REGENT UNIVERSITY COLLEGE OF SCIENCE AND TECHNOLOGY
THE EFFECTIVENESS OF INTERNAL AUDITING IN THE PRIVATE SECTOR
OF GHANA: A CASE STUDY OF JAPAN MOTORS LIMITED, ACCRA.
CHRISTIAN ELENDU
OCTOBER, 2016
REGENT UNIVERSITY COLLEGE OF SCIENCE AND TECHNOLOGY
THE EFFECTIVENESS OF INTERNAL AUDITING IN THE PRIVATE SECTOR
OF GHANA: A CASE STUDY OF JAPAN MOTORS LIMITED, ACCRA.
BY
CHRISTIAN ELENDU
03000213
A DISSERTATION SUBMITTED TO THE SCHOOL OF BUSINESS AND
LEADERSHIP IN REGENT UNIVERSITY COLLEGE OF SCIENCE AND
TECHNOLOGY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE AWARD OF A BACHELOR OF SCIENCE DEGREE (HONORS) IN
ACCOUNTING AND INFORMATION SYSTEMS
OCTOBER, 2016
DECLARATION
I, hereby state and declare that this dissertation is the result of my own original research,
and that no part of it has been presented for another degree in this University or
elsewhere. I have personal knowledge of the facts stated in this project, and if I were to
be called as a witness, I would competently testify about what I have written in this work
I bear sole responsibility for any shortcoming, mistakes, omissions and misinterpretations
which might evolve from this project.
………..…………………………..
………………………….
CHRISTIAN ELENDU
DATE
(STUDENT)
SUPERVISOR’S DECLARATION
I hereby declare that the preparation and presentation of this dissertation were supervised
in accordance with the guidelines on supervision of dissertation laid down by the Regent
University College of Science and Technology
…………………………………
………………………………
MR. (AZUMAH MAMUDU)
DATE
(SUPERVISOR)
i
DEDICATION
I dedicate this research work to God Almighty, for his enhanced and immense wisdom,
knowledge and strength. Also to my late grandfather Boniface Elendu whose
encouragement and support enabled me to pursue this programme.
ii
ACKNOWLEDGEMENTS
First, I wish to express my heartfelt gratitude to my supervisor, Azumah Mamadu, who in
spite of his busy schedule painstaking guided me to bring this research to a successful
end
I am also grateful to my friend – Michael Adalong, for his encouragement and
information gathering help, my proactive friend – Mercy Dawson, for her assistance in
the organisation of the dissertation.
Finally, I wish to thank all those who in diverse ways contributed to the success of this
project.
iii
ABSTRACT
Current business trends have made it imperative for almost all large organisations to
maintain effective internal control systems. Internal control has attracted intense debate
and scholarly attention across industries in accountancy and auditing literature over the
past decades. It is against this background that this study was conducted into the
effectiveness of the internal audit control systems of Japan Motors. The main objective of
the study is to appraise the internal audit control systems of Japan Motors. The specific
objectives included; to review the control environment of the company; to examine the
effectiveness of the risk assessment procedure; to assess the adequacy of the established
control activities; to review the information and communication system etc.
Related literature was reviewed. The study adopted the descriptive research design since
the study was a case study type. The study population was staff of Japan Motors. A
sample size of fifty (50) respondents was used for the study. Simple random sampling
technique was adopted. Data was collected through questionnaire. The data collected
were analysed using tables and graphs and some finds were made as a result of that.
Some of the findings made included: It was revealed from the study that, the control
environment at Japan Motors is very effective as majority of the respondents agree to that
assertion with a few not being sure of the effectiveness of Control environment.
iv
Again the empirical evidence from the study indicated that, majority of the respondents
agree to the assertion that there is an effective control activity functioning at Japan
Motors. The last element of internal control considered by the study was monitoring and
this happened to be the most effective in the company with nearly all respondents
showing that, they perceive monitoring to be effective.
TABLE OF CONTENTS
CONTENTS
PAGE
DECLARATION ................................................................................................................. i
DEDICATION .................................................................................................................... ii
ACKNOWLEDGEMENTS ............................................................................................... iii
ABSTRACT ....................................................................................................................... iv
TABLE OF CONTENTS .................................................................................................... v
LIST OF TABLES ........................................................................................................... viii
LIST OF FIGURES ........................................................................................................... ix
CHAPTER ONE ................................................................................................................. 1
BACKGROUND OF THE STUDY ................................................................................... 1
1.0 Introduction ................................................................................................................... 1
1.1
Problem Statement ................................................................................................... 5
1.2 Objectives of the Study ................................................................................................. 6
1.2.1 Main Objective........................................................................................................... 6
1.2.2
Specific objectives................................................................................................ 6
1.3 Research Questions ....................................................................................................... 7
1.4 Significance of the Study .............................................................................................. 7
1.5 Scope of the Study ........................................................................................................ 7
1.6 Limitations of the study ................................................................................................ 8
1.7 Organisation of the study .............................................................................................. 8
v
CHAPTER TWO ................................................................................................................ 9
LITERATURE REVIEW ................................................................................................... 9
2.0 Introduction ............................................................................................................... 9
2.1 Definition of Audit ........................................................................................................ 9
2.1.1 External Audit .......................................................................................................... 10
2.1.2 Internal Audit ........................................................................................................... 11
2.2 Internal Control ........................................................................................................... 12
2.3 Objectives of Internal Controls ................................................................................... 13
2.4 Types of Internal Controls .......................................................................................... 14
2.5 Establishment of Internal Control System .................................................................. 16
2.6 Types of Internal Control System ............................................................................... 17
2.7 Importance of Effective Internal Control .................................................................... 18
2.8 Types of Internal Auditing .......................................................................................... 19
2.8.1 Financial Internal Auditing ...................................................................................... 20
2.8.2 Operational Internal Auditing .................................................................................. 20
2.8.3 Management Internal Auditing ................................................................................ 20
2.9 Challenges of Internal Auditing .................................................................................. 21
2.10 Limitations of Internal Controls................................................................................ 22
2.11 Measures that can be put in place to Enhance Effective Internal Controls .............. 23
2.12 The Need for Internal Auditing................................................................................. 24
2.13 Chapter Summary ..................................................................................................... 25
CHAPTER THREE .......................................................................................................... 26
METHODOLOGY ........................................................................................................... 26
3. 0 Introduction ................................................................................................................ 26
3.1 Research Design.......................................................................................................... 26
3.2 Research Strategy........................................................................................................ 27
3.2.1 Mixed Methods ........................................................................................................ 27
3.3 Population ................................................................................................................... 28
3.4 Sampling Technique ................................................................................................... 28
3.5 Sample Size................................................................................................................. 29
3.5 Source of Data............................................................................................................. 29
vi
3.5.1 Primary Data ............................................................................................................ 29
3.5.2 Secondary Data ........................................................................................................ 30
3.6 Data Collection ........................................................................................................... 30
3.7 Data Analysis .............................................................................................................. 31
3.8 Chapter Summary ....................................................................................................... 31
CHAPTER FOUR ............................................................................................................. 32
DATA ANALYSIS AND DISCUSSION OF RESULTS ................................................ 32
4.0 Introduction ................................................................................................................. 32
4.1 Personal Information ................................................................................................... 32
4.1.1 Gender of Respondents ............................................................................................ 32
4.1.2 Age Distribution of Respondents ............................................................................. 33
4.1.3 Marital Status of Staff .............................................................................................. 34
4.1.4 Academic Qualification of Respondents ................................................................. 34
4.1.5 Number of Years spent at Japan Motors .................................................................. 35
4.2 Control Environment .................................................................................................. 36
4.3 Risk Assessment ......................................................................................................... 40
4.4 Monitoring and Control Systems ................................................................................ 42
CHAPTER FIVE .............................................................................................................. 47
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS..................................... 47
5.0 Introduction ................................................................................................................. 47
5.1 Summary of Key Findings .......................................................................................... 47
5.2 Conclusion .................................................................................................................. 49
5.3 Recommendations ....................................................................................................... 50
REFERENCES ................................................................................................................. 52
APPENDIX I .................................................................................................................... 55
vii
LIST OF TABLES
Table 4.1: Gender of Respondents .................................................................................... 32
Table 4.2: Age Distribution of Respondents..................................................................... 33
Table 4.3: Number of Years spent at Japan Motors Ошибка! Закладка не определена.
