ABSTRACT
This study, internal
audit an effective tool for fraud control in a manufacturing organization. The
effectiveness of the internal audit were carefully examine and the aim of the
study is to ascertain the contribution of internal audit in fraud prevention in
a manufacturing organization, to evaluate the contribution of internal audit in
fraud detection in a manufacturing organization, to evaluate the contribution
of internal audit in fraud remediation in a manufacturing organization. The
survey research design was adopted and a sample size of eight (8) was gotten
using Taro Yamene’s 1964 formula out of the population of eight (8) staff in
Michelle laboratory Enugu. In determining the number of questionnaire
administered to the respondents, stratified random sampling and the kumar
proportionate were adopted. The data for the study was gathered with a four
point likert scale questionnaire. The study revealed that internal audit has
statistical significance association on fraud prevention in manufacturing
organization, also that internal audit has statistical significance association
on fraud detection in manufacturing organization and finally, internal audit
has no statistical significance association on fraud remediation in
manufacturing organization. The study concludes the failure of the management
to adopt the services of the internal auditor in an organization can lead to
fraud, loss of finance and lack of accountability. The study recommends that
since services of a qualified internal auditor has statistical association on
fraud prevention, detection and remediation in manufacturing company,
management should always adopt the services of the Internal auditors in the
firm so as to ensure no financial leakages and accountability in the firm.
CHAPTER ONE
INTRODUCTION
1.1
Background to
the study
Fraud
is the International distortion of financial statements or other records by a
person (internal or external) to the organizational which is carried out to
conceal the misappropriation of assets or otherwise for gain “(Adeniji 2004 and
institute of chartered accountant Nigeria – ICAN 2006).
However,auditors
have a significant role to play in the detection and prevention of fraud
because they are not only agents of shareholders but their access to internal
and external information makes them efficient monitor (Dyck, Morse &Zingales,
2008).The existence and in fact, the high incidence of fraud in company brings
to mind the question of competence, skills, due care, honesty, and integrity of
auditors in company or business enterprise, qualities are expected to be
displayed by an auditor in every time in every circumstances (Olofin, 2005
&Agbaje, 2007).
Lorsase
(2004) notes that when fraud occurs in work place, the question asked is “where
were accountants and auditors? That an auditor has the responsibility for the prevention,
detection, and reporting of fraud, and illegal acts and errors is one of the
most controversial issues in auditing, and has been one of the most frequently
debated areas amongst auditors, politicians, media, regulators and the public
(Gay & Roger,2002) However, there seems to be misconception that auditors
duties are largely the preventing, detecting and reporting of fraud (Idris,
2009). The internal audit unit is vested with the power of independent checks,
in order to access compliance with established rules and regulations of the
company (Okoya, 2002).Despite the fact that audit exist in various company with
internal control system in place, but the act of financial crime still
continues e.g. fraud, irregularities and even breaches of other control and no
any strong measures being taken to prevent such occurrence.
Auditors
are primarily concerned about fraud as it relates to misstatement in the
financial statement (Bells &Carcello, 2000). So, auditing has a greater
impact in the control of fraud and financial irregularities in companies that
make effective use of their auditing system .The study tends to identify
financial report users’ perceptions of the extent of fraud in company and to
determine their perceptions of the auditor’s responsibilities.
Moreover,
according to the Institute of International Auditors (1991), the internal audit
unit is expected to review the means of safeguarding assets and where
appropriate, verify the existence of such assets. Financial control has
concentrated on the cash out flow, purchasing procedures and accountability of
budget holders for current expenditure on resources inputs (Mainoma, 2007) and
(Buhari, 2001). Therefore, internal auditing furnishes authorities with
analysis, appraisals, recommendations and information concerning all activities
reviewed. The survival of every organization depends on it effective and
efficient utilization of resources (both financial and non-financial).The
internal audit unit is vested with the power of independent checks, in order to
assess compliance with established rules and regulations of the organization
(Okoya, 2002).
