THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM AND IT’S IMPACT ON THE ACTIVITIES OF PRIVATE LIMITED COMPANIES (A CASE STUDY OF PHINORMA NIGERIA LIMITED NGWO)
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1.1 INTRODUCTION AND BACKGROUND OF THE STUDY
The concept of internal control system is becoming increasingly useful in the practice of modern audit that it will be worth while understanding the subject matter and the role it plays in the effective management of a business enterprise. The existence of internal control system in an organization is of great assistance to both the management and the auditions of such an organization.
Not only does it aid the management in the process of decision making, it also provide a base upon which the auditions place reliance when carrying out his audit. With a sound knowledge of the system of internal control operative in a firm, one can easily make a valid judgement on why a firm failed or succeed in its business within the period under review.
According to Holmes (1964, 78) who maintained that as business organization have grown in physical size, as operations have expended in complexity, and as transactions have supplies itself promptly with reliable data based on the objectives of assets presentation, error elimination and income determination. The method of procedures adopted by a business to control its operations provides the management with an assurance that the data available are authentic and factual.
Such system of control comprises measurers taken by an organization for the purpose of protecting its resources against waste and fraud, ensuring accuracy and reliability of accounting and operating data, seeming compliance with company’s policy and evaluating the level of performance in all the sections company. In the words of Meigs (1997, 8) the basic principle of internal control in that no one person should handle all phase of a transaction from beginning to the end. He remarked that when business operations are organized that two or more employees are required to participate in every transaction; the work of one employee gives proof of the accuracy of the work of another.
The primary aim of any organization is to achieve a maximum profit at a minimum cost. This is made possible by the institute of internal control system which acts as a canopy section of an organization.
This type of control existing in a firm therefore plays a very important role in the sense that it helps in the efficient conduct of the firms business consequently. Internal control has been defined by the institution of chartered accountant of England Wales (vol. xix no 17, 36) as the while system of controls, financial and other wise established by management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets secure as far as possible the completeness and accuracy of the records.
It could be inferred from the above definition that internal control system embraces other controls such as internal check and internal audit which operates by appraising and reputing the effectiveness of other control. This will minimize errors, fraud and ensure the presentation of accurate and reliable data. The success of failure of an enterprise depends on a large extent on how effective the system of control is, therefore the hope of the researcher that this study will not only be useful to both employers and employees in the private limited companies but also to investors and provided of capital to both public and private enterprises.
1.2 STATEMENT OF THE PROBLEM
According to Osuala (1987, 36) the statement of problem serves to elaborate upon the information in the title of the study. This study is concerned with the examination of internal control system and its impact on the business of PHINORMA Nig. Ltd Ngwo. The problem could be categorized as general control and application control which firm the basic of internal control system in any organization.
A research project has two important parts namely: -
The question posed and the answers. The researcher seeks to find out the extent to which the system of internal control on PHINORMA Nig LTD Ngwo influences the business by addressing them to the following questions:-
i. Are all transactions from beginning to the handled by the same set of individuals?
ii. How far has the existence of internal audit helped to minimize errors and fraud in the company?
iii. Are employees being supervised made to know their responsibilities and the consequence of failing to carry them out?
iv. Does all staff see the company’s goal as a joint responsibility?
v. Does the company take adequate step to safeguard their assets including debts being owned to it?
1.3 OBJECTIVE OF RESEARCH
The objective of research implies the aims of the researcher in the undertaking the research. It is an overview of the study itself and related very much to its problem in view of the problem state and subsequent questions posed the objectives of this research include the following: -
i. To assess the strength and weakness of internal control system in PHINORMA Nig Ltd Ngwo with the view to determining their ability to minimize fraud.
ii. To discuss as far as possible how mismanagement in the manufacturing sector could be curtailed through the institution of a good internal control system.
iii. To ascertain how far the internal control system in PHINORMA had aided the management in the realization of their organization’s objectives.
iv. To make necessary recommendation on how to correct lapses which may be discovered at the course of this research.
v. To increase the knowledge of research on the internal control system operative in PHINORMA Nig Ltd Ngwo.
1.4 SCOPE AND DELIMITATION SCOPE
This according to Osuala (1987, 28) is concerned with the those parts of topic or problems that normally might be considered to be part of such but which because of limitation of time or other reason, the researcher cannot or does not wish to include, the thus the researcher would have to restrict herself to a particular area of concentrate at specific period of time. So the scope of the research is the effectiveness of the internal control system and its impact on the activities of PHINORMA Nig. Ltd Ngwo. The firm is made up of one several departments and sections. For a better appraisal of internal control system in the firm, one would need to visit several departments and officers’ in-charge in such departments to access their system of controls.
The researcher encounters a lot of problems while carrying out her work. Some are worth mentioning hence they have much bearing with the atmosphere within which the project work has undertaken.
