AN APPRAISAL OF INTERNAL CONTROL SYSTEM IN A MEDIUM SCALE BUSINESS
The aim of the study was to appraise internal control system in a medium scale business focusing on Innoson Company, Enugu. The objectives of the study were to determine the contribution of internal control in the detection of fraud in medium scale businesses, to ascertain the contribution of internal control system to prevent fraud in medium scale businesses and to find out the contribution of internal control system in investigating of fraud in medium scale businesses. The study used survey research design. The population consists of 152 staff while the sample size was 110. The study used tables and percentage for analysis while chi square was used to test the hypotheses. The study found out that internal control significantly contribute in detection of fraud in medium scale businesses among others. The study recommends that the internal control of government enterprises should be effectively implemented as it aids in detecting fraud in organizations. This is due to the fact that internal control helps in detecting voucher padding.
TABLE OF CONTENTS
Title page i
CHAPTER ONE: INTRODUCTION
1.1 Background of study 1
1.2 Statement of the problem 3
1.3 Objectives of the study 3
1.4 Research questions 4
1.5 Research Hypothesis 4
1.6 Significance of the study 5
1.7 Limitations of the study 5
1.8 Definition of terms 6
CHAPTER TWO: REVIEW OF RELATED LITERATURE
2.1 Conceptual framework 7
2.1.1 Element of internal control 8
2.1.2 Benefit of internal control 9
2.1.3 Limitation of internal control system 11
2.2 Theoretical framework 14
2.3 Empirical review 15
2.4 Summary of literature review 18
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research design 20
3.2 Source of data 20
3.3 Population of study 20
3.4 determination of sample size 21
3.5 Instrument of data collection 22
3.6 Method of data collection 22
3.7 Validation of instruments 22
3.8 Reliability of instrument 23
3.9 Method of data presentation and data analysis 23
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data presentation 24
4.2 Data analysis 26
4.3 Testing the hypotheses 31
4.4 Discussion of findings 34
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings 36
5.2 Conclusion 36
5.3 Recommendations 36
5.4 Suggestions for further studies 37
1.1 Background to the Study
Every firm, be it profit or non-profit making organization, will have some objectives which it deem attainable. For profit seeking organizations, their key goal is to maximize shareholder value while the non-profit making organization goal is to satisfy the citizenry’s social need. In order to achieve these purposes, supervision usually plays an important role in the organization (Lannoye,2013). Sometimes it is hard for the management of these organizations to provide first hand and personal supervision of operations due to the size, nature and scope of the organization. The basic components of organizational governance are risk management and financial performance. Therefore, for an organization to achieve this it needs to ensure effective and efficient operations, reliable information (both financial and non-financial) and compliance of rules and regulations. It is based on this fact that internal control systems are introduced in diverse organizations. Kabir (2012) states that internal controls are measures instituted by an organization so as to ensure attainment of the entity’s objectives, goals and missions. In some instances, internal controls are check mechanisms to avoiding wastages, theft and mismanagement of the organization’s assets. In pursuit of organizational objectives regarding reliable financial reporting, effective and efficient operations, managers and boards of organizations resort to establishing internal control systems in ensuring effective outcomes.
Internal control systems involves the control environment and control procedure, all the policy and procedure adopted by the directors and management of an entity to assist in achieving their objectives, including adherence to internal policies, the safe-guarding of assets, the prevention and detection of fraud and error as well as the completeness and accuracy of records, with the timely preparation of reliable financial information (Achibong, 2013).
It is necessary that every organization must have an internal audit department to ensure that accounting systems provide an efficient means of recording and reporting financial transactions, providing management information and protecting the company’s asset from fraud and misappropriation. One of the most effective systems for detecting fraud is internal control, which is a system by definition, operating in the same environment as the fraud itself and serving as an effective, formidable adversary to the fraud scheme and that the definition of internal control, described as a process, framework, or function, do not touch upon systematic concepts.
Internal control according to Achibong (2013), is the accounting tool that can be used to monitor the finances and its disbursement in a public sector organization in attempt to bring eliminate or bring to the barest minimum the issues of fraud in such enterprises. It is believed that properly designed and enforced internal control systems will normally lead to better financial reporting procedures as well as giving rise to a reliable report that improves management accountability function of an institution (Astin&Panos, 2011). However, the prospect of achievement is determined by limitations inherent in all internal control systems. In this respect, --Amudo (2008), explains that internal control systems can only ensure reasonable rather than complete guarantee to the achievement of the organization’s objectives which are instituted by an institution’s management and board of directors. It is based on this premise that this study is been designed to appraise internal control in a medium scale business.
