Effect Of The Internal Audit Functions On Corporate Efficiency

Project and Seminar Material for Accountancy / Accounting

Effect Of The Internal Audit Functions On Corporate Efficiency


The aim of this research work is to examine the effect of internal audit function on corporate efficiency with particular reference to First Bank Nig Plc. The researcher evaluated the impact of internal audit function on the profitability of First Bank Nig Plc. Determined the types and causes of fraudulent practices in First Bank Nig Plc. Determined the impact of internal audit function in the development of Nigerian banking industry. Data for the study were sourced from two main sources which include Primary and Secondary sources of data Collection. Primary data: questionnaires and oral interviews were used to collect information from the respondents. Secondary data: journals, and other relevant materials relating to the area of my investigation will be review. Extensive literature review was carried out on the direct literature and indirect literature on books, journals and past works. The research instrument used in this study includes oral interview and questionnaire. The questionnaire is structural as to contain both close and open ended question. Simple tables and percentages were used in treatment of data. Chi-square was used in testing the hypotheses. At the end the researcher found out that Internal auditing has significant impact on the profitability of bank in Nigeria.

Chapter One


1.1 Background of the Study

The function and the Existence of Internal audit department in an organization cannot be over emphasized considering the enormity of trust and responsibility attached to this department of an organization. This brings to mind why the writer chose to research on the subject, Internal auditing as an Instrument for Effective management.

Internal auditing (IA) serves as an important link in the business and financial reporting processes of corporations and not for profit provides (Reynolds 2000). Internal auditors play a key role in monitoring a company’s risk profile and identifying areas to improve risk management (Goodwin-steward and kent 2006). The aim of internal auditing is to improve organizational Efficiency and Effectiveness through constructive criticism. IA has four main components: (1) verification of written records (2) analysis of policy (3) Evaluation of logic and completeness of procedures, internal services and staffing to assure they are efficient and appropriate for the organization’s policies; and (4) reporting recommendations for Improvements to management (Eden and Moriah 2006).

Internal auditing becomes necessary as a result of the extended span of control faced by the management concerning the employment of men and material in the conduct of organizational affairs. The work of the internal audit are very important In the most modern organization and have trust of responsibility to advice the management and enforce the operations of internal control, and the internal checks in the organization. The inefficiency in the organization during day to day activities are controlled.

Internal audit is an independent appraisal activity in the organization as a service to the management.

The duties are usually define by management and these include:

  1. Measurement of the adequacy and effectiveness of the internal control system on a continuous basis;
  2. Routine checks to prevent and detect errors and frauds;
  3. Provision of hireling advice to management on internal control matters;
  4. Investigation of reported cases of all practices;
  5. Provision of statistical data for management information and decision making; Other special assignment such as disposal of asset, staff audits.

Inspite of this being a seemingly exacting and challenging function of the internal audit department. In some organization, the management starves the internal auditors of funds, staffing and training. It is necessary for internal audit to have credibility by having an internal auditors persons of integrity.

The above qualities of internal auditors contributed to the inefficient of the internal audits of the organization world-wide.

As regards, the problems which usually affects the internal audit departments, the staff of some organization treats the internal audit as “blood hound” and not “watch dogs”. The fraudulent staff would will not normally corporate with the internal auditors as regard to the supply of information which should be used for the effective checks of the works in the organizational activities.

In our society where the business culture has been overridden in recent times with fraudulent practices penetrated by management and employees, the lack of clear understanding of the duties of an auditor in relation to fraud detection has often led to unjustifiable criticisms of his role. Auditors are known to be competent, honest and independent professionals who express unbiased opinion on the truth and fairness of the financial statement as presented by management to members of the company. The accounting profession has over the years built a reputation, which encourages others to rely upon the opinions auditors express. If these opinions are unclear or even unreliable, serious consequences may and indeed have resulted.

