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INTERNAL CONTROL SYSTEM AS AN EFFECTIVE TOOL IN PRIVATE SECTOR

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Aug 18, 2020 Comments Off on INTERNAL CONTROL SYSTEM AS AN EFFECTIVE TOOL IN PRIVATE SECTOR Sunday

INTERNAL CONTROL SYSTEM AS AN EFFECTIVE TOOL IN PRIVATE SECTOR

ABSTRACT

This research seeks to evaluate the effectiveness of internal control system in the private sector. Internal control is one of the vital tools used to control finances, safe guide assets and to checkmate incident of fraud, irregularities in every organization. Internal control can be liken to a network of pillars that holds a skyscraper without which the skyscraper will collapse like a park of card. It is in the light of foregoing that the researcher put up a study of its effectiveness in private companies using Nugget Hotel Limited, Abuja as a case study. The study was carried out through personal interviews, questionnaire and tabular analysis of findings. It became obvious that internal control system is not so effective in most private companies. hence useful recommendation were proffered which if utilized by the private company in this category will make internal control effective and guarantee the survival and profitability of private companies.

 

CHAPTER ONE

INTRODUCTION  

1.1 INTRODUCTION

The study of Auditing became necessary to check upon persons and day to day transaction of organizations, whose business was to record the receipt and disbursement of money on behalf of others. The ancient Egyptians, the Greek and the Romans all utilized system of effectiveness of internal control system to carried out check and counter-checks among various financial officers. The person whose duty was to make such an examination of account became known as the auditor, the word being derived from Latin meaning to hear originally. Prior to the medieval times, auditing was referred to as a process of public hearing in which financial statement or financial records were read aloud. The auditor was referred to as someone who has sole authority to hear and comment on the readings. In medieval times, audit was made to determine whether the person in position of fiscal responsibilities in government were acting and reporting in good faith or in an honest manner.

However, auditing has taken a new dimension in our society today and it will continue to be improved upon as a result of growth and expansion of business, especially in the private sector.

The relevance of auditing in business world of today needs no emphasis as the solution to problem of credibility in reports and accounts lies in appointing an independent person called an auditor to examine and report on his findings. The process of examining and reviewing the accounting transaction in order to give assurance that the financial statement presents the financial position of the firm fairly as at particular period.

Attestation to true and fair view of financial statement of a business refers as auditing. The accounting parties were required to attend before the auditor who examines prepared account to ensure accuracy of underlying record.

The emergence of double entry books system made it possible to record not only cash transactions, but also all transactions involving matters of account, thereby increasing the duties of auditor.

From the above explanation of the meaning and origin of auditing, it has a great psychological effect on those officers or employees entrusted with money and goods and their employers. The importance with which the public and the private sectors and the business community attach to the practice of auditing in Nigeria engendered the federal government to recognize the institute of  chartered accountant of Nigeria  by an act of parliament to formulating standards to be followed by members of the institute in the practice of effective accounting and auditing profession.

Every member of the institute is duty bound to follow the guidelines and code of conduct as enunciated by the institute. Any member who infringes the code of conduct will be punished in any other way as the institute think fit. An internal control system [ICS] is fundamental to any business. In small business the ‘’Boss’’ can run everything himself whilst a system would be helpful it is not a necessity. In larger organisation it is essential and in very large organisation middle rank managers responsible for the system. Today there is pressure to ensure the ICS is effective as part of the corporate governance initiatives. ICS is the system which enables management to implement the business mission and ensure that implementation is correct and complies with applicable laws and regulations.

No system will ever be perfect therefore an essential ingredient of any ICS is to be able to detect failures and limit the consequent damages such failures to the organization. Excellent ICS have achieved such that the level of residual failures is manageable.

1.2    BACKGROUND OF THE STUDY

In the past, there was what is called counter-check, which has been used as financial check-up. This system was on until one person whose duty was to make an examination of books and account of the business known as the auditor. This person’s duty was to record the receipts and disbursement of the money on behalf of other. And it came to pass that he became an auditor for checking the books balance sheet of the company.

It is therefore necessary for efficient accounting records and effectiveness of internal control system so as to enable them knows their financial condition and control.

Internal audit help private sector to carry out their work efficiently and effectively. However, any private sector without audit programme and control is like a ship setting out tosail without a compass.

Audit in private sector adopt what is called a cleared and special tick for effectiveness of work done by them for example, touching of cash, casting of subsidiary books, physical  checks and  posting of machines records and work on the personal ledgers, etc.  The auditor may decide to use a special coloured biro-pen in signifying the work already done so that staff of the client i.e. those involved in the accounting work may not make alterations to what had been audited.

