Leau, Lee Meng (2024) Relationship between internal audit function and financial performance: insights from Malaysia. Master dissertation/thesis, UTAR.
Abstract
This study investigates the relationship between internal audit function, internal audit costs, the ratio of internal audit costs to administrative expenses and profit before tax in the selected Malaysian corporate sector. This study examines quantitative data derived from the annual reports of Malaysian retailing companies, which are members of the Malaysian Retail Chain Association, covering the period from 2021 to 2023. The analysis was performed using SPSS, employing frequency analysis, descriptive statistics, Pearson's correlation coefficient, and regression techniques to explore these relationships. The findings contribute to the body of knowledge on internal auditing and financial performance by highlighting both the impact of specific internal audit components and the broader implications for corporate governance. The findings indicate that, although the ratio of internal audit costs to administrative expenses does not demonstrate statistically significant relationships with financial performance (measured by profit before tax), both the internal audit function and internal audit costs exhibit a strong and significant positive relationship with profit before tax. This highlights the strategic importance of investing in internal audit processes as greater audit expenditure correlates with improved financial outcomes. These results also contribute to the body of knowledge by demonstrating that internal audit costs play a pivotal role in profitability, offering actionable insights for corporate governance. Despite a mixed result, this research provides a foundation for future studies to explore the broader implications of internal audit functions on financial performance. It calls for further investigation into audit quality, scope, industry-specific dynamics and to explore additional dimensions, including ESG considerations, with the potential to refine internal audit strategies and enhance organisational resilience and sustainability. Thereby paving the way for deeper understanding of internal audit’s role in enhancing organisational performance and driving stronger corporate governance practices. Keywords: internal audit function, in-house internal audit, outsourced internal audit, internal audit cost, financial performance, corporate governance
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