ABSTRACT
This study investigated the impact of internal system on the financial management of an organization. The main problem can be identified as lack of internal control on the financial management of the organization that affect profitability and service quality of a firm. The major objective of this study is to determine the effect of internal control to proper use of organizational funds and asset, to ascertain whether perpetration of fraud and losses of revenue in an organization are as a result of weakness in the internal control, to ensure whether a true and fair reflection of organizational activities are presented in the financial statement whether there is an active observation of internal control measures and to determine the relationship between internal control measure and proper keeping of accounting records. A survey research design was adopted for this research study and a sample size was selected using Yaro Yamane sampling technique as data used were obtained from both primary and secondary sources. Research questions were formulated out of which three hypothesis were formulated using analysis of variance(ANOVA) method at 5% level of significance and the P- value was also used for comparison between calculated value of significance of the two groups. The finding from the analysis indicates that internal control measure enhances true reflection of organizational activities as presented in the financial statement, Internal control measures ensures proper use of organizational assets and fund, Perpetration of fund and losses of revenue in organization are as a result of weakness in the internal control system. It also recommends that the management, internal audit department as well as the account department to the overall management of the organization should be focused on insuring the safety of assets and soundness of their operation.
TABLE OF CONTENTS
Cover page i
Tittle
page ii
Declaration iii
Certification iv
Dedication v
Acknowledgement vi
Abstract x
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study 1
1.2 Statement
of Problem 3
1.3 Objectives of the study 4
1.4 Research
Questions 4
1.5 Research Hypothesis 5
1.6 Significance of the Study 5
1.7 Scope of Study 6
1.8 Definition of terms 6
CHAPTER TWO
REVIEW OF LITERATURE
2.1 Conceptual Framework 8
2.1.1 Concept of Internal Control 8
2.1.2 Internal Control 9
2.1.3 Roles and Purpose of
Internal Control 10
2.1.4 Types of internal control 11
2.1.5 Essential Features of Internal Control in Financial Management 13
2.1.6 Internal Control in Financial Institute and Statutory Guideline
as a Tool
Against Fraud and Distress 15
2.1.7 Bearers of Internal Control Responsibility 15
2.1.8 Key Success Factors of a Financial Institution 16
2.1.9 Element of a Good Internal Control 17
2.1.10 Internal Check 18
2.11 Relationship Between Internal Auditing and Internal 18
2.12 Management and Control System 19
2.2 Theoretical framework 20
2.2.1 Stewardship Theory 20
2.2.2 Social Control Theory 21
2.3 Empirical review 22
2.4 Limitations 23
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research
design 25
3.2 Study
area 25
3.3 Population of the Study 26
3.4 Sample Size and Sampling Technique 26
3.5 Sources of
Data 27
3.5.1 Primary
source 27
3.5.2 Secondary
Source 27
3.6 Data
collection instrument and procedure 27
3.6.1 Personal
interviews 27
3.6.2 Questionnaire
27
3.6.3 Validation
and reliability of the instrument 28
3.7 Data analysis
techniques 28
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND
DISCUSSION OF FINDINGS
4.1 Data Presentation 29
4.2 Testing of Hypothesis 39
4.2.1 Hypothesis One 39
4.2.2 Hypothesis Two 40
4.2.3 Hypothesis Three 40
4.3 Discussion of Findings 41
CHAPTER FIVE
SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATION
5.1 Summary of findings 43
5. 2 Conclusion 43
5.3 Recommendations 44
REFERENCE
APPENDIX
APPENDIX 1
LIST OF TABLES
4.1 Distribution of Questionnaire 29
4.2: Distribution according to sex 30
4.3 Distribution According to age of respondents 30
4.4 distribution of Questionnaire according to marital status 31
4.5 Distribution of Questionnaire According to Education Qualification
31
4.6 Distribution According to number of years worked (experience)
for the organisation 31
4.7 Internal Control enhances a true reflection of organizational
activities as presented in the financial statement 32
4.8 All transactions and distribursement follow laid down procedure 32
4.9 Internal control measures ensure proper use of organisational
assets and fund 33
4.10 Preparation of fraud and losses of revenue in organisation are as
a
result of weakness in the internal control system 33
4.11 Accounting records are effectively kept and balanced well 33
4.12 Monthly financial reports are made available in the internal
control of the bottling company 34
4.13 Internal audit reports are taken into consideration in review of
policies 35
4.14 Internal audit department ensures adequacy, accuracy, completes
and
reliability of control system 35
4.15 Internal audit department have access to all transaction in the
company 35
4.16 Duties and responsibilities of officials at various level are
clearly stated 36
4.17 customers credit limits are verified before orders are accepted 36
4.18 fixed assets registered are maintained and checked on a regular
basis with physical assets 37
4.19 Pieces of work sheets are maintained to evidence of work
performed by each other 37
4.20 all security and security documents, including share
certificates,
shareholders and debenture registrar, dividend and internal warrant,
minutes
of important meeting etc. kept under adequate security arrangement 38
4.21 The internal audition or any other authorized senior official are
directed by the board to observe the pay line to see if there are
ghost workers 38
4.7:Analysis of variance on the extent of the internal control
enhances a true reflection of organizational activities as presented
in
the financial statement 39
4.9: Analysis of variance on the extent of internal control measure
ensures proper use of organizational asset and fund 40
4.10 Analysis of variance on the extent of perpetration of fraud and
losses of revenue in organization are as a result of weakness in the
internal control system 41
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
Every organization both profit or non-profit
organization has its objectives and goals in mind to achieve. For the
non-profit making organization, their goal is to satisfy the social need of the
citizens and in the effort to achieve these purposes supervision more often
than not play a vital role.
