Internal Audit Function and Corporate Governance in Libyan Context

This report provides a comprehensive overview of the internal audit function and its crucial role in corporate governance, particularly within the context of Libya. It begins with an introduction outlining the scope and objectives of the study, followed by an exploration of the conceptual evolution of internal audit, its definitions, and its significance within corporations. The report delves into the theoretical perspectives underpinning internal audit and corporate governance, focusing on agency theory and stewardship theory, analyzing their impacts, costs, and significance. It then examines the development and implementation of a well-aligned internal audit strategy, emphasizing the importance of risk assessment and internal controls. Finally, the report investigates the role of the internal audit function in the development of corporate governance codes, highlighting its contribution to ethical practices, accountability, and effective management. The report also includes a literature review summarizing relevant studies and findings, providing a solid foundation for understanding the complexities and importance of internal audit in contemporary business environments.

Running head: INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
Internal Audit Function and the Development of Corporate Governance Code in Libya
University Name
Student Name
Authors’ Note

2
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
Table of Contents
1. Introduction............................................................................................................................2
2. Notions of internal audit within a corporation.......................................................................2
3. Theoretical Perspective of internal audit function and corporate governance.......................7
3. 1 Agency Theory as a theory of Corporate Governance........................................................7
3.1.1 Costs of agency model on corporate governance..........................................................9
3.1.2 Significance of agency model on corporate governance.............................................10
3.1.3 Effects of agency model on corporate governance.....................................................10
3.2 Stewardship Theory of Corporate Governance..................................................................10
3.2.1 Impacts of Stewardship Theory of Corporate Governance on Employees.................12
3.2.2 Particular Influence of Stewardship Theory of Corporate Governance on Clients....12
3.2.3 General consequence of Stewardship Theory of Corporate Governance...................12
4. Developing and implementing well-aligned internal audit strategy....................................13
5. Role of internal audit function in development of corporate governance code...................14

3
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
Literature Review
1. Introduction
The current study delivers a comprehensive image of the internal audit purpose. This
necessarily views the conceptual evolution of theory of internal audit, and illustrates the
necessity for the same, descriptions of the term, and the way it is inevitable to different
entities’ internal audit function operates within. In essence, this runs deeply into the prior
studies that are necessarily directly associated to the topic under consideration and delivers
their findings. This can aid the process of ascertainment of beginning point of the current
study. The present study intends to illustrate and design a conceptual framework and evaluate
overall nature and exercise of the internal audit function within companies in Libya.
2. Notions of internal audit within a corporation
Conceptual approaches concerning internal auditing
Griffiths (2016) indicates that there is a comprehensive image of the internal audit function.
The study views the conceptual transformation of the internal audit function and illustrates
the requirement for the same, descriptions of the terms and the way it is necessary to different
entities. The activities of internal auditing emerged as well as designed owing to value to
specific recipients and owing to potential of fulfilling specific requirements of different users.
Eulerich et al. (2015) assert that the activity of internal auditing is of great importance and
the article recommends specifying significance of the association between specifically section
of accounting as well as assessment. Internal auditing can be considered to be of strategic
significance, as managers, along with the Board of Directors of the reporting unit, can
understand that till there is an appropriate internal structure of control, a few error as well as
failures can be examined and eradicated in a well timed method.

4
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
The Board of Directors of the company necessarily give the impression auditing that is
internal in nature as an act for enhancing the action, in addition to an act of searching for as
well as detecting faults as well as wrongdoing. Therefore, amplification of auditing concept
that is internal in nature, and over and above than that, elucidation of the role that internal
auditing essentially plays today, is crucial. As suggested by Salvioni and Astori (2015), there
are several scholars from the specific ground have analysed the advancement of internal
auditing at the global level as well as nationwide level. A more strong utilization of the
expression audit is discovered during period of economic crisis from the period 1929, given
that then role as well as requirement of internal auditing endlessly augmented, a fact that
directed to the corporation along with standardisation of exercises of internal auditing by way
of institution in the year 1941 in Orlando, USA, of principally the Institute of Internal
Auditors (abbreviated as IIA), to which, at the instant, in excess of 120 nations are associated.
As recommended by Alzeban and Gwilliam (2014), internal audit necessarily had a
significant role within corporate governance ever since the period 1940. It certainly became
more imperative with passage of time. Ever since the period of 1940, several transformations
have taken place as regards internal auditing that was regulated by means of diverse norms as
well as corporate governance codes. McAlister and Ferrell (2016) takes into account the fact
that there are diverse basic actions of internal auditing are registered include analysis of risk,
making certain organization within the entity as well as ensuring conformity.
During the year 1942, Lenz and Hahn (2015) asserts that the first president of the entity
International Institute of Internal Auditors, announced an surprising forecast that majority of
excellent standpoint of internal auditing shall be the “managerial backing”. During the year
1991, Joseph J. Mossis that is the president of the “Institute of Internal Auditors” of Britain,
started again the same comment, however in a more a precise manner. In essence, it is quite
clear for the ones that operate within “Internal Auditing function” that this necessarily plays