Firstly, time factor: - There is no enough time for the researcher to do research work thoroughly. During such short time, the researcher battled with the project and semester’s work load. This hindered the opportunity of carrying out a data led the research work as could befit the project at hand.
Secondly, the uncompromising attitude of the staff of the firm; these people were not prepared to give out some necessary information needed for reasons of secrecy and self presentation of vital documents. Consequently, for reasons of fairness some valuable information including actual documents sourced mentioned or shown in the project.
Finally, the last problem but not the least was lack of fund to meet occasional demand for transportation fare and other related necessary materials to enhance a hitch free research work.
1.5 RESEARCH QUESTIONS
It is an overview of the study itself and very much related to the problem in view and objective of the research. It includes the following: -
i. To what extent does the strength and weakness of internal control system in PHINORMA with the view of determining their ability to minimize fraud?
ii. To what extent does mismanagement in the manufacturing sector could be curtailed through the institution of good internal control system.
iii. To what extent does internal control in PHINOMA aided the management in the realization of their organizational objective?
iv. To what extent are recommendations on how to correct lapses which may be discovered at the course of the research?
v. To what extent does increase in PHINORMA Nig Ltd being the focus of this study produces
The purpose of this study is to access the strength and weakness of internal control system in Phinorma Nig Ltd with the view of determining their ability to minimize fraud. Also to discuss as far as possible how mismanagement in the manufacturing sector could be curtailed through the institution of internal control system.
The primary aim of Phinorma Nig Ltd is to maximize profit at a minimum cost. Their accounting records shall be sufficient to show and explain the transaction of the company and shall be such as to disclose with reasonable accuracy at any time the financial position of the company. This accounting contain entries from day to day of all sum of money received and expended by the company and the matter in respect of which the receipt and expenditure take place and records of assets and liabilities of the company. To live up to the expectation of such responsibility, the management of Phinorma has to evolve a strong system of internal control which would not only spell out a clear segregation of duties among its employees but also set in motion the machinery of careful supervision of their activities and detailed recording of transactions in order to minimize fraud and safeguard the assets of the company.
On the contrary, it is unusual to hear cases of fraud and mismanagement involving the employees of companies; such is a clear manifestation of non-existence of internal control system in the affected companies or that the existing system or totally assent, and member of the organization. Pyle (1975; 200) there would be nothing but confusion as to what has been ordered, received, and there would be error, duplications, shortage and payment for goods not received plus unlimited opportunities for fraud through kickboards to dishonest employees and through payment of factors invoices.
The institution of this system plays a very important role in the sense that its helps in the efficient conduct of the firms business consequently.
1.5 RESEARCH QUESTIONS
The following research questions were formulated in order to find solutions to numerous problems states in the statement of problem. Also to determine the effectiveness and impact of internal control system in Phinorma Nig Ltd. the following research questions are very necessary.
Does internal control in Phinorma aid the management in the realization of their organizational objectives?
Could mismanagement in manufacturing sector be curtailed through the institution of good internal control system?
Are there recommendations on how to correct lapses which may be discovered at the course of this research?
Is there any increase in the knowledge of research on the internal control system operative in Phinorma Nig Ltd?
What are the ability of internal control system in Phinorma with the view to minimize fraud.
The knowledge of research on the internal control system operative in Phinorma Nig Ltd Ngwo?
1.6 SIGNIFICANCE OF STUDY
This refers to the importance or usefulness of the research to the private limited companies, the individuals and the public at large. The ultimate aim of every research is to provide knowledge and information that will bring about a better understanding of the topic under review.
This study is aimed at providing an understanding of the effectiveness of internal control system as obtainable in the Phinorma Nig Ltd Ngwo.
In addition, the researcher will be able to know the extent to which internal control system in the company have helped the management in the realization of the firm’s objectives.
The research will also enable the management to appraise the internal control system in operations with a view to correcting any lapses which may be evident during the investigation process. When completed the research finding and recommendations will form a base to be relied upon by subsequence researchers which may wish to make further inquires into the system of internal control operating In Phnorma Nig Ltd Ngwo.
1.7 DEFINITIONS OF TERMS
This is the meaning of some of the key words used by the researcher in the context of this study. It includes: -
Has been defined by Cook (1976, 135) as the planning, implementation, evaluating and correction of performance in order to ensure that organization objectives are achieved. In involves organizational structure, procedure and records.
According to Mill Champ (1987,16) it has been defined by the committee guide line on Auditing practices as irregularities involving the use of criminal deception to obtain an unjust or illegal advantage. As applied to accounting, fraud constitutes any act or omission of an act that is required or the commission of a deceitful and therefore dishonest nature.
The entire cycle of steps necessary to complete the exchange of assets between the parties or the transfer or use of assets within the business.
All records maintained for transactions and the resulting assets or services and all functions performed for those records.
Refers to the examination of the records and accounts of an organization for specific purpose and for a specific period. The purpose may be for obtaining information of particular nature of work required by a client or in the case of fraud for the purpose of ascertaining its extent.