THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN THE BANKING INDUSTRY (A CASE STUDY OF WEMA BANK PLC)


Content

 

TABLE OF CONTENT

TITLE PAGE                                                                   PAGE

CERTIFICATION                                                                                        ii

DEDICATION                                                                           iii

ACKNOWLEDGEMENT                                                            iv

PROPOSAL                                                                              v

 

CHAPTER ONE

1.0        INTRODUCTION                                                            1

1.1        BACKGROUND OF THE STUDY                                    1

1.2        STATEMENT OF THE PROBLEM                                   4

1.3        PURPOSE OF STUDY                                                    5

1.4        RESEARCH QUESTIONS                                               6

1.5        STATEMENT OF RESEARCH HYPOTHESIS                   7

1.6        SCOPE AND LIMITATION OF THE STUDY                     8

1.7        SIGNIFICANCE OF STUDY                                             9

1.8        DEFINITIONS OF TERMS                                               11

REFERENCES                                                                14

 

CHAPTER TWO

2.0        REVIEW OF LITERATURES                                            15

2.1     INTRODUCTION                                                            15

2.2        HISTORICAL BACKGROUND                                        15

2.3        MODEL AND THEORIES RELEVANT                             16

          TO THE RESEARCH

2.4        CURRENT REVIEW                                                        18

2.5        SOME LITERATURE REVIEW ON                                  22

          INTERNAL CONTROL SYSTEM

2.6     SUMMARY                                                                     23

 

CHAPTER THREE

3.0        RESEARCH METHODOLOGY                                        27

3.1     INTRODUCTION                                                            27

3.2        RESTATEMENT OF THE RESEARCH QUESTION          27

3.3        RESEARCH DESIGN                                                      27

3.4        RESEARCH POPULATION                                             29

3.5        SAMPLING METHODS AND PROCEDURES                  29

3.6        VALIDITY AND RELIABILITY OF RESEARCH

INSTRUMENT                                                                29

3.7        ADMINISTRATION DATA COLLECTION SCHEDULE     29

3.8        PROCEDURES FOR PROCESSING AND ANALYSIS

COLLECTED DATA                                                        30

3.9        LIMITATION OFMETHODOLOGY                                   31

3.10     SUMMARY  OF CHATER THREE                                   31

 

CHAPTER FOUR

4.0        PRESENTATION AND ANALYSIS OF DATA                    32

4.1     INTRODUCTION                                                            32

          TESTING OF THE HYPOTHESIS                                    42

 

CHAPTER FIVE

5.0        SUMMARY, RECOMMENDATION AND CONCLUSION 45

5.1     SUMMARY OF FINDINGS                                              45

5.2        RECOMMENDATION                                                     47

5.3        CONCLUSION                                                                48

BIBLIOGRAPHY                                                             50

QUESTIONNAIRES                                                        53

 


CHAPTER ONE

 

1.0      INTRODUCTION

1.1   BACKGROUND OF THE STUDY

 

It is interesting to note that “Audit” originated from the Latin word “Audire” which means “To Hear” because in ancient time, the owner of a business used to hear a report made by the Auditor about the book keeping and financial records of hours business. This was because the primitive ways of keeping financial records which inducted making marks on ward, keeping figures off hand without any documentation and back of mechanical aids for calculation, had a lot of problems  associated with it.

The rudimentary form of checking records of financial transaction could be traced back to the 17th century when civilization came to stage where people began to come on formal business transactions. But such checking was configured mainly to the public account because private audit in the early stages of civilization are rare.

Auditing, as it exists today, developed quite late because the development of accounting was slow as compared to economic theory.  The eventual development of auditing was based on a strong determination to conquer problems associated with early beginning of business transactions and to provide an independent and competent report on the state of affairs of the business to their owners.

 

In modern times, audits have been affected the needed to encourage public investment by providing an environment for ensuring that investor found are put into proper use.

 

Philosophy of auditing put more input on it that the thinking behind auditing principally arose from the management and the consequential need to safeguard the interests of the owners who in all but the smallest of business were not involved in the day-today decisions made by the management.

Owing to the enlargement of size and complexity of business enterprise today, the concept and scope of auditing have changed. A comprehensive definition of auditing system given by Robert .E. Schlessor as quoted by Jadish Dakash in his book “Auditing principles, practice and problems”  (1990:8) say Auditing is a system examination of financial statements, records and related operations to determine  and herences  to generally accepted accounting principles  management policies stated requirement.

 

Another definition which is widely accepted given by chartered Accountants of England says.

Auditing is an independent examination and investigation of books, records and vouchers so as to enable the Auditor to report whether they have been properly drawn up, so as to show a true and fair view of the profit and loss and balance sheet and of the state of affairs of the business accordance with the best information and explanation given to the Auditor.

