ABSTRACT
The research work is based on the effect of internal
control on organizational performance of local government.
The major objective of this study is to assess the effect
of internal control on organizational performance of local government in which Ojo Local Government was used as a
case study. Various literatures, textbooks, journals and materials from the
internet were used for the study.
Survey research design was used and both Primary and
secondary source of data were also used. Eighty three (83) Questionnaires were
administered as the sample size of the study using a Simple random sampling
technique.
The
data collected were analyzed using simple percentage method.
Two (2) hypotheses
were formulated and tested using chi-square. The test revealed that internal
control system aids adequate financial reporting and internal control system
helps in preventing and detecting errors, frauds and material misstatement.
In conclusion, the presentation and analysis of data, it
was established by the respondents that Ojo Local Government has always
attached importance to internal control and at the same time its managements
and staff has adhered strictly to guidelines. This has enhanced the performance
of the Local Government in terms of finance, quality of service rendered to the
public and staff welfare.
Therefore it is recommended that, recruitment of staff must not be based on
sentiments or favouritism but rather on the skill and competence of the
applicants with reference from people with integrity.
TABLE OF CONTENT
PAGES
Title page i
Certification ii
Dedication iii
Acknowledgement iv
Abstract v
Table of contents vi – viii
CHAPTER ONE
1.0 Introduction 1
– 3
1.1 Brief
History of Ojo Local Government 4
– 5
1.2 Statement
of the problems 6
1.3
Purpose of the study 6
1.4
Research questions 7
1.5
Research hypothesis 7
1.6 Significance
of the study 8
1.7 Delimitation of study 8
1.8 Definition of terms 9
References 10
CHAPTER
TWO
LITERATURE
REVIEW
2.1 Meaning of Internal control system 11 – 14
2.2 Describing
internal controls 14
– 18
2.1.1
Internal Control as defined by the auditing guideline 18 – 19
2.1.2 Fundamental
concepts in COSO report internal 20 – 23
control definition
2.2 Important of internal control 23
– 25
2.3 Components
of internal control 25
2.3.1 The
control environment 26
2.3.2 Risk
assessment process 27
– 30
2.3.3 Information
system 30 - 31
2.3.4 Control
activities 31
– 34
2.3.5 Monitoring
34
– 35
2.4 Features
of Internal controls 35
2.4.1
Organization 36
2.4.2 Segregation
of duties 36
– 37
2.4.3 Physical
control 37
2.4.4 Authorization
and approval 37
2.4.5 Supervision
38
2.4.6 Arithmetical
and Accounting controls 38
2.4.7 Personal
Control 38
2.4.8
Management Controls 39
2.5 Controls
in computer information system 39
– 40
2.6 Management
versus auditor responsibility 40
2.7 Internal
Audit as an element of internal control 41
2.7.1 Scope
and objectives of internal audit 41
– 42
2.8 The
system of internal control as an aid to the auditor 43
2.9 Powers
of the auditor-general for local governments 43
– 47
2.10
Limitation of controls 47
References 48
CHAPTER THREE
RESEARCH METHODOLOGY
3.1
Research design 49
3.1.1
Survey design 50
3.1.3 Ex-post facto design 50
3.1.2
Experimental design 50
– 51
3.2 Area of the study 51
3.3
Population of the study 51
3.4 Instruments for data collection 52
3.4.1 Document 52
3.4.2
Direct observation 52
3.4.3
Interview 53
3.4.4
Questionnaire 53
3.4.5
Measurement 53
– 54
3.5 Validity of the instrument 54
3.6 Reliability of the instrument 54
3.7 Methods of data analysis 55
3.8 Sample and sampling technique 55 – 58
Reference 58
CHAPTER FOUR
DATA
ANALYSIS PRESENTATION
4.1 Introduction 59
4.2 Data collection
and presentation 59 - 79
4.3 Testing of
hypotheses 79
– 84
CHAPTER FIVE
SUMMARY,
CONCLUSION AND RECOMMENDATIONS
5.1
Summary 84
– 85
5.2
Conclusion 86
5.3
Recommendations 87–
88
5.4 Bibliography 89
– 90
Appendix 91
– 94
CHAPTER ONE
1.0
INTRODUCTION
The
establishment of an effective and adequate internal control system is the duty
of the management of any enterprise, this assist in the discharge of their
responsibility for the prevention and detection of irregularities and fraud.