The auditor’s duty is to examine the financial records of the company and to take reasonable care to ascertain that the financial records show the company’s true position. The auditor is expected to prepare a detailed report to the company members and the report shall state the matters set out in schedule six to this act. The auditor is also to consider whether the information given in the director’s report for the year for which the accounts are prepared is consistent with those accounts; and if they are of opinion that it is not, they shall state that fact in their report. If the subsiding company and its auditors fail to provide this information, every other officer who is in default shall be guilty of an offence and liable to fine. That an auditor has the responsibility for the prevention, detection and reporting of fraud, other illegal acts and errors is one of the most controversial issues in auditing, and has been one of the most frequently debated areas amongst auditors, politicians, media, regulators and the public (Gay et al 2007). This debate has been especially highlighted by the collapse of both small and big corporations across the globe. The auditing profession in Nigeria has caught the media’s attention following financial scandals in some of the Nigerian banks such as Intercontinental Bank, Oceanic Bank, Afribank, and Bank PHB among others.

There seems presently to be a misconception that auditors’ duties are largely the preventing, detecting and reporting of fraud, for example, Idris (2009). Financial report users’ perceptions of the extent of fraud in Nigeria, and to determine their perceptions of the auditor’s responsibilities in detecting fraud and the performance of related audit procedures. The paper also aims to ascertain whether the report users’ perceptions of auditors’ responsibilities on fraud are consistent with those of the auditing profession as expressed in auditing standards in Nigeria.

Fraud, according to Adeniji (2004) and ICAN (2006), is an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements. Fraud can also be seen as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse or harm the asset of the organization, (Adeduro, 2008 and, Bostley and Drover 2002). Fraud has increased considerably over the recent years and professionals believe this trend is likely to continue. According to Brink and Witt (2002), fraud is an ever present threat to the effective utilization of resources and it will always be an important concern of management. ISA 240 ‘The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statement (Revised)’ refers to fraud as “an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage”. Aderibigbe and Dada (2007) define fraud as a deliberate deceit planned and executed with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether the perpetrator benefits from his/her actions.

Weirich and Reinstein (2000 cited in Allyne & Howard 2005), define fraud as “intentional deception, cheating and stealing”. Some common types of fraud include creating fictitious creditors, “ghosts” on the payroll, falsifying cash sales, undeclared stock, making unauthorized “write-offs”, and claiming excessive or never-incurred expenses. Pollick (2006) regards fraud as a “deliberate misrepresentation, which causes one to suffer damages, usually monetary losses”. Albrecht et al (2005 cited in Allyne & Howard, 2005) classified fraud into employee embezzlement, management fraud, investment scams, vendor fraud, customer fraud, and miscellaneous fraud. Fraud also involves complicated financial transactions conducted by white collar criminals, business professionals with specialized knowledge and criminal intent (Pollick 2006).

The terms fraud, waste and abuse are often used interchangeably, even though they are conceptually and legally distinct. They nevertheless often coexist, frequently arise from the same underlying factors, and, in terms of prevention, they are often amenable to the same countermeasures. Fraud against the government is more easily accomplished in an environment of administrative and fiscal laxity. Indeed, it may well be that a significant proportion of revenue loss flows less from deceit than from careless or inefficient management of public resources. In any event, the appearance of carelessness and inefficiency can be an invitation to perpetrators of fraud.

1.2 Statement of the Problem

A company may be classified under small medium or large depending on the size, feature of number share authorized calls issue and fully paid etc. many companies face the problem of auditing efficiency such as non-compliance with the accounting standard that the auditing guidelines non- disclosure of some which will enable either the external; auditor to form opinion. Other cooperate crime may pose a problem in the auditing efficiency.

This cooperate crime may be a serious issue, for example in the news watch 5thJuly 1999, Lucky Igbenedion governor of Edo state reported that cheque were flying up and down as formal governor Onearugbulem awarded indiscriminately and Igbenedion reported that there is an inherent debt of 5 million. There is many more looting in all the state in government offices, companies etc. the research work will attempt to highlight on these problem areas that basically undermine auditing efficiency in a company and give a possible solution.

