INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION ABSTRACT
This research on Internal Procedures and Problems in a Banking Institution (A Case of First Bank Nigeria PLC) tends to bring into focus the need for internal auditing due to the increasing volume of work and business activities in a financial institution such as bank.
This ever increasing trend plus the necessary sophistication of banking operations and multiple transactions among other factors had made it impossible for top management to exercise full and direct control and to supervise all the operations.
Internal Audit therefore, serves and acts as an effective tool that could be used to bridge the gap between top management and the operators in order to assure that the policies and all the control systems laid down are adhered to.
In addition, some research questions were stated to enable the researcher make conclusions on internal audit procedures and problems in a banking institution.
I therefore hope that internal audit procedures and problems in a banking institution when followed will help eradicate the high level of fraud and misappropriation of fund in the banking institutions nationwide.
TABLE OF CONTENTS
1.1 Background of the Study
1.2 Objective of the Study
1.3 Significant of the Study
1.4 Scope and Limitation of the Study
1.5 Research Question and Statement of Hypothesis
1.6 Definition of Terms
2.0 Literature Review
2.1 Definition of Internal Auditing From Relevant
2.1.2 An Appraisal Function
2.1.3 A Service of the Organisation
2.1.4 A Managerial Control
2.2 Internal Control and Internal Auditing
2.2.1 Forms of Internal Control System
2.3 The Concept of Fraud
2.3.1 Actual Fraud
2.3.2 Constructive Fraud
2.3.3 Materiality of Fraud
2.4. Scope and Approach of Internal Audit Function
2.5 Internal Audit Procedures and Internal Audit
2.6 Internal Control and Features of Internal Control
2.7 Types of Internal Control
2.8 The Role and Relationship of the Inspectors and Internal Auditor
3.0 Research Methodology
3.0.1 Research Design
3.0.2 Population and Sample
3.1 Source of Data Collection
3.1.1 Primary Sources
3.1.2 Secondary Sources
3.2 Sampling Technique
3.3 Limitation of Data Collection
4.0 Analysis and Presentation of Data
4.0.1 Data Analysis of Result
4.1 Bio-Statistics Analysis
4.2 Research Question One (1)
4.3 Research Question Two (2)
4.4 Research Question Three (3)
4.5 Research Question Four (4)
4.6 Research Question Five (5)
4.7 Test of Hypothesis
5.0 Summary, Conclusion and Recommendation
5.4 Conclusion Reference
1.0 INTRODUCTION: INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION
The origin of auditing is as a result of the separation of ownership from control. It is instituted to protect the interest of the owners by ensuring that financial statements are justifiable. Because of the separation of the ownership from control, it becomes necessary of those managers entrusted with owner's financial reports (stewardship reports) to be accountable to their employers.
Auditing to some certain extent has been in existence for a long time as far as man is required to account for transaction. The term "AUDIT" comes from a Latin word, "Audirea" which means "To Hear". It derived this name when in ancient times, the accounts of an estate are checked by having them called out by those who are compared with those authority and owners. That is, the king and his representatives who listen.
The need for auditing over the years has gained acceptance due to the increasing volume of work and business activities and because the business are not being run by the owners (shareholders) but by managers, this usually create credibility gap that must be filled by an independent third party usually referred to as AUDITOR.
Kwama Gyasi (2000) in his book titled 'An International Guide to Auditing" defined auditing as the "Independent examination and investigation of the evidence from which a financial statement has been prepared with a view to enable independent examiner to report whether in his position and according to the best of the function and explanation obtained by him, the statement is properly drawn and gives a true and fair view of what it proposed to show and not to report on what respect he is not satisfied.
Audit is in two forms: namely, Internal Auditing and External Auditing. Both are very crucial to the well-being of an organization and for effective control and administration. Internal auditing in particular has however grown in importance especially in the banking requiring banks in Nigeria to set up an Internal Audit Department from where internal audit functions are carried out.