Table 4.4: Response for Control Environment ................................................................. 37
Table 4.5: Response for Risk Analysis ............................................................................. 40
Table 4.6: Response for Monitoring and Control Systems ............................................... 43
viii
LIST OF FIGURES
Figure 4.1: Marital Status of Respondents .............. Ошибка! Закладка не определена.
Figure 4.2: Academic Qualification of Respondents ........................................................ 35
ix
CHAPTER ONE
BACKGROUND OF THE STUDY
1.0 Introduction
The origin of the private sector in Ghana’s economy can be traced back to the very
beginnings of colonial capitalism in the then Gold Coast. Even at such an early stage an
essential feature of labour in the informal sector was its heterogeneous character that
provided for varieties of peasant proprietors and agricultural labourers, distribution
agents, buyers, transport owners and employees, porters, repairers, etc. (Ninsin, 1991;
Adu- Amankwah, 1999).
According to Nyamekye (2009), the size of the informal sector employment in the 1980s
was twice that of the formal sector. However, by the 1990s, informal sector employment
had increased by five and half times that of the formal sector. Growing informality is
partly explained by low educational attainment. About 31 percent of Ghanaians aged 15
years and above have never attended school. A total of 55.7 percent of Ghanaians have
attained only basic education and 13.6 percent have attained secondary education or
higher. Generally, Ghanaian men have higher educational attainment than women (GSS,
2008).
The private sector in Ghana is made up of proprietary of micro and small-scaled
enterprises. It consists of producers, wholesalers, retailers and consumers. There are also
intermediary service providers along the value chain such as suppliers of raw materials to
manufacturers on contractual basis. Private sector workers are largely self-employed
persons such as farmers, traders, food processors, artisans and craft-workers to mention
but a few. The sector consists of varied activities. In rural Ghana, private sector work
1
mainly involves agriculture (75%) (GSS, 2008), fishing and fish processing, agro-based
processing. In contrast, more urban workers (43%) are engaged in non-agricultural
activities.
A system of effective internal audit controls is a crucial component of company
management and a foundation for the safe and sound operation of organisations.
However, ineffective internal audit controls result in ineffective programmes and losses
(Financial Management Manual, 2005).
According to an International Monetary Fund (2009), internal audit control refers to the
mechanism put in place on a permanent basis to control the activities in an organisation,
both at a central and at a departmental or divisional level. A key component of effective
internal control is the operation of a solid accounting and information system. Internal
control is a process that guides an organization towards achieving its objectives. These
objectives include operational efficiency and effectiveness, reliability of financial
reporting, and compliance with relevant laws and regulations (COSO, 1992). Absence of
these variables often results in organisational failure. The findings of the Tread Way
Commission Report of 1987 in the United States of America (USA) confirmed absence
of, or weak, internal controls as the primary cause of many cases of fraudulent company
financial reporting.
The widespread global corporate accounting scandals that assumed near epidemic
proportions in recent years were blamed on failure of internal controls. Notable cases
include Enron and WorldCom in the United States of America, Parmalat in Europe, and
Chuo Aoyama in Asia. In South Africa, cases of accounting scandals have been recorded
2
in Johnson Controls Incorporated (JCI) and Rand Gold and Exploration Companies
(Amudo & Emanga, 2010).
Similarly, in Nigeria, the Managing Director and Chief Financial Officer of Cadbury
Nigeria Public Limited Company (PLC) were dismissed in 2006 for inflating the profits
of the company for some years before the company’s foreign partner acquired controlling
interest (Amudo & Emanga, 2010).
These issues emphasize the need to evaluate, scrutinize, and formulate systems of checks
and balances to guide corporate executives in decision-making. These executives are
legally and morally obliged to produce honest, reliable, accurate and informative
corporate financial reports periodically.
At the organisational level, auditing objectives relate to the reliability of financial
reporting, timely feedback on the achievement of operational or strategic goals, and
compliance with laws and regulations (Anderson, 2008).
According to FICA (1977) the responsibility of the Executive Management or
management Board to inform the board and Staff of the main features of the internal
control systems. The Executive Management
can exercise its powers if the need be to
institute controls and verification mechanism to enhance organisation performance. The
internal control system, which is adapted to the characteristics of each company, provides
for the following:
i.
An organisation comprising a clear definition of responsibilities, with suitable
resources and competencies and supported by appropriate procedures, information
systems, tools and practices;
3
ii.
The in-house dissemination of relevant and reliable information, the awareness of
which enables everyone to exercise their responsibilities;
iii.
A system for identifying and analysing the main identifiable risks in relation to
the company’s objectives and for ensuring that procedures exist for managing
those risks;
iv.
Control activities proportionate to the implications of each individual process and
designed to reduce the risks that could affect the company’s ability to achieve its
objectives;
v.
On-going monitoring of the internal audit control system together with a regular
review of the way its operating. This monitoring, which can usefully be reliant on
the company’s internal audit functions when there is one, can lead to the internal
control system being adapted? Executive Management or the Management Board
should assess the parameters for notifying the Board of the main results of the
monitoring and reviews thus performed (FICA, 1977).
Internal audit controls exist in all well established institutions, at least in some form of a
policy document, even if the implementation of the practice is ineffectual or nonexistent.
Inadequate internal controls may be evidenced in weak internal and external auditing less
than factual loan portfolio examinations and less than accurate record keeping. Those
inadequacies in internal audit control can contribute to erroneous decisions (Financial
Management Manual, 2005).
An effective system of internal audit controls gives assurance regarding the integrity of
financial reporting and safeguarding of assets.
4
Fraud can easily be detected through internal audit controls. Such controls also help
accuracy in financial reporting (Asare, 2006).
Internal audit controls are used by organisations to make sure financial information is
accurate and valid. The existences of internal financial controls are important because
they protect the integrity of an organisation's financial information and allow
stakeholders a measure of financial health. Strong internal controls can also increase the
profitability of a company (Krishnan, 2005).
From the above, it is therefore essential to say that, internal auditing plays a crucial role in
helping managers to achieve their goals hence the need for this study to investigate the
effectiveness of internal auditing at Japan Motors Limited, Accra.
1.1 Problem Statement
Internal audit control systems have become a contemporary academic and professional
issue following global fraudulent financial reporting and accounting scandals in both the
developed and developing countries (Asare, 2006). A proactive preventive approach to
the problem requires a critical evaluation of existing internal audit control structures of
firms and making the needed adjustments to ensure that the organisation’s internal
control system is up to date.
Having an up-to-date internal audit control system is desirable. However, the
implementation of such systems is usually challenging to management and staff of
institutions (Krishnan, 2005).
Business areas have ineffective security and integrity of assets, unsecured ways of
purchases, ineffective issuing methods and ineffective establishment of proper business
links.
5
These relevant series of control methods, measures and procedures which tends to
minimize the occurrences of frauds and corruptions in the private sector are normally not
issues to address in an organisation (Krishnan, 2005).
Japan Motors Limited was set up to sell and service Nissan and Toyota cars in the
Ghanaian Market. Though internal auditing controls are in place, if not properly managed
it could lead to irregularities and errors which might promote unreliable and inaccurate
accounting records.
It is against this background that the study tends to examine the effectiveness of internal
auditing in the private sector using Japan Motors, Accra as a case study.
1.2 Objectives of the Study
The objectives of the study entail the main objective of the study and the specific
objectives of the study to be examined.
1.2.1 Main Objective
The research examined the effectiveness of internal auditing in the private sector: A case
study of Japan Motors Limited, Accra.
1.2.2
Specific objectives
The following are the specific objectives of the study:
a. To determine whether internal audit controls exist at Japan Motors, Accra.
b. To identify the types of internal audit controls at Japan Motors, Accra.
c. To review the effectiveness of the internal audit control systems at Japan Motors,
Accra.
6
d. To examine the measures put in place to enhance the effectiveness of internal
audit controls at Japan Motors.
1.3 Research Questions
In order to accomplish the objectives of this study, the following questions were used for
the research:
1. Do internal audit controls exist at Japan Motors, Accra?
2. What are the types of internal audit control systems at Japan Motors, Accra?
3. How effective are the internal audit control systems at Japan Motors, Accra?
4. What measures need to be put in place to enhance effectiveness of internal audit
control systems at Japan Motors, Accra?
