THE EFFECT OF INTERNAL CONTROL SYSTEM IN BANKING INDUSTRY (A case study of Guarantee Trust Bank)
TABLE OF CONTENTS
Title page i
Table of contents v
CHAPTER ONE: INTRODUCTION 1
1.1 Background of the Study 1
1.2 Statement of the Study
1.3 Research Questions 4
1.4 Purpose of the Study 5
1.5 Scope and Limitation 7
1.6 The Significant of the Study 8
1.7 Organization and Plan of the Study 9
1.8 Definition of Terms 11
CHAPTER TWO: LITERATURE REVIEW 15
2.1 Literature review 15
2.2 Review of Related Control 16
2.3 Objective of internal Control system in
Banking Industry 18
2.4Causes and Prevention of Banking Industry Failure.
2.5 The Principle of Effective and Reliability of Internal control in banking Industry. 23
CHAPTER THREE: RESEARCH METHODOLOGY 25
3.1 Introduction 26
3.2 Historical background of Guarantee Trust Bank 27
3.3 Modification of the Research Question and Hypothesis 29
3.4 Research Design 30
3.5 Population Study 31
3.6 Sampling design and procedures 32
3.7 Pilot study validity and reliability 32
3.8 Procedure for processing and analyzing
collection data 33
3.9 Administration of the data collection schedule 34
3.10 Limitation of Methodology 35
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Respondents, characteristics and classification 36
4.2.1 Occupational table Data 37
4.2.2 Sample sex Table data 38
4.2.3 Sample Age Table data 39
4.2.4 Sample Department data 40
4.2.5 Sample level of education table data 43
4.2.6 Comparism of statement reflecting whether internal controls are in place and how can the be improved. 46
4.2.7 Comparism of statement reflecting whether effective and reliable internal control can help to prevent business failure 48
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary, 50
5.2 Conclusion 52
5.3 Recommendations 53
1.1 BACKGROUNDS OF THE STUDY
The term audit is derived from the Latin word “Audire which means to hear in the holding days. The origin of an audit dates back to the ancient times when the land owners allows tenants farmers to work on the land whilst the land owners themselves did not become involved to the business of farming. The Landlords relied upon an overseer who listened to the report of stewardship given by the tenants.
The account of the parties responsible for non financial transaction is used to be called and hear the explanation needed by the person who held the account know as an auditor.
Originally, the function of an auditor is to ascertain the fact, whether the accounting party has properly received the receipts and payment of cash on behalf of his principal and whether the financial statement prepared before him show true and fair view but the scope of audits today has been wide, because the modern auditing is a complex operation calling on a wide variety of skills varying from auditing and financial accounting knowledge to statistics, computing and communication skills.
This therefore become the most important part of the auditors duties owning the enlargement of size and complexity of business enterprises.
Today, the concept and scope of auditing has changed a comprehensive definition of auditing given has Roberts Eschlessors as quoted by Jagdish Drakash in his book. Adding, principle practice and problem (1990) says auditing is an examination of financial statements, records and related operation to determine adherence is generally accepted accounting principle, management policies restated requirement.
In this definition, emphasis laid on auditing being related to operations and how far the adhere to management policies or stated requirements, in other words we find out that we needs to introduce the effectiveness and breakable control of the system.
What then is this internal control system? Internal control system is the while system of control, financial or otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner ensuring adherence to management policies, safe guarding the assets and securing as far as possible the completeness and accuracy of records.
Millicham A.H (1990) In his institution manual for accounting also stated the auditor operational standard required that of an audit to be reliable on any internals control, he should ascertain and evaluate those control and perform compliance test on their control we therefore see that to have a sound reliable and effective control system in an organization we minimize the possibility failure of an enterprise.
1.2 THE STATEMENT OF THE STUDY
With reference to what was mentioned is the introduction that business failure could result to ineffective and unreliable controls system in an organization. This research work therefore will look into ineffective and unreliable control system in the banking industry, today, this posses as a problem because it bring so many associated problems which could be determinate of working capital, high debt equity ratio decline, profit decline, high labour turnover, law capital utilization, low quality service and finally focused which could be either sales fraud, purchases, wages of petty cash fraud.