In present day
decision making, the importance of relevant, reliable and timely accounting
information cannot be overemphasized; hence the need for a strong and reliable
internal control system which is able to assure user and decision makers that
the information provided in the financial statements are true and fair.
The source and
strength of accounting information in any accounting system depends on the
strength of the various controls put in place by the management of such
reporting entity, a major reason that a professional auditor must ascertain and
evaluate the accounting and internal control system which an entity utilized in
the process of providing the information used in preparing its financial
statement.
Internal
control system, according to the Auditing Practice Committee is “the whole
system of control for financial or otherwise, established by the management in
order to carry on the business of the enterprise in an orderly and efficient
manner, ensure adherence to management’s policies, safeguard the assets and
secure as far as possible the completeness and accuracy of the records”.
The
International Standards on Auditing (ISA 400) defined internal control to mean
all the policies and procedures adopted by the management of an entity to assist
in achieving management’s objective of ensuring as far as practicable, the
orderly and efficient conduct of its business, including adherence to
management policies, the safeguarding of asset, the prevention and detection of
Fraud and errors, the accuracy and completeness of accounting records and the
timely preparation of reliable financial information.
Public sector entities are increasingly recognizing the benefits of
organizational governance. A recent survey sponsored by the department of
accounting at Colorado State University, "Audit Committees, Internal
Auditing, and Outsourcing in Local Governments: A Survey of Current
Practice," queried 522 local governments on their use of organizational
governance. The findings indicate that although there has been an increase in
the use of these practices since the early 1990s, there is still ample
opportunity for organizational governance players to add value to their local
governments.
Internal controls are an integral part of any organization’s financial and
business policies and procedures. Internal controls consist of all the measures
taken by the organization for the purpose of:
·
Protecting its
resources against waste, fraud, and inefficiency.
·
Ensuring
accuracy and reliability of accounting and operating data.
·
Ensuring
compliance with the policies of the organization.
·
Evaluating the
level of performance in all organizational units of the organization
What internal control do…
·
Promote
orderly, economical, efficient and effective operations.
·
Safeguard resources
against, loss due to waste, abuse, mismanagement, errors and fraud.
·
Promote
adherence to laws, regulations, controls and management directives.
·
Develop and
maintain reliable financial and management data and accurately present that
data in timely reports.
1.1 BRIEF
HISTORY OF OJO LOCAL GOVERNMENT.
Ojo Local Government was created in May 1989,
under the Military Administration of General Ibrahim Gbadamosi Babangida, as
the President of the Federal Republic of Nigeria, under the Military Governor
of General Raji Rasaki. Before the creation of Ojo Local Government, out of the
Old Badagry Local Government, the area was adjudged the most populous, in the
Federation going by the National Population Census conducted in Nigeria in
1991, the population as at that time was put at 1.01 million. Ojo Local Government
is divided into two segments; the Reverine and the Upland. It is inhabited by
mainly the Aworis, who are very accommodative and progressive.
In 1996, under the Military Administration of
General Sanni Abacha, two Local Governments were carved out of the Old Ojo
Local Government; Amuwo - Odofin and Ajeromi Ifedodun Local Governments. It is
on record that under the administration of Alhaji Latef Jakande, as the
Executive Governor of Lagos State, Ojo Local Government, that did not have the
backing of the Federal Government under President, Shehu Shagari, was created
in 1980; with Alhaji Ajakaiye as the Chirman of the Council between 1980 -
1983. However, the Military Government of Generals Mohammed Buhari and Tunde
Idiagbon scrapped the Local Government when they struck in 1983 and the new
council returned to Badagry Local Government.
