The relationship between internal audit and internal control in Malaysian cooperatives: the moderating effect of risk-management training / Shamsul Anuar Abd Rahim

Cooperatives make the crucial third engine of growth in most countries'
economy after the public and the private sectors. This study's first research objective
examines the relationship of internal audit effectiveness characteristics on internal
control among Malaysian cooperatives. The second research objective is to examine
and visualise the adapted COSO internal control components and its effectiveness
objectives among Malaysian cooperatives and present their internal control
effectiveness achievement. Using the COSO internal control framework, the
cooperative’s internal controls effectiveness is measured by relying on internal auditor’s
assessment rather than utilising the material weakness statement in the financial
statement. This evaluation method is considered more purposeful for cooperatives that
do not have the requirement to disclose their material weaknesses. The result of the
second research objective is used as the dependent variable to satisfy the first research
objective. The third research objective is to examine the moderating effect of the
cooperative’s staff's risk-management training on the relationship between internal
audit effective characteristics and internal control effectiveness among Malaysian
cooperatives. A survey is randomly administered to 234 Cooperatives with annual
revenues of more than RM800,000.00 using a self-administered questionnaire and 126
cooperatives have responded (53.8% response rate). Latest cooperatives information is
collected from Malaysian Co-operative Societies Commission (MCSC), a governing
body for Malaysian cooperatives. This study has utilised the Kohonen’s self-organising
map, a clustering method for the second research objective and the Partial Least Squares
Structural Equation Modelling (PLS-SEM) for the other two research objectives. The
clustering analysis reveals four levels of internal control effectiveness in Malaysian
cooperatives, which less than one-fourth of the cooperatives are considered having
effective internal controls. The four alternative levels of internal control effectiveness
are the highest internal control effectiveness, low efficiency and effectiveness of
activities, low reliability of financial information, and the lowest internal control
effectiveness. The PLS-SEM analysis shows that internal audit accessible to senior
management significantly influences the effectiveness of Malaysian cooperatives'
internal control. The other variables of internal audit characteristics do not influence the
cooperative’s internal controls effectiveness. Testing the moderator influence, riskmanagement
training of the cooperatives' staff, is found to moderate the relationship
between internal audit budget and cooperatives’ internal control effectiveness. In terms
of practical implication, the findings show that internal audit effective characteristics
have some influence on cooperative internal control effectiveness. Ensuring regulation,
providing support to a cooperative internal audit, forming an independent internal audit
unit and having effective monitoring from MCSC would further enhance internal audit
purposes. The findings have some significances on those responsible for assessing and
improving the cooperative’s internal control.