Internal Audit As A Control Tool For Efficient Management

Project and Seminar Material for Accountancy / Accounting

Internal Audit As A Control Tool For Efficient Management


Abstract


The purpose of this study is to assess the efficacy of internal auditing as a tool for efficient management. Internal audit is regarded as the key element in the application of accounting systems which 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, it is in view of this that the researcher intend to investigate the efficacy of internal audit in improving organizational performance.


Chapter One


Introduction

1.1 Background of the Study

The study of this internal control system of an organization is like the study of an anatomy of man. In word of Peter Druker” Good organizational structure dose not buy itself produce good performance just like a good constitution dose not guarantee great presidents or good laws a moral society. But a poor organizational structure makes good performance impossible, no matter how good the individual managers”.

Promised on this dictum, it is therefore obvious that the organizational structures of an establishment will greatly determine to what extent the organization is to be managed. In some organizations, jobs are not properly defined, duties are not efficiently assigned to the right persons and functions are sometimes duplicated with the result that in fighting within the organization results in sub-optimization. By this I mean that each staff and sub-manager try to impress the management and often times to the detriment of the overall goal of the organization.

A good internal control system ensures that functions/duties are properly defined and that duties are properly are properly assigned to qualified staff and that there is an inbuilt control in the system to ensure feedback, detection and correction of errors in good time.

It is the overall good of any organization to ensure its continued existence and growth hence establishments set up certain units/departments in their organization to ensure that its good is achieved to a reasonable degree.

The internal audit is one such unit established by the management to ensure compliance to policy instructions and to correct for correction deviation from the management set guideline .it objectively examines, evaluates and reports on the adequacy of the internal control, thereby ensuring efficient and effective application of limited resources.

Internal check is also another internal control tool employed by the management to ensure that the objective of the organization is attained.

The entire system of check internal audit and internal check, which is geared towards the attainment of the organizations goal, is called internal control.

Internal control has different definitions but most widely accepted is that of the statement of accounting standard (SAS) which defined internal control as “not only internal check and internal audit, but the whole system of controls, financial and otherwise establi9shed by management in order to carry on business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of its records”. The internal control system should be an open one and should be cheap, conveniently manipulated by management to ensure completeness and accuracy of records and also prevent or uncover errors and fraud. It should be based on the overall view of the organization and should provide information for all uses of the system.


1.2 Statement of Problems

In very human endeavor, problems and difficulties will arise. Manufacturing is not an exception to this rule

The common problems encountered include:

  1. Inadequate capital and poor administration
  2. Poor accountability
  3. General increase in all aspects of operational costs
  4. Unsteady policy by government resulting in uncertainties
  5. Internal control breakdowns
  6. Stringent loan conditions by banks

The above general problems are easily identified and are associated with under development of the society. There is also the psychological angle, the problem of dissatisfaction of workers and the attending strike action which often result to loss of many hours and disruption of the entire system


1.3 Research Objective

This study will be aimed at accomplishing the following objectives:

  1. To examine the nature and scope of internal control systems in a manufacturing establishment using Peco feeds as a case study
  2. To ascertain whether the internal control systems in use are appropriate and will lead to efficient management
  3. To identify the principal problems associated with workers dissatisfaction and recognize the implications of such problems for control methods
  4. To seek purpose oriented solutions and make recommendations that will go a long way in solving the identified problems

1.4 Significance of Study

This research work has been undertaken in such a way that students, researchers and interested persons would be educated in the following areas:

  1. The various internal control systems
  2. The causes of breakdown in internal control systems
  3. The effects of an efficient or inefficient internal control systems on the management of an organization
  4. Corrective measure to ratify an inefficient control system

1.5 Statement of Hypothesis

For the purposes of the study, the researcher wishes to states the following hypothesis:

  1. That the internal control system in operation in Peco feeds limited is adequate in the area of promotion and encouragement of effective operational efficiency and adherence to management plans and policies
  2. That the internal control, internal check and internal audit in Peco Feeds Limited has been of immense help to the management both in the areas of safeguarding the assets of the organization and the prevention of questionable claims and payments

1.6 Research Questions

In other that the research provides the results, the following research problems, which revolve around the basic elements of an effective and efficient internal control, system would be utilized in testing the research hypothesis

  1. To what extent does the organizational structure and responsibility sharing arrangement in Peco Feeds Ltd reflect the existence of an effective an efficient control system?
  2. How efficient is the internal control system in Peco Feeds Ltd with regards to the safeguard of its fixed and other assets as well as in the prevention of questionable claims and payments?
  3. How efficient is the accounting system in use in Peco feeds Ltd with regard to responsiveness to the organizational objectives as well as in the area of accuracy and reliability of the financial records prepared under the system?
  4. To what extent has the existence of an internal audit unit in Peco Feeds Ltd helped in the promotion of operational efficiency and encouragement of adherence to management policies?

1.7 Limitations of Terms

In very human undertaking, there has to be a limitation. The limitation could be internal or external; internal to the extent of the researchers ability and external to the extent of things outside the control of the researcher.

In this undertaking finance and time has been the most constraining factor. Some others include the usual Nigerian attitude to label every imaginable piece of information as confidential or to secret.


1.8 Definitions of Terms

1. Internal Control

This is defined as “not only internal check and internal audit, but the whole system of controls, financial and otherwise, established by management in order to carry on the business of the company in an orderly manner, safeguard the assets and secure as far as possible the accuracy and reliability of its records.

2. Internal Check

This is defined as “the allocation of authority and work in such a manner as to afford checks on the routine transactions of day to day work by means of the work of one person being checked or controlled independently by another “.

3. Internal Audit:

This is defined as “an independent appraisal activity within an organization for review of accounting, financial and other operations as a basis for service to management.

It is a management controls which functions by measuring and evaluating the efficiency and effectiveness of other control.

4. System:

This is define is an organized or a complex whole. It is a set of a complex related or a an arrange of essential principles or facts arranged in a rational dependence or collection forming a coherent whole


1.9 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 (background of the study), statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, scope of the study etc.
  • Chapter two being the review of the related literature presents the theoretical framework, conceptual framework and other areas concerning the subject matter.
  • Chapter three is a research methodology covers deals on the research design and methods 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 internal audit efficiency as a tool for efficient management.

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 associated with fraud prevention in companies in Nigeria.


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 extend coverage of the audit to all significant activities of these 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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