It is pertinent to note that the inspection division of bank is functionally synonymous to the Internal Audit Department of any organization or company. As such, the two words, "Internal auditing and Inspection" will be used interchangeably. A definition of an understanding of the meaning of internal auditing will serve as a good starting point for the discussion.
It is practically difficult for an internal auditor to possess any reasonable degree of independence in mind and attitude because of the management influences on the terms, reference and scope of work. Infact, one area of interest to the external auditor is assessing the degree of independence enjoyed by the internal auditor. To achieve this independence, the following must be put into consideration:
They should have an unrestricted access to records, assets and personnel. Freedom to report to higher management and where it exists in audit committee. They should have non-audit work. They should work with an objective frame of mind. There should be no conflicts of interest or any restriction placed on their work
1.1 BACKGROUND OF THE STUDY: INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION
First Bank Of Nigeria PLC is a leading institution in Nigeria with over a hundred years of banking experience, industry and resilience behind it. In 1894, Alfred Jones, a shipping magnate from Liverpool founded the bank which commenced business then as a small industry in the office of Elder Dempster company in Lagos.
The bank grew rapidly in the early year asking in close co-operation with the colonial Government in performing the theoretical roles of a Central Bank. Such issues as in special West African sub-region.
In 1876, a branch was opened in Accra, Gold Coast (now Ghana while another was established in Freetown, Sierra Leone in 1896. This marked a milestone in the bank's international banking operation. Thereby, justifying the West African Operational coverage. The second branch in Nigeria was opened in the Old Calabar in 1900 and two years later, service had extended to Northern Nigeria with a branch network of 291 in 1951, spread throughout the federation including London. The bank has the largest number of branches in the industry.
The bank has experienced phenomenal growth. It had over the year experienced growth in capital base and staff strength. When the bank began operation in 1894, it has only six staff comprising three European and three African. Today, the bank is virtually full. In Nigeria, the bank's determination has been to identify with the apparition of the country in the march toward national development. As a result of these, the bank had continually adjusted its organizational structure and corporate entity.
Its name was changed to Bank of West Africa in 1957 and it was incorporated locally in 1969 to become Standard Bank of Nigeria Limited. This was in response to the dictates of the Companies Decree 1968.
Thereafter, the active participation of Nigeria in the management of the bank became a corporate policy. Further changes in the name of the bank were made in 1979 to First Bank of Nigeria Limited and to First Bank Nigeria PLC in 1991.
As a result of corporate policy and in order to conform to certain regulatory requirement (of the Bank of England) the shareholder of the bank's foreign partners, the Standard Chartered Bank of Africa PLC has been reduced to 9.99. This brought the equity holding by Nigeria to 90.1.
The Bank has assisted in long-term development of the economy and financing rural banking agriculture and credit facilities. Through the community farming loan scheme, the bank has given peasant farmers tremendous access to the much needed bank credit. Over the years, the bank has owned the converted stock exchange president Merit Award as the bank with the best financial reporting in the banking sector. Also, further times, the bank has come first at the Central Bank of Nigeria's farmers Merit Award.
The bank is not resting on the others, despite the past success and good performance. It is thereby ensuring a good beginning for meeting the challenges of the second.
Branding initiatives in First Bank Nigeria PLC are to strategically position the First Bank group as a National Icon and an International player in the financial services industry.
After a century of operation, the Bank commenced the "Century 11" business transformation project in 1996, which was revalidated in 2001 with the theme "Century 11-The New Frontier".
As the Bank marked its 110 years of existence during which it pioneered the art and science of modern banking in the country, becoming Nigeria biggest and most prosperous financial service group, First Bank in a fundamental brand transformation launched on Tuesday, April 27,2004 unveiled a new chapter in its lustrous history: a new corporate identity, logo and official colours. The launch was the culmination of the Bank's strategic re- engineering process embarked upon to usher the bank into its second century of operations.
First Bank of Nigeria PLC realized that it goes beyond change of logo, aesthetics and overall physical ambience of their workplaces. Thus, their brand transformation efforts entailed radical improvements in service delivery and renewal of trust/dependability, which are all self-evidence in the present standing of the bank as an epitome for dependability with financial services sector.
