EFFECT OF INTERNAL CONTROL SYSTEM IN ENHANCING DECISION-MAKING IN COMMERCIAL BANKS (A CASE STUDY OF FIRST BANK OF NIGERIA PLC)


Content

ABSTRACT

This research project is based on Effect of Internal Control System in enhancing decision-making in Commercial Banks, a case study bf First Bank of Nigeria Plc, Isolo Branch. It shows how internal control activities favourably and adversely affect banking industry. The researcher also discussed the regulation of companies and Allied Matter decree 1990 as it affects internal control.

 

In order to realize the objective of the project work, questionnaires were administered on internal control system in banking industry to determine the effect and relationship with other unit.

 

Findings and recommendation have also been made by the researcher at the end of this project work to facilitate the activities of internal control in Banking Industry in Nigeria.


 


TABLE OF CONTENTS

Title page

Dedication

Acknowledgement

Certification

Abstract

Table of content

CHAPTER ONE

1.0       Introduction

1.1       Background of the study

1.2       Statement of the study

1.3       Objectives of the study

1.4       Scope and limitation of study\

1.5       Hypothesis

1.6       Research Questions

1.7       Plan of study

1.8       Definition of Basic Terms

CHAPTER TWO

2.0       Literature Review

2.1       Background of First Bank Plc

2.2       Historical Development of Internal Audit

2.3       Auditing for now

2.4       (a)       What is internal auditing

            (b)       Scope and objectives of internal audit

            (c)       System and procedure of internal audit

            (d)       Internal audit department/audit unit

            (e)       Functions of the internal audit unit

            (f)        Relationship between internal audit and other units in the organization.

                        1.         View of internal control

                        2.         Analysis of internal control

                        3.         Objectives of internal control system in an organization

                        4.         Types of internal controls

                        5.         Inherent limitations of internal controls

                        6.         Internal checks.

2.5       Internal control

            1.         Audit Approach

            2.         Compliance Tests

            3.         Substantive Tests

2.6       Internal audit effect on internals control in various areas of business

2.7       Internal audit and the prevention of fraud

2.8       Contribution of internal audit to internal control

            1.         Reports to management

            2.         Independence of internal audit

CHAPTER THREE

            Research Design and Methodology

3.1       Introduction

3.2       Research Approach

3.3       Research Strategies

3.4       Source of Data

3.5       Data Collection Methods

3.6       Returning of Questionnaire

3.7       Statistical procedure

           

CHAPTER FOUR

4.0       Introduction

4.1       Data Analysis

4.2       Data Presentation

4.2.1   Demographic Classification

4.2.2   Questionnaire Classification

4.3       Hypothesis Testing

CHAPTER FIVE

Summary, Recommendation and Conclusion

5.1       Summary of Findings

5.2       Recommendation

5.3       Conclusion

            Questionnaire

            Bibliography

 

 

 


CHAPTER ONE

 

1.0    INTRODUCTION

As a result of various classes of studies it was found out that a basic requirement of the Companies and Allied Matters Decree (CAMD) 1990 and as amended in 1991 to companies and Allied matters bet (AMA), that the management of an organization should endeavour to keep and also maintain adequate records and accounts which is expected to represent a true and pair view of the state of affairs of the organization financial position i.e. the state of affairs of the balance sheet and also the profit and loss statement of the organization. These will be finally Verified and attested to by an external auditor who at the end of his examination is expected to present to the management.

 

Moreover, to enhance system of perceptional succession of an organization, human agents (normally executive officers and other officers) are being appointed to control its activities and most often, these agents are not the owners hence have therefore become necessary for us to know and understand that the provision of internal audit function is not required by law but that of the stationary audit.

 

Notwithstanding, the internal audit function due to its scope of importance has risen to provide a great deal of assistance to management in meeting up with its own responsibility of planning and especially controlling; this is therefore the reason why existences of an Internal audit department in an organization is the creation of the management. Moreso, with the growth in size and complexity Obtainable in many organizations is recent years; the importance of internal audit has corresponding increased so that it is today a major factor in establishing the quality of an organization's internal control system.

