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COMPETENCE AND WORK QUALITY ON FRAUD DETECTION

MEDIATED BY INTERNAL AUDIT EFFECTIVENESS
Ishak1, Gagaring Pagalung 2, Syarifuddin3, Nirwana4
1STIEM Bonggaya Makassar, Indonesia
2,3,4Faculty of Economics and Business, Hasanuddin University, Makassar, Indonesia

ABSTRACT
The purpose of this research is to develop and test the comprehensive model of the effectiveness of
local government internal audits. This research examines the effect of internal audit competence and
work quality on fraud detection with the effectiveness of internal audit as an intervening variable. The
hypothesis test used partial least squares analysis with questionnaire data survey on the internal audit
of Makassar City Inspectorate. The research sample was 75 people. The hypothesis tests reveal that
internal audit competence has no effect on fraud detection, work quality has no effect on fraud
detection, internal audit effectiveness can moderate the effect of internal audit competence and work
quality on fraud detection.
Keyword: internal audit competence, work quality, internal audit effectiveness, fraud detection
1. INTRODUCTION To create transparent and accountable
governance, regional government organizations
In Law No 22 of 1999 and Law No 25 of 1999, need an independent control function. This
concerning the financial balance between the function works by upholding the values of trust
central government and regional government with and having high integrity in supervising the
a decentralized government system, it is required implementation of government programs.
for each region to prepare its strength in
supervision because the regional autonomy Internal Control Function (APIP) is expected to
system will be implemented. Revised Law No.32 create accountability for budget management. To
concerning Regional Government and Law No. 33 achieve such accountability, internal audit must be
of 2004 concerning the financial balance between effective. According to (Endaya & Hanefah, 2016),
the center and the regions brought changes in internal audit will be effective if the internal audit
regional financial management, which required recommendations are followed up by
regional governments to provide accountability management. Therefore, the effectiveness of the
for the implementation of regional budgets and internal audit must be achieved so that the
expenditure revenues. findings and recommendations produced can
assist Government in achieving efficiency,
Implementation of Regional autonomy system effectiveness and economical.
must be accompanied by the readiness of
Government resources. Regional resources must The effectiveness of internal audit will be achieved
be ready to undertake this mandate with other if it is supported by internal audit competence
capabilities and competencies to maintain public (George & Konstantinos, 2015). Competence is an
trust, especially in the process of implementing expertise a person owns to perform a job. Some
regional budgets and expenditures. The public dimensions of competence are skills, knowledge,
must be guaranteed about the management and experience, professional skills. (Leonora, et, al
accountability of funds in a transparent and 2017) said the education of internal auditors
accountable manner. If the budget and should be adequate, they also consider the
accountability management is implemented in a internal auditors as professional and proactive,
transparent and accountable manner, the public (George & Konstantinos, 2015) said the
trust in Government will increase. competence of internal auditors is important in
introducing a good governance and ensuring
effective utilization of public resources.

