Internal Audit As An Instrument Of Management Control

Project and Seminar Material for Accountancy / Accounting

Internal Audit As An Instrument Of Management Control

Abstract

This study was carried out to examine internal audit as an instrument of management control using Lagos state judiciary, Lagos State. Specifically, the study examined the need for assisting the financial statement of government parastatal i.e the importance of auditing to management of a government parastatals. At the end of this research work an attempt would have been made to look critically into the problems mentioned and their impact in an organization. The contribution of internal audit in solving the problem. And this project work will also cover the role of internal audit as an instrument of internal check to management it will also touch internal control. The study employed the survey descriptive research design. A total of 30 responses were validated from the survey. From the responses obtained and analyzed, the findings revealed that there is a relationship between the internal audit and management control. Also,co-operation exist between the internal auditor and internal check to management.

Furthermore , internal audit assist in the detection and prevention of fraud in the management. The study hereby recommend that the internal audit unit of the organization should keep ethical standard by keeping up to date internal audit manual and train its internal auditors in forensic accounting. Also, Internal audit units should always draw annual audit plan which is the focus of the company as it will help them to have efficient operation. Lastly, The internal audit unit of the organization should always submit their audit plan to the management who will have to be pro-active and take action according to findings of the plan.

Chapter One

Introduction

1.1 Background of the Study

An effective internal audit department is a prerequisites to the growth and survival of any business organization since all organization either small or big, profit oriented, operate within the conditions or resources constraints and also run high risks of fraud and errors, in view or this, there is a need to introduce or establish operating rules and procedure by establishing on internal audit department in other to ensure that the use of their resource are maximized and that the potential risk of internal risk and unintentional irregularities are reduced to the minimum.

This study attempts to examine the internal audit as practiced by government parastatals which is described as those parastatal whose means of operation is less than average comparing with company(s) for the government of the federation through an assessment of Lagos State judiciary, for the purpose of these write up a review of internal audit would be carried out to determine the effectiveness and problems of internal audit department in a government parastatals. In the light of this study, a brief discussion of information protection and control as vital aids to management would be explained. Most information needed by management in order to keep informed about finance and the progress of operations comes from the accounting records. The information to be maximum value must be variable complete and timely. Therefore inaccurate information is no little better than no information at all.

The classification of account, all aspect of the accounting system must be designed to assist management gather information as to answer the question “DOWE HAVE ENOUGH STAFF TO MEET THE ANTICIPATED VITAL ASPECT OF INTERNAL CONTROL” protection of the resources of government is important against a multitude of possible losses ranging from embezzlement to such cases as careless use of government properties.

Internal audit is necessary to ensure that government policies and directives are properly adhered to management internal audit is a key factor in the effectiveness and efficient management of a government parastatals. Internal auditing can be said to be a form of auditing.

Auditing can be said to be such an examination of the books, voucher and accounts of a business and shall enable the auditors to satisfy himself whether or not the balance sheet and profit and loss account are properly complied so as to exist it a true and fair view of the affair to the business, whereas internal audit is independent appraisal or review activities with the organization for the review of the operation as a service to management, it is a management control which function by measuring and evaluating the effectiveness of other control.

Internal audit as defined by millichamp as an independent appraisal function established by the management of an organization for the review of the internal check and internal control system as a service to the organization, it objectively examines, evaluate and report on the accuracy of internal controls as a contribution to the proper economics efficient and effective use of resources.

From the above definition it is clear that:-

  1. Internal audit is an internal function which means that it is conducted by the employees of an organization specially assigned for that purpose.
  2. Internal audit is a service to management i.e is a managerial control, consequently the scope and objectives depend upon the management assessment of what is needed and its willingness to assign the task to the internal audit departments.
  3. Part of the internal audit function is to review and to appraise the organizations operation and records.

The functions of internal audit or auditor is to be independent i.e to be a special and separate entity. (It means separate department from the account department and it reports to the top managements).

The definition of internal audit is broader than the meaning sometimes attributed to the term, it recognizes that internal audit extends beyond those matters which relates directly to the function of the accounting department. This broad definition may be summarized by stating that internal audit is the means by which management obtains the information and protection of errors and fraud that are vital to the successful operation of government parastatals.

A good internal audit department has a direct bearing on the reliability of a concern accounting records permitting the independent auditor (extend) to place a great confidence and relevance.

In the accounting and audited records and thereby justifying reduction in the scope of the auditors examination and redirection of loss efforts.

