EVALUATING THE EFFECTIVENESS OF A COMPANY INTERNAL CONTROL SYSTEM

EVALUATING THE EFFECTIVENESS OF A COMPANY INTERNAL CONTROL SYSTEM

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CHAPTER ONE

1.1             OVERVIEW

Corporate performance management is the area of business intelligence involved with monitoring and managing an organizations performance such as revenue, returns in investment, overhead, operational cort etc. Price Walter house Cooper (2012) noted that it provides the avenue for translating a company’s strategy into measurable targets, in monitoring and evaluating how the company is doing. Corporate performance management gives management, investors, and other stakeholders a real time picture of how the organization is actually in line with its corporate targets so that corporate actions can be taken where necessary.

Margaret (2011) pointed out that it encompasses strategic planning, budgeting, forecasting, work fork, reporting, modeling, scenario  planning, profitability analysis, key performance indicate monitoring and consolidation as it addresses both financial and generating activities of the business entity.

          The key performance indicators according to Massey (2011), means the company’s progress as they relate to its goals and strategy and are usually enshrined in the financial statement of such companies. Harper (2012) and institute of centered accountant of Nigeria (2009) defined the financial statement as a formal record of the financial activities of a business, person or other entities; relevant information about the reporting entity are presented therein the financial statement and in a structured and easily understandable manner, having the following components.

i.                     Statement of financial position showing report on assets, liabilities and equity

ii.                     Statement of comprehensive income and expenses (Known as profit and loss statement)

iii.Statement of cash flow

iv.Statement of comprehensive changes in equity

v.Notes to the financial statement.

          The very essence of financial statement is deeply routed in the companies and Allied matters Act (2004:5331) which states that “every company shall keep proper accounting record and such records shall be sufficient to show and explain the transactions of the company and shall be such to:

a)    Disclose with reasonable accuracy, at anytime, the financial position of the company and

b)    Enable the directors ensure that the financial statements prepared comply with the requirement of the Act with regard to form and content.

      Information emaciating from the financial statements are so vital that it helps a wide range of users such as shareholders, government, financial institutions, employees, creditors/suppliers, media, the general public etc. in making economic decisions.

      Kleinschmidt (2007) pointed out that the very fact that ownership of companies differ from management, their trust is not enough to guarantee the accuracy of such financial statements prepared by management as they emphasized tend to conceal the following:

         i.                Weak internal control mechanism

       ii.                Presence of material misstatement and on errors that tend to depict a financial position different from what actually exist in the company.

    iii.                Non compliance to statutory, accounting professional guidelines/requirements.

    iv.                Fraud, other financial irregularities as many be perpetuated by management and on employees of the companies.

On account of the above challenges, the need for an independent appraisal of the state of affairs in any company cannot be over emphasized. Little Wonder Paul (2009) was quoted to say that “an audit can be compared to an annual checkup with the doctors, the auditor being the doctor while the company is the patient” in the same vein, section 359(1) of the companies and Allied Matters Act (2004) mandated and the need for auditing of companies individuals and on government accounts to guarantee a reasonable level assurance that the financial statement are true and fair, represent state of affairs at the company. This, Okezie (2008) pointed out helps to reduce or settle disputes that might otherwise arise regarding acceptance of the annual reports and accounts of companies.

          In the lights of the foregoing, the researcher shall examine auditing, not just as a concept but also as an exercise, with a view to determining its place as the backbone of organizational effectiveness.                    

1.2             STATEMENT OF THE PROBLEM

Modern-day organizations are increasingly facing performance driven challenges that tend to erode the confidence placed on the financial statements prepared by management of these companies (Bamidele, 2009).

          In charting the course for other scholars, Okozie (2008) frowned at the problems trailing the absence of auditing which, when unattended to, could hamper the quality, form, disclosure requirements of financial statements. These are;

       i.            Presence of weak interval accounting control system which tends to give unwarranted forous to some dubious company management and or employees

    ii.            Material misstatement of crucial assets liability or capital item. This, in turn, leads to financial statements that do not fairly and truly represent the state of affairs at the company.

  iii.            Gross violation of statutory provisions, professional guideline as well as weak level of corporate government which if uncorrected, may bring down heavy fines in the company by the various regulatory / professional bodies.

  iv.            The unattractiveness of company’s shares due to unaudited nature of its account which might scare off investors.

Wikipedia (2012) posited that auditing as a vital part of accounting which provides an assessment of a company’s internal control, seeks not only to solve the above mentioned challenges but also to provide an assurance that financial statements are of the highest quality which would impact on the effectiveness of such reporting entity.

1.3             OBJECTIVE OF STUDY

The following are the key objectives the researcher proposes the study / research to active.

       i.            To use auditing as a means of EVALUATING THE EFFECTIVENESS OF A COMPANY INTERNAL CONTROL SYSTEM.

    ii.            To disclose any firm of material misstatement that may exist in the account of a company through they activity of auditing.

  iii.            To help companies ascertain their level of compliance to both statutory, professional disclosure requirement with a view to correcting variances.

  iv.            To use as a tool to prevent fraud, embezzlement of funds in organizations.

     v.            To improve the investment potentials of companies through the mechanism of auditing.

  vi.            To determine if auditing is really the backbone of organizational effectiveness or not.

1.4             RESEARCH QUESTION

Asika (2001) defined research questions as the set of questions which the research hopes in mind that the study would give answers to this research work shall answer the following questions:

       i.            Can auditing truly evaluate company’s internal control system?


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