INTERNAL AUDITING AS AN INSTRUMENT FOR EFFECTIVE FINANCIAL MANAGEMENT IN THE BANKING INDUSTRY

CHAPTER ONE

INTRODUCTION

1. 1. Background of the Study

The issue of distress in Nigeria of recent has called to question the need for a closer examination of internal auditing as an instrument for effective financial discipline have raised serious doubts in the minds of the public and the customers as to the effectiveness of the internal controls which is the “internal audit” in these banks. The wide and strongly held belief is that if the banking industry in Nigeria had a well developed and managed internal control system or auditing practice, most of these errors that contributed to the distress and consequent liquidation of some bands recent1y would have been detected early enough and remedial action taken.

The general assumption is that if the banking industry in Nigeria has made good use of internal auditing checks the standard of financial management in the banks would have been higher and more reliable than what it is today. In order to examine the authenticity or otherwise of this statement or assumption, we feel it is necessary as a part of the background to the study to briefly discuss the concept of internal auditing and its background.

Internal auditing is an independent appraisal activity within an organization for the review of operation as a service to management development of internal auditing, public accountants were finding an increasing demand for independent audits leading to the expression of an opinion on financial statements, and they recognized that they could seldom perform the function of detailed verification as effectively or efficiently as could the company’s own specialist.

To ensure the judicious application of funds and inculcate in the banking industry the culture of probity and accountability, internal auditing was made the corner stone for effective financial management in the establishment of the community banks.

1. 1. Statement of Problem

In Nigeria, the oil boom of the early 1970’s increased the funds available to the public sector, expanded economic opportunities, but has conversely created chronic problem relating to financial impropriety of the part of the public officials. Increased availability of money led to wide spread fraud in ;contract awards and execution. This among other factors has increased the need for an efficient auditing system in public sector in public sector financial management.

With reference to the banking industry in Nigeria it is distributing to note that financial impropriety which internal auditing exist to check still occur on recultent basis, despite the establishment of internal audit units or its equivalent (inspectorate units).

The effectiveness of the internal auditing as an instrument of financial management.

• The level of resources available to the internal audits in the OSPOLY Microfinance Bank in terms of equipment, human and other operational facilities.

The result of all these tests or assessments would therefore, aim at finding possible solution to the identified problems. So as to allow internal auditing to achieve its objectives of functioning as an instrument for effective financial management in the banking industry with particular reference to OSPOLY MICROFINANCE BANK.

1.3 Research Question and Hypothesis                            

Based on the proceeding discussion use posit the following hypotheses: Is there any relationship between lack of necessary working equipment and the Operation of internal audit in OSPOLY MICROFINANCE BANK?

• The neglect of internal auditing effects the management ability to make important decision.

• The efficiency of the internal audits units is effected by lack of qualified personnel.

HYPOTHESIS

HO: There is no significant relationship between internal audit and effective financial management in banking sector.

H 1: There is significant relationship between internal audit and effective financial management in banking sector.

It is managerial control which functions by measuring and evaluating the effectiveness of other control.

Internal auditing appeared on the business scene much later than auditing by public accountants. The principal factor in its emergence was extended span of control faced by management concerning employing thousands of people and conducting operations from wide spread locations. Defalcations and improperly maintained accounting record were obvious problem under these circumstances and the growth in the volume of transaction presageda substantial bill for public accounting services for the business that endeavored to solve the problem by continuing the traditional form of audit by the public accountants.

The solution was of course to provide the needed auditing service on an internal basis, particularly as the magnitude of the problem made it possible for one or more person to specialize in such auditing services and devote their full time to the needs of a single organization other advantages also resulted from an internal approach to the problem. Internal auditors tended to become better acquainted with the procedure and problem of the organization and the auditing activity could be carried on continuously, rather than once in an year when outside auditing services were utilized. As a further inducement to the in every hank.The worst of all being the present distress of some banks which has thrown many families into untold hardship. This impropriety takes the following from.