Today, two Local governments have been carved
out of the old Ojo Local Government; Iba Local Development Area and Oto-Awori
Local Council Development Area. With this development, there were boundary
adjustment. As of today, Ojo Local Government shares boundaries with Oto-Awori
on its Southwest, it is bounded in the East by Oriade Local Government, in the
North by Iba Local Council Development Area and in the South by the Lagoon. It
also shares boundary with Amuwo Odofin Local Government between Ojo Military
Barracks and the Trade Fair Complex. The Local Government had a TOTAL Land mass
of 180sq km with about 30% of it constituting the Reverine Area, today part of
this Reverine Area is being shared by Oto-Awori Local Council Development Area.
The auditing of Ojo local government under
the government of Babatunde Raji Fashola started officially in 2006
1.2 STATEMENT
OF THE PROBLEM
This research
work is carried out to understand the role which internal control system plays
in the overall performance of business organization; the problems that
triggered this study include:
i.
Continuous
report of errors, frauds and material misstatements by auditors which ought to
have been detected and corrected by management in the implementation of its
policies.
ii.
Inadequate
enlightenment on the need for and purpose of internal control system in an
organization.
1.3 PURPOSE
OF THE STUDY
i. To examine critically the internal control system existing in
Ojo Local Government
ii. To ascertain the elements of internal control in Ojo Local
Government
iii. To examine the effect internal control
system has on Ojo Local Government
performance.
iv. To identify the factors that weakens the internal control
system of an organization.
v. To investigate why internal controls fails to detect material
misstatement thereby increasing the control risk to the auditors.
1.4 RESEARCH
QUESTIONS
i. Of
what importance is the internal control system?
ii. Who establishes the
internal control system?
iii.
What is the
duty of the statutory auditor in relation to internal control system?
iv.
Does the
internal control system improve organizational performance?
v.
Is the
internal audit department an element of internal control?
vi.
Does internal
control system aid the prevention and detection of errors and fraud in an
organization?
vii.
Is the audit
committee a control element?
1.5 RESEARCH
HYPOTHESIS
Ho: Internal
control system does not aid adequate financial reporting
Hi: Internal control system aids adequate
financial reporting.
Ho: Internal
control system does not help in preventing and detecting errors, frauds and
material misstatement
Hi: Internal
control system helps in preventing and detecting errors, frauds and material
misstatement
1.6 SIGNIFICANCE
OF THE STUDY
This study is of great importance to
students, business organizations, consultants and the entire society. It will
educate the management on the importance of internal control system, elements
of the control system, how the system is established and it role in achieving a
better organizational performance.
Furthermore, it will establish the various
ways of ensuring effectiveness of control and methods of reducing its
limitations that have been identified by previous researchers.
1.7 DELIMITATION
OF STUDY
The scope of this study is limited to the
case study, though the result will be generalized. Also the business is located
in Lagos thus geographically its scope is limited.
The questionnaire will be administered to the
members of staff of Ojo Local Government which is a small population when
compared to the business environment obtainable in Nigeria.
1.8 DEFINITION
OF TERMS
Audit Committee: This
body is required to be set up by Companies and Allied Matter Act (CAMA) 1990 to
comprise a maximum of 3 directors and the other 3 shareholders.
Control Risk: This is the risk that the internal control
system of an organization will fail to prevent or discover material
mis-statements present in the financial statement.
Error: This refers
to unintentional mistakes in financial statements.
Fraud: This refers
to an intentional act by one or more individuals among management, employees or
third parties which results in a misrepresentation of financial statement.
Internal Audit: A
review of the organization of a business which may be in many respects similar
to a statutory audit but which is carried out by employees of the business who
are responsible only to management.
Materiality: An
item will be considered to be material in the context of the financial
statement if its omission, misstatement or non-disclosure is significant enough
to affect the message passed by such financial statement.
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