This project work takes a look at the effective impact of the internal control system in an organization. This work also identifies the regulatory and supervisory role of the internal auditors and external auditors and how it has taken part or participated in an organization especially in reducing fraud and enabling the organizations business to be conducted in an orderly manner. The broad objective of this study is to examine the contribution of effective internal control system in an organization while the specific objectives are to examine; the role internal control system play in organizations; the application of internal control procedures in specific areas of the organization such as sales, purchase, wages etc, and; the laid down rules put in place by the management to ensure that the internal control procedures are in operation. Descriptive survey research method was adopted for the study, both primary and secondary source of data was employed, samples of questionnaires were administered to the respondent. A total of 120 copies of questionnaires were administered and 105 was retrieved and used for the study. This represent approximately 87.50% response rate. The data gathered from the questionnaires was analyzed using the chi square (X2). It was observed during the study that internal control actually exist in the organization, and there is internal audit department established by management to see that the internal control system are being applied as laid down by the management in all areas and divisions of the organization. Based on the findings, it was recommended that the internal control system can improve in its functional responsibilities so as to play a prominent role in developing the organization.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
Chapter One: Introduction 1
1.1 Background to the Study 1
1.2 Statement of Problem 3
1.3 Research Questions 4
1.4 Objective of the Study 4
1.5 Statement of Hypothesis 5
1.6 Significance of the Study 6
1.7 Scope of the Study 7
1.8 Limitations of the Study 7
1.9 Definitions of Terms 8
Chapter Two: Review of Related Literature 11
2.1 Introduction 11
2.2 Internal Control 11
2.3 Types and Main Division of Internal Control 14
2.4 Segregation of Duties 15
2.5 Organization Control 16
2.6 Physical Control 16
2.7 Authorization and Approval Control 17
2.8 Arithmetical and Accounting Control 17
2.9 Personnel Control 18
2.10Supervision Control 18
2.11 Management Control 19
2.12 Authorization, Recording and Custody Procedure 19
2.13 Scope and Approaches of the Internal Audit
2.14 Internal Audit Procedures and the Internal Auditor 26
2.15 Management and the Internal Auditor 30
2.16 Functions of the Internal Audit 32
2.17 Assessment of Evaluation of Internal Control 35
2.18 Historical Review of Power Holding Company
of Nigeria 37
Chapter Three: Research Method and Design 44
3.1 Introduction 44
3.2 Research Design 44
3.3 Description of Population of the Study 44
3.4 Sample Size 45
3.5 Sampling Techniques 45
3.6 Sources of Data Collection 45
3.7 Method of Data Presentation 46
3.8 Method of Data Analysis 47
Chapter Four: Data Presentation, Analysis
and Interpretation 49
4.1 Introduction 49
4.2 Data Presentation 50
4.3 Analysis of Data 53
4.4 Hypothesis Testing 61
Chapter Five: Summary of Findings, Conclusion and
5.1 Introduction 64
5.2 Summary of Findings 64
5.3 Conclusion 65
5.4 Recommendations 67
Appendix I 70
Appendix II 71
1.1 Background to the Study
The growth of large companies has been noticed since companies were formed. This must have probably been due to the amalgamation of the business and public ownership, which has risen during the recent years. Therefore, to carryout a continuous audit of such an undertaking would impose an intolerable strain on the resource of an organization, even the large firms of professional auditors (if they undertook a large number of their staff) would engaged permanently and the work to be permanently engaged in one enterprise will deprive them of the opportunity to obtain experience in different business and methods by various audit practice.
It is therefore essential to set each undertaking of the magnitude envisage on its own department under the control of a qualified accountant to carry it out internally. Much of the work would normally have been performed by the professional auditor hence, the establishment: which is closely followed with the controls and procedures being formulated.
These controls and procedures are referred to as the internal control. The responsibility for establishing and maintaining an adequate system of internal control lies with the management of the organization with the auditor from his experience and knowledge of the organization he is helping and advising.
As the internal audit department is being established, so also is the internal audit control which are procedures applied by the internal audit department in order to carry out the policies of the management in an effective and efficient manner and to safeguard the assets of the organization. Controls ensure the smooth running of the organization and the individual work towards the organizations goal. Also, internal control ensures the verification of the various kinds of accounting statement produced for management to ensure the examination of accounting methods and principles adopted to prepare them and also ensure the investigation of the administrative system upon which they are based.
