client attention so that a correction can be
made. If the client refuses to correct the statement, a qualified or an adverse opinion must
be issued depending on how material the misstatement is there for auditors must have a
thorough knowledge of the application of materiality.
A careful reading of FASB definition reveals the difficulty that auditors have in applying
materially in practice. The definition emphasizes reasonable user who rely on the
statements to make decisions. Therefore auditors must have lace knowledge of the likely
users of their clients’ statements and the decisions that are being made. For example if
and auditor knows that financial statements will be relied on I a buy-sell agreement for
the entire business, the amount that the auditor considers material may be smaller than for

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 another wise similar audit in practice in proactive, auditor may has known who all asters
are or what decisions will be made.250
 A common instance is the immediate expensing of office supplies rather than carrying the
unused portion in inventory because the amount is significant.
The situation is totally d/n when the amounts are of sad significance that the statements
are materially affected as a whole. In this circumstances, if is necessary to issue a disclaimer
of opinion or and diverse opinion, depending the nature of the misstatement, in situation of
lesser materiality, a qualified opinion is appointee.
(Arens and Loebbecke, p-52,250)

2.13.2. Assessment of audit risk

The auditor should use professional judgment to assess auditor risk and to design audit
procedures to ensure it is reduced to an acceptably low level.
Audit risk is the risk that the auditor gives an inappropriate audit opinion when the
financial statement are material misstated the more risk the auditor feels the company has,
the more evidence she must plan to collect in order to reduce the risk (defection risk) of not
finding the misstatement.
Audit risk has three components
 Inherent risk is the susceptibility of an account balance are misstatements that could be
material individually or when aggregated with misstatements in other balance or classes,
assuming that there were no related internal control.
 Control risk is the risk that a misstatement that could accord in account balance or class
of transactions and that could be material individually or when aggregated with
misstatements in other balances or classes, will not be prevented or defected and
corrected on a timely basis by accounting and internal control systems.
 Detection risks are the risk that an auditor’s substantive procedures will not defect a
misstatement that exists in an account balances or class of transactions that could be
material individual or when aggregated with misstatements in other balances or classes.

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 CHAPTER THREE
3.RESEARCH METHODOLOGY

3.1.Research Design

To undertake this study the researcher will use a mixed approach, (Quantitative and Qualitative)
type of research design. In the quantitative research design, the researcher will use numerical
expressions that can be obtained from CBE, Mekelle,Adi-hawsi branch. For the qualitative
research design, the researcher will use qualitative expression through words depending on the
auditor’s and the manager’s response and descriptive expression on the information that was
obtained from different sources.

3.2.Population of the study

The target population of the research will be auditors and manager of the bank in order to get
more specified data and information.

3.3.Sample size and sample technique

InCBE,Mekelle, Adi-Hawsi branch the number of internal auditors are three and the researcher
will use all the auditors of the branch and the manager in the study.The researcher will use

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census method, because, the target population is small. So all the number of target population are
included in study which are4(3internal aud itorsanda manager).

3.4. Data source and collection method

In order to complete the study the researcher will apply both primary and secondary source of
data. The primary data is to be collected from questionnaire (forauditors) and in formal interview
for the (manager) and the questionnaire will contain both close and opened to obtain necessary
and sufficient information. Secondary data is the data collected from books, CBE, Mekelle, Adi-
Hawsi branch hmanual procedure and website.

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