EFFECTIVENESS AND EFFICIENCY OF INTERNAL AUDIT AS A TOOL FOR MANAGEMENT CONTROL

Abstract

This study was on effectiveness and efficiency of internal audit as a tool for management control. Five objectives were raised which included; To evaluate the determinant for effective tools in management control, to assess the effects of internal auditing on internal control system of an organization, to under-study, the effectiveness and efficiency of internal audit as a tool for management control, to investigate the type of responsibilities internal audit has with the Board of the organization under which he operates and to examine the effect management interference on the internal auditors functioning with the respect to errors and fraud in the organization.. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from skye bank Enugu. Hypothesis was tested using Chi-Square statistical tool (SPSS).

 

Chapter one

Introduction

1.1Background of the study

Before the advent of the code of best practice on corporate governance, establishment of a sound system of internal control by management has been the major means of achieving the company’s goals and objectives. Where you have a sound system of internal control system the organization is most likely to achieve its goals and objectives but this has not been realizable in the banking industry, where a severe banking crisis has been the experience in most Nigeria banks.

Larger and more complex operations demand greater competency and professionalism from internal auditors to minimize and manage risk. Internal audit is one of a number of internal assurance and business review activities that should operate in a coordinated and complementary manner to the benefit of the organization. These other activities include management monitoring, evaluations, quality assurance and control self-assessment arrangements that are all designed to provide confidence and assurance to Boards that management is meeting its responsibilities and the entity is achieving its objectives. Anao (2012).

Auditing is an expensive proposition, however auditing help in reduction of information risk which is the risk that information upon which a business is based is accurate.

Internal audit is a large and significant part of management control of both large and small organization. The role of internal auditor has evolved from concentration of the detection and prevention of errors and fraud in the present day emphasis to reviewing system of internal control. Internal auditor is concerned with the implementation of social responsibility policies adopted by top management. It is as an independent appraisal activity within an organization for the review of operation as a service to management.

It is a management control, which functions by measuring and evaluating the effectiveness of other controls. The problems which always exist between the managers/director to the owner of business, were solved by appointing an independent person called “auditor” to investigate the report on findings (The Chartered Institute of Public Finance and Accountancy, 2015).

In this period, internal audit is also as a procedure, which offers fundamental security to the business concerning the credibility of financial affairs. The report defines internal control and describes a framework for internal control. However, the crucial difference of this report is that it also provides criteria for the management to utilize to evaluate controls (Aldridge 1994).

The Internal Control moves within a greater scope of management philosophy and of practical application, and adds up value, offering at the same time a systematic scientific approach on the assessment and the improvement of the effectiveness of businesses (Karagiorgos et. al, 2006). From the above definitions, it is all clear that the internal control is not just an one-sided tool for controlling the order and rightness of certain situations, but it is a method of detecting the value added up to a company, achieving the index of effectiveness and profitability of the company (Karagiorgos et. al, 2007).

It serves as a complement to the public sector since increased public sector efficiency results from improvements and places government in a better position to focus on the objectives, conduct and performance of those enterprises that remain in the public sector.

Auditing took the entire stage after the industrial revolution since before this period, transactions increased, precipitated by the development of large corporations, limited liability companies, there became the need for divorce of ownership from control. A banking crisis occurs when there is systemic crisis, that is, a fairly reasonable proportion of banks in the system are unable to meet their obligations to customers, owners and the economy as a result of weaknesses in their financial, operational and managerial conditions, which rendered them either illiquid and /or insolvent.

Accordingly, Alawiye (2006) opined that the Nigeria banking system has suffered very significant setbacks and acute systemic deterioration, which resulted in the distress syndrome that caused a near total collapse of the public confidence in the system. Between 1990 and 2004 more than 50 percent of the institutions comprising 130 commercial banks and 68 merchant banks were suspected to be plagued by the distress cankerworm. This bad situation was warranted by directors and the senior management staff of banks disregard for standard procedures and deliberate breaking of operating rules. The summary of the problem with the banking system is lack of corporate governance that has resulted in total deterioration in the management system of the banking industry. Therefore, there is need to conduct more research on the internal audit as an effective tool for management control in Banking industry as even recommend that more research in the area of management control effectiveness is required.

Furthermore, the issue of effectiveness of internal audit is indispensable because it will create improvement in the government ministries. In line with this, consideration over the measurement of the effectiveness of internal audit function keep receiving a significant challenges, consisting the finding of the best and relevant method for measuring the efficiency and effectiveness of internal audit (Spertus et al, 2010).

1.2 Statement of the Problem

The researcher opinion is that most organization does not apply auditing technique in executing their organization project and those who do have faulty application years back, many internal auditors emphasized one audit objective that is the auditing of project for inventory valuation and income determination as it is an end. The need for effective and efficient performance of the organization depends on the management and the execution of the management to keep records to determine the return of invested capital.

Consequently, many organizations, failed to collect information in a form that will be suitable for other purpose suitable questions such as this could be asked or raised, the consequence of not maintaining proper internal checks and internal control. Why is it that organization fail in its financial decision despite the quality information supplied by the internal auditors? Why is it that auditing information supplied to the organization for it decision are sometimes at cross road with underlying record despite the fact that those record are examiner by internal auditors, these and other questions demand answer that will affect the effective operation of internal auditors in term of its survival and position in the organization.

1.3 Aim and Objectives of the Study

The aim of the study is to under-study the effectiveness and efficiency of internal audit as a tool for management control and is to ascertain whether there is significant relationship between effective and efficient monitoring and fraud detection in Skye Bank of Nigerian while, objective of the study are:

1. To evaluate the determinant for effective tools in management control.
2. To assess the effects of internal auditing on internal control system of an organization.
3. To under-study, the effectiveness and efficiency of internal audit as a tool for management control.
4. To investigate the type of responsibilities internal audit has with the Board of the organization under which he operates.
5. To examine the effect management interference on the internal auditors functioning with the respect to errors and fraud in the organization.

1.5 Research Hypothesis

The hypothesis of this work includes:

Ho1: functions of the internal audit department does not significantly have effects on the management control

Ho2: Lack of information in the institute of management control in Skye Bank does not significantly have effect on the internal audit work of its management.

1.6 Significance of the Study:

It helps in assessment of the effect of internal audit on the internal control system of an organization. It helps to evaluate the determinants for effective tools in the management control of organization. It helps to examine the effect of management interference in the internal auditors functioning with respect to fraud and error in the organization. It helps to evaluate the determined factor of kind or skill required of internal auditor. It helps to examine the effects of management interference in the internal auditors functioning with respect to true and fair view of the organization financial statement.

1.7 Scope of the Study

Realization of the major importance of internal audit in efficient management will set internal audit as a priceless support in the business management effort. Internal audit is currently at a crucial stage in its development as there is a growing demand for audit services. What has yet to he formed is a consensus between theory and practice. This research did not intend to conclude the discussions over this matter; however, it is expected to be one more element to help the formation of opinions and to diffuse other discussions on the subject.

1.8 Definition of Terms

Auditor: A person that act as a regulatory authority of accounting and auditing.

Auditing: The independent examination of an expression of opinion on the financial statement of an enterprise by an appointed person or persons called auditor in pursuance of that appointment and in compliance with any statutory regulation.

Internal Audit: Internal auditing may be defined as the independent appraisal from within an organization of its internal control.

Internal Control: This is defined as “the whole system of controls, financial and 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 policies, safeguard the asset and secure as far as possible the completeness and accuracy of the records. Internal Checks It is the day to day check of the company’s business transaction. Management It is the process of planning, organizing leading and controlling the efforts of the organization member aimed at achieving set goals target.

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