TABLE OF CONTENTS PAGE
Title Page………………………………………………………………………………………………….i
Certification………………………………………………………………………………………………ii
Dedication………………………………………………………………………………………………..iii
Acknowledgement………………………………………………………………………………………..iv
List of Figures……………………………………………………………………………………………v
Table of Contents………………………………………………………………………………………..vi
List of Tables…………………………………………………………………………………………….vii
List of Abbreviation……………………………………………………………………………………..ix
Abstract……………………………………………………………………………………………………xi
CHAPTER ONE : INTRODUCTIION
1.1 Background Information…………………………………………………………………………………………………… 1
1.1.1 Background of the case study – Pipelines and Product Marketing Company (PPMC)………………….. 2
1.2 Statement of Research Problem………………………………………………………………………………………………. 3
1.3 Objective of the Study……………………………………………………………………………………………………………. 3
1.5. Research Hypotheses……………………………………………………………………………………………………………. 4
1.6 Significance of the Study ……………………………………………………………………………………………………….. 4
1.7 Scope and Limitations of the Study …………………………………………………………………………………………. 5
1.8 Organisation of the Study ………………………………………………………………………………………………………. 5
CHAPTER TWO:LITERATURE REVIEW
2.1 Introduction………………………………………………………………………………………………………………………….. 8
2.1.1 Conceptual Clarifications…………………………………………………………………………………………………….. 8
2.1.1.1 Definition of Auditing………………………………………………………………………………………………………. 8
2.1.1.3 Objectives of Audit ………………………………………………………………………………………………………….. 9
2.1.2 Evolution of Internal Audit………………………………………………………………………………………………….. 9
2.1.2.1 Definition and Scope of Internal Audit……………………………………………………………………………… 10
2.1.2.2 Role of Internal Audit …………………………………………………………………………………………………….. 11
2.1.2.3 Objectives of Internal Audit…………………………………………………………………………………………… 12
2.1.2.4 Significance of Internal Audit………………………………………………………………………………………….. 12
2.1.2.5 Assessment of the Internal Audit functions……………………………………………………………………….. 13
2.1.2.6 Procedure of Internal Audit……………………………………………………………………………………………… 14
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2.1.2.7 Reporting and Monitoring……………………………………………………………………………………………….. 15
2.1.2.8 Guidance for Internal Auditors………………………………………………………………………………………… 16
2.1.2.9 Internal audit versus external audit …………………………………………………………………………………… 17
2.1.2.9.1 Relationship between Internal and External Auditors……………………………………………………….. 17
2.1.2.9.2 Similarities and differences between internal audit and external audit………………………………. 18
2.1.2.9.3 The main differences between internal and external audit functions…………………………………… 18
2.1.2.10 Types of internal audits…………………………………………………………………………………………………. 19
2.1.2.10.1 Financial Audit………………………………………………………………………………………………………….. 19
2.1.2.10.2 Management Audit…………………………………………………………………………………………………….. 20
2.1.2.10.3 Compliance Audit ……………………………………………………………………………………………………… 20
2.1.2.10.4 Social Audit………………………………………………………………………………………………………………. 20
2.1.2.10.5 Investigation Audit…………………………………………………………………………………………………….. 20
2.1.2.10.6 System Audit…………………………………………………………………………………………………………….. 21
2.1.3 Operational Audit……………………………………………………………………………………………………………… 21
2.1.4 Internal Control………………………………………………………………………………………………………………… 22
2.1.4.1 Objectives of Internal Control Systems …………………………………………………………………………….. 23
2.1.4.2 Limitations of Internal Control System……………………………………………………………………………. 24
2.1.5 Internal Check………………………………………………………………………………………………………………….. 24
2.1.5.1 Internal Check vs. Internal Audit……………………………………………………………………………………… 25
2.1.6 Internal auditing and Fraud………………………………………………………………………………………………… 26
2.1.7 Fraud ………………………………………………………………………………………………………………………………. 26
2.1.7.1 Types of Fraud ………………………………………………………………………………………………………………. 26
2.1.7.2 Cause of Fraud ………………………………………………………………………………………………………………. 27
2.1.7.3 Roles for Fraud Prevention and Detection…………………………………………………………………………. 28
2.1.7.4 How to Detect and Prevent Fraud and Irregularities……………………………………………………………. 29
2.1.8 Causes of ineffective internal auditing in Public sector………………………………………………………….. 30
2.2 Theoretical Review ……………………………………………………………………………………………………………… 31
2.2.1 Agency theory………………………………………………………………………………………………………………….. 31
2.2.2 Contingency Theory………………………………………………………………………………………………………….. 31
2.2.3 Lending Credibility Theory ……………………………………………………………………………………………….. 33
2.3 Review of empirical findings………………………………………………………………………………………………… 34
2.6 Summary of Empirical Review of Literature…………………………………………………………………………… 38
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CHAPTER THREE:METHODOLOGY
3.0 Introduction …………………………………………………………………………………………………………………………. 45