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Additional to the internal audit competence, work interests of principals and servants are regulated,
quality is also important in achieving an effective such as management philosophy, culture, span of
audit. (Sayag, 2010) cited the views of Glazer and power. Stewardship theory actually uses many
Jaenike (1980) and Ridley and D'Silva (1997) that concepts from psychology and sociology, and is
performing audit in compliance with the internal defined by (Davis, Schoorman, & Donaldson,
audit standards contributes significantly to audit 1997) as "a steward protects and maximizes
effectiveness and contributes added value to the shareholder wealth through company
internal audit function. The work quality in performance, because by doing so, the steward's
improving the effectiveness of internal audits is utility function is maximized". Stewardship
confirmed. (Tackie, Marfo-Yiadom, & Oduro theory emphasizes not only an individualism
Achina, 2016) tested the quality of internal audit perspective (Donaldson & Davis, 1991), but also
work by measuring the compliance with code of the role of top management working as stewards,
ethics, conformity of work with standards, quality incorporating their goals as part of the
assurance and improvement programs, organization. Therefore, if the organization has
conducting peer reviews or self-assessments on good performance, the staff will be motivated and
performance, regular follow-up to verify the devote their energy in their respective fields for
actions for correction to identified problems, plan the success of organization (Davis, Allen & Hayes,
in accord with the key risks and assurances, 2010). It also applies to the context of public
evaluating IA reports by external auditors and sector, if the audit committee performs well, their
other external authorities are positive, IA reports internal auditors will also perform well towards
are clear and accurate, IA work is timely and achieving the objectives of Internal Audit
proactive in conducting and reporting problems to Function.
management. Management decision-making
process is strongly affected by reports, findings The internal audit function can also play a
and recommendations from the IA unit. The stewardship role through the influence of relevant
research results showed a significant positive variables having contribution to organizational
relationship between audit work quality and IA success. This theory is related to studies where
effectiveness. Previous findings (Sayag, 2010) management bolsters IAF fully in terms of
confirm that greater audit work quality and sufficient funding, implementation of audit
greater organizational independence are findings and so on to maximize their utility
positively related to audit quality and auditee function through good organizational
evaluation. performance. At the same time management
works to ensure the autonomy of internal auditors
An effective internal audit is minimizing to maximize their performance.
corruption. (Popoola, et, al, 2016) suggests that
accountants who meet the requirements of An organization benefits greatly from a
knowledge, competence and skills can more easily stewardship approach due to emphasis on
detect and prevent fraud. Additionally, (Asiedu & accountability, i.e. ensuring a good control to
Deffor, 2017) suggests that for the size of internal happen. If the audit is functioning and there is
audit department, the independence of internal reporting, then the organization can be helped to
audit department greatly affects its effectiveness achieve its strategic goals, (Cribb, 2006).
and has a negative effect on corruption. The (Ebimobowei & Binaebi, 2013) stated that audit is
internal audit function is more responsible for the result of the concept and accounting of
detecting and preventing fraud than the external stewardship. This theory emphasizes that the
audit. (Halbouni, et, al, 2016). manager as an individual maintains the resources
assigned to him by the owner (principal) through
2.LITERATURE REVIEW performance. Organizational outputs are
actualized through profitable outcomes that serve
2.1.Stewardship theory as a driving factor for managers who view theory
In stewardship theory, (Donaldson & Davis, 1991) as part of business. Governance strategy based on
found a strong significant effect in explaining the stewardship principles are more effective when
internal audit research framework. In this theory employees such as internal auditors develop
it is explained that stewardship theory is mainly strong relationships with their organizations. Top
concerned with identifying situations in which the management in state entities can ensure the

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achievement of internal audit effectiveness To produce quality work, internal auditors must
through their stewardship approach by ensuring refer to predetermined standard. (Muslim Muslim,
that the internal control system is functioning and 2021) research results reveal that auditor ethics
there is sufficient support for the internal audit has an effect on fraud detection. According to
unit. (Tackie et al., 2016), the quality of work has an
ethical dimension. An internal auditor who works
Provision and utilization of resources in public by complying with ethics code and internal audit
sector settings is the responsibility of the standards issued by organization will increase its
stewardship of governing bodies of government effectiveness so to reduce the error. Furthermore
organizations that are compatible with the (Burnaby, et, al, 2011) said that professional
management role in an entity (International standards rank the third in detecting fraud, in
Federation of Accountants, 2001). (Hernandez, addition to knowledge, tools and techniques of
2012) stated that management governance is internal auditors. Hence, the conclusion is the
associated with factors such as leadership quality of work is related to fraud detection
systems, managerial practices, routines and
procedures. Because stewardship theory rests on Hypothesis
the value of trust, it includes systems, procedures
and tools producing effective results on the H2.Work quality has effect on fraud detection.
resources of owner. 2.4. Effectiveness of internal audit in
2.2. The effect of internal audit competence on moderating the effect of internal audit
fraud detection competence and work quality on fraud
detection
Auditor is expected to be able to performe the
work professionally. According to Bailey (2010) in The effectiveness of internal audit is the goal to
(Yanti, et al, 2018) competence is the ability achieve. If internal auditors are effective, many
needed by auditors to perform certain tasks. impacts can occur. According to Asiedu & Deffor
Competence indicators an internal auditorthat (2017), with the full implementation of Law 658,
must possess are basic/general competence, the size of internal audit department and the
personal, technical, and audit tools and techniques independence of audit department significantly
competencies. Bailey further revealed that the affect the effectiveness of internal audit function
basic competence of an internal auditor can be which has a negative effect on corruption. Kabuye,
developed by continuing education and attending et, al, (2017) internal auditors have appropriate
training. (Baharuddin, et, al, 2014) asserted that and competent status in an organization, they
educated internal auditors have more technical undertake activities to improve fraud
capabilities that make it easier for them to prevent management; Shohihah (2018) said the more
and detect fraud because the audit results are of effective the internal audit, the more the level of
high quality. The study of (Shohihah, et, al, 2018) fraud and corruption can be reduced. Thus the
state that high internal audit competence will effectiveness of internal audit can moderate the
make it easier for auditors to prevent and detect effect of competence of internal audit and work
fraud because corruption is decreasing. (Moyes & quality of internal auditors on fraud detection.
Hasan, 1996) conducted a survey of 357 auditors, Hypothesis:
revealing that the audit experience of auditors and
the previous success of the audit organization in H3.The effectiveness of internal audit can
detecting fraud is a constant significant variable in moderate the effect of internal audit
detecting fraud for each audit cycle and the competence on fraud detection
combined cycle estimates. (Drogalas, et, al, 2017)
H4.The effectiveness of internal audit can
emphasized that training to improve the
moderate the effect of work quality on fraud
competence of internal auditors is very important
detection.
and has a significant effect on detecting fraud.
Thus, the research hypothesis is: 3. METHODOLOGY
H1.Internal audit competence has effects on fraud 3.1. Data collection
detection
This study used a causal design with quantitative
2.3. Effect of work quality on fraud detection