The size and scope of these organizations
have sometimes made it hard for the executors to exercise personal and first
hand supervision of operation. It is in this light that internal control
established by management is initiated. For an organization to carry out its
business there must be some factors put in place for the smooth running of the
organization like materials, machines, money etc. These need to be well
co-ordinated in order for the success of the organization to be achieved. These
factors are used by a group of persons known as management. Neither can
management exist without an organization both is inseparable. The system of
internal control provides assurance to management of the dependability of the
accounting data used in the decision making of the organization. It has been
discovered that due to lack of internal control several banks have been
discovered to have defrauded its customers mostly foreign investors, Having
discovered this, banks now take extra precaution before clearing a cheque
because of rampant incidence of fraud and forgeries which have placed bank loss
on average of N1m each working day of the year in Nigeria. Due to this
challenges, CBN issued a directive to banks to increase its capital base to N25
billion.
Management use internal control as a tool to
check staff, due to the fact that managers are not able to monitor the
activities of the organization. It therefore adopts the internal control in
such a way that the system checks itself and any irregularity within the system
is been detected and corrected.
To ensure that the system
checks itself, management could use devices such as segregations, supervision
of work and acknowledgement of performance. The effective arrangement and
implementation of this control system would ensure proper management. Internal
controls are essential features of any organization that is non-effective.
However no system of internal control can by itself guarantee efficient
administration and the completeness and accuracy of the records nor can it be
proof against fraudulent act especially in connection with those holding the
position of authority.
According to Leslie, (1993)
the inherent limitations of internal control include
•
Management overdoing controls
whenever the control does not suit their selfish ambitions
•
Fraud committed by someone who has
carefully studied the system of a particular organization
•
Abuse of responsibility i.e. taking
advantage of the position held to do or carryout illegal acts.
•
Cleverness of some people who
specialize in gelding computer codes of an organization which are designed to
prevent public access, no matter how secure they might be.
•
Employees of an organization making
potential human errors caused by sheds of excess worked alcohol, carelessness,
distractions etc.
All these are factors that can limit
the effectiveness of internal control system in the financial management of an
organization.
1.2 Statement of Problem
The problem can be identified as
“lack of internal control system on the financial management of an organisation
that affects profitability and service quality of a firm. It is argued that
there may be failures to understand the impact of internal control system in a
firm until the public sector runs void of financial controls. The absence of
adequate financial control measures exposes the financial management of public
sector to certain threats such as incorrect financial statements, loss of
government assets, mismanagement of government vital documents, incorrect and
unreliable financial records which may lead to loss of government integrity,
and implementation of accounting policies inconsistent with the applicable
legislation. However, there is a general perception that institution and
enforcement of proper internal control systems may lead to improved financial
management. It is also a general belief that properly instituted systems of
financial controls improve the reporting process and also give rise to reliable
reports which enhances the accountability function of management of an entity.
