Perfecting analysis implementation to improve the internal audit’s effectiveness in construction companies

Yet there has been no study, theoretical or practical, to investigate the analytical organization associating with improving the efficiency of internal audit, particularly in Vietnamese

NATIONAL ECONOMICS UNIVERSITY

NGUYEN THI DAO

PERFECTING ANALYSIS IMPLEMENTATION TO IMPROVE THE

NATIONAL ECONOMICS UNIVERSITY

INTRODUCTION

While internal audit (IA) was established and developed a long time ago in the world, this type of audit appeared relatively late in our country Not until 1997 did internal audit officially come into existence and get accepted in legal documents During the process of development, although internal audit partly contributed to the development

of regulation in common, it has revealed problems influencing the efficiency of auditing This has been shown in the internal audit activities of various businesses including construction - which is among those with developed internal audit activities and also a sophisticated business In Viet Nam, internal audit exists in large construction companies which are regularly corporations Despite major contributions in management, internal audit has revealed problems influencing the efficiency of auditing, for instance, a confining performance of auditing functions; the failure to meet manager’s expectations This has raised a matter of recognizing and solving issues deriving during the auditing process Analysis is considered an instrument to help internal audit solve these issues

Thus, the author chooses the topic “Enhancing the organization of analysis activities along with improving the efficiency of internal audit in construction corporations”

In the world and in Viet Nam, there have been several research projects relating

to designing and applying the process of analysis in auditing as a whole, particularly in association with the type of financial audit undertaken mainly by independent auditors Yet there has been no study, theoretical or practical, to investigate the analytical organization associating with improving the efficiency of internal audit, particularly in Vietnamese construction corporations Therefore, the research objective of this PhD thesis is to discover how analytical organization influences the efficiency of internal audit

in Vietnamese construction corporations Distinctively, the author will establish an analytical model in order to increase the efficiency of international audit in Vietnamese construction corporations Given that purpose, the research object of this thesis is the organization of analyzing process in auditing which is undertaken by internal auditors The thesis considers only matters occurring during the activity of analytical organization

in the process of internal audit in large Vietnamese construction corporations during the period from 2008 to 2012 The author applies the thesis approach by using a process of conducting a complete internal audit with 4 stages in Figure 1.A below:

APPLYING THE ANALYTICAL METHOD

Planning and

designing the

auditing program

Conducting the auditing plan

Finishing the audit process and making report

Examining the conduction of auditors’ proposals

CONCLUSION OF AUDITING EFFICIENCY IN RELATION

WITH EMPLOYING ANALYZING PROCESS

FACTORS COMPOSING THE AUDITING EFFICIENCY INFLUENCED BY

THE ANALYZING PROCESS

Figure 1.A: Research approach method of the thesis

The thesis uses descriptive statistics, comparative and evaluative methods, based

on a model applying the analyzing process in auditing, with data collected The author

develops the concept of one analytical organization model applied in the internal audit process to achieve the audit efficiency

CHAPTER 1: GENERAL THEORY OF ANALYTICAL ORGANIZATION THE

ANALYSIS WITH THE EFFICIENCY OF INTERNAL AUDIT IN

CONSTRUCTION CORPORATIONS 1.1 Overview of analytical organization

1.1.1 The nature of analysis

Economic analysis is an instrument of economic management to “dissect”, summarize and evaluate economic and social events to establish reliable and effective solutions with the purpose of improving the operation of numerous management systems in the national economy

1.1.2 Contents and method of analysis in the corporation

The major contents of economic analysis are events, business processes that did or will occur in units, components and corporations under affection of subjective and objective factors These events and business processes are expressed by a specific business outcome revealed through figures

Analytical method is the combination of necessary methods used to study the analytical object, allows performing specific analytical objectives Analytical methods in Economics are those that study generally and comprehensively economic activities, their processes

and outcomes in order to evaluate appropriately and objectively the operation efficiency, and to discover available reserves

1.1.3 Analytical organization in the corporation

Analytical organization seeks to establish an optimal relation on the bases of science and art in analysis that are correspondent with each specifically analytical object Analytical organization in the corporation is often dependent on business specific features, types of business and characteristics of each corporation

