Attributes of Internal Audit and Prevention, Detection and Assessment of Fraud in Pakistan

Abstract

With it being considered as a value-added activity, the Internal Audit function (IAF) of a firm is one of the most important functions in an organization. During the last decade, the role of this particular function has become very useful, especially in creating awareness regarding the Prevention, Detection and Assessment (PD&A) of fraudulent activities. In many countries, carrying out an Internal Audit is a legal compulsion for public companies, in order to establish an effective, and efficient IAF. This study aims to explore the relationship between the various attributes of IAF (effectiveness, independence, staff training, qualification and experience), and the PD&A of fraudulent activities in Pakistan. For this purpose, the convenient sampling technique, for data collection, is used and the questionnaires are collected from the respondents belonging to Pakistan. The questionnaire has been prepared in the form of a Likert scale. Respondents for this study include (1) staff members working in the Internal Audit (IA), finance and accounting departments of the companies listed on the Pakistan Stock Exchange (PSX), and (2) staff members of firms that are engaged in external statutory audit in Pakistan. Descriptive statistics show the details regarding the demographic questions, IAF and PD&A of the fraudulent activities that take place in the companies. Moreover, in order to get to the effective and relevant results, the regression analysis is performed in order to find out if there exists any relationship between these variables. The results show that all five independent variables positively affect the PD&A of fraudulent activities. However, three of the independent variables (IAE, IAT, and IAQ) are statistically significant, whereas two of the variables taken into account (IAI, and IAE) are statistically insignificant. It is recommended that the IAF should be more independent, and effective so as to attain the required results. Moreover, firms should also focus on the qualifications and proper training of the staff that are responsible for executing the IAF.