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research methods that aim to obtain data occurred competence refers to the measurement used by
in the past or present regarding beliefs, opinions, (Mustika, 2015); (Drogalas, et, al 2017); (Tackie et
characteristics, behavior and variable al., 2016) with 3 indicators: experience,
relationships. In addition, survey research aims to knowledge, training.
test several hypotheses regarding sociological and
psychological variables from a sample of a 2) Work quality of internal audit is the excellence
particular population. The data collection level the internal auditors have in working based
techniques were interviews and non-depth on audit standards. Quality of work refers to the
questionnaires and the research result is measurement used by (Tackie et al., 2016) with 3
generalized (Ivana, 2021). According to indicators: compliance with ethics code of
Pandiangan et al. (2018) in Sugiyono, sampling is Institute of Internal Auditor (IIA), compliance with
the selection of sample based on certain professional standards and assurance programs,
characteristics that are considered to have 3)Effectiveness of internal audit is the
relevance to previously known population recommendation of internal auditor undertaken
characteristics. Data collection used library by organization. The effectiveness of internal audit
research, a form of research utilizing library refers to the measurement used by (Mustika,
facilities by reviewing theoretical discussions of 2015); (Tackie et al., 2016) with 3 indicators:
various books, articles, and scientific works planning, consistency, risk management
related to writing (Pandiangan, 2018).
4)Fraud detection is the perception of internal
This study used a quantitative survey method by auditors in assessing their ability to detect fraud
distributing questionnaires to 75 internal auditors that occurs. Fraud detection refers to Valery.G
of Makassar City Inspectorate. Data were analyzed Kuumar (2011; 157) with 3 indicators: accounting
using descriptive statistical analysis and partial oddities, weaknesses in internal control system
least squares analysis (SEM-PLS) with smart PLS and transaction verification.
3.0 software program.
4. RESULT AND DISCUSSION
3.2. Research Model
4.1.Evaluation of (Outer) Model Measurement
The rule of thumb is used in convergent validity
test, the loading factor value is 0.5 – 0.6 and the
AVE value is greater than 0.5 (Ghozali and Latan,
2015). After conducting the first iteration process
on the model, the loading factor value for each
variable is obtained > 0.50. Thus, all indicators of
each variable are valid according to the
convergent validity test. The results of the test of
composite reliability, cronbach's alpha and AVE
Operational definition and measurement of are > 0.70 for composite reliability value, > 0.60
variables for cronbach's alpha value, and > 0.50 for AVE
1) Internal audit competence is the ability of value. Therefore, based on this value, all variables
internal auditors to undertake the work in are reliable. The following is the result of the
accordance with their knowledge. Internal auditor outerloading:

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Figure 1. Result Full Model – Bootstrapping

Table 1. Result of Outer Loading, Cronbach, CR and AVE

Construct/Item Loading Cronbach CR AVE
Competence (X1) 0,893 0,915 0,574
1. Experience 0,902
- X1 1 1 0,852
- X1 1 2 0,934
- X1 1 3 0,902
2. Knowledge 0,764
- X1 2 1 0,926
- X1 2 2 0,922
3. Training 0,849
- X1 3 1 0,884
- X1 3 2 0,866
- X1 3 3 0,855

Work Quality (X2) 0,906 0,927 0,681

1. Ethics Code 0,839
- X21 1 0,928
- X21 2 0,927
2. Professional Standard 0,921
- X22 1 0,938
- X22 2 0,938
3. Work Assurance 0,899
- X23 1 0,931
- X2 3 2 0,917

Internal Audit Effectiveness (Z) 0,859 0,895 0,589

1. Plan 0,824

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- Z1 1 0,889
- Z1 2 0,927
2. consistency 0,898
- Z2 1 0,906
- Z2 2 0,908
3. Risk Management 0,841
- Z3 1 0,895
- Z3 2 0,862

Fraud Detection (Y) 0,914 0,936 0,747

1. Accounting Oddities 0,928
- Y1 1 0,964
0,968
- Y1 2
2. Weakness of SPI (Y2) 0,895
3. Transaction Verification 0,879
- Y3 1 0,930
- Y3 2 0,924
Source: Output SmartPLS 3., 2022

4.2.Evaluation of (Outer) Model Measurement Table 2.