5
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
an important role, assisting overall management to support the reins of internal control (Yee
et al. 2017).
Figure: Evolution of Internal Audit Function
(Source: Yee et al. 2017)
Beginning from the period 1950, IIA declared own internal auditin norms that was entirely
different from the ones of external auditting. However, with passage of time these norms
were necessarily generalised and from the period 1970 these essentially became standards of
internal auditing that are primarily subject to alterations owing to different entities that are
continuously struggling with dealing with new difficulties and challenges.
As correctly put forward by Mihret and Grant (2017), initial illustration of internal system of
audit was delivered by director of IIA that is the Research institution established during the
period 1958. Yasser et al. (2015) suggests that Internal auditing that emerges as a particular
section of the wide ground of accounting, using the fundamental mechanisms as well as ways
of accounting. Mat Zain et al. (2015) mentioned that the public accountant as well as internal
assessor utilizes many similar mechanisms that again direct towards an erroneous supposition

6
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
that there subsists minute inconsistency in firm’s operation. Essentially, firm’s internal
assessor, similar to any evaluator, is worried regarding evaluation of legitimacy of depiction.
However, as regards the current case under consideration, the illustration with which
particular evaluator is disturbed takes into account fairly broader choice. Also, there is
requirement to accomplish different themes in which the association to particular accounting
items is frequently to some extent isolated. Also, the internal assessor is relatively more
intensely concerned in assisting to carrying out the operations profitably (Christopher 2015).
As recommended by El-Kassar et al. (2014), internal auditing can be referred to as
Professional rules declared by the “Institute of Audit and Internal Control”. This rule refers to
a specific purpose along with independent activities that confer to a business concern an
cover concerning the stage of specific controls regarding different functions. This shows the
way to the business concern and helps in enhancement of business functions that in turn can
add plus value. In addition to this, this has the requirement to be state that internal audit also
assists the business concern to attain its aims since the same evaluates the administrative
process, controls in addition to processes of governance. However, there exists a risk to
which the business concern is exposed. In addition to this, internal audit presents
explanations and solutions for enhancement of effectiveness of these procedures, or else to
mask drawbacks (Ruud 2013).
As mentioned by Alzeban (2015), internal auditing action appreciates and directs the
corporate governance procedure, in a bid to achieve particular aims associated to ethics,
accountability as well as effectiveness in management. Fundamentally, in this regard, it can
be said that for the purpose of tracking and making certain compliance to the pertinent code
of corporate governance. Essentially, it is crucial to illustrate the notion of corporate
governance. In particular, corporate governance as per OECD, reflects different procedures
according to which a corporation is directed and at the same time controlled (Drogalas et al.

