INTERNAL CONTROL SYSTEM

CHAPTER ONE

1.0   INTRODUCTION

1.1   BACKGROUND OF STUDY

According
to Oxford Learners Dictionary, Organization can be said to be a group of people
who form a business, club etc. together in order to achieve a particular aim.
It can also mean two or more people getting together for a purpose. In getting
together, they decide to interact with one another to achieve the objectives of
the organization (Unamka & Ewurum, 1995:1)

When
we discuss organization, we have variclasses among which are service
organization and social organization etc. All these organizations have in mind
the aim of continuing if not for eternity, a given period of time. (Unamka
& Ewurum, 1995 1, 2, 3)

For
an organization to carry on its business there must be some factors put in
place for the smooth running of the organization management, man-power,
materials, money and machines. These need to be well coordinated in order for
the success of the organization to be achieved. They are used by a group of
persons known as management; neither can management exist without organization-
the two are inseparable twin. (Unamka &Ewurum, 1995:65)

Good
management weaves together the various parts of organization so that all
factors function as a united body. Management refers to the group of executives
or officials of a company who directs efforts towards common objectives by
using available resources (Unamka & Ewurum, 1995:66) management can also be
said to be a process of planning, organization to have an intergrated system
that will aid the achievement of organization objectives (Musselman &
Hughes, 1981)

Effective
management leads to purposeful, well coordinated, goal oriented and goal
directed activities. As earlier social organizations have in mind “CONTINUITY”
and “SURVIVAL” as they are being run for an organization to survive and
continue existing without going bankrupt, or said to be illiquid, i.e. being
its inability to meet up with its responsibilities as and when due, it must
ensure the safty of its assets, cash and also the accuracy and reliability of
its records, it should ensure that it institutes a system of control, strong
enough to ensure such. This system is what is known as INTERNAL CONTROL SYSTEM.

According
to WIKIPEDIA, the free encyclopedia, in accounting and organization theory,
INTERNAL CONTROL is defined as a process effected by an organization’s people
and information technology (I.T) system, designed to help the organization
accomplish specific goals or objectives. It is a means by which an
organization’s resources are directed, monitored and measured. It plays an
important role in preventing and detecting fraud and protecting the organization’s
resources both physical (e.g. machinery and property) and intangible (e.g.
Reputation and intellectual property such as trade marks) the organizational
level, internal co9ntrol objectives relate to the reliability of financial
reporting; timely feedback on the achievements of operational or strategic
goals and compliance with laws and regulations. At the specific transaction
level, internal control refers to the actions taken to achieve a specific
objective (e.g. how to ensure the organization payments to third parties are
for valid services rendered)

There are also a variety of
definitions of internal control as it affects a variety of constituencies
(stakeholders) of an organization in various ways.

Under
the committee of sponsoring organization (COSO) internal control- integrated
framework, a widely-used frame work in the United States, internal control is
broadly defined as a process effected by an entity’s board of directors,
management and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the following categories:
Effectiveness and Efficiency of operations; Reliability of financial reporting;
and compliance with laws and regulations.

According
to Millichamp(2002:85), internal control system is defined as the whole system
of controls, financial and otherwise, established by the management in order to
carry on the business of the enterprise in an orderly and efficient manner, ensure
adherence and management policies, safeguard the assets and secure as far as
possible the completeness and accuracy of the records. Internal controls are to
be an integral part of an organization’s financial business policies and
procedures. Internal control consists of all the measures taken by the
organization for the purpose of protecting its resources against waste, fraud
and inefficiency, ensuring accuracy and reliability in accounting and operating
data, securing compliance with the policies of the organization and evaluating
the level of performance in all organizational units of the organization.
Internal controls are simply good business practices.

Internal
control according to Osita(2002:106) is the whole system of controls, financial
or otherwise, established by management in order to secure as far as possible,
the accuracy and reliability of the records, run the business in an orderly
manner and safeguard the company’s assets, its objectives being the prevention  or early detection  of fraud and errors. It may include internal
auditing.

Everyone
within the organization has some roles in internal controls. The roles vary
depending upon the level of responsibility and the nature of involvement by the
individual. The Kansas Board of regents, president and senior executives
established the presence of integrity, ethics, competence and a positive
control environment. The director and department heads have oversight responsibility
for internal controls within their units. Managers and supervisory personnel
are responsible for executing control policies and procedures at the detail
level within their specific unit. Each individual within a unit is to be
cognizant of proper internal control procedures associated with their job
responsibilities.

The
internal audit role is to examine the adequacy and effectiveness of the
organization internal controls and make recommendations where control
improvements are needed. Since internal auditing is to remain independent and
objective, the internal audit office does not have the primary responsibility
for establishing or maintaining internal controls. However, the effectiveness
of the internal controls are enhanced through the reviews performed and
recommendations made by internal auditing.

The
institution of internal control system is an organization is not without a
purpose; these purposes will be discussed later in this sturdy. One of such is
to ensure that the organization survives, continue to exist, grows, become
vibrant in whatever environment it might be existing or located. It is against
this background that this sturdy seeks to unveil and look at the place,
importance and inevitable nature of internal control system on the survival and
growth of an organization.

          1.2 STATEMENT OF PROBLEMS

When
we refer to internal control system, we talk of a system which will enable an
organization achieve its objectives, we talk of a system which is very
important to the existence of an organization, we talk of a system which will
forestall the perpetration of acts that can act as a clog in the wheel to the
success of an organization. This system is an all round system, that is to say,
it encompasses both financial and non-financial control in realizing the goals
and objectives of running the organization in an orderly manner, safeguarding
the assets of the organization and also ensuring the accuracy and reliability
of the organization’s records.

We
might not really understand the impact of internal control system on an
organization’s performance until probably, we run an organization void of
internal control system. The non-institution of internal control system in an
organization is detrimental to the continual growth and survival of that
organization. Non institution of internal control system in an organization
result in improper keeping of records which could lead to the late preparation
of accounts, doctoring of books of accounts, misappropriation of funds which
are meant to be used for planning, decision making etc. illegal transactions
being transacted, pilferage, misuse of fixed assets etc. improper keeping of
records can also lead to inability to ascertain the organization’s actual
assets; goods in stock, which could breed pilfering.

Lack
of proper record keeping, controlling of proceedings or actions in an
organization could lead to concealing of errors and fraud that might crop-up to
bring down an organization.

The
non-institution of internal control system could lead to inability of the
organization to make proper decisions and plan ahead effectively. When an
organization fails to plan, definitely it will forestall the growth of the
organization; make the organization to start dwindling and struggling for
survival, which will then bring the organization to an end.

1.3   OBJECTIVES OF STUDY

As
earlier said that this sturdy of internal control is not without objectives and
as such we shall see some of the objectives for the institution of internal
control system in an organization. The objectives of this sturdy are: