INTERNAL AUDITING AS AN INSTRUMENT FOR EFFECTIVE MANAGEMENT (A STUDY OF IKOSI EJINRIN LOCAL COUNCIL DEVELOPMENT AREA, AGBOWA, EPE, LAGOS STATE)

CHAPTER ONE

INTRODUCTION

1.1       Background to the study

Internal auditing (IA) is an aged function and considered as an effective instrument of management in almost all organization. It is considered as an important element of organization in both public and private sector. Unegbu and Kida (2011) defined internal audit as part of the Internal control system put in place by management of an Organization to ensure adherence to stipulated work procedure and as aid to management. Internal auditing is seen as an overall monitoring and evaluation function with responsibilities to the entire management for the assignment of effective and efficient control mechanism (Kiabel,2012). Internal auditing is an independent, objectives assurance and consulting activity designed to add value and improve an organization operation. Internal auditing helps organizations accomplish their objectives by having a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process. Internal Auditors are employees of an organization and are not responsible for the execution of company amenities, they advise the board of directors through audit committee regarding how to better execute the irresponsibilities. As a result of their higher scope of involvement, internal auditors may have a variety of higher educational and professional background (Adams,1994)

Internal audit is an important element of the range of resources and mechanisms available to public sector managers to assist them to meet their responsibilities within this environment Anao(2012).Internal audit provides an independent and objective review and advisory service to provide assurance to the Chief Executive and /or Board that the entity's financial and operational controls designed to manage the organization's risks and achieve the entity's objectives are operating in an efficient, effective, economical and ethical manner; and assist management in improving the entity's business performance. According to Izedonmi(2000), Auditing involves an independent examination of the financial statement of an enterprise prepared by the management of that enterprise by an appointed person called auditor in order to express a professional opinion on whether or not those financial statements shows a true and fair position of the organization at the end of the financial period in accordance with the auditor’s terms of engagement as well as other relevant statutory and professional regulations.

Internal Audit ensures effectiveness and the extent to which an internal audit staff meet its obligation, is arguably a result of the interplay among some factors: internal audit quality, management support, and organization setting. Therefore, internal audit should be viewed as a dynamic process that is continuously shaped by the interactions among the factors mentioned above. Internal audit is for both public and private institutions for their corporate governance. The goal of internal auditing is to contribute to organizations for the execution of their responsibilities (Okezie,2004).A quality internal audit is recognized as a means will be normally accountable to assist board and other management in an organization to focus on its obligation to ensure proper and efficient internal controls is put in place.

These roles were highlighted by the Institute of Internal Auditors (IIA) practice Advisory,2130-1 on the role of internal audit in shaping the values and ethical culture of an organization which emphasized that internal audit should part take an active role in supporting organizational objectives (IIa,2004). According to Zeleke(2007) the internal audit activities help to prevent corruption, misappropriation of funds and other financial an organization’s and ensure effective and efficient utilization of resources to achieve the objectives of the organization. Internal Auditors role is generally seen to involve oversight and monitoring. The internal auditor may be instrumental in building and evaluating the economy, efficiency and effectiveness of operations and systems, and will be normally accountable to a governing body. It is important therefore, that the internal auditor be reasonable independent of management as well able to work alongside them (Mc call,2002).This study seeks to examine internal auditing as an instrument for effective management from the lens of financial, operational and compliance audit procedures in Ikosi Ejinrin Local Council Development Area, Agbowa, Lagos.

1.2       Statement of the problem

Performance in the public sector has always been a challenge because monetary values are not the only measures of results especially in public enterprise settings and it is difficult to secure agreement on how best to determine the effectiveness of government organization. Yet it is important that continuous efforts to improve measures of the effectiveness of government organization be put in place or make a continual process targeted towards the achievements government budgetary allocations (Taiwo, 2020).

Internal audit is an integral part of the finance structure of any public organization.The research titled “internal auditing as an instrument of effective management attempt to determine the methods by which public sector like Local government has utilized internal audit as an instrument for effective management. The problems identified are: Internal audit department is too understaffed and generally under resourced to make it fully effective. There exist arrears of work due to inadequate staffing of the internal audit department. Also, there is a claim that internal audit is challenged by the inadequate knowledge of Electronic Data Processing (EDP) hence complicate the efficiency in auditing the computerized systems. Most of the public sector management working papers are not well documented because of this problem.

The unsatisfactory performance of government organizations in Nigeria had been blamed for diverse reasons. Makoju (1991), stated that it is as a result of bureaucratic poor audition system, red-tapism, and lethargy of the civil service which is still intact in the management and operations of the government. The Federal Ministry of Finance Incorporated (2006), disclosed that high incidence of fraud, government's employment of staff based on political connections rather than on the ability to perform, parliamentary control and financial indiscipline account for the causes of poor performance. The accounting systems of government enterprises in Nigeria do not seem to guarantee proper and up-to-date financial records thus making auditing difficult, if not impossible (Dogo, 1990 as cited in Taiwo, 2020). Studies have shown an inconsistency relationship, Bariyima(2012) revealed that an insignificant relationship exists between internal audit function and performance of Government-owned companies which was supported by the study of Enofe, Mgbame, Osa-Erhabor, Ehiorobo, (2013) and Ejoh&Ejom(2014).Salawu and Agbeja, (2007) attributed ineffective internal control systems, audit procedures and accountability were due to political interference. .Onatuyeh&Aniefor (2013) revealed that effective internal auditing ensures proper stewardship reporting and inadequately qualified manpower does hinder proper auditing of government accounts.

The meeting point of most of these studies has always been expressed in treating internal audit as an aggregate construct, however, a key hypothesis in this study is to relax this assumption and disaggregate internal audit into operational, financial and compliance categories while also shifting focus on the financial measure of performance in the public sector. It is noteworthy to state that these granulated approach to evaluating the effectiveness of internal audit has been given limited attention in the extant literature, whereas, an holistic approach to assessing an audit process is key to promoting effective public governance, hence the need for this study.

1.3       Objectives of the study

The objectives of this study are further broken into two segments, which are general and specific objectives. The general objective of the study is to assess the impact of internal audit on the effective management of a public sector. While the specific objectives are as follows;

1.      To determine the effect of financial audit on public governance effectiveness

2.      To determine the effect of operational audit on public governance effectiveness

3.      To determine the effect of compliance audit on public governance effectiveness

1.4       Research Questions

The following are the questions this study would answer:

1.      Does financial audit have an effect on public governance effectiveness?

2.      To what extent does operational audit have effect on public governance effectiveness?

3.      How does compliance audit affect public governance effectiveness? 

1.5       Research Hypotheses

This section explains the hypotheses put forward in the study. This is as follow;

H0₁:     Financial audit has no significant impact on public governance effectiveness.

H0₂:     Operational audit has no significant impact on public governance effectiveness.

H0₃:     compliance audit has no significant impact on public governance effectiveness.

1.6       Significance of the study

The findings of this research provide the insights on how internal audit effectiveness can improve the management of local government authorities. This research work is expected to be of immense benefits to the management of local government authorities that has internal audit department so that internal auditing can make effective use of the department in their administration and in particular for Ikosi Ejinrin Local Council Development Area Agbowa, Lagos. The results of the study are significant in the way that they are large extent relevant for influencing the management activities in the internal audit of Ikosi Ejinrin Local Council Development Area Agbowa, Lagos.

The management will discover the importance of the role of internal auditing function in their local government. The management will be able to re-assess its position in giving prominence to the function of internal audit. Future researchers can use the findings of this study as a base in researching on the internal auditing. Internal Auditor may understand their role and challenges they are likely to face as they carry out their roles.

The study will provide the assurance about the contribution of auditing function to the public sector so that trust and assurance of quality of service delivery.

1.7       Scope of the study and limitations of the study

This research study focused on assessing the effectiveness of internal audit as an instrument for improving the management of public sector in Lagos, Nigeria. In order to realize this focus of the study Ikosi Ejinrin Council Development Area Agbowa ,Lagos was selected as a case study. However, the limitations of the study are as follow;

        i.            Lack of instrument to carry out the research work successfully.

      ii.            Lack of adequate information from the local council.

    iii.            Time constraints.

1.9       Definition of terms

FINANCIAL AUDIT

Referred to as a financial statement audit, is an objective evaluation of your company’s financial statements.

OPERATIONAL AUDIT

Process of evaluating a company's operating activities – both on a day-to-day level and a broader scale.

COMPLIANCE AUDIT

A comprehensive review of an organization's adherence to regulatory guidelines.

INTERNAL AUDIT

Internal Audit(Institute of Internal Audit) is defined as an independent, objective assurance and consulting activity designed to add value and improve an organization's operation.It helps an organization accomplish the effectiveness of risk management, control and governance processes.

PUBLIC SECTOR

Public sector (English dictionary) is defined as that part of a country's economy which is controlled or supported financially by the government. In Tanzania, the public service is a national institution of excellence that has an important role in the abolition of poverty and acquiring a sustainable economic growth

EFFECTIVE MANAGEMENT

Effective management is the ability to do the right thing through others

MANAGEMENT

Management is a process of planning, decision making, organizing, leading, motivation and controlling the human resources, financial, physical, and information resources of an organization to reach its goals in an efficient and effective manner.

AUDIT

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