CHAPTER ONE
1.0
INTRODUCTION
The
origin of auditing is as a result of the separation of ownership from control.
It is instituted to protect the interest of the owners by ensuring that
financial statements are justifiable. Because of the separation of the
ownership from control, it becomes necessary of those managers entrusted with
owner's financial reports (stewardship reports) to be accountable to their
employers.
Auditing
to some certain extent has been in existence for a long time as far as man is
required to account for transaction. The term "AUDIT" comes from a
Latin word, "Audirea" which means "To Hear". It derived this
name when in ancient times, the accounts of an estate are checked by having
them called out by those who are compared with those authority and owners. That
is, the king and his representatives who listen.
The
need for auditing over the years has gained acceptance due to the increasing
volume of work and business activities and because the business are not being
run by the owners (shareholders) but by managers, this usually create
credibility gap that must be filled by an independent third party usually referred
to as AUDITOR.
Kwama
Gyasi (2000) in his book titled 'An International Guide to Auditing"
defined auditing as the "Independent examination and investigation of the
evidence from which a financial statement has been prepared with a view to
enable independent examiner to report whether in his position and according to
the best of the function and explanation obtained by him, the statement is
properly drawn and gives a true and fair view of what it proposed to show and
not to report on what respect he is not satisfied.
Audit
is in two forms: namely, Internal Auditing and External Auditing. Both are very
crucial to the well-being of an organization and for effective control and
administration. Internal auditing in particular has however grown in importance
especially in the banking requiring banks in Nigeria to set up an Internal
Audit Department from where internal audit functions are carried out.
It
is pertinent to note that the inspection division of bank is functionally
synonymous to the Internal Audit Department of any organization or company. As
such, the two words, "Internal auditing and Inspection" will be used
interchangeably. A definition of an understanding of the meaning of internal
auditing will serve as a good starting point for the discussion.
It
is practically difficult for an internal auditor to possess any reasonable
degree of independence in mind and attitude because of the management
influences on the terms, reference and scope of work. Infact, one area of
interest to the external auditor is assessing the degree of independence
enjoyed by the internal auditor. To achieve this independence, the following
must be put into consideration:
1. They should have an unrestricted access
to records, assets and personnel.
2. Freedom to report to higher management
and where it exists in audit committee.
3. They should have non-audit work.
4. They should work with an objective frame
of mind.
5. There should be no conflicts of interest
or any restriction placed on their work
1.1
BACKGROUND OF THE STUDY
First
Bank Of Nigeria PLC is a leading institution in Nigeria with over a hundred
years of banking experience, industry and resilience behind it. In 1894, Alfred
Jones, a shipping magnate from Liverpool founded the bank which commenced
business then as a small industry in the office of Elder Dempster company in
Lagos.
The
bank grew rapidly in the early year asking in close co-operation with the
colonial Government in performing the theoretical roles of a Central Bank. Such
issues as in special West African sub-region.
In
1876, a branch was opened in Accra, Gold Coast (now Ghana while another was
established in Freetown, Sierra Leone in 1896. This marked a milestone in the
bank's international banking operation. Thereby, justifying the West African
Operational coverage. The second branch in Nigeria was opened in the Old
Calabar in 1900 and two years later, service had extended to Northern Nigeria
with a branch network of 291 in 1951, spread throughout the federation
including London. The bank has the largest number of branches in the industry.
The
bank has experienced phenomenal growth. It had over the year experienced growth
in capital base and staff strength. When the bank began operation in 1894, it
has only six staff comprising three European and three African. Today, the bank
is virtually full. In Nigeria, the bank's determination has been to identify
with the apparition of the country in the march toward national development. As
a result of these, the bank had continually adjusted its organizational
structure and corporate entity.
Its
name was changed to Bank of West Africa in 1957 and it was incorporated locally
in 1969 to become Standard Bank of Nigeria Limited. This was in response to the
dictates of the Companies Decree 1968.
Thereafter,
the active participation of Nigeria in the management of the bank became a
corporate policy. Further changes in the name of the bank were made in 1979 to
First Bank of Nigeria Limited and to First Bank Nigeria PLC in 1991.
As
a result of corporate policy and in order to conform to certain regulatory
requirement (of the Bank of England) the shareholder of the bank's foreign
partners, the Standard Chartered Bank of Africa PLC has been reduced to 9.99.
This brought the equity holding by Nigeria to 90.1.
The
Bank has assisted in long-term development of the economy and financing rural
banking agriculture and credit facilities. Through the community farming loan
scheme, the bank has given peasant farmers tremendous access to the much needed
bank credit. Over the years, the bank has owned the converted stock exchange
president Merit Award as the bank with the best financial reporting in the
banking sector. Also, further times, the bank has come first at the Central
Bank of Nigeria's farmers Merit Award.
The
bank is not resting on the others, despite the past success and good
performance. It is thereby ensuring a good beginning for meeting the challenges
of the second.
Branding
initiatives in First Bank Nigeria PLC are to strategically position the First
Bank group as a National Icon and an International player in the financial
services industry.
