Internal Audit Function Characteristics and the Quality of Internal Control Systems: Moderating the Effect of Enterprise Resource Planning System Maturity

Abstract

The aim of this study is to investigate the relationship between the internal audit function (IAF) (independence and competence) and the quality of internal control systems (ICSQ). It also aims to assess the moderating role of the maturity of enterprise resource planning (ERP) on these relationships. Using data from 98 Saudi Arabian small and medium-sized enterprises (SMEs) that have implemented an ERP system, this paper uses a Structural Equation Model to examine the hypotheses. In particular, the Partial Least Squares Structural Equation Modelling (PLS-SEM) is adopted for data analysis and hypothesis testing. The results reveal that both internal audit competence and independence are positively associated with ICSQ. Moreover, the maturity of ERP moderates the relationship between internal audit competence and ICSQ. These findings have significant implications with regard to the ICSQ, as the identification of the internal audit function's characteristics affects the internal control quality of SMEs. In addition, the findings have implications on those who are concerned with measuring ICSQ, such as company managers and regulatory bodies. This study uses the COSO framework to measure ICSQ. Contribution/ Originality: This study is one of very few studies to investigate the impact of the internal audit function (independence and competence) on ICSQ in SMEs, as well as assessing the moderating effect of ERP maturity on this relationship.

Internal Auditing in the Arab World: A Systematic Literature Review and Directions for Future Research

“…From these articles, four studies investigate the mediating effect of various factors such as job burnout (Shbail et al, 2018), IA quality (Bshayreh et al, 2019; Mustafa & Al-Nimer, 2018), job satisfaction (Obeid et al, 2017). Limited studies (four studies) have also investigated the moderating impact of several factors like the maturity of enterprise resource planning (Shaiti & Al-Matari, 2020), IA mechanisms (E. M. Al-Matari & Hussein Mgammal, 2019), external auditor’s size (Khlif & Samaha, 2016), and task complexity (Alqudah et al, 2019).…”

“…It has been found that very limited work considered the interaction of different factors in explaining the complexity of the IAFs and their influence by including moderating or mediating variables (E. M. Al-Matari & Hussein Mgammal, 2019; Alqudah et al, 2019; Baatwah et al, 2021; Shaiti & Al-Matari, 2020). Hence, future studies can take a step further in this direction and consider the interrelation between various factors in exploring the role of IA.…”

“…According to the results of studies conducted on institutions in Arab countries, IA’s independence and objectivity are among the main factors that are positively affected by the presence of independent risk management committees, ACs size, and firms connected to the finance sector (Alhajri, 2017; Al-Twaijry et al, 2004), sound CG (Alaraji, 2020), the gender of chief audit executive (Muqattash, 2017; Oussii & Klibi, 2019), and salary (Muqattash, 2017). As presented in Table 6, the investigation revealed that very limited studies has been directed to the IAFs and the quality of small-medium enterprises (Shaiti & Al-Matari, 2020). In general, IAFs in all Arab countries are still full of opportunities for more investigations (Alhajri, 2017).…”

“…From these articles, four studies investigate the mediating effect of various factors such as job burnout (Shbail et al, 2018), IA quality (Bshayreh et al, 2019;Mustafa & Al-Nimer, 2018), job satisfaction (Obeid et al, 2017). Limited studies (four studies) have also investigated the moderating impact of several factors like the maturity of enterprise resource planning (Shaiti & Al-Matari, 2020), IA mechanisms (E. M. Al-Matari & Hussein Mgammal, 2019), external auditor's size (Khlif & Samaha, 2016), and task complexity (Alqudah et al, 2019). It has been found that very limited work considered the interaction of different factors in explaining the complexity of the IAFs and their influence by including moderating or mediating variables (E. M. Al-Matari & Hussein Mgammal, 2019;Alqudah et al, 2019;Baatwah et al, 2021;Shaiti & Al-Matari, 2020).…”

“…Limited studies (four studies) have also investigated the moderating impact of several factors like the maturity of enterprise resource planning (Shaiti & Al-Matari, 2020), IA mechanisms (E. M. Al-Matari & Hussein Mgammal, 2019), external auditor's size (Khlif & Samaha, 2016), and task complexity (Alqudah et al, 2019). It has been found that very limited work considered the interaction of different factors in explaining the complexity of the IAFs and their influence by including moderating or mediating variables (E. M. Al-Matari & Hussein Mgammal, 2019;Alqudah et al, 2019;Baatwah et al, 2021;Shaiti & Al-Matari, 2020). Hence, future studies can take a step further in this direction and consider the interrelation between various factors in exploring the role of IA.…”