In these definitions, emphases were laid Auditing being related to operations and how far they adhere to management policies on stated requirements. In other words, we find out that there is need to introduce an effective control system a lack of which can head to business failure also resulting to other multiple problems.

What then is this internal control? Internal control system is defined by explain institute as:- Those control, 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 an organization in an orderly manner, safeguard it’s assets  and secure as far as possible the accuracy and  reliability of it’s records.  It may therefore be said that internal or control is an umbrella beneath which are included financial controls, internal check, internal audit and non-financial controls.

The individual components are known as “Control” or “Internal Control” Millichamp .A. U. (1990:97) in his instructional manual for accounting students also defined internal control as related to the definition given by English institute.

 

Also, it was stated in paragraph five of the Auditor’s operational standard requires that for an auditor to place reliance on any internal control, he should ascertain and evaluate those controls and perform compliance test on the control. We therefore see that to have a sound control system, it would be worthwhile for the organization and the possibility of business failure will be minute.

 

1.2      STATEMENT OF PROBLEM

With reference to what was mentioned in the introduction that business failure could result from ineffectiveness of internal control system are, the research work therefore will look into ineffective of internal control system in the banking industry today, this posses as a problem because it brings  so many associated problems which could be detrimental to a business for instance,  deterioration of working capital, high debt equity ratio. Sales decline profit decline, high labour turnover, low capacity utilization, low quality services and finally fraud of which could be either sales fraud purchases, wages of petty cash fraud.

 

1.3      PURPOSE OF THE STUDY

The purpose of the study is to critically look at the problems at hand (business failure) the associated problem it brings and interrelationship between these  variables  and how one leads to the other or it’s effect etc. And to provide recommendation for solving the problem.

 

DETERIORATION OF WORKING CAPITAL

The amount for running of the day –to day business if there is uncontrolled wastages, writing off too many debts etc.

High dept equity-the ratio of outside investor to shareholders. It is importation that a business is geared, but when the gearing ratio becomes too high. There would be a problem of insufficient profit to pay dividend after the deduction of increasing debenture, interest interference of debenture holders in the affairs of a company in respect of non-payment.  

 

FRAUD:-

Irregularities involving the use of deposits to  obtain  an illegal  or unjust advantage:- This could either be cash or sales fraud, these types of fraud relate closely  because  before a cash fraud could  occur a sales must have occurred.

Purchase fraud could be by misuse of order forms, creation of non-existing supplies, presenting two cheques for signature with the same supporting documents.

WAGES FRAUD

This could occur by including during names on payrolls, including ex-employee on the payroll or overcashing gross and net columns in the wages sheet. We therefore, see that control is very important for the solving of these various interlocking problems.

 

1.4      RESEARCH QUESTIONS

In order to achieve the aims and objective of a typical project, questions have to be asked and answers to be provided for them.

Hence, the questions of this research are:-

(a)    What are the effects of internal control in the banking    industry?

(b)    Is the internal control system in place in the banking     industry adequate? If not, can it be improved?

(c)    Can effective control system help to reduce business      failure and other related problems?

(d)        What type of internal control system is being practised by the banking industry?

 

1.5      STATEMENT OF RESEARCH HYPOTHESIS

Research hypothesis means an idea or assumption in mind, which is yet to be verified. It is noteworthy to state that the hypothesis is derived from the combination of the problem detected and the subsequent research questions highlighted above. Thus, the following                                       hypothesis has been formulated and to be tested in this research work in order to draw a logical conclusion.

 

NULL HYPOTHEIS (Ho)

There is no effect on internal control system in the banking industry.

ALTERNATIVE HYPOTHESIS (HI)

There is an effect on internal control system in the banking industry.

NULL HYPOTHESIS (Ho)

There is no adequacy in the internal control system in the banking industry.

ALTERNATIVE HYPOTHESIS (HI)

There is an adequacy is internal control system in the banking industry.

NULL HYPOTHESIS (HO)

Effects of internal controls cannot help reduce business failure and other related problems.

 

ALTERNATIVE HYPITHESIS (HI)

Effect of internal control can help to reduce business failure and other related problems.

NULL HYPOTHESIS (HO)

Effective internal control is not practiced by the banking industry.

ALTERNATIVE HYPOTHESIS (HI)

Efficient internal control is practiced by the banking industry.

 

1.6      SCOPE AND LIMITATION OF THE STUDY

The nature of this study entails the ascertainment of the effectiveness of internal control system in the banking industry. The internal control system being a very large topic.  It could therefore, be said that it would be difficult to look all department of internal control in an organisation. As a result we will limits the research to accuracy and authorization of operations  with respect  to cheques, cash receipts,  wages salaries, petty cash and measuring  the effectiveness  in the banking industry.

Personal interviews and well structure questionnaires will be employed  appropriately, also text books, journals annual report  shall be  consulted.

 

It is not worthy to state that to a large extent this research work will be limited to situations happening at WEMA BANK PLC. A good research requires a lot of work but there are constraints that may likely hinder the researcher from carrying out a successful research work e.g.

