The Role Of Internal Auditing In The Effective Management Control Of Local Governments

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The Role Of Internal Auditing In The Effective Management Control Of Local Governments


Abstract


The subject of this research investigation is the role and functions of internal auditing within the local government councils in Enugu State, specifically, this study has empirically investigated the present situation functions and problems of the internal audit department within the local government councils in Enugu. The major problem of the researcher was to find out their relevance to the to the effective and efficient performances of the local government areas.

The research methodology in this investigation is descriptive approach, based an the answers to certain research questions. Data for the descriptive analysis were generated through an empirical investigation of the activities of the internal audit department in Ezeagu local government area. The methods of data collection were interviews, direct observations and study of secondary materials.The major findings of this study are:-

  1. That Ezeagu local government area has an internal audit department.
  2. That internal auditing helps to know how well the policies of management were executed.
  3. That the duties of the internal auditor could be performed by either the accounts division or the external auditor who must be statutorily appointed.
  4. That all the internal auditors of the local government report to the auditor general, through the executive chairman of their local government areas.

The conclusions of this study are:

  1. Management needs to know whether the report it relieves are accurate and adequate and whether its policies are being effectively translated into action in all sections of the local governments.
  2. It also needs to know whether staffs are being properly trained and that they understand the rules and procedures they are expected to follow.

Proposal


The purpose of this project is to bring out the role and function of internal auditing in the effective management control of local government councils in Enugu State.

The research work will fall in the area of internal auditing in Ezeagu local government area in Enugu State. The internal auditing, which is an audit function is in use by the local governments as a part of their overall system of internal control. The project will state the present situation, functions and problems of the internal audit department with the local government councils in Enugu State.

The research method which is going to be use will be the descriptive approach. The descriptive approach will give answers to certain research questions. This method will enable the researcher to describe in a systematic manner the role of internal auditing in the local government area studied.

The method of data collection is going to be interviews, study of secondary material and direct observations. The scope of the research work will be only limited to Ezeagu local government area in Enugu State. This is due to the short period of time available for the research work/project.


Table Contents


Preliminary Page(s)

  • Title page
  • Approval page
  • Abstract
  • Acknowledgement
  • Dedication
  • Table Contents

Chapter One

Introduction

  • 1.1 Area of research investigation
  • 1.2 Problems background
  • 1.3 Statement of problem
  • 1.4 Method of study
  • 1.5 Objective of study
  • 1.6 The importance of study
  • 1.7 The scope of the study
  • 1.8 The limitations of the study
  • 1.9 Definition of terms

Chapter Two

Literature Review

  • 2.1 Historical background
  • 2.2 Principles
  • 2.3 Operational definition of internal auditing
  • 2.4 Functions of an internal auditor
  • 2.5 Benefits from an internal audit function
  • 2.6 The internal auditor’s role in the area of management audit

Chapter Three

Methodology and Procedures

  • 3.1 The empirical investigation
  • 3.2 Reliability of data collection

Chapter Four

Data Presentation and Analysis

  • 4.1 Location of Ezeagu local government area
  • 4.2 The objectives behind the creation of local governments
  • 4.3 Functions of local governments
  • 4.4 Structural organisation of Ezeagu local government
  • 4.5 Sources of revenue
  • 4.6 The functions of internal audit in the effective management control of local governments
  • 4.7 Results of emperical investigations
  • 4.8 Problems identified
  • 4.9 Procedure of improvement
  • 4.10 Major findings

Chapter Five

Summary, Conclusions, Recommendations for Improvement

  • 5.1 Summary
  • 5.2 Conclusions
  • 5.3 Recommendations for improvement
  • Appendix
  • Interview guide sheet
  • Bibliography

Chapter One


Introduction

1.1 Area Of Research And Investigation

This research investigation falls within the area of internal auditing in Ezeagu local area.

Internal Auditing is an audit function which is being used by local governments as a part of its overall system of internal control. Such auditing is carried out by local government employees who are responsible to local government management. The activities of internal auditors were originally intended to verify secrecy and dependability of the accounting systems, data and information, but currently they are operating in non-accounting functions, verifying local government operation and efficiency.

From the foregoing, internal auditing is therefore, a day to day verification process, which operates continuously throughout the local government financial year. According to Akanyanwu (1990) internal auditing is “The independent appraisal within a local government of the accounting, financial and all other operations as a basis for protective and advisory services to management”.


1.2 Problem Background

The new civil service move with designed to made the service more functional, professional, productive and responsive to the socio-economic needs of the nation. The federal government has also recently revamped and restructure the local government system to enable it perform its role of promoting, co-ordinating and implementing community services, enhancing citizens participation and maximizing the use of local resources. Enormous amount of money if flowing to the local government from the federation accounts (20%), the 10% if the state internally generated revenue and the revenue of the local government.