After
a century of operation, the Bank commenced the "Century 11" business
transformation project in 1996, which was revalidated in 2001 with the theme
"Century 11-The New Frontier".
As
the Bank marked its 110 years of existence during which it pioneered the art
and science of modern banking in the country, becoming Nigeria biggest and most
prosperous financial service group, First Bank in a fundamental brand
transformation launched on Tuesday, April 27,2004 unveiled a new chapter in its
lustrous history: a new corporate identity, logo and official colours. The
launch was the culmination of the Bank's strategic re- engineering process
embarked upon to usher the bank into its second century of operations.
First
Bank of Nigeria PLC realized that it goes beyond change of logo, aesthetics and
overall physical ambience of their workplaces. Thus, their brand transformation
efforts entailed radical improvements in service delivery and renewal of
trust/dependability, which are all self-evidence in the present standing of the
bank as an epitome for dependability with financial services sector.
While
the Bank reflects the agility, dynamism, processes, technology and corporate
mindset of a new generation bank, it lives up to its billing of being 'truly
the first' by reinvigorating its entire set-up.
Vision
Statement: To remain the clear leader and Nigeria's
Bank of first choice.
Mission
Statement: To remain true to our name by providing
the best financial services possible.
Objectives:
To
revolutionize the banks operations in line with the dynamics of the operating
environment.
To
strengthen the bank's brand in response to contemporary realities of the
business environment.
1.2
OBJECTIVE OF THE STUDY
The
objective of this study is to determine the internal audit procedures in
banking institutions. It will be important and needful for an internal audit
department in banks to see how the work is carried out whether it is according
to operating rules and standards. Also, to see how effective it conforms to the
principles of internal control. It also studies the problem of internal audit
in banks and how these can be overcome.
1.3
SIGNIFICANCE
OF THE STUDY
Internal
Audit is one of the parts of internal control. The other is internal check. The
study will help us to know who an internal auditor is, his responsibilities in
a bank, the relationship between internal and external audit.
1.3.1
WHO IS AN INTERNAL AUDITOR
An
Internal Auditor is any person that performs internal auditing function. In a
professional way, an Internal Auditor is one who by training and practice has
an enquiring mind and is charged with the responsibilities of providing
management and board of directors with information about the adequacy and
effectiveness of the organization system of internal control and the quality of
performance.
1.3.2 RESPONSIBILITIES
OF INTERNAL AUDITORS IN A BANK
Internal
Auditors are responsible to the management and board of directors of a bank,
providing them with information about the adequacy and effectiveness of the
bank's system of internal control and the quality of performance. In essence,
it is a management tool since management appoints them; the board of directors
or management, which may vary, determines their responsibilities and scope of
work. The analysis report, appraisal, recommendation and details of information
to be provided differ in format and detail depending on the requirement and
request of management and the board.
The
internal auditor's responsibilities and personal lending should cover adherence
to financial, personal lending, data processing and other administrative
policies and procedures, as well as the operations efficiency and effectiveness
with the resources that are used or applied. An Internal Auditor is responsible
for the review and improvement of the system of internal control and its
element of check. He must be fully acquainted with every system of internal
check on the bank and must satisfy himself that the system will detect and
prevent fraud.
The
Internal Auditor is responsible for the examination and review of the banker’s
policies and activities and also to ensure that these policies are carried out
and are in compliance with statutory/conversant with all the Legislation and circulars
guiding banking operations in Nigeria, and should be able to highlight inherent
deficiencies in the bank operations to management. An internal audit
(inspector) should be able to discover irregularities within the bank at the
request of management.
In
addition, an Internal Auditor is responsible to ascertain that the proper
authority is given for the purchase and disposal of bank's asset and that
therein an insurance cover for each of the asset is provided. He must also be
satisfied that assets are used effectively for the bank's sole benefit so as to
keep wastage to the nearest minimum. In essence, he should see that the assets
of the bank are effectively safeguarded.
He
is responsible for the verification and the accuracy of the bank's financial records
and of related reports and statistics used for management decision. To ensure
this, the Internal Auditor must ascertain that an adequate and effective system
of authorization for entries records is kept. That is, the internal control
system is well designed and actually works in practice.
1.3.3 THE RELATIONSHIP BETWEEN INTERNAL AND
EXTERNAL AUDIT.
An
effective Internal Audit environment can greatly facilitate the task of the
statutory or External Auditors. In management, both operate through the same
methods and there is a common interest in ascertaining that there is:
A.
An effective system of internal
check and
B. An
adequate accounting system.
External
Audit is carried out by firm's External Auditor who reviews the financial
statement provided by the accounts department of the bank and to report and
ensures that the financial statement agrees with the records of account being
kept and carried out by external Auditors. They are then fully independent of
the management because they report directly to the shareholders through the
audit committee.
It
must be noted in the process of carrying out their works that there would be
need to liaise with management of the bank who is expected to institute a
strong internal control within the organization so as to be able to prepare an
account that will show a true and fair view of the state of the bank's affairs
of staff in the Internal Audit Department.