While the Bank reflects the agility, dynamism, processes, technology and corporate mindset of a new generation bank, it lives up to its billing of being 'truly the first' by reinvigorating its entire set-up.
Vision Statement: To remain the clear leader and Nigeria's Bank of first choice.
Mission Statement: To remain true to our name by providing the best financial services possible.
Objectives: To revolutionize the banks operations in line with the dynamics of the operating environment.
To strengthen the bank's brand in response to contemporary realities of the business environment.
1.2 OBJECTIVE OF THE STUDY: INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION
The objective of this study is to determine the internal audit procedures in banking institutions. It will be important and needful for an internal audit department in banks to see how the work is carried out whether it is according to operating rules and standards. Also, to see how effective it conforms to the principles of internal control. It also studies the problem of internal audit in banks and how these can be overcome.
1.3 SIGNIFICANCE OF THE STUDY: INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION
Internal Audit is one of the parts of internal control. The other is internal check. The study will help us to know who an internal auditor is, his responsibilities in a bank, the relationship between internal and external audit.
1.3.1 WHO IS AN INTERNAL AUDITOR
An Internal Auditor is any person that performs internal auditing function. In a professional way, an Internal Auditor is one who by training and practice has an enquiring mind and is charged with the responsibilities of providing management and board of directors with information about the adequacy and effectiveness of the organization system of internal control and the quality of performance.
1.3.2 RESPONSIBILITIES OF INTERNAL AUDITORS IN A BANK
Internal Auditors are responsible to the management and board of directors of a bank, providing them with information about the adequacy and effectiveness of the bank's system of internal control and the quality of performance. In essence, it is a management tool since management appoints them; the board of directors or management, which may vary, determines their responsibilities and scope of work. The analysis report, appraisal, recommendation and details of information to be provided differ in format and detail depending on the requirement and request of management and the board.
The internal auditor's responsibilities and personal lending should cover adherence to financial, personal lending, data processing and other administrative policies and procedures, as well as the operations efficiency and effectiveness with the resources that are used or applied. An Internal Auditor is responsible for the review and improvement of the system of internal control and its element of check. He must be fully acquainted with every system of internal check on the bank and must satisfy himself that the system will detect and prevent fraud.
The Internal Auditor is responsible for the examination and review of the banker’s policies and activities and also to ensure that these policies are carried out and are in compliance with statutory/conversant with all the Legislation and circulars guiding banking operations in Nigeria, and should be able to highlight inherent deficiencies in the bank operations to management. An internal audit (inspector) should be able to discover irregularities within the bank at the request of management.
In addition, an Internal Auditor is responsible to ascertain that the proper authority is given for the purchase and disposal of bank's asset and that therein an insurance cover for each of the asset is provided. He must also be satisfied that assets are used effectively for the bank's sole benefit so as to keep wastage to the nearest minimum. In essence, he should see that the assets of the bank are effectively safeguarded.
He is responsible for the verification and the accuracy of the bank's financial records and of related reports and statistics used for management decision. To ensure this, the Internal Auditor must ascertain that an adequate and effective system of authorization for entries records is kept. That is, the internal control system is well designed and actually works in practice.(project topics final year project topics )
1.3.3 THE RELATIONSHIP BETWEEN INTERNAL AND EXTERNAL AUDIT.
An effective Internal Audit environment can greatly facilitate the task of the statutory or External Auditors. In management, both operate through the same methods and there is a common interest in ascertaining that there is:
A. An effective system of internal check and B. An adequate accounting system.
External Audit is carried out by firm's External Auditor who reviews the financial statement provided by the accounts department of the bank and to report and ensures that the financial statement agrees with the records of account being kept and carried out by external Auditors. They are then fully independent of the management because they report directly to the shareholders through the audit committee.
It must be noted in the process of carrying out their works that there would be need to liaise with management of the bank who is expected to institute a strong internal control within the organization so as to be able to prepare an account that will show a true and fair view of the state of the bank's affairs of staff in the Internal Audit Department.