Nevertheless, available literature indicates that in spite of elaborate system
of controls in organizations, financial management has been elusive in most of
these organizations (Sawyer, 2003). Therefore, all aspects of financial
management in public sector organizations should operate in an environment
where there is confidence in the veracity of the financial information being
used. Hence, the company requires robust systems of financial controls
supported by effective audit and assurance arrangements. This necessitated this
study which sought to establish the effect of internal controls on financial
management of an organisation using Nigeria Bottling Company, Enugu Plc as a
case study.
1.3 Objectives
of the study
The general objective of this
research work is to determine the effect of internal control on the financial
management of an organization. Specifically, this research work stands to
achieve the following objectives:
•
To determine the impact of internal
control to proper use of organizations funds and assets.
•
To ascertain whether perpetration of
fraud and losses of Revenue in an organization are as a result of weakness in
internal control system.
•
To ensure whether a true reflection
of organizational activities are presented in financial statement where there
is an active observation of internal control measures
•
To determine the relationship between
internal control measures and proper keeping of accounting records.
1.4 Research Questions
The research questions are:
•
To what extent does the internal
control measures effect on appropriation of organizational assets and funds.
•
To what extent does perpetration of
fraud and losses of Revenue in an organization are as a result of weakness in
the internal control system.
•
To what extent does internal control
enhance a true reflection of organization activities as presented in the
financial statement?
•
To what extent does a relationship
exists between internal control and proper keeping of accounting records.
1.5
Research Hypothesis
Ho1:Internal
control measure does not ensure proper use of organizations funds and assets.
Ho2:Fraud
perpetration and losses of revenue in an organization are not as a result of
weakness in the internal control system.
Ho3:Internal
control does not ensure, a true reflection of an organizational activities as
presented in financial statement
1.6 Significance
of the Study
There is no controversy that
this research works have been conducted on internal control system, however
much emphasis has been placed on the impact of a good internal control system
on financial management of organizations.
This research work will go a
long way in helping an organization discover the impact of weakness in internal
control and suggest measures in correcting them. It will also reveal the
problems caused by bad internal control system and be useful to students,
scholars, lecturers and other third parties as it shall open new area of
further research work and at same time advance challenges to up-coming
researchers.
1.7 Scope
of Study
The effect of a good internal
control aids management effectiveness in its organization. This research will
specifically focus attention on the activities of organizations in Nigeria and
due to the logical point that not every organization can be studied; this
research is therefore limited to the Nigeria Bottling Company. The focus of
this research is to show the impact of a good internal control system in the
performance of organization financial management.
1.8
Definition of terms
The following terms have been used in
the course of this research work and as such need to be explained. They were as
stated below:
Internal Control: It has been defined by the Auditing
planning committee (APC) in UK as “the whole system of control financial and
otherwise established by management in order to carry out the business of the
enterprise in an orderly and efficient manner to safeguard the assets and
secure as far as possible, the competence and accuracy of records, the prevention
and detection of errors and fraud in accordance with the final preparation of
financial statement.”
Control: Is an exercise performed in the
present to achieve a plan drawn up for the future.
Management: It is defined as the process of
planning, organizing co-coordinating and controlling the activities of an
organization. It is seen as a group of people who monitor and control the
organization activities towards the achievement of the organization objectives.
Audit: This comes from a Latin word “AUDIRE”
meaning to hear in other words it means official examination of account and
records.
Accounting
control: This is concerned with the plan of the organization and all the co-
coordinated methods and procedures which are implemented with a view of safeguarding
assets and enhancing reliability of financial records.
Internal Audit: This is a review of operation and
records sometimes continuous, undertaken within a business by specially
assigned staff.
Impact: This means the duties
responsibilities and functions. As it has to do with work, it is that
fundamental obligation incumbent on the public relations for the attainment of
democratic order in the organization policy.
Accounting: Is the process of producing needed
information regarding primarily the financial activities of economic entities
by Carmichael,
et al (1996) the wide scope of accounting can be
recognized when one considers the diversity of economic entity which cut across
sizes and bounders.
Analysis: In standard
costing and budgetary control, analysis of various in order to seek their
causes. The total profit of various is analyzed into sub – variance indicating
the major reasons for budged figures.
Accounting
Information: This is a system designed to obtain the financial position of an organization
as at the end of the period.
Effectiveness: The total or actual interest paid
or earned in a year, expressed as a percentage of the principal amount at the
beginning of the period.
Efficiency: A measurement of the ability of an
organization to produce and distribute its product. In accounting terms it is
qualified by a communism of the standard hours allowed for a given level of
production and actual hour taken.
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