1.1    BACKGROUND TO THE STUDY

Internal audit is a part of the internal control system existing in an organization both large and small. It is one of these management controls which is execrated continuously by the specialized staff and behalf of the management. Internal audit involves a periodic review of the accounting and internal control system as well as the results of operations in order:-

-        To report on the efficiency and effectiveness of the internal controls and accounting system; and to suggest improvements where necessary and

-        To report on result of operation, variations from plan and the reason thereof.

The internal audit function is delegated by management to employees who have this as their role or sole responsibility. The employees know as internal auditors and constituting the internal audit department are not allowed to carry out other duties in the organization that could result in conflict of interest and consequently impair their independence - a most desirable quality for their roles.

 

Chartered institute of public finance and accountancy (CIPFA) therefore define internal audit as "An independent appraisal activity within an organization for the revenue of operations as a service to the management. It functions by measuring and evaluating the effectiveness of controls.

 

The control structure of an organization consists by and large of an analysis of the relationship between controllability and responsibility or more precisely a specification for which managers are responsible for management of resources in the organization.

 

The problem which has always existed when managers’ report to owners is such that; can the owners believe the report? This is so because it may:-

(i)      Contain errors

(ii)     Not disclosed proud

(iii)    Be inadvertently misleading

(iv)    Be deliberately misleading

(v)     Fail to disclose relevant information.

 

The need has therefore emerged for the existence of a good internal control system in both small and large organization.

 

According to Brigg (1972) "Internal control system could be said to be the whole system of controls, financial and otherwise established by the management of an organization in an orderly and efficient manner, to ensure adherence to management policies, safeguard the assets as far as possible the completeness and accuracy of its records."

 

Some types of controls which may be available in planning of the organization, segregation of duties, physical presentation of assets, authorization and approval, personnel, supervision and management ­includes budgetary and variance analysis.

However, two components of internal control system namely internal check and internal audit can go a long way in ensuring the accuracy and completeness of the financial records. Internal audit being our area of focus involves a periodic review of the accounting, financial and other things.

 

That the laid down policies of management in all areas of operations are being adhered to in practice. It reports on the efficiency and effectiveness of the internal control and accounting system and to suggest improvement where necessary.

 

That all monies due to the organization are received and lodged with the bank or otherwise properly accounted for.

 

-        That all payments made by the organization are properly authorized and that the organization receives full value for any expenditure incurred

-        To report on result of the operations variation from plan and the reason thereof.

 

The internal audit function is delegated by the management to the employees who have this as their sole responsibility. These employees also called internal auditor and constituting the internal audit department are not allowed to carry out other duties in the organization that could result in conflicting interest and consequently impair their independence. This department is created to provide a continuous and complete audit of the accounts and records of the organization with the use of:-

1.       Internal procedural system

2.       Internal check

3.       Pre audit jobs.

 

As these will help the internal control system to the organization more effective and efficient.

 

1.2    STATEMENT OF PROBLEM

Some of these problems we are likely to come across in the course of these study are hereby enumerated below:

 

1.       How effective is the internal auditing tool of internal control system?

2.       The formidability of the internal audit department

3.       The effects of the attitude of staffs towards internal audit.

4.       The effects of non-independence of internal auditor on internal audit procedure and conclusions.

5.       Determination of the kind of skills required of the internal auditor.

6.       The effects of management continuous intrusion in the activities of the internal auditors with respect to extravagance and proud in the organization.

7.       Evaluation of the type of responsibilities and duties expected of an internal auditor in an organization.

8.       The effect of the internal control system that could exist in an organization.

 

1.3    OBJECTIVES OF THE STUDY

Many companies have suffered natural death and many more are still at the verge of collapse just because of lack of effective internal control in place. And where there are the internal auditors have not been alerted to these responsibilities. Why should this be so? It is the objective of this study to research into these problems with possible solution such that:

 

(1)     To have the determine factors that specify the type of skill (both technical and otherwise) require of internal auditor evaluated.

(2)     To correct the attitude of the staffs towards the internal audit department.

(3)     To examine the effect of internal auditing on internal control system of an organization.

