THE ROLE OF INTERNAL AUDITORS ON THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM

THE ROLE OF INTERNAL AUDITORS ON THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM

ABSTRACT

The number of business failures in the world is staggering today. This has led to economic ruin in many countries (developed and developing), and continues to do so in some cases. Most business failures can be traced back to the inability or deficiencies of the internal control system (lCS). This has led to many external auditors losing confidence in the work done by internal auditors. This research focuses on the role of the internal auditors in the effectiveness of the internal control system. It examines the importance of the internal audit function, the challenges faced by the internal audit function, and offers suggestions on how to address those issues to improve the efficiency and effectiveness of business managements. Nestle Nigeria PIc – Otta branch was selected for this purpose. The questionnaires were used for data collection. The proceeds of the respondents (Nestle Nigeria PIc workers) were then analysed.

Interviews were also conducted at Gbeke Oyeniyi & Co, a company that provides internal audit services to companies in Lagos. This was done in order to determine the positions of other businesses in relation to internal auditors challenges. These challenges were identified as part of the research results and business managers were given recommendations on how to overcome them. The research was concluded by advising business owners on how to manage some of the controllable issues businesses face in order to ensure their business’ success and continuity.

CHAPTER 1

INTRODUCTION

1.0 BACKGROUND FOR THE STUDY

Today, there has been a lot of business failures around the globe. This is usually due to management inefficiency in areas such as fraud detection and prevention. Businesses have taken many measures to address this problem. These measures include the creation of –

• Internal Control System (ICS);
• Internal Audit Unit (IAU);
• Total Quality Management (TQM)
• Building a team;
• Organizational control processes, such as policies or procedures, include organizational controls

The internal control system is a way to monitor all other control systems in a business and is the most important measure to strengthen in order for business success.

As an instrument of management, the Internal Audit Unit is responsible for ensuring that the Internal Control System works effectively. They also monitor every control measure taken by management and help to achieve the organisational goals.

In fulfilling their responsibilities, internal auditors face some challenges that make their work more difficult and contribute to failure of the Internal Control system’s (lCS) objectives as well as the overall business organisation’s goals and objectives. These are the questions:

• How can the Internal Control System be effective when internal auditors are not able to perform their duties?
• What are the main challenges faced by internal auditors when performing their duties?
• What can be done to address the issues of internal auditors and ensure business success?

The Internal Control System is built upon the foundation of the Internal Auditor*.

1.1 STATEMENT ABOUT PROBLEMS

Most of the businesses that fail are unable to control their internal controls. It is usually due to management failures in setting up an effective Internal Control System, ineffectiveness of the existing Internal Control System, or non-issuance absolute power to the internal auditor in order ensure its effectiveness. Many businesses have poor records in product quality, low productivity, low sales record; false/unfair accounts statement; poor business performance and slow growth rate. This can all lead to lower productivity and ultimately business failure. These are just a few of the things that can affect the functioning of internal auditors.

• Incompetency/Negligence of internal auditors;
  • Inadequate separation of the Internal Audit Unit (IAU), from the accounting department
  • Fraud involvement of internal auditors
  • Management involvement in fraud
  • The role of the godfather/Abusive abuse of authority
  • Independent auditors for internal audits
  • Internal auditors’ motivations/remuneration.

1.2 STUDY PURPOSE

This research will help to identify:

• Internal auditors play a critical role in ensuring that the Internal Control System is effective within an organization.
• Factors that can hinder internal auditors from performing their duties.
• The only way to address the problems of internal auditors is to ensure the absolute functionality and effectiveness of the Internal Audit Unit (lAU).

1.3 REQUESTIONS

These are the research questions that will guide you during your research.

i. Is it necessary to have internal auditors?

ii. Ii. Would an absence of internal auditors affect the organisational Internal Control System (OIC)?

iii. Do you think the internal control system of an organisation should be strengthened?

iv. iv.

v. Should internal auditors be able to focus on only accounting records and ignore all other aspects of business?

vi. vi. Should an organization’s internal auditors be independent?

vii. Management should ensure independence of internal auditors?

viii. What do you think about the management effort to ensure internal control system effectiveness and efficiency?

ix. Ix.

x. Are internal auditors required to be employees of an organization?

xi. Do internal auditors within an organization need to be professionally certified

1.4 RESERCH HYPOTHESIS

The following research hypothesis was developed to help in the identification of possible solutions to the problems and challenges faced by internal auditors when ensuring internal Control System effectiveness.

