ABSTRACT
The objectives of the study is to examine the ―The Role of Internal Control System as an aid to
Management Decision Making‖. primary data were collected through a well-structured research
questionnaire administered. A sample of 30 were randomly selected and all responded
accordingly. Therefore, chi-square was employed for the data analysis. The study revealed that is
significant relationship between the internal control and decision making.
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TABLE OF CONTENT
Contents
DECLARATION…………………………………………………………………………………………………………… ii
CERTIFICATION ………………………………………………………………………………………………………..iii
DEDICATION……………………………………………………………………………………………………………… iv
ACKNOWLEDGEMENT……………………………………………………………………………………………… v
ABSTRACT………………………………………………………………………………………………………………… vii
TABLE OF CONTENT………………………………………………………………………………………………. viii
LIST OF TABLE………………………………………………………………………………………………………….. xi
1.0 Introduction…………………………………………………………………………………………………………. 1
1.1 Background to the study ……………………………………………………………………………………….. 1
1.2 Statement of problem……………………………………………………………………………………………. 2
1.3 Objective of study………………………………………………………………………………………………… 3
1.4 Research Questions…………………………………………………………………………………………….. 4
1.5 Statement of Hypotheses…………………………………………………………………………………… 5
1.6 Significance of the Study ………………………………………………………………………………….. 6
1.7 Scope and limitations of study……………………………………………………………………………….. 7
1.9 Organization of the study………………………………………………………………………………………. 7
1.10 Definition of Terms…………………………………………………………………………………………….. 8
CHAPTER TWO ………………………………………………………………………………………………………… 10
LITERATURE REVIEW…………………………………………………………………………………………….. 10
2.0 Introduction …………………………………………………………………………………………………….. 10
2.1 Conceptual Clarification ……………………………………………………………………………………… 10
2.1.1 Definition and Understanding of Internal control……………………………………………… 10
2.2 Internal Control………………………………………………………………………………………………….. 12
2.2.1 Components of Internal Control ………………………………………………………………………… 14
2.2.1.1 Control Environment …………………………………………………………………………………. 14
2.2.1.2 Risk Assessment………………………………………………………………………………………… 14
2.2.1.3 Control Activities………………………………………………………………………………………. 14
2.2.1.4 Information and Communication…………………………………………………………………. 15
2.2.1.5 Monitoring ……………………………………………………………………………………………….. 15
2.2.2 What Internal Control Can Do…………………………………………………………………………… 16
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2.2.3 What Internal Control Cannot Do………………………………………………………………………. 17
2.2.4 Roles and Responsibilities………………………………………………………………………………… 17
2.2.4.1 Management……………………………………………………………………………………………… 18
2.2.4.2 Board of Directors……………………………………………………………………………………… 18
2.2.4.3 Internal Auditors ……………………………………………………………………………………….. 19
2.2.4.4 Other Personnel…………………………………………………………………………………………. 19
2.2.5 Classification of Internal Control……………………………………………………………………….. 20
2.2.5.1 Administrative Control……………………………………………………………………………….. 20
2.2.5.2 Accounting Control……………………………………………………………………………………. 20
2.2.6 How to Establish Cost-Effective Controls…………………………………………………………… 21
2.2.7 Determining Your Plan‘s Control Objectives……………………………………………………….. 21
2.2.8 Establishing, Documenting and Communication of Your Internal Controls…………….. 23
2.2.9 Essential Elements of Internal Control ……………………………………………………………….. 25
2.2.10 Importance of Internal Control ………………………………………………………………………… 26
2.2.11 Segregation of Duties……………………………………………………………………………………… 28
2.2.12 Internal Audit ………………………………………………………………………………………………… 28
2.2.13 Objectives of Internal Auditing Function ………………………………………………………….. 29
2.2.14 limitations of Internal Control …………………………………………………………………………. 29
2.3 The Nature of Decision making……………………………………………………………………………. 30
2.3.1 Decision Making Process………………………………………………………………………………. 30
2.4 Internal Control and Information Technology ………………………………………………………… 31
2.5 Theoretical Literature Review ……………………………………………………………………………… 32
2.5.1Research of control conception…………………………………………………………………………. 32
2.5.2 The Need for Control Systems……………………………………………………………………….. 36
2.5.3 Adoption and Design of Controls …………………………………………………………………… 39
2.6 The Need to Align Principals and Agents………………………………………………………………. 40
2.6.1 Control of Agency Problems……………………………………………………………………………. 41
