INTERNAL AUDIT AND EFFECTIVENESS OF INTERNAL CONTROL SYSTEM (A SURVEY OF SELECTED FIRMS IN RIVERS STATE)
Chapter one
Introduction
1.1 Background of the study
Companies in the world face very different challenges, such as globalization, rapid development of technology, industry and business, as well as the risk and complexity of information and data management. With these changes, the risks, including the fraud risks faced by the organization or the company are increasing substantially (KMPG, 2006).
In response, the company is now more aware of the need for a proactive method of fraud prevention and detection to minimize potential fraud risks (Falcon Fraud Manager 2008, Entrust, 2008; Stream Base, 2008, in Edge and Sampaio, 2009).
There have been several cases of Financial Statement Fraud in the last decade (eg Enron and WorldCom in the United States; Lippo Bank, Kimia Farma and Indofarma in Indonesia). FSF generates huge losses for market participants, including investors, creditors and employees.
What is fraud? According to Keller and Owens (2015), there are two categories of fraud, internal and external. Internal fraud is done by insiders, such as employees and directors. External fraud is done by people outside the company, like vendors. Internal fraud can be divided into two categories, such as:
Misappropriation of assets Fraud on the financial statements
Fraud on financial statements involves cheating on journal entries and authorization managers who can take advantage of journal entries in accounting information systems (Debreceny and Gray, 2010).
There has been a high record of business failure in the world today; and this usually is as a result of management inefficiency in the area of prevention and detection of fraud and other irregularities. Managements of businesses have taken several measures to combat this problem. Some of these measures among others include: the establishment of –
Internal Control System (ICS);
Internal Audit Unit (IAU);
Total Quality Management (TQM);
Team Building; and
Organizational Control processes such as policies and procedures
Internal control system is seen as a means of monitoring every other control system in a business organization and it is considered as the most important measure that needs to be strengthened in order to ensure business success.
Internal auditors as an instrument in the hand of the management, and through the Internal Audit Unit (IAU), have been making effort in ensuring the effectiveness of the Internal Control System (ICS), monitoring of every other control measure put in place by the management as well as the pursuance of the actualization of the organizational goals and objectives.
Internal auditors, in discharging their responsibilities, are facing some challenges which make their work so rigorous and contribute to the failure of the Internal Control system (lCS) objectives and the overall business organization) goals and objectives. The questions here are;
How are the internal auditors able to discharge their duties in ensuring Internal Control System effectiveness?
What are the challenges facing internal auditors in discharging their duties?
And, what must be done address the problems of internal auditors in ensuring business success?
Internal auditors· have been playing a very great role in contributing to management effectiveness and efficiencies; and therefore seen as the pillar upon which the Internal Control System rest.
INTERNAL AUDIT AND EFFECTIVENESS OF INTERNAL CONTROL SYSTEM (A SURVEY OF SELECTED FIRMS IN RIVERS STATE)