1.3 RESEARCH QUESTIONS
This paper intends to find answer to these questions so as to achieve it objective and for the purpose of this research work.
i. What are the saving services of the banks and their operation?
ii. What are the native of operation of the bank?
iii. What are the conditions to grant loan and on what type of collateral do you grant loan?
iv. How does cash manager meet the demand of the deposit and the shareholder?
v. What is the policy of bank on the shortage or surplus declared by the central banks?
vi. Does your bank has any has investment in other bank or industry?
1.4 PURPOSE OF THE STUDY
The Purpose of the study is to critically look at the problems at land (Business failure) the associated problem bring an interrelationship between those variable and how one lead to the other or its effect and provide deterioration working capital. The amount available for running the days today business if there is uncontrolled wastage writing off to many debts e.g high debt equity, The ratio of outside investor to the share holders is important for business gearing, but when the gearing ratio becomes too high, there could by problems of insufficient profit to pay divided after the deduction of increasing debenture, interest interference of debenture holder in the affairs of a company in respect of non payment, irregularities invading the used of deposit to obtain an illegal or unjust advantages, this could either be cash or sales fraud, these type of fraud relate closely because before a cash fraud may occur a sale must have occurred, purchase fraud could be misuse of order form, creation of non-existing supplier, presentation of two cheques for signature with the same supporting document e.t.c
Wages Frauds: This could occur by including name on payrolls, leading ex-employees on the payroll or overcastting gross and net columns in the wages sheet. Wages fraud can be effective and reliable internal control which help to reduce business failure and other relates problems.
1.5 SCOPE AND LIMITATION OF THE STUDY
Internal control system being a very large topic could therefore be said that it would be different to work at all departments of internal control in an organization as a result of this the researcher limits himself to accuracy and authorization of operation with respect to cheques, cash receipts wages, salaries, petty cash and measuring the reliability and effectiveness control in the banking industry.
Personal interviews and structured questionnaire will be employed appropriately; also textbook, journals, and annual report shall be consulted.
The limitation encountered were those and willingness of respondents to answer important question.
1.6 THE SIGNIFICANCE OF THE STUDY
The financial services sectors such as banking building society, consumer credit, purchase leading, factory business ventures e.t.c bank represent probably the most important sector, this is not just in term of turnover profit and employment of labour but also in its paramount impact on the other sphere of the economy. Any problem on the banking system would invariable have strong effect on the economy and that is why the research work tries in study the internal control on the banking sector with respect to guarantee trust bank and see how its effectiveness and reliability would be uses to prevent business failures.
This work will serve as a basis of broadening the research knowledge on internal control, it the research knowledge on internal control, the customer audits investors, their would be confidence control in place that can be relied upon for safeguarding their depositor.
Management on the other hand will be able to reduce losses and improve on internal control system finally, the academic world will use this work as a basis for further study for the student.
1.7 ORGANIZATION AND PLAN OF THE STUDY
Plan of the study to this project is divides into five (5) chapters; that it: -
Chapter one of this project focus on or comprises the introduction background of the study, statement of the problem, purpose of the study, untative research question, definition of term, scope and limitation of the study and also the significant of the study.
Chapter two laid emphasis on the literature review that is what other author, newspaper, magazine involved and also to verify the interest figure that have said about objective, course and preventing of banking industry and the principle of effectiveness and reliability of the internal control system in bank industry.
Chapter Three deals with research methodology, historical background of guarantee trust bank, modification of the research question and hypothesis, research design and population study, sampling design procedure and pilot study validity and reliability, procedure for processing and analysing collection of data, Administration of the data collection schedule and limitation of methodology.
Chapter Four contains on the presentation and analysis, respondent characteristic and classification, occupation table data, sample sex, age, department and level of education data, comparison of statement reflection whether internal control are in place and how can this be improve the effective and reliable internal control to prevent business failure in an economy.
Finally chapter five formed the summary of the whole study, conclusion, recommendation and bibliography of the study.
1.8 DEFINITION OF TERMS
1.7.1 AUDIT:- In modern sense, an audit is an process (carried out by suitable qualified auditor) whereby the account of business enterprises including limited comprises, charities, trust and professional firms are subjected to scrutiny to form an opinion as their accuracy, truth and fairness. This opinion is imbedded in an “audit profit” addressed to those interested parties who commissioned the audit, or to whom the auditors are responsible undertake.