3.1 Research Design………………………………………………………………………………………………………………….. 45
3.2 Research Population…………………………………………………………………………………………………………….. 45
3.3 Sample and Sampling Techniques…………………………………………………………………………………………. 45
3.4 Research Instrument…………………………………………………………………………………………………………….. 46
3.5 Validation and Reliability of Research Instrument…………………………………………………………………… 46
3.6 Data Collection Techniques………………………………………………………………………………………………….. 46
3.7 Data Analysis Techniques…………………………………………………………………………………………………….. 46
3.7.1 Chi- Square Statistical Tool ……………………………………………………………………………………………….. 47
CHAPTER FOUR:PRESENTATION, ANALYSIS AND INTERPRETATION OF DATA
4.0 Introduction………………………………………………………………………………………………………………………… 48
4.1. Data Analysis and Presentation…………………………………………………………………………………………….. 48
4.1.1 Analysis of Demographic Characteristics of Respondents……………………………………………………… 48
4.2.2 Test of Hypothesis Two …………………………………………………………………………………………………….. 64
4.2.3 Test of Hypothesis Three …………………………………………………………………………………………………… 66
4.3 Description of research instrument used…………………………………………………………………………………. 67
4.4 Summary of Data Analysis and the Result Achieved ……………………………………………………………….. 67
CHAPTER FIVE:SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Major Findings…………………………………………………………………………………………………. 69
5.2 Conclusion …………………………………………………………………………………………………………………………. 70
5.3 Recommendations……………………………………………………………………………………………………………….. 70
5.4 Suggestion for Further Studies………………………………………………………………………………………………. 71
REFERENCES ……………………………………………………………………………………………………………………72
APPENDIX…………………………………………………………………………………………………………………………74
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LIST OF TABLE
Table 1: Age distribution of respondent ………………………………………. Error! Bookmark not defined.
Table 2:Gender distribution of respondents………………………………….. Error! Bookmark not defined.
Table 3: Marital Status………………………………………………………………. Error! Bookmark not defined.
Table 4 : Educational Qualification …………………………………………….. Error! Bookmark not defined.
Table 5: Professional Qualification …………………………………………….. Error! Bookmark not defined.
Table 6:Work experience…………………………………………………………… Error! Bookmark not defined.
Table 7:Management Cadre……………………………………………………….. Error! Bookmark not defined.
Table 8:There exist Internal Audit Department in the company ……… Error! Bookmark not defined.
Table 10: There is strict adherence to internal control procedures in the organisation …………….Error!
Bookmark not defined.
Table 11:The Internal Audit Department prepare audit report that is adequate in evaluating the
internal control policies ……………………………………………………………. Error! Bookmark not defined.
Table 12: Internal Audit has helped to improve the company’s performance levelError! Bookmark
not defined.
Table 13: There exist internal control policies that must be adhered to by responsible officers..Error!
Bookmark not defined.
Table14: All staff member are aware of the internal control policies of the company …………….Error!
Bookmark not defined.
Table 15: The internal Control policies are used as a safeguard for performance measurement .Error!
Bookmark not defined.
Table 16:The Internal Audit Department reviews the internal control mechanism regularly ……Error!
Bookmark not defined.
Table 17: The Internal Audit Department reviews the company’s internal control procedure
periodically ……………………………………………………………………………… Error! Bookmark not defined.
Table18: The queries and recommendations of the Internal Audit Department are often implemented
……………………………………………………………………………………………….. Error! Bookmark not defined.
Table 19:There has been incidence of fraud and funds misappropriation in the company ………Error!
Bookmark not defined.
Table 20: Incidence of fraud have been detected by the Internal Audit Department ………………Error!
Bookmark not defined.
Table 21: The Internal Audit Department has a functional Audit timetable for effective performance
of its duties………………………………………………………………………………. Error! Bookmark not defined.
Table 22: The Internal Audit Department is independent of Finance and Accounts DepartmentError!
Bookmark not defined.
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Table 23:Internal Auditor performs an independent examination of the company’s financial records
……………………………………………………………………………………………….. Error! Bookmark not defined.
Table 24: The Audit manager reports directly to the top managementError! Bookmark not
defined.
Table 25:The Company’s Auditor have adequate skills and experience to provide internal check for the
company’sasset…………………………………………………………………………………………
Error! Bookmark not defined.