7
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
2016). There are different aspects of corporate governance attained distribution of powers as
well as obligations between mainly the Board of Director, firm’s managers, different
shareholders as well as stakeholders, in order to make certain coordination of diverse actions
and attainment of objectives of the business concern.
The report published by Preda reveals the fact that companies registered at different stock
exchange believes that corporate governance is essentially the outcome of specific norms,
varied traditions along with behavioural themes designed by each and every system of
legislative (Jiang et al. 2017). As published by IIA during the period of July in the year 2006
in their guide on Organisational Governance directed for Internal Auditors of the firm, the
association between internal auditing as well as its advisory service role can be essentially
strengthened in definite aspects of principally corporate governance.
As suggested by Jiang et al. (2017), internal auditing primarily has a more significant part
since the declaration of the law that is the Sarbanes Oxley Law on apparition. Although the
directives stipulated under this Sarbanes Oxley Law do not necessarily attend to the definite
role of the internal auditing mainly within corporate governance of businesses, but there are
different obligations of corporate governance for mainly the audit committees as well as
external auditors and there are also recommendations as regards the significance of internal
auditing. Nickell and Roberts (2014) assert that progression of internal audit indicates
towards orientation towards enhancement of the effectiveness of management of risk,
escalating satisfaction level of stakeholders, improvement of the capabilities that different
internal assessors need to have, mounting concern in enumerating and analysing overall
performance of internal audit. These studies also talk about enhancement of the level of
progression of technology in the studies of internal audit (Lenz et al. 2014). In recent times,
internal evaluators have also participated more and more in different works of functional
auditing, management of risk, several internal controls, and specific requirements of

8
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
governance as well as IT notions. As such, it is extremely crucial to monitor the direction in
which function of internal auditing shall head towards in the upcoming period.
3. Theoretical Perspective of internal audit function and corporate governance
Nickell and Roberts (2014) suggested that corporate governance can be considered as
oversight of policies, processes as well as exercises. This oversight aids to make certain that
the business concern is exercised in the best interests of the firm as well as its shareholders.
The procedures of handling corporate governance are normally handled by a board of
directors. In addition to this, business concern might employ different staff of assessors to
examine and scrutinize internal controls.
Ackermann and Marx (2016) mentioned that the ultimate accountability for corporate
governance in majority of business concerns lies directly with the board of directors. In
essence, internal assessors are mainly charged with making certain that corporate procedures
along with related controls are functioning as intended.
3. 1 Agency Theory as a theory of Corporate Governance
Baharud-din et al. (2014) advocates that agency theory indicates towards issues of directors
that control firms and shareholders own the business concern. Agency theory considers this
specific subject matter into account for preventing the same. As per Tsai et al. (2015), the
main notion of agency notion is that a specific agent gets recruited by primarily the principle
to keeping on the task and the agency is the association between mainly agent as well as the
principle. In addition to this, agency costs are mainly provided by the principle for the
purpose of controlling overall behaviour of the agency owing of deficiency of trust in the
conviction of the agents. Al-Matari et al. (2014) suggests that it is important to assume the

9
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
assignment on behalf of different agents and in this case agent becomes liable to that specific
principle. Fundamentally, there is three different segregations of ownership as well as
control; namely principal (referring to shareholders of a firm), agents (indicating to the
directors of a firm) and task under consideration (indicating towards management of the
corporation) (Lee 2017).
In essence, the agency theory aids business enterprises to develop the corporate governance
and this necessarily starts off with the business enterprises owned as well as managed by the
same individuals. However, in the following phase, it necessarily expands the entire business
by means of contributions of requisite financiers. As such, these individuals can be
essentially the shareholders having restricted liability. Thereafter, in the subsequent stage, it
delegates the responsibility of continuing the operations of the business to principally
managers of the firm (referring to the agents). Further, in the following stage, the business
undertakes separation of business goals. Martin (2015) mention that separation/ division of
business ownership can show the way to probable notions between firm’s directors, firm’s
shareholders along with relationship with principal-agent that can be handled with different
codes of corporate governance.
Ali and Ahmad (2017) suggested that agency theory comparative to corporate governance
supposes a two-tier sketch of firm control and this includes managers as well as owners.
Again, agency theory supports the view that there might be some sort of friction as well as
doubt between these two different groups. As such, the fundamental framework of the
business concern, thus, is the netting of contractual associations among diverse interest
groups having a stake in the business concern.
On the whole, there are essentially three different clusters of interest groups within the
business concern namely, Managers, shareholders as well as creditors (primarily the banks).

