THE IMPACT OF INTERNAL AUDITING ON THE PROFITABILITY OF MONEY DEPOSIT BANK

THE IMPACT OF INTERNAL AUDITING ON THE PROFITABILITY OF MONEY DEPOSIT BANK

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ABSTRACT

In this research work titled the impact of internal auditing on the profitability of money deposit bank with particular reference to First Bank Nig Plc. The researcher evaluated the impact of internal auditing on the profitability of First Bank Nig Plc. Data for the study was sourced from two main sources which include Primary and Secondary sources of data Collection. Primary data: questionnaires and oral interviews were used to collect information from the respondents. Secondary data: journals, and other relevant materials relating to the area of my investigation will be review. Extensive literature review was carried out involving the conceptual, theoretical and the empirical frameworks. The research instrument used in this study was the questionnaire. The questionnaire is structural as to contain both close and open ended question. Simple tables and percentages were used in treatment of data. Pearson Correlation was used in testing the hypotheses.  At the end the researcher found out that Internal auditing has significant impact on the profitability of money deposit bank in Nigeria. Based on the findings the researcher recommends that Daily call over, reconciliation and auditing at every level Surprise internal cash count. Regular review and cleaning of all surprises accounts preparation of monthly account and board of central bank return.

CHAPTER ONE

INTRODUCTION

1.1   Background of the Study

Taking a deep retrospect, internal audit has served as a simple administrative procedure comprised mainly of checking documents, counting assets, and reporting to Board of Directors, Management or External Auditors. In contemporary era, a combination of different forces has led to a quiet revolution of the profession. Organizations have to demonstrate accountability in the use of shareholders money and efficiency in the delivery of services. Organizations now demand great competency and professionalism from internal audit, and scarce resources must be deployed more efficiently to minimize and manage risks. Technological advancement makes it possible to track and analyse data with continually increasing speed thus making it essential for organizations to be well advised by the internal audit department. Internal audit varies from one organization to another, and making change to modern internal audit can be a substantial undertaking. The transition from merely ensuring compliance with rules and regulations to truly delivering added value requires more than just organizational changes. In many bank institutions staff is poorly paid and unmotivated, ethical standards are weak, and governance practices are ineffective leading to asset mismanagement (Ramamoorti, 2003).

All over the world there is a realization that the Internal Audit activity has the potential to provide hitherto unparalleled services to management in the conduct of their duties. This potential has been turned into a challenge and embodied in the new definition of Internal Auditing from the Institute of Internal Auditors (the IIA). Commercial banks have come to the realization that internal audit is essential in improving management of assets in the banks leading improved financial performance of banks (Basel Committee, 2002). According to Robertson (1976) Internal Auditing may be defined in several ways depending upon what purpose is to be served. Pickett (1976) stated that ―internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organization‘s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes‖. This definition actually seeks to demonstrate the depth and breadth of the internal audit activity within an institution as against the previous orientation of reviewing payment transactions over the years.

Internal Audit is an objective and independent appraisal service within an organization on risk management, control and governance by measuring and evaluating their effectiveness in achieving the organization‘s agreed objectives. In addition, internal audit‘s findings are beneficial to the Board of Directors and line management in the audited areas. The service applies the professional skills of internal audit through systematic and disciplined evaluation of the policies, procedures and operations that management put in place to ensure the achievement of the organization‘s objectives, and through recommendations for improvement (Dumitrescu, 2004).

The Board of Directors of the Institute of Internal Auditors in June 1999 described internal audit as an independent, material and consultancy activity, which adds value and improves the functioning of an organisation. It helps the organisation achieve its aims by means of a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and the management process.

Internal audit has several aims and principles which it is necessary to adhere to. It is the board of directors of the bank, however which bears final responsibility that the bank‘s management applies an appropriate and effective system of internal audit, a system of evaluating banking activity risk and risks concerning bank capital, appropriate methods of monitoring compliance with laws, measures and internal procedures. Likewise, the bank's management is responsible for drawing up procedures which identify measure, monitor and control the risks that the bank faces.

Internal audit is a part of the repetitive monitoring of the internal control systems of the bank and its procedures for evaluating internal capital. As such, it assists management and the board of directors in the effective performance of their responsibility as outlined above (Gramling, 1997).

Although the need for objectivity and impartiality is of particular importance for the internal audit department in a banking institution, this does not exclude the possibility that this department, too, may contribute to advisory and consultancy activity, if the independence of analyses and evaluations is ensured. Some banks have also introduced a system of evaluating their activities, which does not replace, but supplements the function of the bank‘s internal audit. This is a formal and documented process whereby management and employees analyse their activities and evaluate the effectiveness of the related internal control procedures (Hawkes, 1994).

