Effectiveness of internal audit in preventing fraud in microfinance companies

Abstract

This study examines how the internal audit function helps to prevent the fraud in Nepalese microfinance companies. As the microfinance expands, they face greater risk of fraud, making effective internal audit essential for protecting their operational task and the stakeholders. This study has used the descriptive and casual research design as the research methodology to explore and assess the effectiveness of internal audit in preventing fraud in MFIs. A total of 484 responses were collected from the respondents using questionnaire and analyzed through reliability, correlation, regression and ANOVA test. Fraud prevention have been considered as dependent variable and scope of internal audit, competence of internal auditor, independence of internal auditor, audit planning and execution and use of technology in auditing were used as independent variables. The result shows that the audit planning and execution (p=0.022) and use of technology in auditing (p=0.014) significantly improve the fraud prevention whereas the competence of internal auditor (p=0.058) has the positive but less significant effect. Scope of internal audit and independence of internal auditor were not significant due to organizational limitation or limitation in internal audit or internal control. The data were also tested for reliability using Cronbach’s alpha which has confirmed the internal consistency of the survey data. Correlation analysis was employed to investigate relationships between internal audit components and fraud prevention. Further, regression and ANOVA (p value = 0.012) (less than 0.05) were conducted to evaluate the significance and impact of these factors on fraud prevention effectiveness. This finding offers a practical recommendation to strengthen audit practices, emphasizing the continuous improvement and adaption of new and advanced technology. It also suggests the future research to explore the audit effectiveness of MFIs in different contexts.it also advances both academic knowledge and practical strategy to enhance financial governance and safeguard the credibility of MFIs. Keywords: Internal Audit, Fraud Prevention, Microfinance Companies, Audit Planning, Audit Technology, Auditor Competencies and Independence, Scope of Audit