A COMPARATIVE ANALYSIS OF THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM IN A COMPUTERIZED ACCOUNTING SYSTEMS

ABSTRACT

Due to the rapid growth of modern technology and computerization there is increase in computer usage in organization and this tends to increase fraudulent practices. This study therefore aims at examining the effectiveness of internal control system in a computerized accounting system and how it enhance profitability and efficiency. In this study, the primary sources of data which is the questionnaire was use and the chi-square (X2) hypothetical test instrument was employed to carried out the data analysis and to test the formulated hypothesis. From the analysis, it was found that an occasional evaluation and review of internal control system increases profitability and efficiency and also help in reducing fraud. It was therefore concluded that as a technique internal control is very important aspect of an organization and therefore recommends to the management whose duty is to ensure the smooth and effective operation of the organization to ensure effectiveness, an occasional evaluation of the internal control system, to establish an internal audit department and to ensure sound and effective internal control system to enhance business operations.

CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

A computerized Accounting system is now a basic necessity and no longer a luxury among business of what ever orientation  and size .In the past accounting was done manually by business owners where by employees perform the whole accounting cycle manually on a periodic basis they calculate trial balances, journalize transaction, prepare financial statement reports and other routines. This process proved time consuming, cumbersome and prone to human error. There were also problems with storage and retrieval of information not to mention consolidated and reporting. Computerized accounting system has revolutionized the way businesses are conducted. They have enable companies to paint a more accurate picture of their organization financial performance and make comparisons and across places and periods of that performance. Even the smallest organizations has computer now and use computerized accounting packages to maintain their accounts. The availability of relatively cheap and reliable accounting software has changed the way auditors approach financial accounting system. Organizations are increasingly dependent on computerized systems and indeed, most large organization could not function without them. It is arguable that modern organization could not grow to their present size without computer-based systems. A computerized Accounting system will not succeed in completely achieving the organizations objectives unless controls know as internal controls are built. Therefore it is very important to operate an effective internal control system in a computerized accounting system by management in order to achieve its goal and objectives which includes. Operating efficiently and effectively produces reliable information complies with applicable laws and regulations and safeguard assets. In short, Internal control consist of those measure designed to keep the business operating on track. It is a necessity in large organizations especially where management is removed from day routine operation of the organization and also where computer-based accounting system is used .These internal controls may include the establishment of standard and procedures for the designing and documentation of new system introduce into the organization bearing in mind the problem of limit resources.  In this research, attention will be on a computerized accounting system which gives an effective internal control mechanisms which will serve us a tool for effective management decision including the necessary interest which will be mentioned in the study. An effective internal control enable the external auditor to rely on the internal control mechanism and also give a true and fair view of the organization financial transaction of a given period and helps to reduce the volume of work to be carried out by the external auditor. The auditor will ascertain through the effective internal control mechanism if the transaction of the organization is correctly reflected in the accounting records. The need for effective internal control system therefore cannot be over emphasized it is important because of the existence of risks and all forms of irregularities in an organization. So, a computerized accounting system will make the crafting of strategic plans especially as competition in the industry heats up. This will hereby reduce fraud and irregularities to its minimum. Having been familiar with what internal control mechanism is, the researcher steps forwards to ascertain the acclaimed importance of the concept of effective internal control system in a computerized accounting system by going into the banking system of which the researcher decide to use Zenith Bank as the study. In every enterprise various controls are always needed for security maximum administrative and operational efficiency in both financial and non-financial areas. The most essential part of such system will be analyzed in details later in this research work in order to fully appreciate the effectiveness of internal control system.

1.2   STATEMENT OF PROBLEMS

In spite of the sophisticated and expensive internal control put in place, there is still an increasing rate if computer fraud, misappropriation of fund, malpractice and other fraudulent practices in organization. In some situations whereby a individual is entrusted with the functions of recordings and storing of data in a computerized accounting system, it will be easier for such an individual to perpetrate fraud which invariably will lead to a big set back to the company and might cause the liquidation of the company. Also there are problems of computer manipulations by an unauthorized staffs and when all these are incurred it eill reduce profitability in the organization and may lrad to the liquidation of the company. With regards to this fayol states in an undertaking control consists of identifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established. It has for its object to point out weaknesses and errors in order to rectify them and to prevent re-occurrence. It operates on everything people and actions There is therefore need for internal control to be instituted in a computerized accounting system as it will enhance profitability and increase efficiency of the staffs and also reduce fraud.

