THE INFLUENCE OF INTERNAL CONTROL SYSTEM

OBEDIENCE AND REGULATION SYSTEM CONFORMITY

TO AUDIT OPINION OF FINANCIAL STATEMENT IN BPK

PROPOSAL

Asked to Fulfill The Assignment of Research Methodology Accounting

Arranged by :

NADA SALSABILLAH NAZIFA

01031281520172

ACCOUNTING MAJOR
FACULTY OF ECONOMICS
SRIWIJAYA UNIVERSITY
PALEMBANG
2017
 CHAPTER I
INTRODUCTION

1.1 Background
There are many kind of cases that happened in company and government
institution caused by fraud. Along with the development of business complexity
and the opening of opportunity in investment makes a higher number of fraud in
company and government institution. Refer to various cases both in national and
international scope, it proves that fraud can happen anywhere (Wahono : 2011).
Implementing good governance is one of the way to avoid the fraud. The
government had been done several efforts to improve transparency and
accountability in the financial system in Indonesia by being responsible to the
success or failure of pre-determined goals and targets. (Mardiasmo : 2002).
According to Regulation No. 17 of 2003 about Financial Statement and
Regulation No. 32 of 2004 about Government in Province, the effort to realizes
transparency and accountability of managing the financial statement in
government by publishing the responsibility of financial statement.
It has been mentioned in Article 2 Regulation No. 15 of 2004 about
Investigation on Management and Responsibility of Financial, the investigation
will be the responsibility of BPK. Then, it has been mentioned in Article 4
Regulation No. 15 of 2004 that the forms of investigation are financial
investigation, performance investigation, and special purpose investigation.
BPK do the investigation based on the standard of auditing set by BPK which
known as Standar Pemeriksaan Keuangan Negara (SKPN).
The value of information is the ability of information to increase the
acquaintance and conviction in decision making (Suwardjono, 2005 : 165).
Information that can support people in making decision and also can be
understood is the characteristic of good information. So, the government needs
to pay attention to the quality of the information published on financial statement
to plan, control and make decision. Every information in financial statement has
it own characteristic. Characteristics in financial statements are normative

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 measurement that need to be realized in order to reach its vision. According to
PP No. 24 of 2005, the qualitative characteristic of government financial
statement are relevant, reliable, comparable and understandable. To realize the
qualified financial statement, it need to hold the internal control system to make
sure that the financial statement is suitable with Standar Akuntansi
Pemerintahan (SAP).
The internal control system is an important information to auditor on giving
their opinion in a planned particular test to decide the tendency and extent of
misrepresentation of financial statement (Hall and Tommie, 2007 : 41). So if an
auditor finds the lowest level of implementation and shows the weakness of
controls in an organization, it will be the consideration of determining the
fairness of published financial statement and give their opinion generally.
In addition to the internal control system, an auditor will also consider
compliance with the laws and regulations in conducting the investigation. In
giving their opinion, the auditor does not only see the truth and compliance of
financial statements with accounting standards alone but rather considers its
relationship to the law (CPA Australia Ltd, 2013). Based on the relation, there
is an interest to start a research about the analysis of the internal control system
obedience in affecting the auditor opinion of the financial statements on BPK,
the regulation system conformity in affecting the auditor opinion of the financial
statements on BPK and the relation of auditor professionalism with the internal
control system obedience and regulation system conformity.

1.2 Problem Formulation

This study attempts to test the research that has been done by previous
researchers about the compliance of internal control system with a combination
of other independent variables of compliance with the applicable law. Based on
these issues can be formulated as follows:
1. How does the obedience of internal control system affect the audit opinion
of financial statement in BPK?

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 2. How does the conformity of regulation system affect the audit opinion of
financial statement in BPK?
3. How does the auditor's professionalism relate to internal control system
obedience and regulation system conformity?

1.3 Purpose of The Research

The purpose of this research are:
1. To know the effect of obedience on internal control system to audit opinion
of financial statement in BPK.
2. To know the effect of conformity in regulation system to audit opinion of
financial statement in BPK.
3. To know the relation between professionalism of auditor and internal
system control obedience and regulation system conformity.