1.4 Significance of the Study
The study would help the Japan Motors to put in place measures for their day to day
management of safeguarding assets, prevention and detection of frauds, errors and
irregularities. The study would also help to identify weaknesses, risk and potential areas
of fraud which will serve as a guide to management to fashion out policies and strategies
that will mitigate the perceived and inherent dangers in organisations. The study will help
the general public to identify factors affecting the internal auditors that serve as a
hindrance for them to perform satisfactory to improve the fortune of public service.
1.5 Scope of the Study
The study assessed the effectiveness of internal in the private sector using Japan Motors
as a case study and the focus was on the Accra branch.
7
The emphasis was on the practices and procedures of internal auditing. The reason for
choosing Japan Motors in Accra was that the researcher can have access to information
and reaching those who matter most in Japan Motors Limited as far as the regional level
was concerned.
1.6 Limitations of the study
The limitation of the study is that of time. The study is expected to be completed and
submitted within a given period. Therefore, even though the study could have been
extended to cover a wider population, doing so would invariably lead to an increase in the
time spent on the study. This may have led to missing the deadline for the submission of
the final work.
1.7 Organization of the study
The research was organised in five main chapters. Chapter one discussed a general
introduction and an overview of the background to the research, statement of the
problem, research objective, research questions, significance of the research, scope and
limitation of the research and the organisation of the study.
Chapter two took a look at the literature review of the research. Chapter three focused on
the research methodology in terms of research design, research population, sampling
technique, sampling size, data collection procedure and data collection and analysis.
Chapter four looked at the presentation and analysis of findings.
8
CHAPTER TWO
LITERATURE REVIEW
2.0 Introduction
This chapter deals with the assessment of literatures which relate to the topic the
effectiveness of internal audit control in the private sector. The internal control system of
an entity is strictly interrelated to the structure used by management to oversee the
activities of the organisation. Several literatures would be selected and relevant areas
would be reviewed and evaluated. This chapter provides information about aspect of
previous works which relate to this study. In view of this, a number of presentations
culled from various sources are under review here.
2.1 Definition of Audit
Numerous definitions have been given to the term “Audit” by various researchers and
authorities.
However, according to Soltani (2007) in An International Approach to
Auditing, an audit can be defined as a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and events to ascertain
the degree of correspondence between those assertions and established criteria and
communicating the results to interested parties.
Millichamp (2002) defined auditing as a systematic process based on logic and reasoning.
It is an activity that must be planned and conducted in a methodical manner but not a
process that can be performed haphazardly.
9
Furthermore, the auditor obtains and evaluates evidence. The auditor gathers evidence as
he or she makes decisions related to financial information presented by an entity. This
evidence is used in relation to the third key aspect related to auditing (Okai, 1996).
The Audit Practice Committee of UK, (1980), is believed to have given a general
definition of the term audit as an independent examination and expression of opinion on
the financial statements of an enterprise by an appointed auditor in pursuance of his
appointment and in compliance with the relevant statutory obligations.
2.1.1 External Audit
External auditing as defined by the Audit Practice Committee of U.K (1980), is “an
independent examination and expression of an opinion on the financial statements of an
enterprise whether profit oriented or not, irrespective of its size and legal forms”.
External audit is defined as the independent examination and expression of opinion on
the financial statement of an entity (Millichamp, 2002). An independent person is brought
in from outside the organisation to review the accounts prepared by management. The
primary aim of external audit is to enable the auditor to express opinion as to the truth
and fairness of the financial statements so as to add credibility to them (Millichamp,
2002).
An objective of external audit is to detect and prevent errors and fraud, and help the client
to improve upon his accounting and internal control systems. External audit is not
designed to identify errors, fraud and weakness in the client’s system but the audit work
is carried out in such a manner as to be able to unearth errors, frauds, and weaknesses
(Attwood & Stein, 1986).
10
Okai (1996) stated that external audit is a sovereign body which resides outside the
organisation, they focus on financial accounts or risk associated with finance and they are
appointed by shareholders. The main function is to perform statutory audit of the
financial accounts providing an opinion on whether it is true and fair reflection of the
company’s financial position.
2.1.2 Internal Audit
Arens and Loebbecke (1994) in Auditing Integrated Approach, argue that internal audit
“is a process by which a competent independent person accumulates and evaluates
evidence about quantifiable information related to a specific economic entity for the
purpose of determining and reporting on the degree of correspondence between the
quantifiable information and established criteria”.
Cosserat and Rodda (2008) Modern Auditing, gives the opinion that internal auditing
merely refers to “any audit activities carried out by audit professionals who are
employees of the entity that is being audited”.
Millichamp and Taylor (2008), express their view on internal auditing as “an independent
and objective assurance and consulting activity designed to add value and improve an
organisation operation”. From this we can deduce that internal auditing helps an
organisation to accomplish its objectives by bringing a systematic disciplinary approach
to evaluate and improve the effectiveness of risk management, control and governance
process. It is also clear that internal audit is intended to be proactive not reactive, their
intention is to add value to the organisation and not to be simply an overhead cost
(Millichamp & Taylor, 2008).
11
According to Stettler (1977), the growing recognition by management of the benefits of
good internal controls and the complexities of an adequate system of internal control in a
large organisation have led to the development of internal auditing as a form of control
over all other internal controls. The emergence of the internal auditor as a specialist in
internal control is the result of evolutionary process that is similar in some ways to the
evolution of independent auditing (Millichamp, 2002).
According to Rittenberg and Schwieger (2000), the internal auditing profession defines
internal auditing as ‘an independent and objective assurance and consulting activity that
is designed to add value and improve an organisation’s operations.
From the above definitions, auditing can be seen as independent and objective
investigation of an entity’s financial statement whether it is public or private and
establishment of opinions on the truth and fairness of the financial position, financial
performance and cash flow position of the entity.
2.2 Internal Control
Okai (1996) in his book “Auditing for you” argues that the term internal control
comprises all the methods, procedures and arrangement adopted within an organisation to
ensure, as far as practicable the safeguarding of assets, the completeness, accuracy and
adherence to management.
Millichamp (2002) also define internal control system as the whole system of controls,
financial and 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
12
policies, safeguarding the assets and secure as far as possible the completeness and
accuracy of the records.
According to the COSO report issued in 1992, internal control is a process, effected by
the entity’s board of directors, management and other personnel, designed to provide
reasonable assurance regarding the achievement of objective in the following categories:
i.
Effectiveness and efficiency of operations
ii.
Reliability in financial reporting and
iii.
Compliance with applicable laws and regulations
Whittington and Pany (2004) defines internal control as a set of processes, functions,
activities, sub-systems, and people who are grouped together or consciously segregated to
ensure the effective achievement of objective and goals.
All the above definitions of internal control have identified the main objectives of
internal controls to be the assurance that organisational resources will be put to economic,
efficient and effective use in order to achieve the objectives for which the organisation
was set up.
2.3 Objectives of Internal Controls
According to Howard (1984), increasing attention has been paid to the methods of
internal control in recent years.
13
Howard (1984) argues further that not only the complexity of modern business
techniques but also the increased size of business units have encouraged the adoption of
methods which, whilst increasing the efficiency of the business, also act as safeguards
against error or fraud. The objectives that internal controls must meet to prevent errors
and to be efficient so as o provide reasonable assurance are that:
i.
Recorded transactions are valid. The system should not permit the inclusion of
fictitious or non - existent transactions in accounting records.
ii.
The transactions are properly authorized. The system should ensure that
transactions are properly authorized.
iii.
Transactions are recorded. The procedures must provide controls to prevent
omissions of transactions from the records.
iv.
Transactions are properly valued. An adequate system must include procedures to
avoid errors I calculating and recording transactions at various stages in the
recording process.
v.
Transactions are properly classified. Proper account classification accounting to
appropriate categories or divisions must be ensured by the system.
2.4 Types of Internal Controls
According to Okai (1996) there are eight (8) types of internal controls. They entail:
1. Organization – Every enterprise should ideally have a plan of their institution,
defining and allocating responsibilities and identifying lines of reporting for all
aspects of the enterprise’s operations. Authority delegation within the institution
and responsibilities should be clearly specified.
14
2. Segregation of duties – It is important to separate those responsibilities or duties
which would if combined enable one individual to record and process a complete
transaction. Segregation of duties thus reduces the risks of international
manipulation or errors and increases the element of checking. The functions
which should be separated entail authorization, execution, custody, and recording
and in the case of computer based accounting systems development and daily
operations.