1.2 Organization of internal audit and the role of analysis

In the world, internal audit developed quite early, since the 1900s [86] The popular opinion is that “…the internal audit is an independent activity, ensures the objects and

consultative activities, is established to increase the value and improves the activities of

an organization The internal audit assists organization in performing its objectives with the systematic and regular approach in order to evaluate and enhance the effect in risk management, supervision and regulatory processes” [[89, p.725] The internal audit organizing order of in a corporation is according to Figure 1.1:

The analysis or the process of analysis is one of the basic auditing procedures The procedure of analysis in internal audit assists auditor in making plan, performing an effective audit

Analytical organization through the process or the procedure of analysis is used in the internal audit with contents, methods, performing scopes… as being generalized in Figure 1.2 below:

1.3 Organization of analyzing influences on the efficiency of internal audit in corporations

1.3.1 The relation between analytical organization and internal audit efficiency

Step 1: Making a plan for internal audit Step 2: Performing the plan of internal audit Step 3: Making a report of internal audit Step 4: Examining the implementation of the internal audit proposal

Figure 1.1 Process of an internal audit

Step 2 Considering the independence and reliance of data

Figure 1.2: The procedure/process of analysis

Different researches conducted on the efficiency of internal audit majorly concentrate on processes, outcomes and objectives of internal audit The relation between the efficiency

of the audit and the analytical procedure is described in figure 1.3:

1.3.2 Developing the model of analytical organization aiming to increase the efficiency

of internal audit in corporations

The first: Analysis in making strategic plan for risks is described generally in Figure

Business plans

Organization’s objectives

Evaluating risk preferences Resources for priviledged sectors Strategic plans for internal audit Annual audit plans Audit Estimation Quarterly audit plans

Reporting anticipated objectives Primitive examinations

Audit Specific plans

Figure 1.4 General model of making plan for internal audit based on risk estimation

How to apply analytical procedure in

Making plans to target risks Conducting the overall audit

Making an audit report for users

Figure 1.3 Influence of analysis on the efficiency of internal audit

Making a risk-oriented audit plan needs to be developed following a model going from strategic planning to overall planning and to audit programming – Figure 1.5

The relation of specifying the objectives is described generally in Figure 1.6

Applying the approach to analyze according to the top down analytical model is generalized in Figure 1.7

Figure 1.5 Process of making strategic audit plan

Available procedures

Required strategic plans

Organization’s objectives Organization’s strategies Evaluating sectional risks

Audit results as required - Objectives

Evaluating

Analysis according to PESTL and

SWOT models Strategic gaps

Performing

Available

resources

Organization’s objectives Objectives of each audit section Objectives of each audit service Audit objectives for each auditor Figure 1.6 Levels of audit objective

Analyzing strategic risks Business strategic risks

Analyzing exterior threats

Analyzing remaining risks Risks need to be considered and applied Figure 1.7 Strategic analytical model specifying audit objectives

(1) In terms of analyzing strategic risks of each section: Analysis aims at assisting

auditor in specifying the position of organization in relation with external sections/organizations, including corporation’s shareholders, and at the same time specifying external threats or risk towards the organization’s success In order to analyze strategic risks, auditors need to initiate from the economic system’s factors in an organization Auditors will apply the five-competitive-force strategic analytical model (Five forces) and PESTL model to identify and evaluate strategic risks – Figure 1.8

(2) In terms of analyzing business risk from internal processes: Analysis aims to

indentify and then evaluate business risks upon given internal processes – Figure 1.9