10
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
Setiawan and Djajadikerta (2017) asserts that shareholders often have disagreements with
both banks as well as managers, because their common priorities are unlike. Managers hunt
for quick profits that amplify their own riches, power and status, whilst shareholders are
further fascinated in unhurried and stable growth over period. The rationale of agency theory
is to recognize points of disagreement among corporate clusters of interest groups. As such,
Banks intend to lessen risk whilst shareholders wish for to reasonably maximization of
profits. Managers are relatively more risky in the area of profit maximization, as their careers
are founded on the capability to generate proceeds and present the results to the board. In
essence, this fact that contemporary corporations are founded on these associations that
generates costs and each and every group has the intent to control the other (Ravjee and Marx
2015).
3.1.1 Costs of agency model on corporate governance
One of the most important insights of essentially agency theory is the notion of costs of
keeping up with the labour division among various credit holders, varied shareholders as well
as managers. In essence, managers necessarily have the benefit of information, as they
understand close up of the firm. Also, they can necessarily utilize this for enhancement of
their own status at the cost of shareholders. Restricting overall control of different managers
itself involves costs (namely decreased profits), whilst profit seeking in various risky
ventures might possibly alienate different banks along with other financial institutions (Al-
Matari et al. 2017). Keeping track and restricting managers itself also involves now and then
considerable amounts of costs to the business concern.
3.1.2 Significance of agency model on corporate governance
As suggested by Ruud (2013), agency model on corporate governance upholds the view that
that business enterprises are principally units of disagreement in place of unitary, profit-

11
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
seeking equipment. This disagreement is not unusual but embedded within the framework of
contemporary business enterprises.
3.1.3 Effects of agency model on corporate governance
Drogalas et al. (2016) asserts that it is quite possible that in case if one accepts the notion of
agency theory, that business enterprises are in point of fact groups of associated fiefs.
Alzeban (2015) states that each one of the fief has own specific interest as well as culture and
opinions regarding the purpose of the firm in a different way. In evaluating the purpose of a
corporation, one can suppose that managers shall behave in a manner to make best use of
their own profit as well as reputation, even at the costs of firm’s shareholders. Also, one
might perhaps even comprehend the role of managers as one of institutionalized
deceitfulness, in which the irregularity of knowledge allows managers to function operate
with more or less total sovereignty.
3.2 Stewardship Theory of Corporate Governance
As suggested by Stewardship theory is regarding the manager who can operate as
accountable stewards of specific principle as well as assets that they manage (Jiang et al.
2017). Furthermore, stewardship theory can be considered as the alternative opinion of the
agency theory in which the managers are considered to act in their own eagerness. It can be
hereby mentioned that specified that stewardship is a definite mechanism to lessen loss of
agency. This strategy incorporated the compensation, retention policy of executives of the
firm, ascertaining different benefits as well as incentives of the managers of the corporation
by means of financial rewards and delivering shares by the process of maintenance of
alignment. In essence, this offers pecuniary interest to the members of the staffs and this can
inspire employees to perform better. Lenz et al. (2014) suggests that the steward can be
considered to be one who pays attention and looks after the requirements of others as well as

12
INTERNAL AUDIT FUNCTION AND CORPORATE GOVERNANCE
executives of the business enterprise intends to look after interest of firm’s shareholders and
they necessarily arrive at a decision regarding the business enterprise.
Whilst profit drives any sort of business, certain businesses might perhaps take into account
fraction of something greater. In essence, stewardship theory supports that ownership doesn’t
in reality own a business; it is only just holding it in a specific trust. As such, this reflects the
manner in which business. Nickell and Roberts (2014) suggests that the processes might
prove to be a medium for a advanced calling or else are devised to honour a initial vision of a
founder, therefore generating a profit that essentially takes a back seat to satisfying a social
standards of a company.
Ackermann and Marx (2016) put forward the view that stewardship models might perhaps
involve different environmental issues, in which a business thinks that it should function with
as slight influence as possible on the entire world. Again, other business concerns might
perhaps champion specific human else wise animal rights, abstaining from utilizing products
that necessarily are completed in sweatshops or else are examined on various live subjects.
However, there are still others who might honour religious beliefs of the owners and
represent themselves as servant leadership. In essence, these models have the tendency to be
prejudiced, with administration ascertaining boundary between socially accountable or
irresponsible behaviour (Baharud-din et al. 2014).
A business concern that is committed to a greater purpose shall attract clients who share the
same idea. Nevertheless, in case if the holders indicate towards stewardship else wise social
accountability in the area of corporate governance, company’s customers cautiously weigh
this alongside the manner in which the business concern actually function. Inconsistency
between words and action estrange base of the client (Tsai et al. 2015).