LIST OF ABBREVIATIONS
NNPC: Nigerian National Petroleum Corporation
PPMC: Pipelines and Products marketing company
IIA: Institute if Internal Auditors
IA: Internal Audit
ICAEW: Institute of Chartered Accountant of England and Wales
CIMA: Chartered Institute of Management Accounting
COSO: Committee of Sponsoring Organisations
APB: Auditing Practices Board
ISA: International Standards on Auditing
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ABSTRACT
The main objective of the study was to assess the Internal Audit mechanisms put in place by the
management of Pipelines and Product Marketing Company, determine its efficiency and effectiveness
of also to ascertain degree of autonomy of the corporation’s Internal Audit Department. Data were
gathered through questionnaires administered to the staff in Finance & Account Department and
Internal Audit Department PPMC. Chi- square and Statistical tool were used to analyse the data.
Findings from the study indicated that PPMC has effective internal control system, which have
enhanced the company’s level of performance. The study also showed internal audit can effectively
detect fraud and financial irregularities in PPMC. The study recommends that PPMC should recruit
more competent personnel as auditors, institute audit committee and resource their internal audit
departments. The study reveals that no organisation can operate effectively and efficiently without an
Internal Audit Department alongside with a good internal control system. The study thus concludes
that internal audit department must exhibit a high degree of autonomy in order to achieve
operational efficiency.
xi
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CHAPTER ONE
INTRODUCTION
1.1 Background Information
Risk is inherent in every business decisions and in the business process established to assist in the
achievement of organisation objectives. Changes in the way organisations carry out their normal
activities resulting from expansion of the business, can place extra-ordinary quality on the
organisation’s control mechanism and become major source of risk. That is why establishing and
implementing effective risk and control elements of the overall corporate governance framework
is essential to all organisations. ICAEW, (2004).
Internal audit is established by management as an independent appraisal function to review the
internal control system as a service to the organisation. The primary role of internal audit is to help
the Board and Executive Management to protect the assets, reputation and sustainability of the
organisation. It does this by assessing whether all significant risks are identified and appropriately
reported by management and the risk function to the Board of Directors: assessing whether they
are adequately controlled; and by challenging Executive Management to improve the effectiveness
of governance, risk management and internal control. Internal audit department is responsible for
evaluating the adequacy and effectiveness of system of risk management and internal controls
operated within the company. Its responsibilities are defined and monitored by the Audit
committee, on behalf of the Board. Internal auditors are employees of the organisation; they are
guided by principles such as independence, objectivity, integrity, confidentially and competency
to their functions. The role of internal auditors is receiving recognition rapidly. This is evident in
the establishment of Institute of Internal Auditors (IIA) in countries like U.S and U.K. as noted by
Nagy and Cenker. (2002).
2
Internal auditors are seen as part of top management team involved in the creation of
organisational wealth and values through effectiveness of risk management, control and
governance processes.
This study therefore seeks to carry out an assessment of internal audit operation in Pipelines and
Product Marketing Company (PPMC), a subsidiary of NNPC. Government parastatals like NNPC
(Nigerian National petroleum Corporation) would use operational audit to carry out an inquiry into
the business processes of the corporation. Operational audit is a systematic review of
effectiveness, efficiency and economy of operation.
1.1.1 Background of the case study – Pipelines and Product Marketing Company (PPMC)
Pipelines and Product Marketing Company (PPMC) is responsible for transporting crude oil to
local refineries established by Nigerian National Petroleum Corporation (NNPC). The company
also markets other petroleum products to industries, automobiles, and domestic cooking; refined
petroleum products in domestic markets, as well as exports primarily in the ECOWAS sub-region;
and products, such as fuel oils, base oil solvents, waxes bitumen, and sulphur. It operates a
network of pipelines and depots. The company was founded in 1988 and is based in Abuja,
Nigeria. -PPMC is a subsidiary of NNPC. PPMC was set up with the objective of providing
excellent customer services by transporting crude oil to functioning refineries and moving white
petroleum products to the existing and future markets efficiently and at low cost through a safe
and well maintained network of pipelines and depots. It is also part of the objectives of the
company to profitably and efficiently market refined petroleum products in the domestic as well as
export markets especially in the ECOWAS sub-region while providing marine services and
maintaining uninterrupted movement of refined petroleum products from the local refineries. The
Vision of PPMC is to be the dominant supplier of all refined petroleum products to the existing
domestic and growing export markets within the West African sub-region. Its mission is thus to
ensure security of supply of petroleum products to the domestic market at low operating costs,
3
marketing special products competitively in the domestic and international markets, providing
excellent customer service by effectively, and efficiently transporting crude oil to the refineries.
1.2 Statement of Research Problem
PPMC was established to transport crude oil to NNPC local refineries and to markets other
petroleum products to industries, automobiles and domestic cooking, as well as exports primarily
in ECOWAS sub-region. It is often adjudged that officers of government parastatals entrusted
with the management of both material and human resources of their establishment are not brought
under thorough control. The ultimate consequence of this is that much of the resources allocated
to the parastatals are indiscriminately mismanaged. In most parastatals, there is little or no
resistance to the temptation of colliding with other workers to embezzle allocated fund to the
detriment of the government and society as a whole.