Table 1.1 below describes analytical ratios used to indentify, measure and evaluate risks

in internal processes

Rivals New entrants

Figure 1.8 Analyzing threats towards the business of an organization

Figure 1.9.Analyzing risk of processes

Operational risk

Technological risk

Information risk

Financial plan making risk

Process risk Labor resource

risk Leader risk Integrity risk Compliance risk

Table 1.1 Analyzing internal threats Risks in

processes

Management activities relating to

risks

Ratios of risk analysis and evaluation

Inferior strategy - Relating to the initiative of

- Initiative of Board of directors

- Management according to operation

- Estimating

- Applying operating cost and analysis the movement

- Customers’ attitudes Missing

- Changes in market shares

- Comparing with rivals

- Changes in revenues and costs

Lack of

flexibility

- Appropriate structure of encouragement

- Cycle of time in terms of reporting process

- Reflections and proposals of employees

- Employee’s attitudes

Inappropriate

value for

shareholders

- Providing analysis with information

- Planning to repurchase shares

- Market value of the equity

- Price to Earning ratio

- Ratio analysis Audit plan having specific time often establishes audits which are performed in a period This is considered as a basic task of internal audit function – Figure 1.10

Analysis is used in specific audit plans or in audit instruction in association with specific

Audit strategy Resources

Audit plan with specific time Figure 1.10 The time specific relation between strategy

and audit plan

Methods

Business plan

sections (in step of making plan) If dividing according to specifically audited object/section/operation in association with tasks and with making plans, the analytical procedure is applied on the basis of trend, rate and model analysis

The second: Analysis in carrying out systematic audit Analyses need to be specific

towards risk-based system auditing – Figure 1.11: (1) Examine activities such as systems, factors of one system, componential systems, parallel systems and parental systems, (2) carry out the systematic approach with carrying out specific auditing contents

Basic analytical techniques such as financial statement analysis according to time series, relative financial statement analysis, ratio analysis, cash flow analysis, nonfinancial

Specific audit plan

Enquiring systems and risks

Evaluating controlling activities

Extended basic test

Generating

guarantees

Generating proposals

Final checking step Report

Figure 1.11 Process of auditing risk-based systems

Yes

No

measurement, comparison with rivals, will combine closely with operational measurement using balance scorecard, PESTL, SWOT model…

The third: Analysis in the period of making auditing report and examining the implementation of auditing proposals towards users The analytical procedure is used

in this period in order to assist auditors in evaluating the rationality of procedures carried out, whether audit evidences collected are sufficient and suitable for making decision or not, as well as evaluating the legality of conclusions proposed by auditors, including audit opinions on specific issues in an internal audit

1.4 Experience on Analytical organization to increase the efficiency of internal audit from several countries

Experiences for internal audit: First: Analysis is carried out in every stage of an internal audit in corporations; Second: Contents are analyzed according to internal audit’s task; Third: Analysis is specified in standards and related regulations; Fourth: Application of analytical methods is changeable depending on objective approaching methods

CHAPTER 2: THE STATUS OF ANALYTICAL ORGANIZATION WITH THE EFFICIENCY OF INTERNAL AUDIT IN VIETNAMESE CONSTRUCTION

CORPORATIONS 2.1 General characteristics of Vietnamese construction corporations influencing analytical organization in internal audit

2.1.1 The process of establishment, development of Vietnamese construction corporations with those of internal audit

Over 50 years of continuous development, the construction industry has majorly contributed to the achievement of economic – social tasks, step-by-step modernized, developed and integrated into regional and international areas Meeting huge demands for the construction field of the economy, Vietnamese construction corporations are significantly expanding in terms of both the quantity and size According to 2005 State- owned enterprise law [41], corporations which are invested and established by the State through collecting dots without spontaneously economic association of unit members and state-owned corporations are divided into two types: corporations established according

to Decision 90/TTg on 7/3/1994 (Corp 90 for short) [10] and corporations established according to Decision 91/TTg on 7/3/1994 (Corp 91 for short) [11] of the government Until June, 2012, the numbers of corporations (established according to Decision 90/TTg and Decision 91/TTg on 7/3/1994, and transformed model) were 87 Corp.90 corporations and 21 Corp.91 corporations Among those, 34 corporations operating in the construction field were majorly managed by the Ministry of Construction and Transportation Then

some of the corporations were transformed into company models which are Limited Company and Parent-Child Company