According
to Thompson (2003), internal auditing should not be restricted to financial
transaction only. Internal auditors can equally assist management by ensuring
that adequate financial and management controls have been implemented and are
operating effectively or by identifying the weakness in such system and making
recommendations toward their improvement. These include among others; internal
audit with which errors are more likely to be discovered in their early stages.
Existence of assets is verified so as to protect the assets of the company,
errors in account can be correctedearly once detected by the internal auditors,
its acts as moral influence on the staffs and promotes efficiency by compelling
the officers to keep on their books of account entered up to date, a detailed
examination of the financial account submitted by contractors is facilitated, cash
disbursement, such as for wages and salaries, may be checked before theyare
cashed.
The
responsible for ensuring that internal control is established in the
organization lies with management. The internal audit is supposed and to be
custodian of internal control by providing assurance to the management that the
company has put in place adequate and effective internal control system, and
must not hesitate to draw management’s attention to lapses observed in the
control. A good and visible internal control system increases operational
efficiency, thereby making it more difficult for the preparation of fraud
(Mayo, 2003). Effective internal control requires; appropriate accounting
procedure and system, division of duties I.e. separation of responsibilities,
especially those of authorization, regular verification of supervision of each
person’s work by their superior officers. Internal control in its broad sense
includes all controls operated by an organization to facilitate its activities
and improve its efficiency and productivity. It also includes all
administrative controls designed to effect, supervise and check management
policies and strategies within an organization such as work study, production
control, marketing, selling and distribution, financial and accounting control.
The main objective of internal auditing is to provide assurance to management
that the internal control system in the company is sound in design and
effective in operation. It also helps to achieve value for money(Momoh 2005).
Okwoli (2004)
also shares the view that the present requirement of internal audit is not the
detection of fraud and errors, but reviewing the system of internal control.
This is because in private company, internal audit is meant to carry out an
independent appraisal of the effectiveness of internal controls and other
financial controls in such ministry. Norm Anton as cited in Daniel (1999),
emphasizes the importance of internal audit by saying that ‘’without audit, no
efficiency, no development. The growth of any economy depends to a large extent
on the system of control adopted by the management and the success and
sustenance of the internal control lies on internal auditing. The above
observation underscores the importance of internal audit in every organization
of the internal control to effect.
Organization all
round the world be it financial or otherwise needs auditing for proper
assessment of their financial statements. In order to achieve set out goals and
objectives, resources must be properly managed to get the profound results needed.
(Joe, 2013).
Auditing in the
Nigerian organizational system is relevant hence financial management in any
company leads to the success and growth of the company.Auditing as a tool for
accountability for efficient and effective company administration is clear term
study which will educate us on the importance of company audit and how it will
affect the staff if mismanagement of fraud eventually occurs.
1.2
Statement of the
Problem
Fraud is the use
of one’s occupation for personal enrichment through the deliberate misuse or
misapplication of the employing organization’s resources or assets, and is
unfortunately, much more common in private than some owners realize. It has
really been the undoing of many unlucky businesses. Private companies are
likely to be victims of internal fraud, even much more than their larger
counterparts (conventional Companies) as owners tend to put blind faith in
their employees. They also neglect to take proper precautionary measures
against fraud, which can add to the cost of doing business. The problem is that
the trust that many owners o private companies placed in their employees is not
always justified.
Clearly, fraud
is a pervasive corporate problem, affecting organizations across industries and
sectors without regard to size. Because of fraud’s disastrous consequences,
failure to put deterrent procedures in place could put a company out of
business within days. Fraud prevention, then, is a defined program of proactive
measures to avoid or mitigate fraud. Failing to address these issues places a
company at a competitive disadvantage when fraud becomes a cost of doing
business. The study therefore, wants to ascertain how internal audit contribute
to effective fraud control in organizations.
1.3
Objectives of
the Study
The main
objective of the study is to examine the internal audit system in the operation
in companies in Nigeria and evaluate the effectiveness of the system as a toll
for fraud control.
The study also
has its specific objectives as follows:
i.
To
ascertain the contribution of internal audit in fraud prevention in a
manufacturing organization.
ii.
