Table of Contents
2.1 Internal audit
2.2.1 What is an internal audit
2.2.2 Determinants of Internal Audit
2.2 Financial performance.
2.2.1 What is financial performance?.
2.2.2 Determinants of financial performance in the banking sector
2.3 Theories developed overtimes.
Lending Credibility Theory.
2.4 Review of Empirical Studies.
- 5 Impact of internal audit on financial performance.
2.7 Time frame.
In this section, it will be present several kinds of literature on different parts of internal audit and their influence on the financial performance of various companies specifically banks. The research questions of this study are a) What are the determinants of internal audits in the perspective of UK commercial banks?; b) What are the determinants of financial performance in UK commercial banks?; c) How does internal audit impact the financial performance in the UK banking sector?; and d) How can UK banking sector effectively apply internal audit to improve financial performance? The aim of this study is to analyze the impact of internal audits on the financial performance of commercial banks. This study mainly focuses on risk management and corporate governance. In addition, this study evaluates the internal audit in banks, their roles in banks, and their impact on the financial performance of commercial banks. The objectives are a) to identify the determinants of internal audits in the perspective of UK commercial banks; b) to identify the determinants of financial performance in UK commercial banks; c) to evaluate the impact of internal audit on financial performance in the UK banking sector; and d) to provide recommendation on internal audit function for UK commercial banks.
The study found that the UK commercial banking sector is facing difficulties with expected financial performance. Mutua (2013) said, internal audit contributes a lot to achieve transparency and excellence, and maximize shareholders’ values and wealth. The internal audit action assesses risk experiences regarding the governance, actions and information systems of the organization. Internal auditors are looked forward to recommending progress in areas where chances or lacks can be identified (Fish, 2012). Thus, it is now an issue for UK commercial banks including Santander Bank to do a study on how internal audit functions affect financial performance.
This chapter first reviews the term “internal audit” and determinants of internal audit. Then, the term “financial performance” and its determinants are reviewed. Next, the theories and empirical studies of internal audits are reviewed. Then, the impacts of internal audits on financial performance are reviewed. Finally, the literature gaps are identified, and the importance of this study is defined.
2.1 Internal audit
2.2.1 What is an internal audit
The term “internal audit” is defined in several ways. According to Pickett (2015), the activity which is independent, purpose pledge and consulting and is created to develop the operations of the organization is known as internal audit. For evaluating and developing the efficiency of risk management, controlling and supremacy the process brings a methodical, well-organized approach which is very helpful for an organization to complete its purposes. As Fish (2012) notes, in the case of determining and assessing the company’s efficiency to gain their desired objectives internal audit plays an important role in risk management, control and governance. Additionally, the results of the internal audit are helpful to the Board of Directors and line supervision in the audited sections. According to Dumitrescu (2014), by conducting the policies, processes and actions in a systematic way to use the skills of internal audit the management can ensure the attainment of the organization’s goals via recommendations for enhancement. The Board of Directors of the Institute of Internal Auditors (2009) defined an internal audit as an independent, substance and consultancy action that raises the value and enhances the operations of any organization. It supports the organization in determining and assessing the company’s efficiency of risk management, control and governance to gain their desired objectives. Internal audit has many objectives and ethics and they are very essential for it to follow them.
According to Fish (2012), the board of directors of the bank is mainly responsible for the implementation of the suitable and efficient system of internal audit, a system that is used to assess banking action risk and risks regarding bank assets, suitable processes of observing fulfillment with laws, measures and internal actions. Ramamoorti (2015) said it is the responsibility of the management of the bank to set up events that are used to identify, control and monitor the risks that are faced by the bank. One of the important parts of the internal control systems of the bank is internal audit and it is used to appraise the internal capital. According to Gramling (2016), internal audits provide assistance to management and the board of directors in the efficient performance of their liability that is described above. The internal audit department in a banking institution is very much in need of realism and neutrality. This department can also contribute as an advisory and consultancy, whereas analysis can be conducted without any force. According to Pickett (2015, many banks launch a new system of assessing their actions. This system cannot be replaced but an internal audit is a supplement of this system.
2.2.2 Determinants of Internal Audit
Internal Audit Standards
According to Chepkorir (2016), the standards which are most important are statements of fundamental needs in the case of professional practices of internal auditing as well as to measure the workability of their activities. The activities of the audit work are related and depend on the internal audit standard that participates considerably. According to Ridley and D‘Silva (2014), they identify complying with professional standards is the greatest significant provider to IA‘s new value. The Institute of Internal Auditors (2013) published the internal standard for both audits and various services which are related to the audits. Gramling (2014) said generally internal auditors give more services about ideas compare with other financial reports. They need auditors for completing their activity independently as well as obey the standards of the professional practice for example internal audit activity would measure and give for the development of the operation. Mutua (2013) stated that organizations require auditors to carry out their role independently and in compliance with accepted criteria for professional practice, such that internal audit activity will evaluate and contribute to the improvement of risk management, control and authority applying a suitable and effective method. This is very significant and necessary for both willingness among lawful needs and direct measurement to influence the decision of the internal audit performance.
Independence of Internal Audit
According to Mutua (2013), independence may be defined as the liberty from conditions that threaten the capability of the internal audit activities to run the internal audit responsibilities in a balanced method. Independence is the most important part of auditing (Chun, 2013). The internal auditor has to right the freedom not only for personal purposes but also in the business operational activities. On the other hand, Spencer (2013) said there were some suspicions about the truthfulness of the auditor‘s views, endings as well as suggestions. Thus, for achieving the desired activity and goals of the internal audit independence is most important and required. There are two forms that are independent that are achieved such as organizational status and objectivity. Glazer and Jaenike (2016) said that each bank has to their internal audit department and the whole activities are dependent on it. In maximum time, it can be noticed that the internal audit of the small banks is given on the outside. It is very important that in the banking sectors the internal audit should have independence from the day-to-day internal control systems (Viswesvaran, 2014). It indicates that the activities and performances of this department have done properly and independently. There is no disagreement of interests among the internal auditors and the bank. Each and every bank has to suitable and effective internal audits for gained their desire success and purposes (Carcello, 2015)………………………………