R-Square Adjusted
The Goodness of Fit Model is measured by using
R-Square and Q-Square Predictive Relevance. The R Square
magnitude of Q2 has a value with a range of 0 < Adjusted
Q2 < 1, where the closer to 1, the better the model. Fraud Detection 0,380
Based on the results in table 2 above, the R2 value Source: Output SmartPLS 3., 2022
indicates that the R2 value for fraud detection is
above 0.33 which means that R2 in this study is 4.3. Hypothesis Test based on Bootstrapping
moderate. Likewise, the model is in moderate Results
category because the Q2 value is <0.5. The After conducting the bootstrapping process, the
following is the value of R2 and Q2 in this study: path coefficients are obtained, as follows:

Table 3. Path Coefficients

Standard
Original Sample T-Statistics
Deviation P-Values
Sample (O) Mean (M) (O/STDEV)
(STDEV)
Internal Audit Effectiveness -
> Fraud Detection
0,371 0,389 0,155 2,396 0,017
Competency -> Fraud
Detection
0,147 0,152 0,183 0,800 0,424
Work Quality -> Fraud
Detection
0,065 0,051 0,198 0,330 0,741
Source: Output SmartPLS 3., 2022
concluded that the effectiveness of internal
Based on the results of analysis in the table of path audit has a significant effect on fraud detection.
coefficients, it can be concluded that:
b.The value of t-statistics for the effect of
a.The value of t-statistics for the effect of internal competence variable on fraud detection is
audit effectiveness variable on fraud detection 0.800 <1.966 at a probability level of 0.424>
is 2.396>1.966 at a probability level of 0.05. While the coefficient value on the effect is
0.017<0.05. While the coefficient value on this 0.147. From these results it can be concluded
effect is 0.371. From these results it can be that competence has no effect on fraud
detection.

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c.The value of t-statistics for the effect of the work 4.3.Test of Moderated Structural Equation
quality variable on fraud detection is 0.330 Modeling
<1.966 at a probability level of 0.741> 0.05.
While the coefficient value on the effect is Based on the results of the analysis , the
0.065. From these results it can be concluded conclusions can be drawn based on the table of
that the quality of work has no effect on fraud test results as follows:
detection.
Table 4. Moderator Test of SEM
Standard
Original Sample T-Statistics
Deviation P-Values
Sample (O) Mean (M) (O/STDEV)
(STDEV)
Moderating EA 1 ->
Fraud Detection
0,348 0,361 0,115 2,222 0,024
Moderating EA 2 ->
Fraud Detection
0,380 0,396 0,129 2,567 0,008
Source: Output SmartPLS 3., 2022

From the moderation test table above, it can be interaction between the moderator variable and
explained as follows: the predictor variable (Sugiono, 2004).
a. The t-statistics value for the effect of 4.4 Discussion
competence variable on fraud detection
moderated by internal audit effectiveness 4.1.1. Effect of internal audit competence on
variable is 2.222 > 1.966 at a probability level fraud detection
of 0.024 <0.05. While the coefficient value on Results of the analysis show that the value of t-
this effect is 0.348. From these results it can be statistics of competence on fraud detection is
concluded that the effectiveness of internal 0.800 <1.966 at a probability level of 0.424> 0.05
audit is able to moderate the effect of and a coefficient value of 0.147. It means that
competence on fraud detection. competence of internal auditors has no effect on
b. The t-statistics value for the effect of work fraud detection. The result of this study supporte
quality variable on fraud detection moderated (Poltak, et, al, 2019) who state that auditor
by internal audit effectiveness variable is 2.567 professionalism is still limited to audit function as
> 1.966 at a probability level of 0.008 <0.05. a management service organization that
While the coefficient value on this effect is prioritizes compliance rather than increasing
0.380. From these results it can be concluded organizational value and affects audit
that the effectiveness of internal audit is able to effectiveness by providing quality audit services,
moderate the effect of work quality on fraud adding value, and auditee evaluation. Similarly
detection. (Maheasy & LS, 2017) conducted research on
regional inspectorates from 6 provinces and found
Taking into account the test results above, the that the current professionalism of auditors is
values of both path coefficients and moderation more about compliance than adding value, so it is
tests denote that there is an effect of internal audit not surprising that auditor professionalism has no
effectiveness on fraud detection. Meanwhile, the effect on audit effectiveness. In addition, specific
moderation test shows that the internal audit competencies are still needed for public sector
effectiveness can moderate the effect of the two internal auditors in understanding the level of
independent variables on the dependent variable. control and risk in the public sector (Maheasy &
Therefore, the internal audit effectiveness in this LS, 2017).
study conforms the criteria of a quasi moderator
variable. The quasi moderator variable is a 4.4.2.Effect of work quality on fraud detection
variable that is included in the third column in the The value of t-statistics of work quality variable
moderating variable criteria which shows that on fraud detection is 0.330 <1.966 at a probability
there is a relationship between the moderating level of 0.741>0.05. The coefficient value is 0.065.
variable and the criterion variable, and there is an it can then be concluded that work quality has no