* Misappropriation  embezzlement of funds

• Falsification of accounting records such as suppressing a book entry, make improper book entry, making on improper posting to a ledger document and the concealment of defalcation.

• Perpetration of accounting errors e.g. failing to make a book entry, making an incolTect book entry making an incorrect calculation, losing a supporting document, making a posting to an incorrect ledger account e.t.c.

Gross mismanagement banking property and its managerfinancial/material, resources. Some public affairs/banking observed attribute the persistence of this impropriety to inefficient audit system, others contend that it is due to the intensively of relevant banking officials to audit advice. There are also others who hold the view that lack of independence by the internal audit units of the bank hampers their ability to check the above anomalies.

+ The degree of independence of internal audit in the banking industry with particular reference to OSPOLY MICROFINANCE BANK.

1.4 The Purpose of the Study

The objectives of this are to find out.

• The status of equipment of the internal audit of OSPOLY MICROFINANCE BANK

+ The extent to which auditors recommendation on the activities of financial managers are respected or neglected y these concerned.

•• Whether the internal audit unit is adequately staffed to cope with the auditing work needed in OSPOLY MICROFINANCE BANK

1.5 Scope of the Study

The scope of the study like conceptual framework is used to make the research more manageable and this provide guidelines for diagnosing the research problem. This will help the researcher to draw inferences and adduce conclusion about the problem posed in the course f his work. For this conceptual framework is adopted because it is more option analyzing the problem under study.

They only concept that can effectively analyze the problem under study is the concept of “reliance in internal audit” (Patty 1982:61) The concept is all embracing an shall, therefore be applied as out conceptual framework takes into account.

 The degree of independence of the internal auditor from those responsibilities he is reviewing. The number of suitable qualified and experienced staff employed in the internal audit function.

> The scope, direction, extent and timing of the tests made by the auditor.

> The evidence available of the work done by the auditor and of review of that work.

The extent to which management takes action based upon the reports of the internal audit function.

Explaining these guidelines further, Vivian, R.V cooper, in his book, student manual of Auditing States.

Whereas internal accounting control are exercised by those individuals who perform the basis controls and disciplines on a regular basis internal audit act as a separate higher level of internal control, to determine whether the underlying accounting system arc functioning effectively.

As already mentioned earlier the concept is all embracing in that it includes such other analytical tools as compliance test substantive test and the concept of materiality, all these put together would clearly bring to the light the extent of the role of internal audit in the effective financial management in the banking industry.

If it is borne in mind that the whole process of preparing accounts for audit and other accounting codification, as well presentation of all the transaction in such as way as to give a true and fair view of the results for the period and of the position at a specified date, then the study of the roles of the internal audit in the banking industry would be useless if this concept “Reliance on internal audit” is not applied in the assessment of the internal auditors performances, the application of the concept would therefore, service as a guide to determine.

1.6 Limitation of the Study

The research views all area of internal auditing of Ospoly Microfinance Bank. It expresses the benefit being derived from the establishment of an internal system. Several attempts are being made to access the achievement and failure of the internal auditing.

Besides, that the study analysis on existence between internal reconciliation of any organization and it focus on value of establishing an effective internal auditing system.

Nevertheless, the impact of this system is very essential for every department in any Organization to maintain and supervise their daily transaction. In addition, any organization that fails to imbibe the impact of the system will find it complaints to move forward with its counterpart.

1.7 Significance of Study

This study is important of the following reasons. In Nigeria there seams to be a general lack of interest among the citizenry concerning how financial resources are managed and accounted for by bank officials. Often there are very scanty and weak societal reactions to the excesses of these officials. Arising from the seemingly lack of concern is the general lack of understanding of the purpose of banking accounting and auditing. This study intend to contribute to arousing this concern furthermore, the literature on banking accounting and auditing in Nigeria is very scanty, thus showing in this crucial area of our national concern. The very few works that are available on this subject have a general tendency to neglect the material dimensions of the role of internal auditing in Nigeria banking industry.
In reference to probity and public accountability, it is doubtful whether Saudi advance can be made without great public awareness of the need for a system which check abuse and inefficiency in the management and utilization of public financial resources. This research work will help to sensitize the general readers to the grave anomalies perpetrated in our banking financial management system and subsequently demonstrate the inherent danger this entails on our economy. A case in point is the issues of his distress bank.

