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CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND OF THE STUDY

The establishment of an effective and adequate internal control system is the duty of the management of any enterprise, this assist in the discharge of their responsibility for the prevention and detection of irregularities and fraud. In present day decision making, the importance of relevant, reliable and timely accounting information cannot be overemphasized; hence the need for a strong and reliable internal control system which is able to assure user and decision makers that the information provided in the financial statements are true and fair. The source and strength of accounting information in any accounting system depends on the strength of the various controls put in place by the management of such reporting entity, a major reason that a professional auditor must ascertain and evaluate the accounting and internal control system which an entity utilized in the process of providing the information used in preparing its financial statement.

Internal control system, according to the Auditing Practice Committee is “the whole system of control for financial or otherwise, established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management’s policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records”. The International Standards on Auditing (ISA 400) defined internal control to mean all the policies and procedures adopted by the management of an entity to assist in achieving management’s objective of ensuring as far as practicable, the orderly and efficient conduct of its business, including adherence to management policies, the safeguarding of asset, the prevention and detection of Fraud and errors, the accuracy and completeness of accounting records and the timely preparation of reliable financial information. Public sector entities are increasingly recognizing the benefits of organizational governance.

A recent survey sponsored by the department of accounting at Colorado State University, "Audit Committees, Internal Auditing, and Outsourcing in Local Governments: A Survey of Current Practice," queried 522 local governments on their use of organizational governance. The findings indicate that although there has been an increase in the use of these practices since the early 1990s, there is still ample opportunity for organizational governance players to add value to their local governments. Internal controls are an integral part of any organization’s financial and business policies and procedures. Internal controls consist of all the measures taken by the organization for the purpose of: Protecting its resources against waste, fraud, and inefficiency. Ensuring accuracy and reliability of accounting and operating data. Ensuring compliance with the policies of the organization. Evaluating the level of performance in all organizational units of the organization What internal control do… Promote orderly, economical, efficient and effective operations. Safeguard resources against, loss due to waste, abuse, mismanagement, errors and fraud. Promote adherence to laws, regulations, controls and management directives. Develop and maintain reliable financial and management data and accurately present that data in timely reports.

BRIEF HISTORY OF OJO LOCAL GOVERNMENT.

Ojo Local Government was created in May 1989, under the Military Administration of General Ibrahim Gbadamosi Babangida, as the President of the Federal Republic of Nigeria, under the Military Governor of General Raji Rasaki. Before the creation of Ojo Local Government, out of the Old Badagry Local Government, the area was adjudged the most populous, in the Federation going by the National Population Census conducted in Nigeria in 1991, the population as at that time was put at 1.01 million. Ojo Local Government is divided into two segments; the Reverine and the Upland. It is inhabited by mainly the Aworis, who are very accommodative and progressive. In 1996, under the Military Administration of General Sanni Abacha, two Local Governments were carved out of the Old Ojo Local Government; Amuwo - Odofin and Ajeromi Ifedodun Local Governments. It is on record that under the administration of Alhaji Latef Jakande, as the Executive Governor of Lagos State, Ojo Local Government, that did not have the backing of the Federal Government under President, Shehu Shagari, was created in 1980; with Alhaji Ajakaiye as the Chirman of the Council between 1980 - 1983.

However, the Military Government of Generals Mohammed Buhari and Tunde Idiagbon scrapped the Local Government when they struck in 1983 and the new council returned to Badagry Local Government. Today, two Local governments have been carved out of the old Ojo Local Government; Iba Local Development Area and Oto-Awori Local Council Development Area. With this development, there were boundary adjustment. As of today, Ojo Local Government shares boundaries with Oto-Awori on its Southwest, it is bounded in the East by Oriade Local Government, in the North by Iba Local Council Development Area and in the South by the Lagoon. It also shares boundary with Amuwo Odofin Local Government between Ojo Military Barracks and the Trade Fair Complex.The Local Government had a TOTAL Land mass of 180sq km with about 30% of it constituting the Reverine Area, today part of this Reverine Area is being shared by Oto-Awori Local Council Development Area. The auditing of Ojo local government under the government of Babatunde Raji Fashola started officially in 2006

1.2 STATEMENT OF THE PROBLEM

This research work is carried out to understand the role which internal control system plays in the overall performance of business organization; the problems that triggered this study include: 1. Continuous report of errors, frauds and material misstatements by auditors which ought to have been detected and corrected by management in the implementation of its policies.
2. Inadequate enlightenment on the need for and purpose of internal control system in an organization.

1.3 PURPOSE OF THE STUDY

i. To examine critically the internal control system existing in Ojo Local Government

ii. To ascertain the elements of internal control in Ojo Local Government

iii. To examine the effect internal control system has on Ojo Local Government performance.

iv. To identify the factors that weakens the internal control system of an organization.

v. To investigate why internal controls fails to detect material misstatement thereby increasing the control risk to the auditors.

1.4 RESEARCH QUESTIONS

i. Of what importance is the internal control system?

ii. Who establishes the internal control system?

1. What is the duty of the statutory auditor in relation to internal control system?

2. Does the internal control system improve organizational performance?

3. Is the internal audit department an element of internal control?

4. Does internal control system aid the prevention and detection of errors and fraud in an organization?

5. Is the audit committee a control element?

1.5 RESEARCH HYPOTHESIS

Ho : Internal control system does not aid adequate financial reporting Hi : Internal control system aids adequate financial reporting.

Ho : Internal control system does not help in preventing and detecting errors, frauds and material misstatement

Hi : Internal control system helps in preventing and detecting errors, frauds and material misstatement

1.6 SIGNIFICANCE OF THE STUDY

This study is of great importance to students, business organizations, consultants and the entire society. It will educate the management on the importance of internal control system, elements of the control system, how the system is established and it role in achieving a better organizational performance. Furthermore, it will establish the various ways of ensuring effectiveness of control and methods of reducing its limitations that have been identified by previous researchers.

1.7 DELIMITATION OF STUDY

The scope of this study is limited to the case study, though the result will be generalized. Also the business is located in Lagos thus geographically its scope is limited. The questionnaire will be administered to the members of staff of Ojo Local Government which is a small population when compared to the business environment obtainable in Nigeria.

1.8 DEFINITION OF TERMS

Audit Committee: This body is required to be set up by Companies and Allied Matter Act (CAMA) 1990 to comprise a maximum of 3 directors and the other 3 shareholders.

Control Risk: This is the risk that the internal control system of an organization will fail to prevent or discover material mis-statements present in the financial statement.

Error: This refers to unintentional mistakes in financial statements.

Fraud: This refers to an intentional act by one or more individuals among management, employees or third parties which results in a misrepresentation of financial statement.

Internal Audit: A review of the organization of a business which may be in many respects similar to a statutory audit but which is carried out by employees of the business who are responsible only to management.

Materiality: An item will be considered to be material in the context of the financial statement if its omission, misstatement or non-disclosure is significant enough to affect the message passed by such financial statement.

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