1.2 Statement of Problem
The attitude of the non-management staff has made the research work very difficult for the researcher, the non-management staffs are saying that management are laying the internal control policy for nothing, since the internal auditor report to management and the fraud are mainly committed by the management which they report to. Why should management institute the department which has no effect in the organization? For this reason, it is very difficult for the researcher to get fact from them. The non-management staffs were not seeing internal control as an advantage to the organization while the management staffs are seeing internal control as an advantage to the organization.
Over the years the researcher has identified that most public organizations in Nigeria could not achieve their primary objective due to lack of proper internal control system. Hence, this study is to investigate the internal control system in place in Auchi Polytechnic, Auchi.
1.3 Research Questions
In order to achieve the objective of this study, the following research questions require responses.
1. What role has internal control played in the organization?
2. Has the application of internal control procedures been specific in the organization?
3. What laid down rules has the management put in place to ensure that internal control procedures are in operation?
1.4 Objective of the Study
The broad objective of this study is to examine the contribution of effective internal control system in an organization while the specific objectives are to examine:
i. the role internal control system play in organizations.
ii. The application of internal control procedures in specific areas of the organization such as sales, purchase, wages etc.
iii. The laid down rules put in place by the management to ensure that the internal control procedures are in operation.
1.5 Statement of Hypothesis
The hypothesis will be stated in:
i. The null hypothesis which is denoted by HO and
ii. The alternative hypothesis which is denoted by HI
HO: Internal control is not an advantage to the organization in the areas of segregation of duties because collusion amongst staff can make internal control.
HI: Internal control is an advantage to the organization in the areas of segregation of duties ensuring that no one person is responsible for all aspect of a transaction.
HO: There is no significance relationship between internal control procedures and effective operations of the financial areas in the organization.
HI: There is significance relationship between internal control procedures and effective operations of the financial areas in the organization.
1.6 Significance of the Study
This study will be of benefit to the following;
1. Management and staff: It is expected that the findings of this research in conjunction with the findings of similar research projects on the subject of internal control would be useful to the management staff of the organization.
2. Future researchers: The research work can also serve as a reference for the future researchers and also a guide for them. The findings of this research can also be a guide for the future auditors for them to know the effectiveness of internal control.
1.7 Scope of the Study
This study is focused on the contribution of effective internal control system in an organization. The investigation covers a period of five years from 2008 – 2013. The sample size of the study is 105 i.e. staff in the bursary department, internal control department and academic staff of the Department of Accountancy, Auchi Polytechnic, Auchi, Edo State.
1.8 Limitations of the Study
In writing this project, so many problems were encountered, which are listed below:
1.9 Definition of Terms
1. Internal control: This can be defined as the whole system of control, financial and otherwise established by management in order to carry on the business of the organization. The individual component of internal control system is known as “control”
2. Internal check: This is defined as the allocation of authority and work in such a manner as ‘to afford heck on the routine transactions of the day to day work by means of work of one person being complementary to that of carrying out the substantive test. This is done to know if the transactions and account balances and other procedures such as analytical review which tend to detect any material errors in the accounting records or in the financial statement.
3. Internal Audit: This can be defined as a dependent appraisal activity within an organization for the review of financial accounting and other operations as a basic for services to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other control an organization own specifically assigns staffs to conduct it.
4. Verification: Verification comprises of a set of auditing procedures carried out with a view to ensuring that what are stated in the financial statement as assets at their correct values are real property of the enterprise and correctly presented in the context of current authorities guidelines.
5. Vouching: This involves the examining of transactions against their retailed document with a view to ascertaining their validity authorization recording.
6. Internal Auditor: This is a person that heads the internal department. He is a representative of management and also he is interested in determining whether each branch or department of an organization has a dear understanding of its identity and possible areas of its assignment.
7. Internal Control Questionnaires: These are checklist of question that are designed to discover the existence of internal control to identify any possible areas of weakness.
8. Internal Control Evaluation Sheet: This is used in. conjunction with the internal control questionnaires, the answers to the key questions depend on the evaluation for follow-up questions.
9. Preliminary Evaluation: This is an essential step in determining the design and execution of a programme procedural audit test.
10. Enquiring: This is the seeking of relevant information from those persons who have knowledge of the transactions.
11. Observation: This is the looking at an operation or procedures that is being performed by others in order to determine the manners in which it is performed at the particular time of observations.