The Impact Of Internal Control System On The Financial Management Of An Organization

THE IMPACT OF INTERNAL CONTROL SYSTEM ON THE FINANCIAL
MANAGEMENT OF AN ORGANIZATION
(A CASE STUDY OF THE NIGERIA BOTTLING COMPANY PLC, ENUGU)

ABSTRACT
Over the years, there have being a problem of incorrect and unreliable financial record which has lead to loss of organizational integrity. The research work aimed among others at determining the relationship between internal measures to proper accounting records. A survey research design was adopted for this research study and a sample size was selected using Yaro Yamane sampling technique as data used were obtained from both primary and secondary sources. Four research questions were formulated out of which three hypothesis were formulated using regression co-efficient analysis method at 5% level of significance and the Z table was also used for comparison between calculated value of significance B and tab le value. The finding from the analysis indicates that internal control measure management performance and is necessary for the growth and effectiveness of the organization. Financial management of any organization cannot do without internal control as true and fair presentation of financial statement may never be possible if the board and senior management are not committed to providing a well planned internal control system. It also recommends that a periodical review of the organization should be done by the management so as to cope with the model trends in organizational fraud prevention.
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TABLE OF CONTENTS
Cover page
Title Page i
Dedication ii
Acknowledgement iii
Approval Page iv
Abstract v
Table of contents vi
CHAPTER ONE
INTRODUCTION
1.1 Background of the study 1
1.2 Statement of problem 3
1.3 Objective of the study 4
1.4 Research Questions 5
1.5 Statement of hypothesis 5
1.6 Significance of the study 7
1.7 Scope of the study 7
1.8 Limitation of the study 8
1.9 Definition of terms 8
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1.10 References 10
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction 11
2.2 Internal control 11
2.3 Role and Purpose of internal control 13
2.4 Types of Internal control 15 2.5 Function of internal control 19
2.6 Internal control in financial institution 20
2.7 Element of a good internal control system 24
2.8 Relationships between internal auditing and internal control system. 27
2.9 Management and internal control system 28
2.10 Defect and shortcoming of internal control 29
2.11 Possible solution to defects internal control system 31
2.12 Limitation of internal control 32
CHAPTER THREE 34
3.0 Research methodology
3.1 introduction 34
3.2 Research design 34
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3.3 Sources of data 34
3.4 Area of study 35
3.5 population of the study 35
3.6 sample size and sampling technique 35
3.7 Research instrument 36
3.8 Validation and Reliability of instrument 37
3.9 Method of data analysis 37
CHAPTER FOUR
4.0 Data Presentation and analysis 40
4.1 introduction 40
4.2 Data Presentation 40
4.3 Test of hypothesis 45
CHAPTER FIVE
Summary, Conclusion and Recommendation 54
5.1 Summary of findings 54
5.2 Conclusion 54
5.3 Recommendation 55
Bibliography 57 Appendix 59
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Questionnaire 60
ABSTRACT
Over the years, there have being a problem of incorrect and unreliable financial record which has lead to loss of organizational integrity. The research work aimed among others at determining the relationship between internal measures to proper accounting records. A survey research design was adopted for this research study and a sample size was selected using Yaro Yamane sampling technique as data used were obtained from both primary and secondary sources. Four research questions were formulated out of which three hypothesis were formulated using regression co-efficient analysis method at 5% level of significance and the Z table was also used for comparison between calculated value of significance B and tab le value. The finding from the analysis indicates that internal control measure management performance and is necessary for the growth and effectiveness of the organization. Financial management of any organization cannot do without internal control as true and fair presentation of financial statement may never be possible if the board and senior management are not committed to providing a well planned internal control system. It also recommends that a periodical review of the organization should be done by the management so as to cope with the model trends in organizational fraud prevention
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CHAPTER ONE
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Every organization both profit or non-profit organization has its objectives and goals in mind to achieve. For the non-profit making organization, their goal is to satisfy the social need of the citizens and in the effort to achieve these purposes supervision more often than not play a vital role.
The size and scope of these organizations have sometimes made it hard for the executors to exercise personal and first hand supervision of operation. It is in this light that internal control established by management is initiated. For an organization to carryout its business there must be some factors put in place for the smooth running of the organization like materials, machines, money etc.
These need to be well co-ordinated in order for the success of the organization to be achieved. These factors are used by a group of persons known as management. Neither can management exists without an organization both are inseparable. The system of
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internal control provides assurance to management of the dependability of the accounting data used in the decision making of the organization
It has been discovered that due to lack of internal control several banks have been discovered to have defrauded its customers mostly foreign investors, Having discovered this, banks now take extra precaution before clearing a cheque because of rampant incidence of fraud and forgeries which have placed bank. Loss on average of N1m each working day of the year in Nigeria. Due to this challenges, CBN issued a directive to banks to increase its capital base to N25 billion.