3. Physical – These are concerned mainly with the custody of assets and involve
procedures and security measures designed to ensure that access to assets is
limited to authorized personnel. This includes both direct and indirect access
through documentation. These controls assume importance in the case of
valuable, portable, exchangeable or desirable assets.
4. Authorization and Approval – All transactions should require authorization or
approval by an appropriate responsible person. The limits for those authorizations
should be specified.
5. Arithmetic and Accounting – These are the controls within the recording
function which check that the transactions to be recorded and processed have been
authorized.
Such controls include checking the arithmetical accuracy of the
records, maintenance and checking of totals, reconciliations, control accounts and
trial balances and accounting for documents.
15
6. Personnel – There should be procedures to ensure that personnel have
capabilities commensurate with their responsibilities. Inevitable, the proper
functioning of any system depends on the competence and integrity of those
operating it.
The qualification, selection and training as well as the innate personal
characteristics of the personnel involved are important features to be considered
in setting up any control system.
7. Supervision – Any system of internal control should include the supervision by
responsible officials of day-to-day transactions and the recording thereof.
8.
Management – There are controls exercised by management outside the day-today routine of the system. They includes the overall supervisory control exercised
by management, the review of management accounts and comparison thereof with
budget, the internal audit function and any other special review procedures.
2.5 Establishment of Internal Control System
Millichamp (2002) stipulates that management establish internal control system, either
directly or by means of external consultants, internal audit, or accounting personnel.
It follows that management is responsible for designing controls in order to carry on the
business of the enterprise in orderly and efficient manner, ensure adherence to
management policies, safeguard its assets and secure as far as possible the completeness
and accuracy of the records.
Attwood and Stein (1986) also argued that every business has some kind of accounting
system by which transactions are processed, and records of those transactions maintained.
16
It must be noted that the establishment of internal control system is purely a managerial
function and the internal audit department contributes significantly in the design of these
controls.
Since internal auditors are professionals who possess the necessary skill to evaluate the
potential impact of any control system to be instituted, their input is vital in establishing
effective internal controls (Attwood & Stein, 1986).
2.6 Types of Internal Control System
Galloway (1994) posits that controls can be either preventative or detective. Preventative
controls attempt to deter or prevent undesirable events from occurring. Separation of
duties, proper authorization, adequate documentation, passwords and physical control
over assets and even traffic signs are all examples or preventative controls.
According to Galloway (1994), detective controls attempt to detect errors or irregularities
which have already occurred. Reviews, analyses, reconciliations, periodic physical
inventories, audits and surveillance cameras are all examples of detective controls. Both
types of controls are essential to an effective internal control system. From a quality
standpoint, preventative controls are essential because they are proactive. However,
detective controls play a critical role providing evidence that preventative controls are
functioning effectively.
Zabihollah (2002) also explains that controls can be either preventive or detective. The
intent of these controls is different. Preventive controls attempt to deter or prevent
undesirable events from occurring.
17
They are proactive controls that help to prevent a loss. Examples of preventive controls
are separation of duties, proper authorization, adequate documentation, and physical
control over assets. Detective controls, on the other hand, attempt to detect undesirable
acts (Zabihollah, 2002). Detective controls provide evidence that a loss has occurred but
do not prevent a loss from occurring (Okai, 1996). Examples of detective controls are
reviews, analyses, variance analyses, reconciliations, physical inventories, and audits.
Preventive and Detective controls are essential to an effective internal control system.
From a quality standpoint, preventive controls are essential because they are proactive
and emphasize quality (Millichamp, 2002).
Zabihollah (2002) further explains that management authorizes employees to perform
certain activities and to execute certain transactions within limited parameters.
In addition, management specifies those activities or transactions that need supervisory
approval before they are performed or executed by employees. A supervisor’s approval
(manual or electronic) implies that he or she has verified and validated that the activity or
transaction conforms to established policies and procedures (Zabihollah, 2002).
2.7 Importance of Effective Internal Control
Price (2005) asserts that corporate governance and accountability processes are geared at
seeking and protecting shareholders interest, which has become a number one priority of
most organisations.
18
Price (2005) therefore argues that effective internal controls are essential to ensure that
the stewardship responsibility placed on management is carried out effectively and
efficiently by;
a. protecting its resources against waste, fraud, and inefficiency;
b. ensuring accuracy and reliability in accounting and operating data;
c. securing compliance with the policies of the organization; and
d. Evaluating the level of performance in all organizational units of the organization
to ensure that objectives are achieved as planned.
The organisational checks and balances provide authority functions that minimize the
potential waste, fraud, abuse and mismanagement (Millichamp, 2002). Thus, internal
controls perform a watchdog's role on behalf of management. it implies that any
organisation, profit and not for profit alike, without effective internal control system is
more prone to irregularities and errors such as waste, fraud, inefficiency, as well as fines
for non-compliance with the necessary regulations.
2.8 Types of Internal Auditing
The Audit Practice Committee of U.K (1980) gives the following types of internal audit
into which the duties of internal audit can be divided:
1. Financial Internal Auditing
2. Operational Internal Auditing
3. Management Internal Auditing
19
2.8.1 Financial Internal Auditing
The financial internal auditing is described by Okai (1996) as embracing the conventional
tasks of examining records and evidence in order to detect errors and prevent fraud.
It includes reviewing routine financial and management reports, looking for trends within
the figures thus, being able to identify significant deviation from the norm (Okai, 1996).
2.8.2 Operational Internal Auditing
The term operational audit was referred to by Whittington and Pany (1995) Principle of
Audit and Assurance, as a comprehensive examination of an operating unit or a complete
organisation to evaluate its performance as measured by management objectives. This
covers the examination of the control procedures and whether or not they are being
adhered to. Such examination would seek to identify areas of improvement in efficiency
as well as in internal control and control check.
2.8.3 Management Internal Auditing
The management internal audit relates to the review and evaluation of the management
structure within the organisation and the performance of managers as a group or
individually (Millichamp, 2002).
It also includes the appraisal of the environment for the exercise of management skills as
well as the measurement of external management performance against established criteria
(Millichamp & Taylor, 2008).
20
2.9 Challenges of Internal Auditing
According to Kinney et al. (1999) internal auditing may face the following challenges:
a. Image: In most organizations in Ghana, the image of internal auditors is rather a
bad one. Internal auditors have come to be seen as "enemies of management" in
some organizations; this may stem from misunderstanding of the roles and duties
of internal auditors (Kinney, 2000).
b. Communication: Although communication has always been of utmost
importance for internal auditors, it is now taken an even more prominent role.
Auditors have to speak clearly and succinctly while conveying often sensitive
issues and findings to appropriate parties, such as the audit committee (Kinney,
2000). Lately, it has become even more apparent that audit committees must
receive more information about the company's risk and controls - a responsibility
that falls to the chief audit executive and the internal audit unit with input from
the external auditors (Kinney et al., 1999).
c. Staff competency: With the myriad changes in today's business community,
keeping the internal audit team members up to date will require serious
commitment to continuing professional education. Reputations fall very quickly
when incompetent or untrained staff is assigned to tasks beyond their ability.
Management in most instances is even reluctant to release funds for the training
and development of the internal audit staff. The lack of training and development
of the audit staff hampers the effective discharge of duties (Kinney et al., 1999).
21
d. Ethical conduct / independence: Another challenge for individual internal
auditors as well as entire internal audit departments is ensuring ethical conduct in
their operations; demonstrating the willingness to do the right thing at the right
time, even in the face of opposing views. The tendency for management to pry
into the activities of the internal audit department is very high.
2.10 Limitations of Internal Controls
According to Millichamp and Taylor (2007), internal controls are essential features of
any organisation that is run efficiently.
However, it is important to realise that internal controls have inherent limitations which
include:
i.
A requirement that the cost of an internal control is not disproportionate to the
potential loss which may result from its absence.
ii.
Internal controls tend to be directed at routine transactions. The one-off or
unusual transaction tends not to be the subject of internal control.
iii.
Potential human error caused by stress of worker-load, alcohol, carelessness,
distraction, mistakes of judgment, apathy and the misunderstanding of
instructions.
iv.
The possibility of circumvention of controls either alone or through collusion with
parties outside or inside the entity.
v.
Abuse of responsibility by senior managers resulting in management override of
controls.
vi.
Changing in environment making control inadequate.
22
vii.
Fraud.
2.11 Measures that can be put in place to Enhance Effective Internal Controls
According to Kinney (2000), increasing attention has been paid to the methods of internal
control in recent years. He argues further that not only the complexity of modern business
techniques but also the increased size of business units have encouraged the adoption of
methods which, whilst increasing the efficiency of the business, also act as safeguards
against error or fraud. The objectives that internal controls must meet to prevent errors
and to be efficient so as o provide reasonable assurance are that:
a. Recorded transactions are valid. The system should not permit the inclusion of
fictitious or non - existent transactions in accounting records.
b. The transactions are properly authorized. The system should ensure that
transactions are properly authorized.
c. Transactions are recorded. The procedures must provide controls to prevent
omissions of transactions from the records.
d. Transactions are properly classified. Proper account classification accounting to
appropriate categories or divisions must be ensured by the system.
e. Transactions are recorded at the proper time. The recording of transactions either
before or after the time they took place increases the likelihood of failing to
record transactions or recording them at the wrong amount. Therefore, effective
control system should ensure timely recording of transactions.
23
2.12 The Need for Internal Auditing
Whittington and Pany (2001) rightly stipulate that an imperative aspect of the
organisation’s monitoring system is the internal audit function. He further argues that as
representative of top management, internal auditors are interested in determine whether
each branch or department has a clear understanding of its assignment, adequately
staffed, maintains good records, properly safeguards cash, inventories and other assets,
and cooperates harmoniously with other departments.
According to Millichamp (2002) management is responsible for establishing and
maintaining a system of internal controls within an organisation.
Internal controls are those structures, activities, processes and systems which help
management effectively mitigate the risks to an organisation’s achievement of objectives.
Management is charged with this responsibility on behalf of the organisation’s
stakeholders and is held accountable for this responsibility by an oversight body
(Millichamp, 2002).
A dedicated, independent and effective internal audit unit assists both management and
oversight body in fulfilling their responsibilities by bringing a systematic and disciplined
approach to assessing the effectiveness of the design and execution of the system of
internal control and risk management processes (Okai, 1996). The objective assessment
of internal controls and risk management processes by the internal audit unit provides
management, the oversight body, and external stakeholders with independent assurance
that organisation’s risks have been appropriately mitigated (Kinney et al., 1999).
24
Amudo and Inanga (2010) stated that organisations that do not have internal audit
function are therefore missing the valuable benefits that professional internal auditors
provide. In addition, they are also running the risk o relying on management who may not
be in the best position to provide skilled, independent, and objective opinions on internal
controls.
Some organisations assign internal auditors on a part-time basis to an existing staff
member who has other responsibilities. When this occurs, the person does not have the
professional internal audit training or experience necessary for optimal effectiveness
(Okai, 1996). Such organisations run the risk of poorly performed audits and reviews, and
this individual, who may be relatively junior in the organisation, may lack the
organisational status and stature to achieve positive results in this environment, high risk
processes may not be identified for review and serious internal control deficiencies may
be overlooked (Galloway, 1994).
2.13 Chapter Summary
From the above discussions and contributions on the study area, it is evident that internal
control system plays a major role in the internal auditing and accounting principles of an
organisation and the private sector is no exception. Management therefore has the
onerous duty to effect appropriate internal audit control system in their organisation
which is a major step in achieving organisational success.
Hence the need for employers in the private sector institutions to establish the right
internal audit control system that would help inure to the benefits of the organisation as
far as growth, profit maximization and overall success are concerned.
25
CHAPTER THREE
METHODOLOGY
3. 0 Introduction
This chapter presents the procedures and activities employed in conducting this research.
Research methodology according to Saunders et. al. (2007) is the technique and
procedures used to obtain and analyze research data. It takes into account issues such as
the research design, research strategy, research population, sample size, sampling
technique, data collection procedure, and finally the data analysis.
3.1 Research Design
According to Burns and Bush (2002) research design is defined as a set of advance
decisions that make up the master plan specifying the methods and procedures for
collecting and analyzing the needed information. This helps the researcher to formulate
the sort of data to collect for the study. Burns and Bush (2002) stated that the main types
of research designs entail exploratory, explanatory, descriptive and cross – sectional
research design. The study adopted a descriptive research design. Descriptive research
design seeks to provide an accurate description of observations of phenomena. It deals
with “what” questions rather than answering questions about how or why the phenomena
occurred and its most distinguishing feature is that, the researcher has no control over
variables.
26
A case study was used and as such the survey method of data collection was employed to
collect data of qualitative nature. A structured questionnaire was prepared for respondents
to give appropriate answers.
3.2 Research Strategy
There are two main research approaches by which social science research including
business studies is conducted. These are qualitative and quantitative research approach.
According to Merriam (2009), qualitative researchers are interested in understanding the
meaning people have created in particular how they make sense of their world and the
experience they have in the world.
Tashkkori and Teddlie (1998) perceive qualitative research as using methods such as
participant observation or case studies which result in a narrative, descriptive account of a
setting practice. The study used the mixed method.
3.2.1 Mixed Methods
Different names have been given to this new research method including multi-strategy
(Bryman, 2004), mixed methodology (Tashkkori and Teddlie, 1998), or mixed methods
(Creswell, 2003). Combining the two methods helped the researcher to increase the
study’s credibility compare to what would be achieved by using a single method.
The researcher adopted the mixed method which combines quantitative and qualitative
techniques for the reasons of achieving credibility of result, for better interpretation of
result, to offset the weaknesses associated with using one method and to achieve
corroboration between the two methods.
27
3.3 Population
Saunders et al. (2007) defines research population as the full set of cases from which a
sample is taken.
In line with this, Cohen et al. (2000) stated that, population is a group of people who are
subjected to a piece of research. The target population is the population to which the
researcher ideally would like to generalise the results. In attitude surveys, population
validity is of extreme importance; therefore, great care should be taken to obtain a
representative sample in order to prevent a biased result (Welman & Kruger, 2005).The
target population for this study is made up of all employees of Japan Motors, Accra. The
total population of Japan Motors, Accra is made up of 60 employees.
3.4 Sampling Technique
Probability sampling method was adopted in selecting the study organisation. Probability
sampling ensures that each element of the population of interest has an equal chance of
selection as they are drawn from the sampling frame (Haer & Becher, 2012).
In selecting the respondents, convenience sampling techniques were used to select all
staff of Japan Motors, Accra. Convenience sampling (sometimes known as grab or
opportunity sampling) is a type of non-probability sampling which involves the sample
being drawn from that part of the population which is close to hand (Saunders et. al,
2007). The researcher used convenience sampling because respondents that the
researcher could easily reached out to be used for the study.
28
3.5 Sample Size
In research it is often impossible to study every member of the population involved.
However, some researchers do overcome this difficulty in situations where the study
population itself is small and also not very scattered.
To address the challenge of access to the complete population, representative samples are
thus prescribed and accepted in any scientific study.
A sample is a finite part of a statistical population whose properties are studied to gain
information about the whole, when dealing with people, it can be defined as a set of
respondents (people) selected from a larger population for the purpose of a survey
(Saunders et. al., 2007).
A sample can refer to a set of people or objects chosen from a larger population in order
to represent that population to a greater extent (Haer & Becher, 2012). Therefore, the size
of the study sample and the way in which it is chosen will certainly have implications for
the confidence in the results and the extent to which generalizations can be made.
A sample size of 50 was drawn from a target population of Japan Motors, Accra.
3.5 Source of Data
Data was obtained from both primary and secondary data sources using varied
techniques.
3.5.1 Primary Data
Primary source of data was obtained through questionnaire. Questions that were used in
the research included both closed and open-ended questions.
29
The closed ended questions were intended to restrict respondents’ answers; this provided
an objective based for comparative analysis. The open-ended questions were intended to
give respondents the latitude of freedom to express their views in an unconstrained
manner.
3.5.2 Secondary Data
Secondary data are information or data already collected by other researchers or
institutions, usually for different purposes (Saunders et al., 2007).
Secondary data
enables the researcher to place the study in the context of existing knowledge as well as
broadens the researcher’s understanding to the research topic (Saunders et al., 2007).
Secondary data sources were gathered from newspapers and manuals on the subject
matter which gave the researcher information about the effectiveness of internal auditing
in the private sector using Japan Motors as the case study. The internet as well as other
relevant publications was also consulted.
3.6 Data Collection
The object of data-collection is to get a good overall picture of how a process performs.