*Null Hypothesis

* Alternative Hypothesis (HI).

i.Ho – Internal auditors are not required in an organization.

Hi, that an organization needs the services of internal auditors.

ii. Ho – The Internal Control System’s (ICS) effectiveness will not be affected by the absence of an internal auditor.

Hi – The Internal Control System’s (lCS) effectiveness will be affected if there are no internal auditors.

iii. Ho – This Internal Control System does not need to be strengthened.

Hi, The Internal Control System must be strengthened.

iv. Ho – Internal auditors within an organization do not need to be professionally certified.

Hi, All internal auditors in an organization must be professionally certified.

v. Ho. – The internal auditors in an organization should not be independent.

Hi – The internal auditors in an organization should be independent.

vi. Ho – Management should not increase efforts to ensure effectiveness of the Internal Control System.

Hi – The management should increase efforts to ensure the effectiveness of the Internal Control System.

vii. Ho – Management should not guarantee independence for internal auditors.

Hi – Management should ensure independence of internal auditors.

1.5 SIGNIFICANCE DURING STUDY

The owners, who are both the investors and the capital providers for businesses, have experienced a variety of problems due to management inefficiency (ices). This has led to some potential investors deciding not invest their capital on businesses. These problems include:

• Total business failure may result in the loss of invested funds and the request for money (money) upon liquidation. Investors may be required to provide additional* funding to help the creditors.
  • Poor business performance can lead to non-declaration or inconsistent payments of dividends.
  • Management incompetence, as well as other irregularities, can lead to poor capital growth and continual falls in market share.

External auditors, who are responsible for investigating and formulating opinions on the true and honest view of a company’s financial statements, find their scope more expanded in organizations where they cannot rely on internal auditors. Such cases will require very thorough investigation as if internal auditors were not present.

This research will help to prevent the occurrences of the above-mentioned challenges. It will also aid in the restoration of confidence in the minds of both prospective and immediate investors on securities that they invest in businesses.

1.6 STUDY SCOPE

This research will focus on the impact of Internal Control System (lCS) on the effectiveness of Internal Auditors. It will also consider how important internal auditors are in this process.

Nestle Nigeria Plc – Otta Branch.

It will also cover the following:

• Problems of internal auditors being addressed
• External auditors are provided with measures to rely on internal auditors’ work and the Internal Control System (lCS).
• Investor confidence in management (management)

1.7 LIMITATION TO STUDY

Research in a developing country such as Nigeria is plagued by a lack of sufficient data requirements. Most of the data collected are not only insufficient but also unreliable.

Another problem is the time limitations. This research work takes longer than expected and may not allow for deep analysis of the subject.

Another limitation to this study is financial constraints. Finance is an important resource in any research project. To be successful in research, you must have a high level of financial commitment to reach a larger population and make generalized conclusions about the whole population.

1.8 DEFINITIONS TERMS

Some terms and concepts are not clear in this context. These meanings will be clarified under this heading.

Definitions of various terms and phrases:

• Auditing Independent examination and expressions of opinion on the financial statements of an enterprise by a designated auditor in accordance with any applicable statutory obligation.
• Adequate control:Present If management has organized and planned (designed) in such a way that it provides reasonable assurance that risks have been effectively managed and that the organization will achieve its goals and objectives efficiently and economically.
• Board: A board is an organization’s governing body. It can be a board or supervisory board, a board or head of an agency, legislative body, board or governors, or trustees.
• Engagement A specific task or review activity for internal audit. This could include an internal audit, self-assessment review of control, fraud examination or consultancy. An engagement can include multiple tasks or activities that are related to a set of objectives.
• Finance:This activity involves the provision of money or funds to the places and times that are most needed.
• Fraud is Any illegal act that involves deceit, concealment, or violation of trust. These acts do not require the threat of violence, or use of force. Parties and organizations commit fraud to get money, property, or services; avoid losing services; or secure their personal or business advantage.
• Government The combination of processes and structures used by the board to inform and direct manage the activities of the organization towards achieving its objectives.
• Management:This refers to the organization and control of an entity or sector.

Risk: An event that could have an adverse effect on the achievement or pursuit of goals. The risk is assessed in terms of likelihood and impact.

Standard: A professional pronouncement issued by the Internal Audit Standards Board. It outlines the requirements for performing a wide range of internal audit activities and for evaluating internal auditor performance.

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