1.3   OBJECTIVE OF THE STUDY

The objective purpose of this study is to identify and determine the effectiveness of internal control system and the consequences of an ineffective internal control system in banking industry of which zenith bank is the study. The research work scores the internal control system of zenith bank with the view of ascertaining its strength and weakness. the objectives are:

1.  To evaluate and review internal control in an organization and it increase in efficiency and profitability.

2.  To examine the factors that influences the activities and performance of the internal control system department in the organization

3.  To analyze how internal control system ensure the efficiency of workers.

4.  To introduce strategy that will reduce computer fraud and the occurrence of computer fraud.

5.  To analyze the extent to which external auditor rely on the internal control mechanism of the company.

1.4       RESEARCH QUESTIONS

From prior debated and research on internal control system in a computerized accounting system ways of fraud prevention which are adequate reporting of agents stewardship, internal and external checks by the auditors and reduction in the frequency occurrence of errors in their account. Equally the scholars in the vein have suggested that some of the likely problems associated with auditing of banking industries accounts are absence of qualified  manpower accounting resources and facilities, time and administrative interference. In an attempt to examine the proposal and problem of internal audit in a banking industry, the following questions have been brought up which include:

1.  How does the evaluation and review of internal control system increase efficiency and profitability?

2.  What are the factors that influence the activities and performance of the internal control system department in the organization?

3.  How can internal control enhance the efficiency of workers?

4.  What strategy should be put in place to reduce computer fraud and avoid the occurrence of computer fraud?

5.  To what extent do the external auditors adhere to the work performed by the internal auditor?

1.5   RESEARCH HYPOTHESES

The following hypotheses have been formulated for the purpose of conducting this study:

Hypotheses one

Hi- there is a significant relationship between occasional evaluation and review internal control in an organization and it increase in efficiency and profitability.

Ho- there is no significant relationship between occasional evaluations and review internal control in an organization and it increase in efficiency and profitability.

Hypotheses two

Hi- there are factors that influence the activities and performance of the internal control department.

Ho- there are no factors that influences the activities and performance of the internal control department.

Hypotheses three

Hi- internal control mechanism enhances the efficiency of workers.

Ho- internal control mechanism does not enhance the efficiency of workers.

Hypotheses four

Hi- there is need for internal control strategy to be put in place to reduce computer fraud and occurrence of computer fraud.

Ho – there is no need for internal control strategy to be put in place to reduce computer fraud and occurrence of computer fraud.

Hypotheses five

Ho- external auditors rely on the internal control mechanism of the company.

Ho- external auditor does not rely on the internal control mechanism of the company.

1.6   SIGNIFICANCE OF THE STUDY

The relevance of this study is in its attempts to fraud out and evaluates those factors responsible for effective internal control system in Zenith bank Enugu state. At this point the researcher needs to stipulate the primary and secondary beneficiaries of the research work. This research work will ensure that effective internal control is imperative to be installed in an organization. This will enhance the safeguarding of assets, smooth operation of the business and avoid unnecessary loss of profit, adherence to management policy and loss of assets.

The significance will include the following

1.  To ensure the researcher finds out problems encountered in relation to the internal control system and make appropriate recommendation for improvement.

2.  To serve as a guide for organization having weak internal control systems to improve on the quality of their internal control system and then make it more effective.

4.  To serve as a guide to others who are likely to carry on research on this study in future.

1.7   SCOPE OF STUDY

Originally the scope was to cover the whole of Zenith bank in Enugu state. This as a matter of necessity would have entailed sampling data from both head office and branches in the state. This study was harrowed to only the Enugu Branch in presidential road. The main branch was chosen for reasons such as proximity ease of data collection and the limited time within which the research was narrowed more to the accounting and internal audit department of the bank.

1.8   LIMITATION OF THE STUDY

This study was affected by certain constraint which include

1.  Financial constraints: Cost implication in conducting and presenting this research work was huge. Transportation fare to and fro the bank under study to gather the necessary information and searching through the internet attract a lot of cost.

2.  Lack of adequate information: There is also difficulty in getting the required information from the workers. Workers feel that they are revealing official secret, therefore if was difficult to get the required information from the bank.

3.  Inadequate material: Inadequate supply of literature in the libraries such as newspapers, journal, books constitutes a hindrance to this research work.

4.  Time constraint: time was a major problem for the research work give to carryout this research work was very short of which the researcher cannot carryout this study within the short time frame.

1.9   DEFINITION OF TERMS

1.  Auditor: A professional accountants responsible for the control of the audit and signing of the audit report on behalf of a firm.

2.  Internal audit: The standards for the professional practise of internal auditing defined internal audit as an independent appraisal function established within its activities as a service to the organization.

3.  Authorization: This is approval from the appropriate authority in order to execute any transaction or given a legal right to execute any transaction.

4.  Control: The ability to direct the financial and operating polices of order undertaking with the intention of gaining economic benefits from its activities.

5.  Effectiveness: According to Ducker (1977: 24) effectiveness is doing the right thing, if simply means the result needed.

6.  Efficiency: Producing a satisfactory or desired result.

7.  Fraud: This is misrepresentation of facts by individuals in order to extort money or property into personal or individual use.

8.  External auditors: These are independent professional accountants (qualified) often referred to as independent auditors or certified public accountants.

9.  Internal auditors: Auditors that been employed by the management of organizations individuals, companies, partnership and government as well as other agency.

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