The federal government of Nigeria came up with a financial instruction in 1979 instructing all local government to set up internal audit unit in each local government. But the behavior and attitude of operation of local government system resulted in many local governments not setting up internal audit units or if set up, they were not functional. The federal government in 1988 set in motion a real wave of change. A real frame work of internal auditing in the local government was spelt out in order to make it less difficult for management of the local government to have perfect control of the activities of staff of the local government as the greatest contributing factor to the poor performances of the local governments.


1.3 Structure Of Local Government

Local government forms the third tie of government in Nigeria; in Nigeria so to say we have the federal government at the apex, the state government at the middle and local government at the bottom. Local government was created to help in catering for the rural populace. Its operations include the provision of same social amenities, such as cottage hospitals, rural roads, and bridges, management of primary schools that is before now. At the head of affairs in each local government is the chief executive of the local government who is referred to as the local government chairman. We also have the legislators of the local government who were elected in various wards.

The local government administration has the chairman at top of affairs, followed by his deputy, and then come the secretary, the personnel executive officer (PEO), the treasurer and the internal auditor. The internal auditor reports to the auditor general of the state through the executive chairman of the local government.


1.4 Statement Of The Problem

The local government has three broad sources of revenue. They include 20%direct from the federation accounts, 10% of internally generated revenue of the state government and revenue internally generated by the local government herself. The internal source available to the local government area include, rents from market stores, royalty paid by some residents companies in a local government, contractors registration, sales of car/bus emblems, etc.

Since the local government has a whole lot of possible source of revenue the problem therefore include:

  1. How can efficient management controls be achieved?
  2. What is the role of internal auditing in ensuring this control?
  3. How can the internal auditing be made a useful tool for management control?

1.5 Method Of Study

The major method of this research investigation will be descriptive, based on the answers to certain research questions. Detailed discussion an methodology will be presented in chapter three.


1.6 Objective Of The Study

  1. The researcher intends to find out; the role of internal auditing in management control.
  2. Whether the function of the internal audit department are performed in compliance with the established standards and policies and how much it has succeeded in achieving the objective of the local government.
  3. In the end the researcher shall establish some acceptable benefit that may be derived from effective audit control system.

1.7 The Importance Of The Study

This research is an attempt to survey the constructive parts, which internal auditing can play in the local government system in Nigeria with particular reference to Ezeagu local government area – Enugu State.
A lot of problems are facing the local government areas as not having an effective audit control system. One of these problem is the management seems to gloss over the operation of the local government, which are carried out in disorganized manner. The researcher was motivated to choose this topic because of her belief that if management of Ezeagu local government have complete control of the activities of the members and staff of the local government, an efficient management which is pre-requisite for high productivity will be assured.

This is so because an efficient control system will enable the management to monitor the performance of the executives and take necessary and adequate corrective actions to ensure high performance of the executives and take necessary and adequate corrective actions to ensure high performance at the levels.


1.8 Scope Of The Study

The scope of the study is limited to Ezeagu local government area of Enugu State. This is because of the limited time available for the researcher for the submission of the report and the financial involvement of the scope is further widened. Furthermore, from the related literature reviewed, it was observed that there was enough bases for generalizing the result of the study.


1.9 Definitions Of Terms

The following terms, which due to their technical nature carry special meanings, need some definition to aid proper understanding of this paper. The writer therefore, wishes to define them briefly here but those of them that need further explanations were explained in later chapters.

Internal Audit:

This is a continuous review of operations and records understanding within an organization by specially assigned staff.

Internal Control:

This is the whole system of control established by the management to enable it carry out its management function efficiently. Institute of Chartered Accounts of England and Wales (ICAEW) defines internal control as “the whole system of control, financial and otherwise, established by management in order to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible the accuracy and reliability of the records.

From the above definition, it is clear that the main purpose of internal control is to safeguard assets and keep proper records.

The important features of internal control are:

  1. The plan to the organization with particular reference to the allocation of staff duties (segregation of duties)
  2. Authorization, recording and custody procedure including internal checks.
  3. Managerial supervision and reviews (including internal checks). This is the point where the internal auditor comes into focus.
Watch Dog:

This refers to one who is always around at the center of activities of the business. He carefully watches every person on the activities, only running back to the master to report errors committed.


Chapter Five


Summary, Conclusions, Recommendations for Improvement

5.1 Summary

The aim of this chapter is to briefly summarize some of the findings of this empirical observation, give a conclusive report and make some recommendations.

Summary:

This research investigation starts, with discussion on chapter one, which is the introduction.

