SCIENTIFIC AND PRACTICAL FOUNDATIONS FOR ASSESSING AND IMPROVING THE EFFECTIVENESS OF INTERNAL AUDIT IN COMMERCIAL BANKS

Abstract

The article examines the scientific and practical foundations for assessing the effectiveness of the
internal audit function in commercial banks. Four families of measurement approaches—conformance-based,
perception-based, activity-based, and outcome-based—are compared, and it is shown that outcome-based
measurement, which alone captures the value created by the function, is not feasible in practice because audit
findings are recorded as unstructured narrative text and therefore cannot be aggregated, compared, or tracked
over time. The author develops a deficiency passport, a standardised record that captures the substance, cause,
effect, recurrence, recommendation, responsible owner, and residual risk of every internal audit finding. The passport
extends the classical finding attributes with four analytical blocks, applies a six-class root-cause taxonomy, and
produces the data on which an internal audit effectiveness index (IAEI), built from five dimensions, is computed.
Tested on conditional data, the instrument revealed a 50 per cent recurrence rate and a residual risk reduction of
only 60.3 per cent behind a nominally satisfactory remediation record and identified control design deficiencies as
the dominant driver of inherent risk.