Theories Of Auditing

The American Accounting Association (AAA) guidelines (1973) defines auditing as, “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria, and communicating the results to interested parties”. According to Arens et al. (2005) auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria”. Thus various definitions for auditing by different authors and professional bodies/association are presented below.

In essence, these definitions imply that the prime role of external

These theories are contingency theory, stakeholder theory and agency theory. However, three of these theories are considered important in accounting, auditing and management. According to contingency theory, an organization must categorize specific aspects of an accounting system which is associated with certain defined circumstances and demonstrate an appropriate matching (Otley, 1980). Stakeholder theory, however, proposes that the corporate responsibilities and duties are not only restricted to shareholders but also extended to stakeholders like employees, creditors, prospective investors and shareholders, governmental and professional bodies, environmentalists, customers and suppliers (Culpan & Trussel, 2005). It is argued that each stakeholder has a right to be treated as an end, and not solely as means to an end (Shankman, 1999). These two theories seem to discuss the operating circumstances from where the firm operates (contingency) and the primary relationship between external stakeholders and the organization as the whole. Nevertheless, internal auditing seems to be more relevant in explaining the agency problems arising from within the organization, although internal auditing indirectly explains the relationship between internal and external environment as the result of new definition of internal auditing by IIA in 2000. The issues of business ethics as a

Another study considered that internal auditors‟ job is not done until defects are corrected and remain corrected (Sawyer, 1995). In their study, Mihret and Yismaw (2007) presented a rather different perspective of evaluation of internal audit effectiveness from the previous studies by focusing on factors within the organization which has an impact on the effectiveness of internal audit. According to their model, there are four key factors, the interaction of which will result into internal audit effectiveness. These are internal audit quality, management support, organizational settings and attributes of the clients. On the other hand, Gansberghe (2005) opposes that perception and ownership, organization and governance framework, legislation, improved professionalism, conceptual framework and resources are the key factors responsible for an effective internal audit system in the public sector. Arena and Azzone (2009) states internal auditing as a value adding function to an organization as this function now incorporates a new link to internal control i.e. risk management. According to this study, internal auditors have embraced value addition approach by transforming their functions and extending their involvement areas to governance processes risk management and control. Internal audit effectiveness is seen as a function of three