  • Chapter one includes the area of research investigation, the problem background, state of the problem, method of the researcher, the objective of the researcher, what motivated him to choose the topic and the format of the who research method.
  • Chapter two deals with the relevant literature necessary in this area of research investigation, the historical background on the topic investigated, that is internal auditing in Ezeagu local government. It also includes the functions and benefits of an internal audit, the role of internal auditors in the area of management unit as well as the principles of internal auditing.
  • Chapter three deals with the method and procedure that were employed in this area of research investigation.
  • Chapter four deals with data presentation and analysis. It includes the description of the structural systems of the local government area. The description of Ezeagu local government generation of its resources.
    The second part of chapter four deals with the functions of internal audit in the effective management control of the local governments.
  • In chapter five, the researcher intends to summarize some of the findings of his empirical observations, give a conclusive report and offer some recommendations.

The research reveals that the management of all local governments is aware of the importance of the role of internal audit as a tool for management control. Although the internal audit department is important in management control, some of the people interviewed were of the opinion that their duty can be more economically performed by either the Accounts division or the External Auditor who must be statutorily appointed. It follows that since the internal audit is not a statutory requirement, the funds needed for its establishment and maintenance can be used for other purposes.

The study also reveals that it is necessary for the internal auditors to be independence of the executive chairman of his local government area. The independence of objective reporting must be granted. Other problems identified as militating against the effective performance of internal Audit are:

  1. Internal audit units are merely one-man team.
  2. The report of the internal auditors are praises to the chief Executives
  3. The current practice, which makes it mandatory, the internal auditors
    report has to pass through the office of his executive chairman does not augur well for objective reporting.
  4. Management seems to glass over the operations of local government, which are carried out in disorganized manner, for example:-
    • Various local government internal audit units does not know their set goals or procedures
    • Vital account books and other records are not maintained
    • Frauds, misappropriations and other irregularities are allowed to go undetected and unchecked.
    • The internal auditors are yet inexperienced and are concerned with the routine examination of accounting records.
    • The financial memoranda are yet to be amended to incorporate relevant changes in the new civil service dispensation.
    • The study also revealed that the internal audit department/unit in the local government is not being fully utilized because of the above problems in their setting.

5.2 Conclusion

The following conclusions have been drawn from the findings of this research investigation.

In the new political dispensation, the chairman if the local government is at the apex of the local government administrations. It is his statutory responsibility to appoint his secretary and his supervisor’s councilors.
Authority is so delegated by management to a large number of these supervisors that a wide trouble some rite develops between the top executives and the operations, which they direct. It is under this circumstance that the top executives needs to rely on accounting and statistical records for information on the progress of departments/units, sections and group which made up the whole.

The management needs to know whether the report it receives are accurate and adequate and whether the policies it has formulated are being effectively translated into action in all sections of the local government. It also needs to know whether staffs are being properly trained and that they understand the rules and procedures they are expected to follow judging from the cases of frauds and embezzlement uncovered in several local government within the period 1970-1999, one will see the need for internal auditing as a good management control for the progress of local governments.

This research concludes that the internal audit department in the local government is of relevance and of great importance for the effective and efficient management of local governments.


5.3 Recommendations For Improvement.

On the basis of thee finding I have made, I recommended that internal Auditing if very well employed is a good tool for management control. The following procedures are hereby recommended.

  1. That since work that is being done by internal auditors is big in scope, the Government should employ more staff to help in the audit regulation.
  2. That the independence of the auditors should as a matter of urgency be decreased.
  3. That the government should employ people who are qualified and experienced in accounting to work as internal auditors. Judging from the cases if frauds and embezzlement uncovered in several local government within the period 1970-1999, one will see the need for internal auditing as a good management control for the progress of local governments. This research concludes that the internal audit department in the local government is of relevance and of great importance for the effective and efficient management of local governments.
  4. That the chief executive should delegate duties that they are commensurate with his status to the internal auditors.
  5. That the internal auditors should have complete access to the local government policies, procedures and records and have proper knowledge of the management policies and procedures.
  6. He should be allowed to follow any investigation on the effective of internal control to any length.
  7. The internal auditor must be thoroughly familiar with the policies and plans of the local government, its methods, procedures, its personnel and its physical facilities to enable him render maximum service to management.
  8. The chief executives of local governments should approve a policy whereby the functions, lines of communication and reporting and responsibilities of the internal auditors are very clearly stated. The internal auditors review should include institutional activities and management controls. The researchers believe that if the responsibility of the internal auditors is not restricted to financial accounting and financial matters.
  9. The status of the internal auditors should be elevated so that he could discuss freely with other heads of departments whose duties he has to verify and advice. This will make the internal auditors to stop fearing to be reprimanded by his supervisors.
  10. It is the responsibility of the internal auditor to prevent errors, frauds, waste and theft and not only to detect fraud. For the internal auditors to achieve the above stated objectives, he should;
    • Adopt pre-audit activities to avoid errors.
    • From time to time hold briefings with policy operators to intimate them on the policies and procedures of governments as its affects their areas.
    • Let the policy makers understand that he is not there to hunt anybody but to prevent certain error incompliance to government laid down rules and programmes.

The Role Of Internal Auditing In The Effective Management Control Of Local Governments


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