1.2   Statement of the Problem

Banks constitute the chief cornerstone of an effective financial system of any given stable economy of a country. At the heart of banking, is the audit function; this is evident by the fact that all other departments are linked with the internal audit department. The importance of internal audit system cannot be overemphasized where a variety of requirements, processes that are both manual and information communication technology-based (ICT) are used. In describing auditing, Betty (1975) describes auditing as a branch of accounting concerned with the efficient use of resources to achieve a previously determined objective or set of objectives contained in a plan. Obazee (1997) describes internal auditing as the whole system of auditing, financial and otherwise, intended to secure management information and reliability of accounting records. Organizations have recognized internal audit function as a tool for ensuring effective workings of the internal control system. This is why Okolo (2001) describes the internal audit function as an aspect of control mechanism, within a business, manned by specially assigned staff.In Nigeria, the audit function in the banking sub-sector has not been fully tapped although it has done comparably well; consequently, cases of errors and intent to defraud and other fraud cases exist in the banking industry. It is therefore no surprise that the distress in the banking sub-sector in the nineties reflected lack of effective control mechanism of the internal audit function in the banking industry. These experiences of failed banks in Nigeria, and other nations, called for the reinforcement of internal audit and the strengthening of the controls system in the Nigerian banks. This call to action is quite pertinent as the banking institution is the backbone of an effective economy. On this wise was this study undertaken to assess the impact of internal auditing on the profitability of money deposit banks.

1.3   Objectives of the Study

The primary objective of this study is to examine the impact of internal auditing on the profitability of money deposit banks. Specifically, we would focus on:

a.   The various ways internal auditing has improved profits in the banks.

b.   The factors militating against effective internal audit in money deposit banks.

c.   Examine the relationship between effective internal audit and profitability of money deposit banks.

1.4   Research questions

a.   How has internal auditing improve profitability in money deposit banks?

b.   What are the factors limiting effective internal audit in money deposit banks?

c.   Is there a relationship between effective internal audit and profitability of money deposit banks?

1.5   Research Hypothesis

The study developed and formulated for testing, the below hypothesis:

H0: There is no significant relationship between an effective internal audit and the profitability of money deposit banks.

Ha: There is a significant relationship between an effective internal audit and the profitability of money deposit banks.

1.6   Significance of the Study

It is hoped that this study will enable the management of the First bank (Place of Study) and other similar companies that requires an effective internal audit such as Research institute, business organizations and the General Investigating public be guided adequately in the pursuit of the realization of their own objectives. It will enable them manage the increasing fraud and wastages, cases of sophistication of crimes, Irregularities and their implications. Finally, it will be of immense benefit to the practicing accountants in their audit works, there would be accountants, legal practitioners who need them as a Good reference guide for their legal duties.

1.7   SCOPE OF THE STUDY

The scope of this study is limited to the impact of internal auditing on the profitability of money deposit bank with particular reference to First Bank Nig. Plc. The reason is to enable the Researcher have a enough time to carry out an In-dept. study of the subject matter with regards to its operations in the institution. It is important to state that in spite of the sensitive nature of the issue, the quality of work was neither delineated nor lacked substance and as such should be reliable in establishing comparative standards of performance.

1.8 LIMITATION TO THE STUDY

The major limitation to this study is Essentially Time. The time presently allotted to the study of research documentation/project writing is quite insufficient. On a suggestion that student should be groomed and grounded in the areas of research of work right from their 2nd year of the four years programmes. This will enable them perform optimally.

1.9 DEFINITION OF TERMS

AN AUDIT: Nwabueze C.C (1997) Defined an audit as an independent Examination by a statutory appointed person called the auditor  to investigate, an organization, it’s records and the financial statements prepared from them, and thus. Form an opinion on the accuracy and correctness of the financial statement.

AUDITING: J.C Eze Defines auditing as an activity carried on by the auditor when he verifies or Examines accounting information, Determine the accuracy and reliability of accounting statement and reports, and then express his opinion.

INTERNAL AUDIT: An independent appraisal function Established by the management for the review of the internal control system as a service to the organization. (J.C EZE)

The institute of chartered accountants of England and Wales (ICAE&W) also defines internal auditing as: - “A Review of operation and records, sometimes continuous undertaking within a business by specially assigned staff”

INTERNAL CONTROL SYSTEM:   Auditing standard and guide line (ASG) define the system as ’’ the whole system of controls, financial & otherwise established by the management in order to:

1.  Carry on the business of the enterprise in an orderly and efficient manner;

2.  Ensure adherence to management policies;

3.  Secure as far as possible the completeness and accuracy of the records.

MANAGEMENT AUDIT: According to mayo associates limited (1988) management audit is an independent Examination of the quality and polices of the management of an organization as well as the level of their execution against the background of relevant environmental factors and condition. It could cover any aspect of an organization activities such as: corporate planning, marketing, finance and accounting, production research and development, or other aspect of its corporate affairs. The objective is to produce a report which will form a basis for the review and amendment of the organization policies and procedures.

AUDITING STANDARD: Auditing practice committee (APC) defined Auditing standard as those principles which the members of the profession should use as guide line whenever they are discharging an auditing responsibility


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