Many management of government parastatals large organization and small one had found a need for an internal audit in addition to external audit. Internal auditors are employee of the parastatlas and work exclusively for the management. Their functions partly overlap those of the external auditors and infact are quite different.

The precise function rarely laid-down of internal audit are determined by the management and varies greatly from organization to organization.

There is a laid down rule issued in June 1990 to guide the internal audit department.

Internal auditing is thus carried out by independent personal called internal auditor who are employees of the establishment and this independence is not always easy to consive. However it can be assisted by:

  1. Reporting to the top management of his funding without being bias.
  2. Having no conflicts of interests or any restrictions placed upon their work by management.
  3. Having no non-audit work.
  4. Having the scope of arranging its own priorities and activities.
  5. Having unrestricted access to records assets and personnel.

The management of a government parastatal need a complete and accurate accounting and other departmental records because:

  1. The parastatals cannot be otherwise controlled.
  2. The financial statement which are required for numerous purpose can only be prepared it adequate primary records exists.
  3. Statutes often have a specific requirement on record keeping for specific form of government parastatals.

The basic need for an audit is to restore the problem which exist between the managers and the owners interms of report which they believe may contain errors, not disclosed fraud, deliberately misleading, inadvertently misleading, fail to disclose relevant information. The solution to this problem of credibility in reports and account lies in appointing an independent person called an auditor to investigate the report and their report on there finding.

Auditing an instructional manuals for Accounting students by H.A. MILLICHAMP expressed the auditing guideline issued in June 1990 give a very good summary of the stages in a system of audit as:-

  1. Identifying the system parameter.
  2. Determine the control objectives
  3. Identifying the expected control to meet control objectives.
  4. Review the system against expected control.
  5. Test the operation of control in practice.
  6. Give an opinion based an audit objective as to whether the system provides an adequate basic for effective control and whether it is properly operated in practice.

In carrying out an internal audit of an organization or government parastatals there is need to follow the underlisted stages of planning an internal audit thus:

  1. Identifying the objectives of the organization.
  2. Define internal audit objectives
  3. Take account of relevant changes in legislation.
  4. Obtain a comprehensive understanding of the organisation’s system structure and operation.
  5. Identify, evaluate and rank risk to which the organization is exposed to.
  6. Take account of change in structure or major system in the organization.
  7. Take account of known strength weakness to the internal control system.
  8. Take account of management concerns and expectations.
  9. Identify audit areas by services, functions and major systems.
  10. Determine the type of audit e.g system, verification or values of money (e.g stock control, cash balances)
  11. Take account of the plan of internal audit and other review agencies.
  12. Assess staff resources required and match with resources available.

Internal audit as an instrument of management involves a periodic review of the accounting and internal control system as well as the result of operations in order.

  1. To report on the efficiency and effectiveness of the internal control and accounting system and to suggest improvement where necessary such as continuous update of existing controls to block loopholes.
  2. To report on result of operations, variations from plans and the reason thereof.
  3. Safeguard the asset of the parastatal effectively.
  4. Study the environment and recommended improvement on review of existing controls.

The success of internal audit will depends on the degree of support it receives form the management which must be seen in a positive light rather there as a big stick to weild against line management and must also be seen to be independent.

A quality internal audit services will make a positive contribution of the objectives of any organization. The key areas where an internal audit department can be effective are:

a) Government Policies:

Management at a distance can be aided by utilization of internal audit more traditional policy role, while also accounting compliance with corporate policies and procedure.

b) Value By Money:

A value of money audit is an independent appraisal of the performance of management in seeking to secure economy efficiency and effectiveness in the use of resources at its disposal. This value for money approach can be adopted when undertaking of a product service department.

(c) Management Information:

One of the key to successful is the quality of the management information available, its accuracy and its reliability. Here the internal audit department has a big role to play in assessing the adequacy and suitability.

(d) Financial Control:

Where as the external will take a view of the financial controls operated within the establishment during their annual audit, this may not cover establishment during their annual audit, this may not cover items or areas where there are value which would be considered immaterial such as pretty cash or expense. But the accuracy of controls over these activities can often give a good indicator as to the control exercised over financial activities as a whole. The internal auditor is again ideally situated to ensure that these and other basis financial control are in place at each of the parastatals operation.

1.2 Statement of Problem

In designing, installing, maintaining and operating any internal audits, the management would have to examine.