A      -       Time constraints

B      -       Financial statements

C      -       Data constraints etc.

 

1.7      SIGNIFICANCE OF STUDY

In the financial services sectors such as banking, insurance, building societies, consumer credit, purchase business leasing, factoring business venture etc. bank represents probably the most important financial sector.  This is not just in terms of turnovers profit and employment of labour, but also it’s paramount impact on the other sphere of the economy. Any problem in the banking system would invariably have strong effect on the economy and that is why this research work tries to study the internal control in the banking sector with respect to WEMA BANK PLC and see how it’s effectiveness would be used to prevent business failure.

 

These work will serve as a basis of broadening the researcher’s knowledge on internal control and it’s users. To customers and investors, they would be confidence that controls in place an be relied upon fore safe guarding of their deposit.  Management in the other hand will be able to reduce losses and improve on internal control system.

 

Finally, the academic world will use this work as a basics for further study.

 

BACKGROUND OF THE COMPANY (WEMA BANK PLC)

1.     Head Office: Idema Tower, 57 Marina, PMB Tinubu Lagos.

2.     Legal Form: The bank was incorporated as a private limited liability company on May 2nd, 1945 and was later converted to a public company in April 1987. The Bank’s shares which are currently quoted on the Nigeria Stock Exchange were first listed in February 13th 1991,  the bank was issued a universal  banking license by CBN on February 5th 2001.

3.     Principal Activity: The bank is principally engaged in the business of banking. The services provided by the bank include retail banking, granting of loans and advances, money market activities and foreign exchange operations.

4.     End of Accounting year:   31st March

5.     Number of Employees:     1824

6.     Number of Branches:       116

7.     Capital structure:-

(a)    Authorised: N4,000,000,000

(b)    Paid up: N1,555,460,414

8.     Analysis of Shareholdings

        Odu’a Investment co-limited            40%

        Other Nigerian Shareholders           60%

        Total                                                100%

Note: Wema Bank was formerly called Agbonmagbe  bank until 1969 when the name was changed.

 

1.8      DEFINITION OF TERMS

1.     AUDIT: In modern sense, an audit is a process carried out by suitable qualified auditor”) whereby the accounts of business enterprise, includes limited companies, charities, trust, and professional forms are subjected to scruiting to form an opinion as to their accuracy, truth  and fairness. This opinion is embodied in an “Audit report” addressed to these interested parties who commissioned the audit, or to whom the Auditors are responsible under statutes.

 

2.     Audit Test: Tests carried out in the process of Auditing  to determine the trueness and fairness of the transaction involved  and also verify the interest figure.

 

3.     Audit Evidence: This is all information obtained by the Auditor during the audit work and on which he bases his opinion on the financial statement. Sources of Audit evidence are internal and external sources.

4.     Compliance Test: These are those tests, which seek to provide audit evidence that internal control procedures are being applied as prescribed.

5.     Effectiveness: This is the degree to which pre-determined objectives of taught are met.

6.     Enquiry: Seeking revelation information from         knowledgeable persons inside or outside the enterprises        whether formally or informally.

7.     Computation: Checking the arithmetical accuracy of the         accounting record or seeking independent calculations.

8.     Internal Audit: This is an independent appraisal functions with in an organisation for the review of system and the quality of performance as a service to the organisation. It objectively examines adequacy and reports on the adequacy of internal control as a contribution to the proper economic, efficient and effective use of resources.

9.     Internal Check: This is an aspect of internal control which is exclusively concerned  with the prevention and early detection of errors and fraud and  this involves the arrangement of book keeping and other  clerical duties ins such a way  as to ensure.

a.     That no single task is executed from it’s beginning to it’s conclusion by only one persons and

b.     That the work of each work engaged upon task is subject to an independent check in the source of another duty.

10.   Internal control questionnaires: These are lists of questions designed to get specific information about a particular items, financial or otherwise with regard to internal control of an organisation.

11.   Internal control evaluation questionnaires: These are list of questions designed to assessing whether specific errors are possible than with establishing whether certain desirable controls are present.

12.   Organisation chart:  This is a pictoral/diagram of levels of authority and responsibility within a company.

13.   Segregation of duty:  This means an adequate division of responsibilities and authority such that no one person is responsible for the recording and processing of a complete transaction.

14.   Substantive tests: These are those tests of transactions and balanced and other procedures such as analytical reviews which seek to provide evidence as to he completeness, accuracy and validity of information in the accounting record or in the financial statements.

 

 

 

 

 

REFERENCES

1.     Wool F.E. (1979) Auditing today, prentice Hall

        International 3rd Edition Pages 71-88.

2.     Prakash .J. (1990) Auditing principles, practices and problems page 8.

3.     Ferdinard .T. Olusanya (2001) Auditing and Investigation. Page 1.

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