(Case Study the Automated Payment System

بسم الله الرحمن الرحيم

الجامعة الإسلامية – غزة
كلية التجارة
قسم المحاسبة / Islamic University – Gaza
Faculty of Commerce
Department of Accounting

The effectiveness of internal audit system in reducing the occurrence of errors and frauds in Palestinian services companies

(case study – The Automated Payment System

in Gaza electricity distribution company)

Faculty of Commerce

The Islamic University of Gaza

Dina Saher Al-Qura'an Randa Harara

220113166 220112376

Supervisor:

Dr. Salah Shubair

2014-2015

Dedication

All praise to Allah, today we fold the days' tiredness and the errand summing up between the cover of this humble work .

To the utmost knowledge lighthouse, to our greatest and most honored prophet Mohamed - May peace and grace from Allah be upon him .

To the Spring that never stops giving, to my mother who weaves my happiness with strings from her merciful heart... to my mother .

To whom he strives to bless comfort and welfare and never stints what he owns to push me in the success way who taught me to promote life stairs wisely and patiently,…. to my dearest father ,God bless his soul .

To whose love flows in my veins, and my heart always remembers them,… to my brothers and sisters .

To those who taught us letters of gold and words of jewel of the utmost and sweetest sentences in the whole knowledge. Who reworded to us their knowledge simply and from their thoughts made a lighthouse guides us through the knowledge and success path, ….To our honored teachers and professors .

Abstract

The study examine the impact of internal auditing function in assessing the size and the amount of frauds , errors and its role to protect companies from them especially in Palestinian services company , and because its importance among the companies as it has several functions that mean to enhance the controlling and monitoring in these companies for example, the major and significant role in designing and developing the internal control system and support the corporate governance.

In addition to that it helps in measuring and evaluating competence and efficiency performance, for this importance this study aims to identify The effectiveness of internal audit in reducing the occurrence of errors and frauds in Palestinian services companies(case study – Gaza electricity distribution company) .

The study population consists of some of employees in relation with internal auditing function in Gaza Electricity Distribution company .

The Researcher used the descriptive analytical method , and utilize both primary and secondary sources for data collection .

The results of statistical analysis show that (1) There is a statistically significant relationship between internal audit system and the effectiveness of internal audit services in Gaza Electricity Distribution Company,through these statistical results, we can say that the system of internal audit in the Gaza electricity company has possibilities, especially in the effectiveness side of the internal audit services and we cannot deny its existence.

Also there is a statistically significant relationship between internal audit system and the financial and administrative performance, and the researchers found that these statistical results, indicate that the system of internal audit in the Gaza electricity company is in relation but not very closely with the financial and administrative performance in the company.

Moreover the analysis show statistically significant relationship between internal audit system and the ability to assess and manage risks related to automated payment system applicable in Gaza electricity distribution company, the study found that the results which concerning the main task of the system of internal audit, does not give an excellent impression but good one in terms of the system's ability to assess and manage risks related to automated payment system.

Table of Contents
Deduction . / 1
Abstract. / 1
Chapter.1 Research Proposal / 1
Introduction. / 3
statement of problem . / 4
Research objectives. / 4
Significance of the project. / 4
Scope and limitations of the project . / 5
Methodology. / 5
Research variable . / 5
Research Hypothesis. / 5
Research tools. / 6
Research parameter. / 6
Data sources. / 6
Previous studies. / 6
Chapter .2 Internal Audit / 12
Introduction. / 13
Concept Of Internal Audit. / 13
The objective of internal audit. / 14
International Standards for the Professional. Practice of Internal Auditing. / 15
Types of audits. / 16
Work process of internal audit function. / 16
The audit charter. / 19
The working model. / 20
Audit Competencies. / 24
Training and Development of Audit Team. / 25
The relation between internal auditors and external auditor / 26
Audit Committee / 28
Chapter .3 Gaza Electricity Distribution Company / 30
Company Profile . / 31
The organizational chart. / 32
Automated payment system. / 32
Advantages of automated payment system / 33
Disadvantages of automated payment system / 33
GEDCO procedures in automated payment system / 34
Chapter ….4 Methodology / 36
Research methodology / 37
Questionnaire content. / 37
Data measurement / 38
Test of normality / 38
Validity of questionnaire / 39
Structure validity of the questionnaire / 43
Cronbach’s Coefficient Alpha / 44
Chapter .5 Data Analysis and Discussion / 45
General information / 46
Testing Hypothesis, Discussion and interpretation / 50
Chapter .6 Conclusion & Recommendation / 57
Conclusion . / 58
Recommendation. / 58
References list / 61
Appendix I / 63

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7Chapter OneProposal contents

Chapter One : Research Proposal :