Many auditors use initials of their firm to indicate the work already done, while others simply dock right in a very characterize way to differentiate it from the one customarily used by the organization’s staff.

A strict rule should be instituted however, that no alteration should be made in any figure after the auditor as passes them by hi special ticks or marks as them are sometime called.

The internal control system is the major part in any organization, ‘’internal control is the process designed and attended by those charged with governance, management and other personnel to provide reasonable assurance about achievement of entity’s objective with regard to reliability of financial reporting effectiveness and efficiency of operation and compliance with applicable laws and regulations.

It follows that internal control is designed and implemented to address,identified business risk that threaten the achievement of any of these objectives ‘’ [sri Lanka Auditing Standard 315, [LCASL]. According to Basu [2006], Millichamp, [1987, 1996], the institute of chartered’ Accountant of England & Wales [ICAEW], ‘’Internal Control System is the whole system of controls, financial or otherwise, established by the management in order to carry on the business of the enterprise in orderly and efficient manner ensure adherence to management polices safeguard assets and secure as far as possible the completeness and accuracy of records. It comprises of the following components [Coso; 2002]

  1. control environment
  2. entity’s risk assessment process
  3. information and communication system
  4. control activities
  5. monitoring

Private sector is unique sector in the economy. It provides different kinds of services to the customers and manages huge volume of funds every day.

Majority of activities in the economy depends on the strength and stability of the private sector. Due to these facts the necessity of internal control system in the private sector cannot be undermine. The basis of safe and sound private activities, the effective internal controls are so important. A system of tough internal control can support to ensure that the goals and objectives of the private sectors or companies will be met, that the private will help to attain long term profitability targets. Maintain reliable financial and managerial reporting such a system can also help to ensure that the private sector comply with laws and regulation as well as policies, plans internal rules and procedures and decrease the risk of unexpected losses or damage to the private sector reputation. This will helps Board of Directors of private sectors and management to safeguard private sector resources, produce reliable financial reports and comply with laws and regulations. Meantime, it support to reduce possibilities of substantial errors and irregularities and assist in their timely detection when the do occur. Also this control system may discover mistake caused by personal distraction, carelessness, and errors in judgement or unclear instruction in addition to fraud or deliberate noncompliance with policies.

1.3 STATEMENT OF THE PROBLEM

In the context above background, the presence of effective internal control system and their use is very vital to private companies which engaged in broader financial, economic and social roles. No any argument that every private sector must have the strong internal control system in position. Accordingly it is regard to examine that ‘whether or not the established internal control systems are effective and are they being effectively practiced in private sectors’. The study attempts to provide answers in respect of the private sector by studying the following question

  1. Why should private sector audit their account
  2. Is there any need for effectiveness of internal control system in the private sector
  3. What should be done in order to ensure efficiency and effectiveness of auditors in the private sector

1.4 OBJECTIVES OF THE STUDY

 The mainobjective of the study is to evaluate effectiveness of internal control system in private sector.

Therefore the study intends to;

  • Examine the nature and structure of internal control system in the private sector.
  • Determine the relationship between internal control components and effectiveness of internal control system in private sector.
  • Investigate the types of fraud in private sector.
  • Identify factors those contribute to the incidence of fraud in private sector.
  • identify strategies that can take to eliminate fraud in private sector
  • Give an explanation to why private sector need effectiveness of internal control system
  • The effectiveness of ICS involves measuring time it takes to find failures and time taken to rectify the damage.
  • Assess and evaluate the operation of internal control system in private sector
  • To bring out the significance of auditingin the private sector.

1.5 RESEARCH QUESTIONS

      General Research Question

      What is the contribution of the relationship between internal control components and the effectiveness of internal control system as regardsthe financial performances of the private sector?

Specific questions

  1. What are the factors affecting the effectiveness internal control system in use in private sector?
  2. What is the relationship between internal control components and the effectiveness of internal control system in private sector?
  3. What types of frauds occur in the private sector?
  4. Which factors contribute to the incidence of frauds in the private sector?
  5. What kinds of strategies can take to eliminate frauds in private sector?

1.6 STATEMENT OF HYPOTHESIS

The researchable statement on the effectiveness of internal control system is to test the statement of sixhypotheseson the financial performances of the effectiveness of internal control system in private sectorderived as follows;

  1. H01 = The control environment enhance effectiveness of internal control system in the private sector
  2. H02 = The entity’s risk assessment process enhances effectiveness of internal control system in the private sector
  3. H03 = The information and communication system of top to bottom line of  management in private sector support effective internal control
  4. H04 = The control activities of top management in private sector support effectiveness internal control.
  5. H05 = The monitoring controls enhances effectiveness of internal control system in the private sector
  6. H06 = There is positive relationship between internal control components and effectiveness of internal control system

1.7 SIGNIFICANCE OF THE STUDY

The findings of the study will be of great importance to a lot of interested parties such as the enterprise owners in private sectors and it will help the effectiveness of internal control system in the private sectors.