1.3 Objective of the Study

The objectives of the study are;

  1. To ascertain the effect of internal audit in corporate organization
  2. To ascertain the function of internal audit in corporate organization
  3. To ascertain the relationship between internal audit and corporate efficiency

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

  1. H0: there is no effect of internal audit in corporate organization
    H1: there is effect of internal audit in corporate organization
  2. H02: there is no relationship between internal audit and corporate efficiency
    H2: there is relationship between internal audit and corporate efficiency

1.5 Significance of the Study

The study will give a clear insight on effect of internal audit function on corporate efficiency. The study will be beneficial to students and to corporate organization. This study will serve as a reference to other researcher that will embark on this topic.

1.6 Scope and Limitation of the Study

The scope of the study covers effect of internal audit function on corporate efficiency. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.9 Definition of Terms


In general is the mechanism within the process of accountability whereby the performer of those in control of the research of the organization is check or monitored by or on the behalf of the interested persons. The statutory audit of limited companies is the commonest example.

Internal Audited:

An element of the internal control system set up by the management of an enterprise in order to review accounting, financial, and operating and determine whether the prescribe policies are being adhered to. External auditors take account of the work done by an eternal auditor letters independence, staff resource, test mode, and influence by the management action.


The is referred to the ability to perform a duty well and produce a statistical result


It is an instrument used in doing a certain work or producing a certain result especially such that require accountancy or precision


An association of persons for a business purpose in particular which incorporated in the united kingdom under the companies Act or by the Act of parliament or by royal charter. In Nigeria, company is registered by a cooperate affairs commission Abuja and regulated by the companies and allied matter decree 1990. There are companies limited by share and those limited by guarantee.

Companies can be divided into

  1. Private limited companies
  2. Public company

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five

Summary Conclusion and Recommendation

5.1 Introduction

It is pertinent to note that this research was aimed at assessing effect of internal audit function on corporate efficiency

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations were made which in the opinion of the researcher will be of benefits in addressing the challenges internal audit function on corporate efficiency

5.2 Summary

The absence of a relationship arose from possible under emphasis on internal auditing by these enterprises. Where the internal audit function is de-emphasised (as the present study shows), clearly, it cannot impact positively on financial performance. Consequently, we strongly recommend the creation of an Internal Audit Department in those enterprises where there is none. Existing Departments then should be strengthened by according them the necessary professional independence and employing adequate number of experienced and qualified staff to enable the Department extends coverage of the audit to all significant activities of this organization.

5.3 Conclusion

The internal audit department is very important inside a firm where the internal audit is regarded as the key element in the application of accounting systems and this in turn, helps in evaluating the work of the department. The internal audit is considered as the backbone of the business accounting as it is the section that records all businesses related to the sector. The efficiency of internal audit helps develop the work of the company because the financial reports reflect the internal audit department’s quality. In addition, an internal audit is considered as a significant part of the corporate governance(CG) structure in the organization and CG covers the activities of oversight by the board of directors and audit committees to ensure credible financial reporting process (Public Oversight Board, 1994).

5.4 Recommendations

Haven completed the study, the researcher recommends that; first, the future researchers to empirically examine the effect of factors of internal audit on firm performance. Second, the future authors should employ this study in the developing countries considering the necessity of this type of research in this environment.

More importantly, future studies could compare between two or more countries in the same economy and culture; for example in the Middle East or exactly in the gulf countries. Third, with respect to the importance of audit quality, the present research considers audit quality as a moderator between the association of audit characteristics and firm performance. This study reviews internal audit studies and found that only a few studies investigated the relationship between internal audit, firm performance and earning management. Last but not least, in consistent to the value of the integration between accounting-based measure and market-based measure together to enhance performance of firms to provide a clearer picture to investors, future studies should look into the how this integration should take place.

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