Introduction...... 3

statement of problem…………………………………….……………...4

Objectives...... 4

Significance of the project...... 4

Scope and limitations of the project………………………….……………5

Methodology...... 5

Research variable..…………………………………..………………………………….….….…………5

Research hypothesis…………………...………………………………………………………...... …..5

Research tools ……………………………………………………………………6

Research parameter …………………………………………………………..…6

Data sources ……………………………………………………………..……….6

Previous studies…………………………………………………………………..6

Introduction 1.1

The world is changing, and becoming faster. Have been and are producing massive and major changes, converting it both economic and social activity, and one of the important things that have contributed to this recent changes is an internal audit which is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, diminishing the possibilities of pilfering and governance processes

Internal audit began in unsophisticated manner during the Second World War, especially In 1939,when the Nazi Party were the first government to recognize the importance of having a well-controlled mechanism for running an evil, world-conquering regime. The IIA were contracted to undertake a series of efficiency reviews in the early weeks of World War II. At this time many organizations found it difficult to maintain operational efficiency and control. So, Companies appointed special staff (i.e. present day internal auditors) to review operations and report to them. The taskstarting as an internal business function primarily focused on protection against payroll fraud, loss of cash, and other assets, internal audit’s scope was quickly extended to the verification of almost all financial transactions, and still later, gradually moved from an “audit for management” emphasis to an “audit of management” approach which is assigned to internal auditors.Internal audit activities are performed in diverse legal and cultural environments; within organizations that vary in purpose, size, complexity, and structure; and by persons within or outside the organization. While differences may affect the practice of internal auditing in each environment, compliance with the International Standards for the Professional Practice of Internal Auditing is essential if the responsibilities of internal auditors are to be met.

Through an audit, an organization can identify a system’s ineffectiveness, take corrective action, and ultimately support continuous improvement. Unfortunately, a poorly deployed internal auditing system can lead to increased, non value-added costs, many hours of wasted resources, and an eventual, inevitable QMS breakdown.

Management must be aware into the fact that the internal audit process is just as critical and important an activity as any other process within the QMS. An internal auditing system must have the commitment of senior management. Without their approval, support, and encouragement, the internal audit process is doomed for failure and worse–time and money wasted.

When scheduled audits are routinely postponed, management is sending a clear message, “Auditing is a low priority, and we only perform them because it’s a necessary evil.”

Consequently, companies that understand and support their internal audit systems sharpen their QMS edge. Their internal auditors have acquired the skill to identify a system’s effectiveness as well as ensure compliance. These companies have progressed and understand the subtlety of continuous improvement..

Statement of the problem1.2

The financial scandals and claims of financial fraud and the financial crises that have occurred in recent years, Prove the weak of internal audit systems in many companies, this weaknesses can be clear in the most of organizations in Palestinian economy ,and for the importance of services companies in Palestine society, this research will examine the internal audit system for one of the most important services companies exactly in our recent time, which provide citizens with essential electricity to continue their life correctly and to check if there is an impact of electricity company's internal audit system in decreasing the possibilities of frauds and scandals that can affect the quality of its services negatively.

The research Main Questions:

1- Is there a relationship between the quality of internal audit activities and the

typeamount of frauds and services mistakes?.

2- Are the qualifications, knowledge and experience of the internal auditors sufficient enough to let them work in proper manner?

3-Are the auditors applying the standards for the internal auditing and generalize it on their company in Gaza?

4-How can we improve the process model of internal auditing in the electricity company?.

1.3 Objectives of this study:

This study aims to achieve the following objectives:-

Understand the concept and the types of internal audit.
Recognize the importance of the objectives of the internal audit function.
Identify internal control system in the electricity distribution company.
Identify the internal auditing standards applied in the electricity distribution company.
Identify the obstacles and difficulties that prevent the application of internal auditing standards in the electricity distribution company.
Recognize the effects of internal audit on the effectiveness and efficiency of services.

1.4Importance of this study:

Emphasize the significance of expansion in the application of internal audit work in the Palestinian economic environment, the benefits from the development of accounting practices and the development of the audit profession and thus improve the efficiency and effectiveness of the Palestinian services companies, which will impact on the environment of Palestinian economy positively.

 the study examines the effects of the role of internal audit in improving the efficiency and effectiveness From the viewpoint of the internal auditors.

1.5 Scope and limitations of the project:

Spatial borders: the study was applied for private services sector firms .

Time limits: research deals with the reality of internal auditing and its impact in management practices in the period between 2010 and 2014,

The sample of the study : the internal auditors and accountants in the Gaza Electricity Distribution Company in the Finance Management.

1.6 Study Methodology:

the research includes displaying the practical study design by using descriptive analytical approach in collecting data through:

Primary resources: where we make interviews with officials, reports.
Secondary resources: Such as text books, Master and doctorate dissertations,thesis and Journals.

and showing the variables , hypotheses, and research tools .