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 CHAPTER II
LITERATURE REVIEW

2.1. Concepts
2.1.1. Internal Control System (SPI)
Internal controls are designed to provide reasonable assurance
about achieving three classes of objectives: financial reporting
reliability, effectiveness and efficiency of operations, and compliance
with applicable laws and regulations (Arens et al., 2008).
Various kind of accounting and auditing professions made an
organization to develop an internal control system better which known
as The Committee of Sponsoring Organization (COSO) of the
Treadway Comission. COSO (1992 : 9) in his report mentions the
formulation of internal control as follows :
"Internal control is process, effected by an entity’s board of
directors, management and other personnel, designed to
provide reasonable assurance regarding the achievement of
objectives in following categories : effectiveness and
efficiency of operations, reliability of financial reporting and
compliance with applicable laws and regulations."
The internal control structure of COSO is known as the COSO -
Internal Control - Integrated Framework which consists of five
components including the control environment, risk assessment, control
activities, information and communication, monitoring.
According to Government Regulation No. 60 of 2008, Internal
Control System is an integral process of actions and activities
undertaken continuously by the leadership and all employees to provide
reasonable assurance on the achievement of organizational goals
through effective and efficient activities, reliability of financial

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 reporting, security of state assets, and obedience to laws and
regulations.
Sudjono and Hoesodo (2009) in Kawedar (2010) stating that a
SPIP is said to be good if it meets five components, namely:
1. Control environment within government agencies that affect the
effectiveness of internal control.
2. Risk assessment of possible events that threaten the achievement of
the objectives and targets of government agencies.
3. Control activities to address risks and the establishment and
implementation of policies and procedures to ensure that risk-
mitigation measures are effectively implemented.
4. Information and communication. Information is data that has been
processed that can be used for decision making in the
implementation of duties and functions of government agencies.
5. Monitoring of internal control over the quality of SPI performance
and processes that provide confidence that audit findings and other
evaluations are immediately acted.
In reporting the weakness of internal control over financial
reporting, BPK auditors should be able to identify "conditions that can
be reported" that individually or cumulatively is a material weakness.
The examiner should place the identification into a finding in a
reasonable perspective (SPKN, 2007).
2.1.2 Government Regulation
Standar Akuntansi Pemerintahan (SAP) is a reference in
publishing the financial statements of government entities, both central
and local government. The users of financial statement use SAP to
understand the information presented in financial statement. While
external auditor use the SAP as a criteria in auditing. Thus SAP is used
as a unified perception between users and auditors of financial
statements. SAP that applied in Indonesia based on Government
Regulation No. 24 of 2005 and being replaced with Government

5
 Regulation No. 71 of 2010. This regulation is being the foundation for
all the entities report including local government in publishing financial
statement for all stakeholders. Beside SAP, the auditor use another
criteria in arranging investigation report which are Regulation No. 17
of 2003, Regulation No. 1 of 2004, and Regulation No. 15 of 2004.
Investigating Standard No. 3 related to standard of financial
investigation report, requiring auditor to make an auditing report state
that the financial statement suitable with applicable accounting
principle comprehensively.
2.1.3 Auditor Opinion
According to Article 1 Regulation No. 15 of 2004, opinion is a
professional statement as a conclusion by the auditor of the fairness in
information that presented in financial statement. The criteria of
opinion are based on:
1. conformity with the government accounting standard
2. adequacy of disclosure
3. compliance with the regulation
4. effectiveness of internal control system
There are four kind of opinion that given by the auditor:
1. Unqualified Opinion - including the unqualified opinion modified
wording; unqualified opinion state that the financial statement
presented and disclosed fairly in all material respects and financial
information in the financial statements may be used by the users.
2. Qualified Opinion - reasonable opinion with the exception of
stating that the financial statements have been presented and
disclosed fairly in all material respects, except for the impact of
matters relating to the excluded, so that financial information in the
financial statements that are not excluded in the opinion of the
examiner can be used by users of the report finance.
3. Adverse Opinion - an unfair opinion states that the financial
statements are not presented and disclosed fairly in all material

6
 respects, so that financial information in the financial statements
can not be used by users of financial statements.
4. Disclaimer of Opinion - the statement refuses to give an opinion
stating that the financial statements can not be checked in
accordance with inspection standards. In other words, the examiner
can not assure that the financial statements are free of material
misstatements, so that financial information in the financial
statements can not be used by users of financial statements.
2.1.3. The Overview of Term Examination (IHPS)
IHPS is arranged to fulfill the Article No. 18 Regulation No. 15 of
2004 about Auditing National Financial Statement which asked to
present the IHPS to representative institutions, presidents and regional
government at least on the third month after the related term. IHPS
presented by central government, regional government and state-owned
enterprises. The results of investigation are grouped by the kind of
investigation; financial investigation, performance investigation and
special purpose investigation.