1.7.2 AUDIT TEST: - Test is carried out in the process of auditing to determining the trueness and failure of the transaction.
1.7.3 AUDIT EVIDENCE: - This is obtained by carrying out audit tests.
1.7.4 COMPLIANCE TEST: - These are those test which seek to provide, Audit evidence that internal control procedures are being applied as prescribed.
1.7.5 EFFECTIVENESS: - This is the degree to which predetermined objective of target is meet.
1.7.6 ENQUIRYS:- Seeking relevant information from knowledgeable persons inside the enterprises whether formally or informally.
1.7.7 COMPUTATION: Checking the arithmetical accuracy of the accounting records or seeking independent calculations.
1.7.8 INTERNAL AUDIT: This is an independent appraisal function within an organization for the review of system and the quality of performance as a services to the organization. It objective is to examine adequacy and internal control as contribution of the proper economic efficient and effective use of resources.
1.7.9 INTERNAL CHECK:- This is an aspect of internal control which is exclusively concerned with the prevention and detection or errors this involve the arrangement of book keeping and other clerical duties in such away as to ensure (1) that no signal fraud is encountered from its beginning to its conclusion by only one person (2) that the work of each clerk engaged upon a task is subject to an independent check in the source of another duties.
1.7.10 INTERNAL EVALUATION QUESTIONNAIRES:- This is list of question designed to get specific information about a particular item.
1.7.11 ORGANIZATION CHART: - This is pictorial presentation of level of authority and such that no person is responsible for the recording the processing of a complete transaction.
1.7.12 SUBTANTIVES TESTS: - These are the test of review, which seek to provide evidence as to the competence accuracy and validity of information in the accounting records in the financial statement.
5.0 SUMMARY, CONCLUTION, RECOMMENDATION AND BIBLIOHRAPHY.
This study was undertaken to examine the reliability and effectiveness of the internal control system in banking industry and whether it has been fully utilized in the preventing of business failure.
This research gives entrance altogether of what the work all is about and what is ought to find. It give a brief understanding of auditing which involve were cash audit to more move complex issues such as to ascertain whether the balance sheet and profit and loss for auditing objective to achieved as control is needful.
Penlative research question were asked and hypothesis were formulated to be tested in respect of the problem scope of the study was mentioned and limitation which the research were to encounter in this course of study.
This research also reviewed peoples opinion of the said topic, that business to continue functioning.
The business failure could be noticed when employee start resigning, idleness of machines, when capital for running the day to day affairs become difficult to get and when outside interest holder are more than the original owner of organization, causes which were obviously that of an effective and reliable control.
The researcher concluded by suggesting that if there were proper reporting that bad corporate communication sales decline will be erased and adherence to authorization and approval could check excessive frauds, which gradually deteriorate working capital rotational of having capability, commensurate with responsibility segregation of duties, supervisor physical verification of asset, accuracy of record e.t.c .
It is pertinent to note that for an organization to continues functioning properly, responsibilities must be allocated and define, also lines of reporting must be identified, strong adherence to authorization approach location of employee all duties must be segregated supervised, physical verification of assets and accuracy of records. The bank used as a case study was the guarantee trust bank of Nigeria plc. Control exist in the system and adequately but there was room for improvement.
It was shown in our test that, any inefficiency in any aspect of control would lead to one problem or other leading to business failure.
The effectiveness and reliability of internal control system can help in improving the performance and continuity of operations of guarantee trust bank Nigeria plc
i. The management should organize regular symposium, use of circular new, letter and manuals to enlighten and educate their employees and checks on the role of internal auditor in the bank.
ii. The system of internal control and its procedures must be evaluate at different state of operations and where loopholes are discovered, adequate steps should be taken to concept the immediately.
iii. The internal auditor department should not noly be honest and objective but must seen to be so, some qualities expect of them as professional qualifications experiences faithfulness and diplomacy.
iv. The internal control system should be reviewed to overcome. Some of its weakness which include all items for batching that must be thoroughly checked and others involved should make sure that all items needed in a batch are well prepared..