  1. Audit compatible with overall objectives of the parastatals.
  2. Analyse the nature of risk in-existence.
  3. Non-compliance with the rule and regulation set up by government for both personal and management thereby over siding control.
  4. Causes, nature and types of frauds detection and preventing of fraud in relation to adequate internal audit department.

1.3 Objective of the Study

This write-up is intended to study the need for assisting the financial statement of government parastatal i.e the importance of auditing to management of a government parastatals. At the end of this research work an attempt would have been made to look critically into the problems mentioned and their impact in an organization. The contribution of internal audit in solving the problem. And this project work will also cover the role of internal audit as an instrument of internal check to management it will also touch internal control.

1.4 Research Questions

The following questions have been prepared for the study

  1. Is there any relationship between the internal audit and management control?
  2. Does co-operation exist between the internal auditor and internal check to management?
  3. Does internal audit assist in the detection and prevention of fraud in the management?

1.5 Significance of the Study

This research work will be carried out with the aim of checking for the problem of fraud, extence of relevance on internal audit by external audit in an establishment by some set of people through their department mainly account department in the course of this study attempt will be on finding out if internal audit department has any effect to the management and shall be compared with external audit.

1.6 Limitation of the Study

Auditing as a whole is a wide spread course and much have this already been written about it. However, for the purpose of this study the researcher will be limited to the impact of internal audit to management of Lagos State judiciary.

1.7 Brief History of Lagos State Judiciary

Judiciary is a function of government parastatals which is responsible to the administrator of Lagos State, it serve as a revenue from which Lagos State Government generate much find though government pump in money to this area of parastatals to carry out is operations/plans they expect them “judiciary” to return part of the money they realize at the end of the year to government coffers.

This arm of government parastatals generate much fund to government coffers which is refer to as returns to government. Lagos state judiciary generate much funds from different aspect of their function among which are probate registry of high court i.e collection of estates fees from the estate of the decreased, this aspect of “probate” is where judiciary generate most of its fund because for every estate fees collected they charge a commission of about 10% which is been paid directly to government coffers. They also generate money from litigation i.e filling fees, motions, summons, writes of summons, and through deposit of wills.

Most of the money they generate and those pump in by government inform of budget are been spent on maintenance of office equipment and furnitures, they use part to repair and purchase machinery or assets e.g cars, office equipment and pay staff salary.

Lagos state judiciary are situated at different are of the state. i.e most local government have their judiciary including the newly created ones and practice is referred to as the “GEOGRAPHICAL SPREAD of JUDICIARY”.

Judiciary as been headed by the chief judge whose office is situated at Ikeja. Men are always appointed as Chief judge in the federation not until 1995 when Chief Mrs. Omotosho was appointed chief judge in the whole federation which makes a history to Lagos state judiciary.

The main aim of judiciary is ‘CASE” i.e punishing offenders and implementing government rule and regulation and also settle dispute between company and individuals they encourage the citizen of the country and also improve the economy of the country by assisting individuals of their rights.

Chapter Five

Summary, Conclusion and Recommendation

5.1 Summary

In this study, our focus was on the internal audit as an instrument of management control using the Lagos state judiciary as a case study. The study specifically was aimed at highlighting the need for assisting the financial statement of government parastatal i.e the importance of auditing to management of a government parastatals. At the end of this research work an attempt would have been made to look critically into the problems mentioned and their impact in an organization. The contribution of internal audit in solving the problem. And this project work will also cover the role of internal audit as an instrument of internal check to management it will also touch internal control. A total of 30 responses were validated from the enrolled participants where all respondent are drawn from staff of Lagos state judiciary.

5.2 Conclusion

Based on the finding of this study, the following conclusions were made:

  1. There is a relationship between the internal audit and management control.
  2. Co-operation exist between the internal auditor and internal check to management.
  3. Internal audit assist in the detection and prevention of fraud in the management.

5.3 Recommendation

Based on the responses obtained, the researcher proffers the following recommendations:

  1. The internal audit unit of the organization should keep ethical standard by keeping up to date internal audit manual and train its internal auditors inforensic accounting.
  2. Internal audit units should always draw annual audit plan which is the focus of the company as it will help them to have efficient operation.
  3. The internal audit unit of the organization should always submit their audit plan to the management who will have to be pro-active and take action according to findings of the plan.
  4. The researcher recommended that the management on their part should acknowledge the report submitted to the management and allocate more power to the internal audit to ensure independence.

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