All respondents must fully understand what is going on and what is required of them. The
data collected should accurately reflect the performance of the process (Dale et al., 2007).
The main instrument used to collect data for the study was the questionnaire. The
questionnaire was used to collect data from the Japan Motor’s employees. The items were
designed after carefully reviewing literature which specified variables of interest for the
study. After careful scrutiny by the supervisor, the questionnaires were administered to
30
the employees at Japan Motors, Accra over a period two weeks. Permission was earlier
sought from the manager before administering the questionnaires. The self-completed
questionnaires were then retrieved from the respondents for data analysis.
3.7 Data Analysis
The analysis and interpretation of data was presented using descriptive and inferential
statistics.
According to Welman and Kruger (2005), descriptive statistics involve the description
and summary of data, while inferential statistics involve the inferences that are drawn
from the results.
The study used both qualitative and quantitative analysis. Before the quantitative
analysis, data collected was sorted, edited, and entered in the software (SPSS).
Data was processed and analyzed using Statistical Package for Social Scientist (SPSS –
V16) software as well as Microsoft Excel 2010 and generated into percentages, pie
charts, bar charts and tables to give good visual impression and clarity of information.
3.8 Chapter Summary
This chapter focused on the procedures of data gathering and analysis employed in the
study. The research instrument and the research design used in this study were the
questionnaire and descriptive research design. The research method presented in this
chapter was related with the statement of problem and objectives of this study. This
chapter entailed the research method, the research design, population of the study, sample
size determination, sampling techniques and procedure, sources of data and data
collection, research instrument and design.
31
CHAPTER FOUR
DATA ANALYSIS AND DISCUSSION OF RESULTS
4.0 Introduction
This chapter encompasses the presentation, discussion and analysis of data collected from
the field. Research findings constitute a very important stage of the research exercise. It is
an essential part of the survey and it is affected by its overall quality. This chapter
explains information gathered from the field through the use of questionnaires.
4.1 Personal Information
These entail gender, age group, marital status academic qualification and length of time
of job. Frequency tables were used in analyzing the data gathered from the respondents.
4.1.1 Gender of Respondents
This was to find the gender of the respondents in the survey.
Table 4.1: Gender of Respondents
Gender
Frequency
Percentage (%)
Male
35
70
Female
15
30
Total
50
100
32
Source: Field Data, 2016
From table 4.1, it is realized that 35 of respondents representing 70% of the total number
of participants were males while 15 representing 30% of the total number were females.
This clearly shows that there were considerably more male participants than female in
this survey and it may be as a consequence of the sample technique used in selecting
respondents or that the Japan Motors has more male workers than females.
4.1.2 Age Distribution of Respondents
This showed the age distribution of the respondents in the study.
Table 4.2: Age Distribution of Respondents
Age
Frequency
Percentage (%)
Less than 20 years
-
-
21 – 30 years
30
60
31 – 40 years
15
30
41 – 50 years
5
10
Older than 50 years
-
-
Total
50
100
Source: Field Data, 2016
Table 4.2 above shows that 60% of the respondents were between the ages of 21 – 30
followed by 31 – 40 (30%) and 41 – 50 (10%). The result shows that majority of the
Japan Motor’s employees are quite young and falls between 21 – 30 years.
33
4.1.3 Marital Status of Staff
From figure 4.1 below, out of the 50 respondents surveyed, 20 (40%) of them were
married and 30 (60%) were single.
The majority of the respondents being single could be partly as a result of the majority of
these respondents being in the 21 – 30 years age bracket.
Marital Staus of Respondents
40%
Married
Single
60%
Figure 4.1: Marital Status of Respondents
Source: Field Data, 2016
4.1.4 Academic Qualification of Respondents
This was to find out the highest qualification of the various respondents in the study area,
responses are as follows:
34
Academic Qualification of Respondents
35
30
25
20
15
10
5
0
35
70%
0
WASCE
10
20%
HND
5
10%
Bachelor
Degree
Masters
Degree
Figure 4.2: Academic Qualification of Respondents
Source: Field Data, 2016
From the figure 4.2 above, it was realized that 35 respondents had First Degree from
various fields, while 10 had Higher National Diploma (HND), 5 had master’s degree
qualifications. Figure 4.2 evidently shows that majority of the respondents have a
bachelor’s degree which shows that the level of education of respondents in this survey is
very high.
4.1.5 Number of Years spent at Japan Motors
This was to find out the number of years respondents had spent at Japan Motors, answers
are illustrated as follows:
35
Table 4.3: Number of Years spent at Japan Motors
Years
Frequency
Percentage (%)
0 – 1 year
6
12
2 – 3 years
9
18
4 – 5 years
30
60
6 years and above
5
10
Total
50
100
Source: Field Data, 2016
Table 4.3 above indicates how long employees have spent working with Japan Motors,
60% representing majority of the respondents said they have been working with Japan
Motors for the past 4 – 5 years followed 18% (2 – 3 years), 12% (0 – 1 year) and 10%
said they have been with Japan Motors for 6 years and above. The implication is that, the
Japan Motors employees are relatively loyal to the company.
4.2 Control Environment
The responses of workers on the various items are indicated by the numerals 1, 2, 3, 4,
and 5 respectively for strongly disagree, disagree, uncertain, agree and strongly agree.
36
Table 4.4: Response for Control Environment
Statement
1
Management decisions are made collectively
and not controlled by one dominant individual.
2
4
5
5
3
1
18
23
(10%)
(6%)
(2%)
(36%)
(46%)
34
6
3
4
3
(12%)
(6%)
(8%)
(6%)
6
9
10
20
(12%)
(18%)
(20%)
(40%)
4
2
4
15
25
(8%)
(4%)
(8%)
(30%)
(50%)
4
7
11
22
(8%)
(14%)
(22%)
(44%)
Codes of conduct or ethics policies exist in (68%)
Japan Motors
5
Policies regarding the importance of internal (10%)
audit controls and appropriate conduct are
communicated to all staff of Japan Motors.
Audit or other control systems exist to
periodically test for compliance with codes of
conduct or policies.
3
6
Management periodically reviews policies and
procedures to ensure that proper audit controls
(12%)
are in place.
Source: Field Data, 2016
Table 4.4 shows that a high percentage of workers either agree or strongly agree that
management decisions are made collectively and not controlled by one dominant
individual as compared to those who either disagree or strongly disagree with the same
issue.
37
Workers who either agree or strongly agree number 41(or 82%) out of a total of 50
respondents while those who either disagree or strongly disagree with the same issue
number 8 (or 16%) of the total respondents. Workers who are not sure with this issue
represent the remaining percentage.
Table 4.4 again indicates that a large percentage of respondents either disagree or
strongly disagree that codes of conducts and ethics polices exist at Japan Motors as
compared to those who either agree or strongly agree with the same issue.
Workers who either agree or strongly agree with this issue number 7 (or 14%) out of the
50 respondents. Those who either disagree or strongly disagree with the issue number 40
(or 80%) out of a total of 50 respondents. The rest of the respondents were not sure.
Additionally, Table 4.4 shows that a high number of the respondents either agree or
strongly agree that policies in regards to internal control and conduct is communicated to
all employees. Workers who either agree or strongly agree number 30 (or 60%) out of a
total of 50 respondents. Their counterparts who either disagree or strongly disagree with
the same issue number 11 (or 22%). The rest of the respondents were not sure.
Table 4.4 further indicates that respondents who either agree or strongly agree that audit
or other control systems exist to test for compliance outnumber those who either disagree
or strongly disagree with the same issue. Workers who either agree or strongly agree with
this issue number 40 (or 80%) out of the total of 50 respondents.
Those who either disagree or strongly disagree with the issue number 6 (or 12%) out of
the total. The rest of the respondents were not sure. The implication of the responds form
employees is that most of the systems in placed are well understood.
38
There are no ambiguities so far as internal controls are concerned. It all means that
employees are comforted working with the systems as most of them seems to appreciate
the system.
Table 4.9 also shows that respondents who either agree or strongly agree that
management periodically reviews policies and procedures outnumber those who either
disagree or strongly disagree with the same issue. Workers who either agree or strongly
agree with this issue number 33 (or 66%) out of the total of 50 respondents.
Those who either disagree or strongly disagree with the issue number 10 (or 20%) out of
the total. The rest of the respondents were not sure.