Again, there is the problem of non-utilization or in some cases under-utilization of allocated
resources, which pose great risk associated with the misuse of organisation funds and resources.
Do internal audit department exist in the company? What is the degree of autonomy of internal
audit operations? Do the management really understand the guidelines and standards of internal
audit in PPMC? These are some of the questions that prompted the researcher to evaluate the
internal audit mechanism in PPMC.
1.3 Objective of the Study
The primary objective of the study is to assess the internal audit operations of Pipeline Product
and Marketing Company (PPMC) – a subsidiary of Nigerian National Petroleum Corporation
(NNPC).
The specific objectives of the study are to:
i. Assess the Internal Audit mechanisms put in place by the management of PPMC
ii. Determine the efficiency and effectiveness of Internal Audit mechanism in PPMC
iii. Ascertain degree of autonomy of the corporation’s Internal Audit Department.
4
1.4 Research Questions
The following research questions are put forth in the study in order to achieve the above stated
research objectives;
i. What are the Internal Audit Procedures in PPMC?
ii. How efficient and effective are the Internal Audit in PPMC?
iii. To what degree is the autonomy of Internal Audit Department in PPMC?
1.5. Research Hypotheses
Hypothesis One
H0: PPMC does not have a good Internal Audit Procedure
H1: PPMC have a good Internal Audit Procedure
Hypothesis Two
H0: The Internal Audit in PPMC is not effective and efficient
H1: The Internal Audit in PPMC is effective and efficient
Hypothesis Three
H0: Internal Audit in PPMC does not have a satisfactory degree of autonomy
H1: Internal Audit in PPMC has a satisfactory degree of autonomy
1.6 Significance of the Study
The study adds to the existing knowledge of internal audit system and the role that internal
auditors’ plays in ensuring effectiveness of system of risk management and internal control
operated within an organisation. It will serve as good source of reference to organisations for
instituting and ensuring effective internal audit. Also, this would enable the corporation to derive
optimum result from its employees by improving upon its internal control system. Similar
5
corporations will equally benefit to discover that internal auditors do not exist only to detect fraud
but also to advice management on effective governance, risk and controls.
1.7 Scope and Limitations of the Study
This research seeks to perform an assessment of internal audit in government parastatals, with
specific focus on PPMC a subsidiary of NNPC. The period of the study is 2015. Structured
questionnaires were administered to staff members of PPMC at the branch operational office in
Delta State, Nigeria. Time was a major constraint of the study. Availability of respondents to
respond quickly to the questionnaire also posed constraint to the study.
1.8 Organisation of the Study
This study is divided into five chapters.
Chapter One: This chapter gives an overview of the study. It highlights the statement of the
problem, objectives of the study, significance of the study, research questions, research hypotheses
and scope and limitations of the study.
Chapter two focuses on the literature reviewed related to internal audit, its components and
importance. Theoretical framework and empirical review of related studies are also addressed in
this chapter.
Chapter three discusses the methodology used in the study. This includes research designs,
population and sample size, research instrument, and data collection on internal audit evaluation of
PPMC.
Chapter four analysed the data collected from administered questionnaires.
Chapter five presents the summary of findings, conclusions and recommendations for adoption by
PPMC in order to achieve its business goals.
6
1.9 Definition of Terms
i. Auditing: Auditing is defined as an independent examination of the books and account of an
organisation by a duly appointed person to enable that person give an opinion as to whether the
account show a true and fair view and comply with relevant statutory guidelines or lay down rules
and regulations.
ii. Auditor: An auditor is an accountant who conducts an audit to verify the accuracy of the
financial records and accounting practices of a business or government. An auditor is also an
officer whose duty is to examine the accounts of officer who received and disbursed public
moneys by lawful authority.
iii. Internal Audit: This refers to independent, objective assurance and consulting activity
designed to add value and improve an organisation’s operations. It helps an organisation
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve
the effectiveness of risk management, control, and governance processes.
iv. Internal Auditor: This is an employee of a company charged with providing independent and
objective evaluations of the company’s financial and operational business activities, including its
corporate governance.
v. Internal Control: Internal control is the whole system of control, financial and otherwise,
established by management in order to carry on with the business in an orderly manner, ensure
adherence to management policies, safeguard its asset and secure as far as possible the
completeness, accuracy and reliability of books and other record.
vi. Internal Check: Internal check is the aggregate of the check and balance imposed on the day
to day transactions in an organisation where by the work of one person is verified independently
by or is complementary to the work of one another.
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vii. Fraud: This is defined as a criminal deception in an act of acquiring other people’s money
kept in one’s possession deceitfully.
viii. Government Parastatals: They are companies owned and controlled by government for
business purpose in order to make profit.
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