2.2. Theories
Agency theory is a relationship or contract between principal and agent.
The main principle of this theory states the existence of a working
relationship between the party giving authority (principal) as an investor with
the party who receives the authority (agency) as manager, in the form of
cooperation contract (Anthony and Govindarajan : 2005). Agency theory has
the assumption that each individual is solely motivated by his or her own
interests, causing a conflict of interest between principal and agent. This
happens because of the separation of ownership and control of the company
(Jensen and Meckling, 1976). According to Jensen and Meckling (1976) there
are two types of asymmetric information, namely: adverse selection and
moral hazard. Adverse selection, a situation in which the principal can not

7
 know whether a decision taken by an agent is actually based on the
information it has acquired, or occurs as a negligence in the task.

2.3. Previous Research

Bryan, Stephen H. and Lilien, Steven B., 2005, stated that they cannot
determine or measure whether behind-the-scenes externalities accrue to firms
as they implement more internal controls over financial reporting.
Skaife, Hollis Ashbaugh and Collins, Daniel W. and Kinney, Jr.,
William R., 2006 stated that because regulatory guidance on the criteria for
distinguishing between levels of control deficiencies was not released until
March of 2004, which is well after many firms provided their first disclosure
of control problems. As a result, the inter-firm consistency of these self-
reported classifications of control weaknesses is problematic.
Beneish, Messod Daniel and Billings, Mary Brooke and Hodder, Leslie
D., 2007, stated that the term “bad” refers to disclosure of a material weakness
under Section 302 and the term “good” refers to non-disclosure under Section
302. For Section 404 disclosures, the terms “bad” and “good” refer to
qualified and unqualified internal control opinions, respectively.
Zhang, Yan and Zhou, Jian and Zhou, Nan, 2006, stated that the results
from our conditional logit analyses suggest that a relation exists between audit
committee quality, auditor independence, and internal control weaknesses.
Firms are more likely to be identified with an internal control weakness, if
their audit committees have less financial expertise or, more specifically,
have less accounting financial expertise and non-accounting financial
expertise, as well. They are also more likely to be identified with an internal
control weakness, if their auditors are more independent.

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2.4. Conceptual Framework
One of BPK's obligation is giving the opinion of the fairness on financial
statement of local government. In making decision of the fixed opinion, team
of auditor use various considerations both derived from financial statements
including the opinion on the effectiveness of its internal controls, conformity
with accounting standards, regulation conformity, and adequacy of
disclosure. Another factors that related to budget realization are indirectly
related to the level of internal controls and the assumption that auditor opinion
has the same level with the opinion on the previous year. Based on that
situation, the framework of this research is as follow:

Independent Variable

The weakness of Internal

Control System (SPI)

Dependent Variable
The number of regulation
conformity

Auditor Opinion

Control Variable

The Opinion on Previous Year

Budget Realization Entity

2.5. Hypothesis
Kawedar (2010) and Sipahutar and Khairani (2013) in his research
correlate the level of SPI weakness with the change of audit opinion through
qualitative method. In the results of his research, the two studies produce
similar conclusions that states that changes in audit opinion is declining is
influenced by the weakness of internal control entity. On the basis of the
description, then prepared the research hypothesis as follows:
H1 : The Weakness of Internal Control System has a positive effect to
auditor opinion

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 Sipahutar and Khairani (2013) in conclusion of his research also revealed
a material violation of the legislation and mismatch of financial statement
presentation in accordance with applicable regulations. The higher level of
materiality of those fraud, the lower level of qualified opinion and adverse
opinion. Based on the relationship of those two variable, the hypothesis can
be formulated that regulation conformity will give negative effect with the
unqualified opinion.
H2 : The Regulation Unconformity has a positive effect to auditor
opinion

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 CHAPTER III
RESEARCH METHOD

In this chapter will be explained about the methods used in the study.
Explanation of this research method consists of five parts, namely research
variables and definition of operational variables, population and sample, type and
source of data, data collection methods, methods of analysis, and stages of
implementation of research activities.