1.2 Statement of the Problem
Internal control system is considered to be essential in accounting system as this will enhance the effectiveness and efficiency of the management of an enterprise.
An effective and efficient internal control system ensures that all recorded transactions are real, properly valued, recorded timely, correctly classified, correctly summarized and correctly posted.
However, whether or not the internal control system has helped the management in having a sound accounting system is the issue of debate. Therefore, the question being asked is whether the controls in internal control system are sure that errors and fraud can be discovered with reasonable promptness, and whether the control procedures as prescribed and applied in practice are successful in preventing and detecting material errors and fraud in the accounting system.
An adequate system of internal control reduces but does not eliminate the possibility of fraud or irregularities and error. An internal control system therefore, can only provide reasonable assurance that the management objectives in establishing the system are achieved. This is propelled by certain problems and limitations inherent in the internal control system. An efficient internal control system involves a clear definition and separation of duties for various employers of groups within a company. The intention of separating the duties is to protect against fraud, waste abuse and mismanagement of resource. It is quite unfortunate some organizations have failed to achieve this goal due to the prevalence of fraud especially as committed by employees in the organization.
1.3 Objectives of the Study
The broad objective of this study is to appraise internal control system in a medium scale business focusing on Innoson Company, Enugu.
The specific objectives include the following:
1. To determine the contribution of internal control in detection of fraud in medium scale businesses.
2. To ascertain the contribution of internal control system to prevention of fraud in medium scale businesses.
3. To find out the contribution of internal control system in investigation of fraud in medium scale businesses.
1.4 Research Questions
The following research questions are stated for this study:
1. What are the contribution of internal control in detection of fraud in medium scale businesses?
2. What are the contributions of internal control system to prevention of fraud in medium scale businesses?
3. What are the contributions of internal control system in investigation of fraud in medium scale businesses?
1.5 Research Hypotheses
The following hypotheses are formulated for this study:
HO1: Internal control does not have significant contribution in detection of fraud in medium scale businesses.
HO2: Internal control system does not have significant contribution to prevention of fraud in medium scale businesses.
HO3: Internal control system does not have significant contribution in investigation of fraud in medium scale businesses
1.6 Significance of the Study
This study will be of immense significance to the management and staff Innoson Company, Enugu in that it will go to a great extent in suggesting ways to ensure the effectiveness and efficiency of internal control system as well as how to prevent fraud in these firms with the aid of internal control system.
It will also enlighten scholars on the concepts of internal control system as well as other related terms associated with internal control system.
The general public will not just understand the concept of internal control system but may go to a great length in adopting its principles in their private businesses to curtail or eliminate fraud in their businesses.
The employees of diverse organizations will also get to understand the concepts of internal control system as well as how to apply its concept in fraud prevention and elimination.
1.7 Scope of the Study
This study focuses on internal control in Innoson Company, Enugu.
1.8 Limitations of the Study
The researcher encountered diverse constraints in the process of carrying out this study:
1. Difficulty in Gathering Research Material:
There was difficulty in gathering the necessary information or materials necessary for the successful completion of this research study. This is due to the fact that most of the respondents were either not on sit or were uncooperative in providing the necessary information as regards to the study.
2. Time Constraints
Time also posed as a constraint to the successful completion of this research study. The researcher had to combine the time for lectures and work to carrying out this research study. Though it was not easy but he was still able to carry out the research work.
There was not enough finance on the part of the researcher to complete this research study.
Irrespective of these constraints, the researcher was still able to successfully carry out this research study.
1.9 Definition of Terms
Internal Control System: This is defined as thewholesystem of control, financial and otherwiseestablishedbymanagement in ordertocarryonthebusiness of theenterprises in anorderly and efficientmanner.
Fraud: Fraud is defined as the intentional misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or an organization.
Misappropriation: To take (something, such as money) dishonestly for your own use.
Management Information System: A management information system (MIS) is a computerized database of financial information organized and programmed in such a way that it produces regular reports on operations for every level of management in a company..