Table 4.4 above, indicated that the control environment of Japan Motors is quite
effective. However, in terms of codes of conducts and ethical policies, it was found that
the control environment was weak according to the respondents surveyed. Although most
employees confirmed that there are controls in place, they also confirm that adherence to
it has been poor. This implies that most of the controls are bent in order to get thing done.
This is a seeming disaster for management as things might not go as expected. The
adherence rate should be improved.
From table 4.4 above, it is also stated that internal control systems actually exist in the
organisation. This is because majority of respondents are aware. It thus implies that those
who break control procedures can be legally sanctioned by management.
39
The findings confirmed the assertion of the Treadway commission of the committee of
sponsoring organisations (COSO), that it is management responsibility to set up the
internal control system and that the internal auditor‘s role is to evaluate the effectiveness
or otherwise of the system. Control environment is the component that provides the
foundation needed for the other components to build on in internal financial controls
systems (Kinney, 2000). Overall, the control environment in Japan Motors was very
good.
4.3 Risk Assessment
The responses of workers on the various items are indicated by the numerals 1, 2, 3, 4,
and 5 respectively for strongly disagree, disagree, uncertain, agree and strongly agree.
Table 4.5: Response for Risk Analysis
Statement
1
Japan Motors has clear objectives and these have
been communicated so as to provide effective
direction to employees on risk assessment and
audit control issues.
There are sufficient staff members who are
competent and knowledgeable to manage
company activities and these have been provided
with adequate resources.
2
40
4
5
-
1
4
17
28
(-)
(2%)
(8%)
(34%)
(56%)
4
7
8
14
17
(8%)
(14%)
(16%)
(28%)
(34%)
13
20
5
8
4
(40%)
(10%)
(16%)
(8%)
Significant internal and external operational, (26%)
financial, compliance and other risks are
identified and assessed on an ongoing basis.
Source: Field Data, 2016
3
Table 4.5 shows that majority of workers either agree or strongly agree that Japan Motors
has clear objectives and these objectives are communicated so as to provide effective
direction to employees on risk assessment and audit control issues.
Workers who either agree or strongly agree with this issue number 45 (or 90%) out of a
total of 50 respondents while those who either disagree or strongly disagree with the
same issue number 1 (or 2%) out the total. The rest of the respondents are not sure.
On whether there are sufficient staff members who are competent and knowledgeable to
manage company activities, Table 4.5 shows that majority of workers either agree or
strongly agree that members in their appreciate their work.
Workers in the majority group number 31 (or 62%) out of a total of 50 respondents.
Workers who feel that there are not sufficient staff members who are capable and
knowledgeable to manage the company’s activities number 11 (or 22%) of the total
population. The rest of the workers are not sure.
Table 4.5 further indicates that workers who either agree or strongly agree that there is a
significant internal and external operational, financial, compliance and other risks that is
identified and assessed on an ongoing basis. The number of workers who either disagree
or strongly disagree outnumber their counterparts who either agree or strongly agree with
this statement.
Workers in the second category number 12 (or 24%) out of a total of 50 workers while
their counterparts in the first category number 33 (or 66%) out of the total. The rest of the
workers are not sure.
41
Table 4.5 above indicates that in general risk assessment in Japan Motors is effective.
However in terms in terms of risk analysis, identification and assessment of risk was
weak.
All organisations seem to be aware of the common risks, but risks are not documented or
formalized, periodical re-assessments are not made, and formal or informal risk policies
are lacking (Galloway, 1994).
In risk analysis component, the COSO framework does not state specific approaches, but
rather principles which should be followed in risk assessment (Soltani, 2007).
According to Lannoye (2009) an internal control provides reasonable assurance not
absolute assurance. Therefore, regardless of how well designed and operated an internal
control system is, it cannot provide absolute assurance that all objectives will be met.
4.4 Monitoring and Control Systems
The responses of workers on the various items are indicated by the numerals 1, 2, 3, 4,
and 5 respectively for strongly disagree, disagree, uncertain, agree and strongly agree.
42
Table 4.6: Response for Monitoring and Control Systems
Statement
1
There are ongoing processes within Japan
Motor’s overall business operations and these
are addressed by senior management to monitor
the effective application of the policies,
processes and activities related to internal audit
control and risk management
There are effective follow-up procedures to
ensure that appropriate change or action occurs
in response to changes in risks and control
assessments.
2
5
1
4
15
30
(-)
(2%)
(8%)
(30%)
(60%)
-
4
8
13
25
(-)
(8%)
(16%)
(26%)
(50%)
15
20
5
6
4
(40%)
(10%)
(12%)
(8%)
-
6
4
16
24
(-)
(12%)
(8%)
(32%)
(48%)
4
6
15
20
(8%)
(12%)
(30%)
(40%)
6
8
15
12
(12%)
(16)
(30%)
(24%)
9
(18%)
5
There are effective reporting procedures in
communicating a balanced and understandable
(10%)
account of the company’s position and
procedures.
All staff understands their role in the internal
audit control system.
4
-
Reports on significant failings or weaknesses are (30%)
reported to management on a timely basis.
There
are
established
channels
of
communication for individuals to report
suspected breaches of laws or regulation or other
improprieties
3
Source: Field Data, 2016
Table 4.6 shows that workers who either agree or strongly agree that there are ongoing
monitoring processes at Japan Motors outnumber their counterparts who either disagree
or strongly disagree with the same issue.
43
Workers in second group number 45 (or 90%) out of a total of 50 respondents while those
in the first group number 1 (or 2%) out of the same total. The remaining percentage of
workers indicated that they were not sure of this issue.
Also, Table 4.6 indicates that majority of the respondents either agree or strongly agree
that there are effective follow up procedures in place at Japan Motors. Workers who
either agree or strongly agree with the issue number 38 (or 76%) out of a total of 50
respondents while their counterparts who either disagree or strongly disagree with the
issue number 4 (or 8%) out of the same total. The rest of the respondents are not sure.
Again, Table 4.6 shows that workers who either disagree or strongly disagree that reports
on significant failings or weaknesses are reported to management on a timely basis
outnumber those who either agree or strongly agree with the same issue. Workers in the
latter group number 10 (or 20%) while those in the former group number 35 (or 70%).
The remaining percentage of worker represents those who are not sure.
Additionally, Table 4.6 shows that workers who either agree or strongly agree that there
are established channels of communication for individuals to report suspected breaches of
laws or regulation or other improprieties outnumber those who either disagree or strongly
disagree with the same issue.
Workers in the second category mentioned number 40 (or 80%) out of a total of 50
respondents while their counterparts in the first category number 6 (or 12%) out of the
same total. As shown in the table 4.6, 8 % of the respondents are not sure.
44
Table 4.6 further shows that workers who either agree or strongly agree that there are
effective reporting procedures in communicating a balanced and understandable account
outnumber those who either disagree or strongly disagree with the same issue. Workers
who either agree or strongly agree with the issue number 35 (or 70%) out of a total of 50
respondents while their counterparts who either disagree or strongly disagree with the
same issue number 9 (or 18%) out of the total. 6 (or 12%) workers are not sure as shown
in Table 4.6 above
Table 4.6 also shows that workers who either agree or strongly agree that all staff
understands their role in the internal audit control system outnumber those who either
disagree or strongly disagree with the same issue. Workers in the second category
mentioned number 21 (or 42%) out of a total of 50 respondents while their counterparts
in the first category number 14 (or 28%) out of the same total. As shown in the Table 4.6,
15 (30%) of the respondents are not sure.
Table 4.6 above indicates that the on-going monitoring processes at Japan Motors were
generally effective. However, separate evaluation and reporting deficiencies were
average.
According to COSO (1992) monitoring component includes allowing managers clear
responsibility guidelines so that they are able to effectively do their jobs.
Table 4.6 also indicated that there are right communication channels in place for
individuals to report suspected breaches of laws or regulation or other improprieties.
Japan Motors information system was also integrated to capture all relevant information
in the organisation.
45
Information and communication component is designed to allow employees the ability to
carry out their responsibilities in the best manner possible. COSO Internal Control Integrated Framework, (1992)
46
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.0 Introduction
This chapter concludes the study. It begins with a brief summary of the study which is
followed by the major findings and conclusions. The recommendations of the study are
finally presented.
5.1 Summary of Key Findings
The research revealed that majority of accounting and administration personnel are
males, the age group of 21 – 30 years constitutes the majority of employees in Japan
Motors and many of the respondents had acquired tertiary education.