To
evaluate the contribution of internal audit in fraud detection in a
manufacturing organization.
iii.
To
evaluate the contribution of internal audit in fraud remediation in a
manufacturing organization.
1.4
Research
Questions
Based on the
objectives, this study seeks to answer the following questions:
i.
To
what extent do internal audit contribute to fraud prevention in a manufacturing
organization?
ii.
What
is the contribution of internal audit to fraud detection in a manufacturing
organization?
iii.
How
does internal audit contribute to fraud remediation in a manufacturing organization?
1.5
Research
Hypotheses
This study is
required to test the following:
i.
H0:
Internal audit does not contribute significantly to fraud prevention in a
manufacturing organization.
H1: Internal audit
contributes significantly to fraud prevention in a manufacturing organization.
ii.
H0:
Internal audit does not contribute significantly to fraud detection in a
manufacturing organization.
H1: Internal audit
contributes significantly to fraud detection in a manufacturing organization.
iii.
H0:
Internal audit does not contribute significantly to fraud remediation in a
manufacturing organization.
H1: Internal audit
contributes significantly to fraud remediation in a manufacturing organization.
1.6
Significance of the study
The work is very
relevant in one way or the other to the Nigeria companying industry as a whole,
primarily this study is designed for all those who may be interested in
carrying out further study on internal audit system as it related to fraud
prevention, detection and remediation in manufacturing organizations in
Nigeria.
Manufacturing
Companies:
companies in Nigeria will derive great assistance from this research work in
detecting fraud in their companies and improving their internal control system
subsequently preventing and minimizing fraud. There is no need over-emphasizing
the fact that if companies are able to reduce the incidence of fraud in their
operation to the least level, there will be able operates on a more profitable
ground.
Shareholders:
They
are the direct beneficiary of companies and they will get bonuses if the
companies operate successfully. The use of internal audit system will reduce
the risk of fraud and increase the company’s profit which will reflect on the
dividends of the shareholders.
Customers: company
customers deteriorating confidence on the companying industry will once more be
restored and thereby help in building up good companying habit in Nigeria.
Government:
The
creation of an effective internal audit committee function can help a
government establish accountability because it can focus specifically on issues
related to fiscal accountability.
1.7 Scope
of the study
This study
concentrates solely on the manufacturing organizations and focuses on Michelle
Laboratory Plc.
Empirical
generalization will be made of other private organizations in Nigeria.
1.8 Limitations
of study
A very detailed
research work was not possible as a result of some limitations suffered by the
work.
The major part
of this is as a result of the secrecy of organizations in Nigeria.
Organizations in Nigeria do not let out information to people easily especially
researchers. This is because other people can make reference to their research
work and use the information against the organization.
Other limitation
composed on this study, is that of shortage of time and financial constraints.
The time limit set for the submission of this project work was short and this
made it impossible for a detailed research work to be carried out. These
problems of time and finance account for the limitation of the sample size to
only Michelle Laboratory Plc. in Enugu. However, through concerted effort I was
able to finish the project without compromising the quality of output.
1.9 Definition
of terms
It is very
eminent to define some professional terms and language used in this work to
make it easily understandable to interested readers of other disciplines.
Audit: Ajembi (1999)
describe audit as an examination by an individual or a firm of a set of financial
statement and to the underlying books and records which result, the auditing
provides an opinion on the financial statement. Audit here refers to internal
audit.
Accountability: This simply
defined as the process of keeping and documenting all the relevant data of an
event.
Stewardship
Account:
This is an account required of the stewards or agents to render to the person
they are subjected to the management of a firm render stewardship account to
the members of the boards of directors.
Financial
Statement:this
is a formal record of the financial activities and position of a business,
person or other entity.
Shareholders: This is a
person who owns a share in an organization or firm.
Financial
Irregularity:
This is the international distortion of the financial statement for whether
purpose of misappropriation of fund.
Compliance
Audit: This
is a kind of audit method carried to ensure that all books and records are in
agreement with the laid down procedures and regulations.
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