The
External Auditor can also benefit from the assistance of the Internal Auditors
on the area of detailed Audit test in which case, the External Auditor will
determine the extent of the items and will also review and test check the
Internal Audit working papers. However, the degree or relevance to be placed on
the work of the Internal Audit Department by the External Auditors will depend
on the following:
i. The qualification and the experiences of the
Internal audit staff.
ii. Their
qualification and quality of work report.
iii. How the report of the
department affects management decisions.
1.3.4
INTERNAL
AUDIT TECHNIQUES
The
Internal Audit Department in any organization performs the function assigned to
them using any of the following techniques. The Internal Audit techniques are
collectively known as 'ENVECOIN'
1.
Enquiry: This involves seeking relevant
information from knowledgeable persons inside and outside the organization
(Management, Staff, Solicitors, Bankers, Parent Company, Values etc) formally
or informally, orally or in writing. The degree of reliability that the Auditor
attaches to evidence obtained in this manner depends on his opinion as to the
competence, experience, independence and integrity of the respondent.
2.Verification:
This involves the Internal Audit in review and examination of records,
documents and tangible assets as a means of determining their ownership,
existence and value of assets and responsibility for liabilities.
3.
Evaluation: Here, Internal Auditor makes a personal
judgment based on the result of his field of work. This judgment is usually
made in such areas as the system of the business, to security of the assets and
the effectiveness of management performance.
4.
Computation: The Internal Auditor checks the
accuracy of the accounting records or management performance.
5.
Observation: This involves
looking at an operation or procedure being performed by others so as to
determine the manner of its performance. The Auditor can attend stock take or
cash counts to observe reliable evidence as to the manner of the performance at
the time of the observation but not at any other time.
6.
1nvestigationlInspection: Internal Auditor may
carry out special exercise to get to the root of a matter by reviewing documents
or examining records, documents or tangible assets. The investigation of
records and documents provide evidence of varying degree of reliability
depending upon their nature and source.
1.4
SCOPE
AND LIMITATION OF THE STUDY
The
study as earlier mentioned would cover all aspect of Internal Auditing in
Banking Institution. It covers the procedures adopted by the bank used as a
case study and the problems encountered in carrying out its Internal Audit
function.
The
study is however limited by the following;
i. Lack of
enough materials (textbooks, write up) on bank Auditors and External Audit in
banks.
ii. Inability
to get enough information as a result of (i) above.
iii. The time
specified for the writing and submission of the write up.
iv. The delay
in giving response to questionnaires.
v. Fuel
crisis as the time of writing.
1.5 RESEARCH
QUESTION AND STATEMENT OF HYPOTHESIS
In
the course of making this write-up, certain questions on the topic in general
are needed to be reviewed and answered because of their importance. These are
termed 'research questions' and a few of them are highlighted as follows:
i. Is
Internal and External Auditor really independent?
ii. Do they have unrestricted access to the bank's books
voucher or record?
iii. Do they
have the utmost freedom to carry out their function and thereafter report to
the appropriate authority?
iv. Are Internal Audit report, analysis and
recommendations by the Internal Auditor actually treated and accepted?
v. Is
Internal Audit function carried out in accordance to prevailing rules and do
they conform to the principles of a second internal control system?
vi. To
what extent does the management recognize the work and activity of the external
audit department?
vii. Is External Auditing actually carried out in the real sense of the
word and according to the definition?
1.6
DEFINITION OF TERMS INTERNAL CONTROL
SYSTEM
In
Auditing, internal control mean the whole system of controls, financial and
otherwise established by management in order to secure as far as possible the
accuracy and reliability of the company's records and safeguard its assets.
INTERNAL
CHECK
This
is a part of internal control, which deals with the organization, and operation
of the book keeping and financial accounting functions of business.
AUDIT
PROGRAMME
This
contain steps and plans of work that must be followed by the Audit staff in the
course of their audit work. It also contains who carries out an aspect of the
work.
AUDIT
REPORTS
These
are findings and recommendations of the Internal Auditor written to management
on the system (or audit) of any section or department of the organization.
FRAUD
This
can be defined as an act or course of deception deliberately practiced to gain
unlawful or unfair advantage.
INSPECTION
AND INTERNAL AUDITOR
An
Internal Auditor is the independent personnel who carries out the work of an
Internal Auditor on a banking institutions and environment.
PRELIMINARY
SURVEY
This
is a survey normally carried out by an auditor to have a full and thorough
grasp of the method, procedures and also the operational system to the audit
assignment.
LETTER
OF NOTIFICATION
This
is used to formally notify the manager of the particular department whose work
is to be audited.
VERIFICATION
This
is obtaining evidence of the existence of ownership of assets and confirmation
of the liabilities of the business.
REFERENCES
Badmus Olusegun Elegbede David (2003). Auditing
& Investigation, Theory & Practice.
Kwama Gyasi (2000). International Guide to Auditing.
First Bank Nig PLC Annual Report.
Business Plan
Case study
Exam Preps
Feasibility Study
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