The External Auditor can also benefit from the assistance of the Internal Auditors on the area of detailed Audit test in which case, the External Auditor will determine the extent of the items and will also review and test check the Internal Audit working papers. However, the degree or relevance to be placed on the work of the Internal Audit Department by the External Auditors will depend on the following:
i. The qualification and the experiences of the Internal audit staff.
ii. Their qualification and quality of work report.
iii. How the report of the department affects management decisions.
1.3.4 INTERNAL AUDIT TECHNIQUES
The Internal Audit Department in any organization performs the function assigned to them using any of the following techniques. The Internal Audit techniques are collectively known as 'ENVECOIN'
1. Enquiry: This involves seeking relevant information from knowledgeable persons inside and outside the organization (Management, Staff, Solicitors, Bankers, Parent Company, Values etc) formally or informally, orally or in writing. The degree of reliability that the Auditor attaches to evidence obtained in this manner depends on his opinion as to the competence, experience, independence and integrity of the respondent.
2.Verification: This involves the Internal Audit in review and examination of records, documents and tangible assets as a means of determining their ownership, existence and value of assets and responsibility for liabilities.
3. Evaluation: Here, Internal Auditor makes a personal judgment based on the result of his field of work. This judgment is usually made in such areas as the system of the business, to security of the assets and the effectiveness of management performance.
4. Computation: The Internal Auditor checks the accuracy of the accounting records or management performance.
5. Observation:This involves looking at an operation or procedure being performed by others so as to determine the manner of its performance. The Auditor can attend stock take or cash counts to observe reliable evidence as to the manner of the performance at the time of the observation but not at any other time.
6. 1nvestigationlInspection: Internal Auditor may carry out special exercise to get to the root of a matter by reviewing documents or examining records, documents or tangible assets. The investigation of records and documents provide evidence of varying degree of reliability depending upon their nature and source.
1.4 SCOPE AND LIMITATION OF THE STUDY: INTERNAL AUDIT PROCEDURES AND PROBLEMS IN A BANKING INSTITUTION
The study as earlier mentioned would cover all aspect of Internal Auditing in Banking Institution. It covers the procedures adopted by the bank used as a case study and the problems encountered in carrying out its Internal Audit function.
The study is however limited by the following;
i. Lack of enough materials (textbooks, write up) on bank Auditors and External Audit in banks.
ii. Inability to get enough information as a result of (i) above.
iii. The time specified for the writing and submission of the write up.
iv. The delay in giving response to questionnaires.
v. Fuel crisis as the time of writing.
1.5 RESEARCH QUESTION AND STATEMENT OF HYPOTHESIS
In the course of making this write-up, certain questions on the topic in general are needed to be reviewed and answered because of their importance. These are termed 'research questions' and a few of them are highlighted as follows:
i. Is Internal and External Auditor really independent?
ii. Do they have unrestricted access to the bank's books voucher or record?
iii. Do they have the utmost freedom to carry out their function and thereafter report to the appropriate authority?
iv. Are Internal Audit report, analysis and recommendations by the Internal Auditor actually treated and accepted?
v. Is Internal Audit function carried out in accordance to prevailing rules and do they conform to the principles of a second internal control system?
vi. To what extent does the management recognize the work and activity of the external audit department?
vii. Is External Auditing actually carried out in the real sense of the word and according to the definition?
1.6 DEFINITION OF TERMS INTERNAL CONTROL SYSTEM
In Auditing, internal control mean the whole system of controls, financial and otherwise established by management in order to secure as far as possible the accuracy and reliability of the company's records and safeguard its assets.
This is a part of internal control, which deals with the organization, and operation of the book keeping and financial accounting functions of business.
This contain steps and plans of work that must be followed by the Audit staff in the course of their audit work. It also contains who carries out an aspect of the work.
These are findings and recommendations of the Internal Auditor written to management on the system (or audit) of any section or department of the organization..