3.1 Research Variables and Definition of Operational Variables

In this study used two types of variables are independent variable and
dependent variable. The purpose of the study is to understand and make the
dependent variable, explain its variability or predict it. While the independent
variable is the variable that affects the dependent variable, either positively or
negatively (Sekaran, 2011). The dependent and independent variables used in
this study are described as follows.
3.1.2 Dependent Variable
The dependent variable in this research is opinion issued by BPK on
audit of local government financial report. In this research, the opinion
of Unqualified Opinion with Explanatory Paragraph is included in the
category of unqualified opinion. All data about the opinion is obtained
from The Summary Audit Result of BPK. This variable is measured
using the dummy variable that is the value 1 for the entity that obtains
the unqualified opinion, and 0 for the entity that does not get the
unqualified opinion.
3.1.2 Independent Variable
Independent variables in this study consist of 4 variables that will be
described as follows.
3.1.2.1 The Weakness of Internal Control System

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 The weakness of Internal Control System as one of the
independent variables in this study is measured by the number of
findings in each year of audit related to the weakness of Internal
Control System obtained from The Summary Audit Result by
BPK. The number of findings is separated into three categories:
the weakness of the accounting and reporting control systems, the
weakness of the control system of the implementation of the
budget of income and expenditure, and the weakness of the
internal control structure.
3.1.2.2 Finding Compliance with Legislation
The other independent variables are the findings of
compliance with the legislation in this study as well as the audit
results of BPK. This variable is measured by the number of
findings in each of the audit related statutory legislations that will
devide into seven categories: non-compliance findings that cause
local losses, findings of potential regional losses, findings of lack
of acceptance, service provider findings, inaccurate findings
about inefficiencies, and findings about ineffectiveness.
3.1.3 Control Variable
Control variables are variables that can affect the total variation
of dependent variables when formulating a causal relationship
between two independent and dependent variables. The dependent
variable is not only influenced by the independent variable, because
we know how big the total variation of the dependent variable is
caused by the presence of factors other than the independent variable
(Sekaran, 2013). Therefore, by controlling these variables will
improve the relationship between independent variables and
dependent variables. Some of the variables that influencing the
unqualified opinion are as follows
3.1.3.1 Budget Entities Realization

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 The variable in this research are budget realization value
obtained from BPK audit report on local government which is the total
amount of rupiah from total income and expense account in budget
realization report in each year..
3.1.3.2 The Previous Year’s Opinion
Other control variables in this study are opinions issued by BPK
RI on the audit of local government financial statements in one year
before. This data is obtained from the summary of BPK RI audit
results. The previous year's opinion was measured using dummy
variables, with a value of 1 for unqualified opinions, and 0 for
opinions other than unqualified opinions.

3.2 Population and Sample

The study population is all local governments in Indonesia whose
financial statements become the object of examination by BPK RI. Based on
data of districts in Indonesia totaling 524 districts / cities, there are 1207 objects
of BPK RI audit of local government financial reports. The sample is part of
the population. The sample consists of a select number of members from the
population. The sample method used is the sampling area design method which
is a geographical cluster (Sekaran, 2011).

3.3 Type dan Source Data

The type of data used in this study is secondary data. Secondary data is
data collected by other party and can be accessed through internet, document
search and other information publishing container by related company. Source
of data obtained from Report of Audit Result of BPK to local government
which become sample, next data source is summary audit result of BPK.

3.4 Method of Collecting Data

The data collected by studying the data obtained from the secondary data
source, then continued with the recording and counting. These data are

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 collected through the website www.bpk.go.id as well as request data report
results of inspection to the BPK RI office.

3.5 Method of Analysis

According Ghozali (2011) the purpose of data analysis is to get relevant
information contained in the data and use the results to solve the problem.
Quantitative analysis techniques used to lead the relationship between
dependent variables and independent variables. In this study the type of
relationship between variables is the relationship causality (causality
relationship) is to examine the influence of internal control system and the level
of compliance legislation against the unqualified opinion over the audt of local
government financial statements.

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