(4)     To analyze the responsibilities of the internal auditor/internal audit department to other offices in the organization as a whole

(5)     To examine the effects of management interference or intrusions in the department

(6)     To verify how true the independence of the internal audit department, mostly, the internal auditors is being effected and further enhanced.

1.4    SCOPE AND LIMITATIONS OF THE STUDY

The research highlighted various internal controls and procedures in the banking environment. The operation of banking sector will be subject to independent appraisal of accounting, financial and other operations by way of measuring and evaluating the effectiveness, efficiency and economy of all controls within the bank.

 

For accuracy of data collection, collation and analysis, the researcher in accordance with the objectives of this study will concentrate on points highlighted above with peculiar reference to First Bank of Nigeria Plc.

 

However, the scope of the study suffered a setback in terms of financial constraints. There were no enough funds to cover the study of internal control in all banks operating in Nigeria. The secrecy of some bank officials also made it difficult to obtain all the information required in respect of internal control in the banking sector. Another limiting factor in the coverage of the study is the time fixed for the completion of this research project work. Inspite of this limitation the areas covered is adequate in achieving the objective of the study.

 

1.5    HYPOTHESES

The following hypothesis will be tested:

1.5.1 Ho:    There is no significant relationship between the internal audit and internal control system of the organization.

HA:    There is significant relationship between the internal audit and internal control system of the organization.

1.5.2  Ho: Internal audit should not receive maximum co-operation from other department staff, the errors and risk involve would not classifiably reduce.

HA:    Internal audit should receive maximum co-operation department staff, the errors and risk involve would classically reduce.

1.5.3 Ho: The internal audit should not be directly responsible to the highest level of management.

HA:    The internal audit should be directly responsible to the highest level of management.

1.5.4  Ho: Internal auditors are sufficiently independent to performing their audit roles.

HA:    Internal auditors are not sufficiently - independent to fulfill their audit roles.

 

1.6    RESEARCH QUESTIONS

With the earlier mentioned problems on mind, this study will endeavour to provide answers to the following questions:

1.       What are the effects of management interference in internal audit functions?

2.       What is the valuation of the contributions of other department to the internal audit department?

3.       What are the effect of non-independence of the internal auditor on the internal audit procedure and conclusion?

4.       In view of the fact that internal audit is an integral part of internal control measures, does it have to centre around the unveiling deficiencies inherent in an organization and if so, how effective has this being?

 

 

 

 

1.7    PLAN OF THE STUDY

The research work has been organized chronologically in order to simplify the research excise as well as facilitates quick understanding by intended readers and prospective researchers.

 

The project is divided into five chapters. Chapter one consists of the introductory aspect which includes the background to the study; scope and limitation of the study, statement of the problem, objective of the study, hypothesis, research questions, plan of study and definition of plan, chapter two deals with the literature review part of the project work. Chapter three covers the research design and methodology and returning of questionnaire. Chapter four presents the data finding and analysis of results. Chapter five consists of summary, recommendations and conclusion.

 

1.8    DEFINITION OF TERMS

The following terms are used in this project and should be construed as stated:

1.8.1  Internal Audit: This is an independent appraisal activity within an organization for review of operations as a service to management. It serves as a control means for measuring and evaluating the effectiveness of other controls.

1.8.2  Statutory Auditor: He is an external auditor to an organization. He is the auditor appointed on the basis of the statute of each AGM (The Company Annual General Meeting).

1.8.3  Internal Control System: This is the whole system of control financial and otherwise established by management in order to carry on the business of the organization in an orderly and efficiently manner to ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of its records.

1.8.4  The Internal Checks: This is defined as the checks on the day to day transactions which operates continuously as part of the routine system whereby the work of the person is provided independent or is complementary to the work of another.

1.8.5 Internal Audit Department: This is a department set up in both small and large organization as well to look into the audit in any organization.

1.8.6  Effectiveness: This is the degree to which the goals of an organization is attached. It is also the act of doing the right things.

1.8.7 Efficiency: The act of doing things right at first time.

1.8.8 Fraud: This refers to irregularities involving in the use of connivance deception to obtain an unjust or illegal advantage.

1.8.9 Error: This is described as unintentional mistakes.

 


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