The establishment of internal control system has made the operations of the company
effective. The control system in Japan Motors comprises authorization and approval,
segregation of duties, physical controls, arithmetical and accounting, management,
organisation, supervision, personnel, and acknowledgement of performance controls. For
example, the organisational structure defines the formal relationship among groups and
individuals in the company. The structure determines the authority, responsibility, and
reporting line in the company.
Management involves all the units which are affected by or affect the control system in
its design. For instance, the internal auditor is involved since he is an expert and
possesses the skills to suggest appropriate control measures.
47
It was found that Japan Motors has a systematic, comprehensive approach to internal
audit control, which is consistently documented, understood at management level and
communicated to personnel.
However, there were still some inconsistencies concerning how internal controls were
implemented and enforced and also all responsibilities were not clearly defined.
The overall objectives for instituting the internal controls in Japan Motors have been
achieved. This is because the company's assets are being protected against waste, fraud,
and inefficiency; accounting and operating data have been accurate and reliable; and
policies have been complied with. These have been possible through segregation of
duties, authorizations, physical control, and supervision, acknowledgement of
performance, periodic reviews and evaluation of the system.
The controls at Japan Motors have been designed with recourse to the existing laws and
regulations. The procedures enable the company to declare the right profit and tax. The
company has, therefore, been saved from penalties and other legal cost associated with
non-compliance with applicable laws, rules, and regulations.
Even though the company has competent staff, the number of personnel is woefully
inadequate. This constraint makes the personnel overwork and at times leave out some
outlets.
48
5.2 Conclusion
Careful analyses of the findings from the analysis in chapter four prove that:
i.
No organization can operate effectively without internal control system: This
is because the internal control system, which comprises authorization and
approval, segregation of duties, physical controls, arithmetical and accounting,
management, organization, supervision, personnel, and acknowledgement of
performance controls, ensures orderly, efficient and effective operation.
For example, the absence of an organizational structure, which defines the formal
relationship among groups and individuals in an organization, will be a recipe for
chaos since the structure determines the authority, responsibility, and reporting
line in an organization.
ii.
Adequate controls result from all inclusive design process: Inputs from the
various departments give a clear picture of the likely outcome if certain actions
are taken, and thus appropriate control measures are suggested. For instance, the
financial accountant is aware that no one person should be responsible for the
recording and processing of a complete transaction, and thus suggests segregation
of duties.
iii.
Effective internal control system is a pre - requisite for achieving overall
organizational objective: This is because effective internal controls ensure
efficient and effective management, adherence to management policies, asset
protection, and complete and accurate records. This results in profitability and
achievement of other objectives of the organization.
49
iv.
Internal audit requires certain qualities to be effective: Qualities of an
effective internal audit consist of independence, objectivity, authority, adequate
resources, and competent staff. Independence of the internal auditor means the
internal auditor has a dual reporting relationship to management and the
organization’s most senior oversight group. Competent staff, on the other hand,
means that the internal auditor must possess the required skills and qualification
to work as internal auditor.
v.
Effective control system helps organizations to avoid penalties: Effective
controls are designed with recourse to the existing laws and regulations, which
help organizations to declare the right profit and tax. This goes a long way to save
such organizations from penalties and other legal cost associated with non
compliance with applicable laws, rules and regulations.
5.3 Recommendations
In view of the conclusions drawn above, it is imperative for Japan Motors Limited to:
a. Establish effective control system: This can be done by including all the
functional heads in its design, and have it reviewed, evaluated and examined
periodically by internal auditors.
b. Institute an audit committee: An audit committee should comprise board members
independent of management. Such committee should be responsible for receiving
internal audit reports and ensuring that management implements such reports.
50
The appraisal and promotion of internal auditors should be the responsibility of
the committee other than management. The existence of audit committee ensures
independence of internal audit department.
c. Recruit competent personnel as internal auditors: Personnel who are member of a
professional body with its competence and ethical implications are essential in
ensuring effective internal audit. Besides ongoing training in specialist area, such
as computers, is useful.
d. Provide adequate logistics and personnel to its internal audit department:
Logistics such as computers, communication gadgets and cars will enhance
effective internal audit. Moreover, having adequate personnel will enable the
internal audit department undertake thorough review of the control system.
Internal auditors must be provided with resources that commensurate their scope
of work.
51
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54
APPENDIX I
QUESTIONNAIRE FOR STAFF
REGENT UNIVERSITY COLLEGE OF SCIENCE AND TECHNOLOGY,
ACCRA
THE EFFECTIVENESS OF INTERNAL AUDITING IN THE PRIVATE SECTOR
OF GHANA: A CASE STUDY OF JAPAN MOTORS LIMITED, ACCRA.
This research will examine and study the variables most often associated with the
effectiveness of internal auditing in the private sector of Ghana. It should take less than
10 minutes for you to complete this survey. No personal information will be collected
and your answers will be completely classified and anonymous. Your participation is
voluntary. You may refuse to participate in this study, skip questions, or end your
participation at any time. Thank you for your co-operation.
Please tick the appropriate box or write in the space provided.
SECTION A: PERSONAL INFORMATION
1. Gender
Male [ ] Female [ ]
2. Age
Less Than 20 [ ] 21 – 30 [ ] 31 – 40 [ ] 41 – 50 [ ] Older Than 50 [ ]
3. Marital Status
Yes [ ] No [ ]
4. Highest level of education
WASSE [ ] HND [ ] Bachelor Degree [ ] Masters Degree [ ]
55
5. How many years have you been working with Japan Motors?
0 – 5 years [ ] 6 – 10 years [ ] More than 10 years [ ]
SECTION B: CONTROL ENVIRONMENT
Please indicate whether you strongly disagree, disagree, are uncertain, agree or strongly
agree with the statements that follow by ticking (√) 1, 2, 3, 4 or 5 as appropriate.
KEY
1-Strongly disagree 2-Disagree 3-Not sure, 4-Agree and 5-Strongly Agree
1
Strongly
Disagree
2
Disagree
3
Not sure
4
Agree
Statement
1
1. Management decisions are made collectively and not
controlled by one dominant individual.
2. Codes of conduct or ethics policies exist in Japan Motors
3. Policies regarding the importance of internal audit
controls and appropriate conduct are communicated to all
staff of Japan Motors.
4. Audit or other control systems exist to periodically test
for compliance with codes of conduct or policies.
5. Management periodically reviews policies and
procedures to ensure that proper audit controls are in place.
56
5
Strongly
Agree
2
3
4
5
SECTION C: RISK ASESSMENT
Please indicate whether you strongly disagree, disagree, are uncertain, agree or strongly
agree with the statements that follow by ticking (√) 1, 2, 3, 4 or 5 as appropriate.
KEY
1-Strongly disagree 2-Disagree 3-Not sure, 4-Agree and 5-Strongly Agree
1
Strongly
Disagree
2
Disagree
3
Not sure
4
Agree
Statement
1
5
Strongly
Agree
2
3
4
5
1. Japan Motors has clear objectives and these have been
communicated so as to provide effective direction to
employees on risk assessment and audit control issues.
2. There are sufficient staff members who are competent
and knowledgeable to manage company activities and these
have been provided with adequate resources.
3. Significant internal and external operational, financial,
compliance and other risks are identified and assessed on
an ongoing basis.
SECTION D: MONITORING AND CONTROL SYSTEMS
Please indicate whether you strongly disagree, disagree, are uncertain, agree or strongly
agree with the statements that follow by ticking (√) 1, 2, 3, 4 or 5 as appropriate.
KEY
1-Strongly disagree 2-Disagree 3-Not sure, 4-Agree and 5-Strongly Agree
57
1
Strongly
Disagree
2
Disagree
3
Not sure
4
Agree
Statement
1
1. There are ongoing processes within Japan Motor’s
overall business operations and these are addressed by
senior management to monitor the effective application of
the policies, processes and activities related to internal audit
control and risk management
2. There are effective follow-up procedures to ensure that
appropriate change or action occurs in response to changes
in risks and control assessments.
3. Reports on significant failings or weaknesses are
reported to management on a timely basis.
4. There are established channels of communication for
individuals to report suspected breaches of laws or
regulation or other improprieties.
5. There are effective reporting procedures in
communicating a balanced and understandable account of
the company’s position and procedures.
6. All staff understands their role in the internal audit
control system.
Thank you for your time.
58
5
Strongly
Agree
2
3
4
5