The study will attract the attention of the private sectors in adoption of effectiveinternal control system for their establishment. This is so because the finding from this research will make them understand the importance ofgood and sound internal control system and therefore, give the needed management support for the internal control system to function.

The study will also enhance the existing knowledge of private sector concerning internal controls and its effectiveness.

Also research studies and text books on internal control are not comprehensive. So this study will be a valuable reading material for student and researcher and also helps as a manual to managers of private sector as well as other organisation. The motivation of the research work is to evaluate the effectiveness of internal control systems. The existence of the study will support the private sectors to put in place activities for their day to day management of safeguarding assets, prevention and detection of frauds, errors and irregulaties. Also, it is hoped that findings from this study will conform or refute the present perception about the effectiveness internal control system in private sectors. This will provide the companies to redefine approaches that would facilitate the success of private sector objectives. In addition, the findings of the study will support identify gaps in the systems of internal control in the private sectors.

1.8 JUSTIFICATION OF THE STUDY

Justification for effectiveness of internal control system in private sector organisations that do not have proper internal controls tends to deteriorate overtime. Therefore, companies should incorporate effective internal control system to accompany other risk management approaches like insurance and organisation to identify and assess operating controls, financial reporting and regulatory compliance process and to formulate preventive measures.

justification for effectiveness of internal control system in private sector organisation will exist to carry out their set goals and objectives to achieve these goals, they must have set of rules that direct their efforts toward the achievement of the goals and objectives, with this the needs for a system of internal control comes in. An internal control is a set of policies and procedures put in place by the management of an entity to help it achieve its goals. Internal control is a set of rules that provide fair justification of control activities in an organisation

1.9 SCOPE OF THE STUDY

This research emphasis on the effectivenessinternal control system in private sectors which involves private sector and private companies are considered in the study and the research however focused on the private sectors due to the enormous size of the private sectors.

This study will be confined to Nugget Hotel Limited, Abuja operating in the private sector of the Nigeria’s Economy.

It is opined that numerous guests and customers who obtained their lodging and accommodation services that the thesis Nugget hotel has an excitingly comfortable services and it is well established. A wide range of customers obtaining their hospitality services here, encompassing both local and foreign customers.                                                                                           

1.10 DEFINITION OF TERMS

  1. AUDIT

      The independent examination and expression of opinion on the financial statement of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation or the in depth examination of the books of account and vouchers of a business as willenable the auditor to report whether he is satisfied that the balance sheet is properly drawn up, so as to give a true and fair view of the profit or loss for the financial period according to the best of the information and explanations given to him and as shown by the books, and if not, to report in that respects that is not satisfied.

  1. AUDIT STAFF

 Those members of the auditor’s staff, who take a direct part in the audit engagement.

  1. COMPLIANCE TEST

      These tests seek to provide audit evidence, that effectiveness of internal control system and procedures are being applied as prescribed. The main aim of this is to discover whether there is any deviation from the prescribed systems which may have material effect on the reliability of the records as a basis for the accounts. Compliance tests are also known as procedural test.

  1. FINANCIAL STATEMENT

 Balance sheets and profit and loss accounts [or other forms of income statements] together with additional statements and notes as identified as being within the scope of the audit opinion.

  1. INTERNAL AUDIT

      This is an independent appraisal activity within the organization for the review of operation as a service to management.  It is a management control which functions by measuring and evaluating the effectiveness ofother controls – Institute of Internal Auditors of Nigeria.

  1. INTERNAL CONTROL SYSTEM

 This is the whole system of controls, both financial and otherwise established by management in  order to carry out the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.

The individual components of effectiveness of internal control system are known as ‘’control’’ or internal control.

  1. SUBSTANTIVE TEST

Those tests of transaction and balance, and other procedures such as analytical reviews which seek to provide audit evidence as to the information contained in the accounting records or in the financial statements. Substantive tests are also known as weakness tests.

  1. MATERIALITY

An item is considered materialists disclosure misstatements or omission is likely to distort the view given by the financial statements or other statement under consideration.

  1. THE AUDITOR

The individual or firm carrying out the audit of the enterprise and the parties of such individual or in such firms where appropriate the term includes audit staff acting with delegated authority.

  1. VOUCHING TEST

Vouching is the examination by the auditor of all documentary evidences, which are available to support the authenticity of transactions entered in client’s records. It is therefore a particularly important form of substantive testing.

 

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