It will also be a good guide and of practical benefit to financial administrators, general administrator and other professionals. The work will generally serve as a stimulus to further researchers into banking auditing system and make significant contribution to existing body of literature on this important area of financial administration.

1.8 Definition of Terms

Board of Directors: These are those who manager the affaire of the bank and take its major decisions.

Shareholders:- This refers to those who have bought share from the bank. They attend the annual general meeting of the bank, lays its general politics and receive dividends on the shares bought when the bank is doing well and declaring huge profits.

Manager: This is the officer in charge of the banks daily activities and reports to the Broad of Director on the Progress of the bank form time to time. The manager is the highest paid officers in banking staff.
Accountant: Any officer of the bank so designated “Accountant” either by direct appointment or promotion.

Accounting clerk: Any staff of the bank so designated “accounting clerk” either by direct appointment or promotion.

Auditor:- Any professional accountant or staff charges with the duty of auditing the banks accounts.

Audit staff: Any stag deployed in the internal auditor unit and charged with the responsibility of conducting audit work on a regular basis.
Auditing examination of the completed records and the subsequent submission of a report by the auditor.

It is a continuous and complete examination of the activities of the bank for a defined period by an auditor with a view to submitting a written report there on to keep the management properly informed on the financial and other related matters.

Audit programme: Is the auditor plan of action of a given period. It is a guide to auditing. Audit report: Any finding made by the internal auditor in the course of his audit work that is reported to the chairman of board of directors. In other words it is an auditor’s finding prepared and submitted to the management in written after an audit exercise.

Audit standard: Prescribe the basic principle and practices which members of the various accounting bodies are expected to follow in the conduct of any audit.

Audit evidence: This include all relevant and reliable informative concepts such as signs, indication testimony and facts which an auditor obtains in the course of his examination of a financial statement as would enable him to form on objective opinion as to the correctness or otherwise of the financial statement the is auditing and to make appropriate report there form

Audit credit: As the term suggests it represents those aspect of the internal audit unit which have made positive contribution to the prudent financial management of the OSPOLY.

Audit Debt: Is the reverse of audit credit, that is, it is the shortcoming of the internal audit in the discharged of is responsibilities
Control: Involves checking or account records to ensure uses of funds are strictly obeyed.

Internal audit: Is the unit charged with the function of auditing of auditing the OSPOLY accounts internally.
Concept of materially:- This concept presuppose that anything that is material is very important or significant. The meaning in relation to a statement of account is will affect the overall perception of or impression on the reader or the user of the statement of the account factors that would determine whether an item is material or not include:

a. Account involved

b. Nature of item and

c. Statutory requirement and purpose of a financial statement.

Internal auditing: Is the independent appraisal activity within the OSPOLY for the review of accounting financial and other operations as a base for service to management.

Internal auditor: Any officer charged with the responsibility of auditing the bank’s accounts internally.

Internal cheeks: Aggregate of cheeks and balances imposed on the day to day transaction in the OSPOLY whereby the work of one person is verified independently by or is compulsory complementary to the work of another. The objective being the prevention or early detection of errors and frauds.

Internal control: Is the regular checking and monitoring of the bank financial and other operational activities which include revenue account expenditure accounts, general administration et with the OSPOLY.

I.O.U.S: Money advanced to responsible officials to serve a particular purpose. Such money are normally retired or accounted for after a given period whether released was carried out.

Qualified or unqualified audit reports: A qualified audit report is one in which the auditor express reserve of givens an adverse opinion when he is unable to report affirmatively on the matters that contains in the financial statements while unqualified audit report is one in which the auditor gives without reservation, thus indicating that he is completely satisfied that the financial statement give.

Resources: Include human element (labour face) material good and finds available and essentially produced by given time for purpose of carrying out the business of the bank at given period.