Management use internal control as a tool to check it staff due to the fact that managers are not able to monitor the activities of the organization. It therefore adopts the internal control in such a way that the system checks itself and any irregularity within the system is been detected and corrected.
To ensure that the system checks itself, management could use devices such as segregations, supervision of work and acknowledgement of performance. The effective arrangement and
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implementation of this control system would ensure proper management.
1.2 STATEMENT OF PROBLEM
We might not really understand the impact of internal control system in an organization until probably we run an organization void of internal control system.
The absence of adequate internal control measures exposes the financial management of an organization to certain threats such as:
- Incorrect financial statement and /loss of the companys’assets.
- Stealing and mis-management of organizational vital documents which may be done by an employee to take undue advantage.
- Incorrect and unreliable financial records which may lead to loss of organizational integrity.
- Non implementation of accounting policies in consistent with the applicable legislation appropriate in presentation of financial statement.
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1.3 OBJECTIVE OF THE STUDY
The overall purpose of this research work is to evaluate and determine the impart of internal measures in an organizational financial management.
A well defined organizational structure helps management to run the business in an orderly manner. This enhance operational and efficiency, which is the important features of internal control.
Specifically, this research work stands to achieve the following objective.
1. To determine the impact of internal control to proper use of organizations funds and assets.
2. To ascertain whether perpetration of fraud and losses of Revenue in an organization are as a result of weakness in internal control system.
3. To ensure whether a true reflection of organizational activities are presented in financial statement where there is an active observation of internal control measures.
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4. To determine the relationship between internal control measures and proper keeping of accounting records.
1.4 RESEARCH QUESTION
The following research questions will be used to form the research hypothesis and they are:
1. To what extent does the internal control measures impacts on appropriation of organizational assets and funds.
2. To what extent does perpetration of fraud and losses of Revenue in an organization are as a result of weakness in the internal control system
3. To what extent does internal control enhance a true reflection of organization activities as presented in the financial statement
4. To what extent does a relationship exists between internal control and proper keeping of accounting records
1.5 STATEMENT OF HYPOTHESIS
This research is undertaken on the basis of the following hypothesis.
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HYPOTHESIS ONE (1)
Ho: internal control measure does not ensure proper use of organizations funds and assets.
Hi: Internal control measure ensures proper use of organization funds and assets.
HYPOTHESIS TWO (2)
Ho: Fraud perpetration and losses of revenue in an organization are not as a result of weakness in the internal control system.
Hi: Fraud perpetration and losses of Revenue in an organization are as a result of weakness in the internal control system.
HYPOTHESIS THREE (3)
Ho: internal control does not ensure, a true reflection of an organizational activities as presented in financial statement
Hi: Internal control ensures a true reflection of an organizational activities as presented in financial statement.
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1.6 SIGNIFICANCE OF THE STUDY
There is no controversy that this research works have been conducted on internal control system, however much emphasis has been placed on the impact of a good internal control system on financial management of organizations.
This research work will go a long way in helping an organization discover the impact of weakness in internal control and suggest measures in correcting them. It will also reveal the problems caused by bad internal control system and be useful to students, scholars, lecturers and other third parties as it shall open new area of further research work and at same time advance challenges to up-coming researchers.
1.7 SCOPE OF STUDY
The impact of a good internal control aids management effectiveness in its organization. This research will specifically Focus attention on the activities of organizations in Nigeria and due
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to the logical point that not every organization can be studied, this research is therefore limited to the Nigeria Bottling Company. The focus of this research is to show the impact of a good internal control system in the performance of organization Financial management.
1.8 LIMITATION OF THE STUDY
The major constraints in this study include the conservating nature of organization and their apathy towards providing information, especially with respect to their internal operation policies
Human errors and biasness are other limiting factor of this study. This is because some data’s were obtained through discussions and interviews therefore there is the possibility of human error of omitting some vital information. Respondent may also exaggerate important information in order to give their organization a positive credit for fear of what seem an invasion into the organization’s privacy. Time and finance is also a limiting factor.
1.9 DEFINITION OF TERMS
The following terms have been used in the course of this research work and as such need to be explained. They were as stated below:
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INTERNAL CONTROL
It has been defined by the Auditing planning committee (APC) IN Uk as “the whole system of control financial and otherwise established by management in order to carry out the business of the enterprise in an orderly and efficient manner to safeguard the assets and secure as far as possible, the competence and accuracy of records, the prevention and detection of errors and fraud in accordance with the final preparation of financial statement.”
CONTROL
Is an exercise performed in the present to achieve a plan drawn up for the future.
MANAGEMENT
It is defined as the process of planning, organizing co-ordinating and controlling the activities of an organization. It is seen as a group of people who monitor and control the organization activities towards the achievement of the organization objectives.
AUDIT
This comes from a Latin word “AUDIRE”meaning to hear in other words it means official examination of account and records.
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REFERENCE
1. chambers Auddrew: the structure of internal audit October 1979,pp27-31
2. paddy: financial management for student pp 28-30