Research Variable:1.7

Variables:

It represents the dependent variables and independent variables by introducing theoretical analysis for each variable , this analysis shows the importance of the variables and its role in assumed the relationship between internal audit and the electricity service and how to measure those variables,this research is to study the relationship between the effectiveness and efficiencies of internal audit services in electricity company as dependent variable and the internal audit systemfor avoiding frauds in GDECO as an independent variable, moreover this research will study the relation with other dependent variables which are:

1.The ability to asses errors and management risk.

2.financial and administrative performance.

1.8 Research hypotheses:

Main hypotheses:

Null Hypotheses:- there's an inverse significant relationship between internal audit system and the effectiveness of internal audit services in electricity company.

Alternative hypotheses:- there's no inverse relationship between internal audit system and the effectiveness of internal audit services in electricity company.

Sub-hypotheses:

There is a statistically significant relationship between internal audit system and the financial and administrative performance.
There is a statistically significant relationship between internal audit system and the ability to assess errors and managerisks.

1.9 Research Tools:

1. Computer software, include: Microsoft word, SPSS.

2. Questionnaire .

3. Internet.

1.10 Research Parameters:

Time Frame : first semester 2014.
Language: English for publication, Arabic and English for questionnaire.
Geographical area: Gaza strip.
The environment of the research(Scope):the internal auditors and accountants in the Gaza Electricity Distribution Company in the Finance Management.

Data sources:1.11

* Primary resources: where we make interviews with officials, also through reports and questionnaires .

* Secondary resources: Such as text books, journals and internet.

1.12Previous studies :

"The effect of the internal auditing on financial performance applied study on Bank of Palestine " (Keshta ,Hassan ,Alghalayini ,2009)

This study aims to identify the role of the internal audit in controlling the financial and managerial performance in the Palestinian corporations taking in considerations all the aspects that would limit this purpose of the internal audit department.

These factors would be the business environment, the qualification of the auditor, the laws and regulation, the extent to which the corporation are committed to these laws and other factors ,it also identified the degree of independency granted to the internal audit and the importance of this in increasing administrative and financial performance in Palestine. Moreover this research focus on the current situation and any amendments needed to be undertaken in the coming period so that the internal audit function of controlling the performance on both sides the managerial and the financial will be effective.The researchers used the analytical descriptive methodology due to the nature of the research, also the researchers searched for a previous work in the area of internal auditing by surfing the internet specially the specialized sites that contain articles and other forms, the researchers will depend on materials that will be took from the internal auditing departments and other related departments in addition to organizing an interview with internal auditors for the targeted company.And found the results about the role of internal audit in achieving the objectives and enhancing bank's performance and summarizes the following conclusions based on the created case study:

1-The existence of the audit department is vital and necessary, so that it’s being provided with all the resources needed to achieve a high quality in this job.

2-There is a necessity to train and develop the skills of the employees working in this area in the Palestinian companies so they can catch up with the development on this job around the globe.

3-The internal auditing department is given the time and resources to hunt any potential risks surrounding the working environment in the Palestinian companies as a trust in the importance of this job to the achievement of the high quality in every task being done.

4-the effectiveness and efficiency of the internaqqwqaaWAWawSawwwwal audit job depends mainly on the degree of coordination between the different departments, the more the coordination the better the outcomes.

5-The internal auditors work in an objective and independent manner from the management to achieve the objectives of this job of providing fair and reliable information to the different users and related parties.

Finally the research recommendations:

According to the findings of this study they provided some suggestions, might be

help the managers in the banks that listed in Gaza strip if they use them effectively.

1-It is necessary to teach internal audit, internal control and risk management in university as separate course in bachelor degree.

2-The management of bank of Palestine should create communication channels with Institute of Internal Auditors (IIA).

3-The role of internal auditor should be expanded to involve all the activities of the bank not routine activities only.

4- Training courses for employees about update standards of internal auditing should be created periodically.

5-Top management of bank have to create performance measurements which used by internal auditor for evaluation of performance.

6-It is necessary to response by management to the internal audit report about risks that will be reduced.

7-The planning of internal auditing should be discussed and evaluated by audit committee.

"The impact of information systems audit on improving bank's performance applied study at banks working in Gaza "(Rezeq Harb ,2012)

The study examines the impact of information systems audit on improving

performance of the working banks in Gaza Strip. The study population consists of someof the banks‘ branches in Gaza Strip and the main management centers in Gaza Strip. Theresearch targets the banks managers, heads of sections, accountants, IS auditors, internalcontrollers and internal auditors of the banks. The research results show that information systems auditing play a central role in improving the performance of banks and achieving the bank's strategic development aims, because the banks have reliable technology that organizes the information gathered from

all sources and analyze the data to increase the quality of information provided systems. Business operations in the banking has been increasingly dependent on the computerized information systems. It has now become impossible to separate (IT) from the business of the banks.The researcher analyzed data through using the descriptive analytical approach by collecting data from secondary sources (books, references, studies, websites, articles … etc.),and through the questionnaires as a primary source that were prepared and distributed to a sample of a population under consideration, so that the researcherconclude the following conclusions based on