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effect on fraud detection. Although internal auditor training has a positive significant effect on
auditors follow standards in their work, their are fraud detection.
still lacking of ability to find fraud. The internal
auditors cannot yet detect fraud. This is due to the 4.4.5. Effect of work quality on fraud detection
lack of quality resources to conduct fraud moderated by internal audit
investigations. It is in line with (Erlina, et, al, effectiveness
2018) who suggests that the low quality and The t-statistic value of work quality on fraud
capability of local government internal auditors in detection moderated by internal audit
North Sumatra Province is due to the work quality effectiveness variable is 2.567 > 1.966 at a
of the internal auditors is relatively low. Their probability level of 0.008 <0.05. The coefficient
work is inefficient, unprofessional and low value is 0.380. Furthermore, it can be said that the
commitment. internal audit effectiveness can moderate the
4.4.3.Effect of internal audit effectiveness on effect of work quality on fraud detection. Internal
fraud detection auditors who work by complying with ethics code
and professionally using their professional skills
The value of t-statistics of the effect of internal will make work plans so as to facilitate the priority
audit effectiveness variable on fraud detection is scale to be the target of examination. The results
2,396>1,966 at a probability level of 0.017<0.05. of this study bolster the research by (Muslim
The coefficient value is 0.371. It can be concluded Muslim, 2021) which reveals that auditor ethics
that the effectiveness of internal audit has a has an effect on fraud detection. According to
significant effect on fraud detection. This is in line (Tackie et al., 2016) the work quality has an
with (George Drogalas, et al, 2017) who found that ethical dimension where the internal auditor in
audit effectiveness has a positive and significant working conforms the internal audit code of ethics
effect on fraud detection. (Shohihah et al., 2018) issued by organization. Furthermore (Burnaby, et,
states that the effectiveness of internal audit tends al, 2011) suggests that professional standards are
to reduce corruption. The more effective the at number three in detecting fraud, apart from the
internal audit, the less corruption in the knowledge, tools and internal auditor techniques.
organization. (Asiedu & Deffor, 2017) says the full
implementation of the Act, the size of internal 5. CONCLUSIONS, IMPLICATIONS AND
audit department and the independence of audit LIMITATIONS OF RESEARCH
department have significant affect on the 5.1. Conclusion
effectiveness of internal audit function which has
a negative effect on corruption. Based on the results of analysis and discussion, it
can be concluded that internal audit competence
4.4.4. Effect of competence on fraud detection has no effect on fraud detection. Work quality of
moderated by the effectiveness of internal auditors has no effect on fraud detection.
internal audit Internal audit effectiveness has effect on fraud
The t-statistics value of competence on fraud detection. Internal audit competence has effect on
detection moderated by internal audit fraud detection through internal audit
effectiveness variable is 2.222 > 1.966 at a effectiveness. Work quality has effect on fraud
probability level of 0.024 < 0.05. The coefficient detection through internal audit effectiveness.
value is 0.348. The conclusion is that the 5.2. Implication
effectiveness of internal audit can moderate the
effect of competence on fraud detection. Internal The implications of this study is to contribute
auditors who have qualifications and supported empirically an overview of the importance of
by work plans will further enhance their ability to internal audit competence in fraud detection and
detect the possible fraud. The internal auditors internal audit effectiveness in mediating
must have consistency in assessing something. competence and work quality in fraud detection.
With the competencies possessed, it will increase This research is expected to give contribution to
the auditor's awareness to be consistent in further researchers in developing the role of
working so as to increase the ability to detect internal audit in strengthening public sector
fraud. The results of the study are in line with organizations for the creation of corruption-free
George Drogalas, et.al, 2017) who suggests that organizational governance.

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5.3. Limitation Accounting and Management Information

This research was conducted with a quantitative
Systems, 16(4), 434–454.
method using a questionnaire where the answers https://doi.org/10.24818/jamis.2017.040
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