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THE ROLE OF INTERNAL CONTROL SYSTEM AS AN AID TO MANAGEMENT DECISION MAKING

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Topic Description

CHAPTER ONE

1.0   Introduction

 

1.1   Background to 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 carry out 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 internal control provides assurance to management of the dependability of the accounting data used in the decision making of the organization. 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 implementation of this control system would ensure proper management. High-profile organizational failures typically lead to the imposition of additional

rules and requirements, as well as to subsequent time-consuming and costly compliance efforts. However, this obscures the fact that the right kind of internal controls—enabling an organization  to capitalize on opportunities while offsetting the threats—can actually save time and money, and  promote the creation and preservation of value. Effective internal control also creates a competitive advantage, as an organization with effective controls can take on additional risk.   According to Chambers (1995), Cosserat (1999), Ridley and Chambers (1998), internal Controls are systems comprising of the control environment and control procedures. They further state that the internal control systems include all the policies and procedures adopted by the directors and management of an entity to assist in achieving their objective of efficient conduct of its business, including adherence to internal policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completion of the accounting records and timely preparation of reliable financial information. Successful organizations ensure that they attain and consolidate continued survival in a competitive environment Drucker (1999). Thus successful organizations set performance measures that focus attention that identifies and communicates the success, support organization learning and provide a basis for assessment and reward (Brown, 1996).

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. Because internal control is so important to the reliability of financial statements, there are times when the internal control system should be examined closely. Examining the design of internal controls can be extremely beneficial and is usually much less costly than an audit of the organization wide financial statements .Control itself exists to keep performance of an organization within what is expected

by the organization, control built within a process is internal in nature and takes place with a combination of interrelated components such as social environment affecting behavior of employees, information necessary in control and policies and procedures (COSO 2001).The absence of adequate internal control measures exposes the financial management of an organization to certain threats such as:

  • Improper use of organizational resources and funds, due to inadequate internal control to

keep a proactive check on the way the resources and funds are utilized.

  • Non-existence of Value for Money requisites and principles in the management of

organizational resources and funds.

  • Financial and operating reports and data are not relevant, reliable and misrepresent what

they purport to represent.

  • Non-availability of appropriate mechanism to ensure that policies, plans, procedures,

statutory requirements and regulations that govern the operation and reporting process of

the organization are been complied with across the organization

 

1.3   Objective of study

The overall purpose of this research work is to evaluate and determine the impact of internal measures in an organization and its significance in making it a basis for decision making in Unilorin .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.

 

  • To determine the impact of internal control to proper use of organizations funds and

assets.

  • Appraise the economy, efficiency and effectiveness with which resources are employed.
  • Appraise the relevance, reliability and integrity of management, financial and operating

data and reports

  • Review the systems established to ensure compliance with those policies, plans,

procedures, statutory requirements and regulations which could have a significant impact

on operations.

1.5   Statement of Hypotheses 

 

The following four (4) hypotheses were formulated and tested in this study.

 

Hypothesis one

H0: Internal control system is not relevant in the proper use of funds and asset

 

H1: Internal control is relevant in the proper use of funds and asset

 

Hypothesis two

 

H0: Internal control negatively affects management control and decision making

 

H1: Internal control positively affects management control and decision making

 

Hypothesis three

 

H0: The existing system of controls does not facilitate efficient, effective, and economic utilization of resources

 

H1: The existing system of controls facilitates efficient, effective, and economic utilization of resources 

Hypothesis four

H0: Sound internal control system does not bring about relevant and reliable financial, management and operating data and information

 

H1: Sound internal control system bring about relevant and reliable financial, management and operating data and information   

 

1.6   Significance of the Study

This research finding will provide a conceptual frame work and standard against which organizations could assess their internal control system and their effectiveness. Also the result of the study will contribute to identify the gap within the system of internal control in educational institutions. It is also believed that invaluable benefits to management and those charged with governance in educational institutions, will establish on how the internal control system will ensure of improving the financial performance and ultimately serve as a basis for management control and decision making. To the researcher who will be interested on the same idea, it will provide the proper path, of what this research could not cover considering its limitations.  The result of this research work will also help the educational institutions to sit up in following the control measures in their day to day management. Moreover this research is to partially fulfill an academic requirement for the award of a bachelor‘s degree it is expected that recommendations will be provided to complement the policies by the regulatory bodies and the efforts of education sector in addressing problems.

Decision making is one area that is given a lot of prominence all over the world, it has been widely researched. A lot of literature has been written on decision making, and external auditors normally place an emphasis on internal controls as a measured to ensure sustainable and improve

management control, however, it is the perception of the researcher that there are still gaps in the research so far done. This study will therefore try to establish the linkage between internal controls and improved management control and decision making.

 

1.7   Scope and Limitations of study

The study mainly focused on internal control system and its impact on the management control and decision making of an organization, it will be only concentrated on testing internal controls apparel with internal audit, so as to assess the risk so management within the organization. The proper internal control is the easier way of attaining (the university plans and objectives) on understanding this i will be concentrating on the administrative department within the educational institution (university), to assess whether the educational institution comply with rules and regulations governing them. The period of study is 2014/2015 academic session. In this study, no limitations were experienced.

 

 

1.9   Organization of the study

This research work is structured as a five chapter work such that the background information, statement of the research problem, scope and limitations of the study, research hypotheses and definition of terms is covered by chapter one.

 

Chapter two focuses on the theoretical and conceptual framework relevant to the study, related literatures were also reviewed.

Chapter three for research methodology, research design, population and sample size, research instruments, method of collection and data collection technique.

Chapter four is devoted to data presentation and analysis and interpretation of result

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