Before 1996, Vietnam did not have any official legal documents about the internal supervision and the internal audit system At the end of 1996, based on National Budget Law, the Government released Decree 199/2004/NĐ-CP on 03/12/2004 “Promulgating Regulation of managing state-owned company’s finance and managing state-owned capital invested in other companies” [13] to create a legal corridor for organization and operation

of internal audit Based on Decree 59/1996/ND-CP[14], the Ministry of Finance released Decree 832/TC/QD/CDKT (28/10/1997) which promulgated “Internal audit regulation” [6], a partial internal audit organization model[4], [5] After 1997, internal audit was organized in numerous large corporations, including Vietnamese construction corporations

In construction corporations of Vietnam, internal audit is organized majorly in Corp.90 Initial survey results before profound research showed that there were 8 corporations organizing internal audit Changes in business environment required that the management needed to change and internal audit appeared Continuous changes of construction corporations have required changes of internal audit to meet new demands

2.1.2 Characteristics of the construction industry having influences on the analytical organization in internal audit of construction corporations in Viet Nam

Operating characteristics of construction corporations in Viet Nam have influences on internal audit organization according to 2 groups of characteristic: (I) Regarding features of

the construction industry, we need to concern specific characteristics, for example: Firstly, diversified organizational models; Secondly, competitions among construction corporations continuously increase while the number of projects tends to decline due to impacts of the government and macro economy’s policies not yet having escaped from the worldwide economic crisis; Thirdly, the construction industry is generally sensitive with changes in economic conditions; Fourthly, reflections of construction corporation against negative situations; Fifthly, The Government’s regulations and policies; Sixthly, impacts of financial and real estate markets; Seventhly, the issue of extending operations abroad; Eighthly, the trend of merger and acquisition; Ninthly, the issue of decreasing cost and improving operation (II) Regarding construction corporations in Viet Nam, we need to concern about specific characteristics, for example: Firstly, dispersive production activities; Secondly, construction corporation’s products are often special; Thirdly, construction must comply strictly the system of standards and processes; Fourthly, construction generally needs to be invested largely in terms of capital; Fifthly, the issue of using resources wastefully, and pollution…When analyzing characteristics of construction

and its products, managers have to take care of different factors of internal audit organization in order to achieve an efficient audit in Vietnamese construction corporations, including: (1) Internal audit is a necessary managing method to assist manager in identify the problems influencing objectives of the corporation; (2) The complication,

diversification and fluctuation in construction corporations in our country give internal audit new requirements; internal audit has to face more problems

2.1.3 Characteristics of organizing business management having influences on analytical organization in internal audit of Vietnamese construction corporations

In terms of business management in construction corporation of Viet Nam, we can describe generally following basic characteristics which have influences on requirements for

internal audit and its capacity of meeting as well as issues being placed: The first is organization models of construction corporations; The second is that construction corporation is managed by various ministries; The third is that the way of management in Vietnamese construction corporations is the lump sum based on the amount of work

Identifying risks in the internal process in general and in the process of lump sum in construction corporations in particular is the managers’ preference Furthermore, internal audit can assist superior managers in improving the current process in order to increase the efficiency and the effectiveness of the business This is also the expectation of corporation managers for internal audit

2.2 The situation of analytical organization in the internal audit of Vietnamese construction corporations

2.2.1 Overview of organizing internal audit in Vietnamese construction corporations

Step 1, Planning for an internal audit: The implementation of this exercise in

construction corporations is normally set in internal audit regulations even with corporations having internal audit sections but have yet to establish their own regulations However, in practice, plan-making only covers some general activities Auditing programs for financial statements are generally performed by internal auditors based on their experience regarding individual account checking However, making plans and designing programs reveal several limitations

Step 2, Performing internal audit plan: At this stage, auditors perform tasks

based on the plans and the programs that have already been established, internal audit sections who are not involved in establishing programs may rely on experience alongside with information from previous audit records and initial collections The implementation process has several common points: First, audit process is associated with contents of financial audit such as fixed asset, revenue, cost, etc Second, audit process relies on experience; Third, this process mainly reviews previous auditing and accounting documents and does not apply methods which are undiversified, inappropriate to audit objects Fourth, the process is repeated and inflexible

Step 3, Summarizing and generating internal audit report: An internal audit

report executed by internal auditors is based on detailed description and auditor’s summary according to the procedure of accounts in the financial statement