2.6.2 Adoption of New Organizational Practices………………………………………………………. 44
2.6.2.1 Coercive Isomorphic Change………………………………………………………………………. 45
2.6.2.2 Mimetic Isomorphic Change……………………………………………………………………….. 45
2.6.2.3 Normative Isomorphic Change ……………………………………………………………………. 46
Empirical Review………………………………………………………………………………………………………… 46
2.7 Control from Different Theoretical Perspectives…………………………………………………….. 46
CHAPTER THREE…………………………………………………………………………………………………….. 52
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RESEARCH METHODOLOGY …………………………………………………………………………………. 52
3.0 Introduction……………………………………………………………………………………………………….. 52
3.1 Research Design…………………………………………………………………………………………………. 52
3.2 Research Population……………………………………………………………………………………………. 52
3.3 Sample and Sample Techniques……………………………………………………………………………. 53
3.4 Research Instrument……………………………………………………………………………………………. 53
3.5 Validity and Reliability of Instrument……………………………………………………………………. 53
3.6 Data Collection Technique…………………………………………………………………………………… 53
3.7 Method of Data Analysis …………………………………………………………………………………….. 53
CHAPTER FOUR……………………………………………………………………………………………………….. 55
DATA PRESENTATION AND DISCUSSION ………………………………………………………………. 55
4.1 Demographic Data of Respondents ………………………………………………………………………. 55
4.2 Testing of Hypotheses…………………………………………………………………………………………… 57
4.2.1 Hypothesis one:……………………………………………………………………………………………. 57
4.2.2 Hypothesis Two: ………………………………………………………………………………………….. 58
4.2.3 Hypothesis three…………………………………………………………………………………………… 59
4.2.4 Hypothesis Four…………………………………………………………………………………………… 61
CHAPTER FIVE ………………………………………………………………………………………………………… 63
SUMMARY OF FINDINGS, DICUSSION, CONCLUSION AND RECOMMENDATIONS
……………………………………………………………………………………………………………………………………. 63
5.0 Introduction……………………………………………………………………………………………………….. 63
5.1 Summary of Findings………………………………………………………………………………………….. 63
5.2 Conclusion ………………………………………………………………………………………………………… 63
5.3 Recommendations………………………………………………………………………………………………. 64
REFERENCES …………………………………………………………………………………………………………. 65
APPENDIX…………………………………………………………………………………………………………………. 67
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LIST OF TABLE
TABLE NO PAGE NO
2.6 Different theoretical perspectives on controls 48
4.1 Respondents‘ Profile 55
2 Chi-Square (X2) contingency table on the relevance of internal control 57
system in the proper use of fund and asset.
3 Chi-Square(X2) Tests on the relevance of internal control system in the 57
proper use of fund and asset.
4 Chi-Square (X2) contingency table on the effect of internal control system 58
on management control and decision making.
5 Chi-Square Tests on the effect of internal control system on management 59
control and decision making.
6 Chi-Square (X2) contingency table on the internal control system and 60
efficiency, effectiveness, and economy of resources utilization.
7 Chi-Square Tests on the internal control system and efficiency, effectiveness, 60
and economy of resources utilization.
8 Chi-Square (X2) contingency table on internal control system, and relevance 61
and reliability of financial and management information.
9 Chi-Square Tests internal control system, and relevance and reliable 62
financial and management information.
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CHAPTER ONE
1.0 Introduction
1.1 Background to the study
Every organization both profit or non-profit organization has its objectives and goals in mind to
achieve. For the non-profit making organization, their goal is to satisfy the social need of the
citizens and in the effort to achieve these purposes supervision more often than not play a vital
role. The size and scope of these organizations have sometimes made it hard for the executors to
exercise personal and first hand supervision of operation. It is in this light that internal control
established by management is initiated. For an organization to carry out its business there must
be some factors put in place for the smooth running of the organization like materials, machines,
money etc. These need to be well co-ordinated in order for the success of the organization to be
achieved. These factors are used by a group of persons known as management. Neither can
management exists without an organization both are inseparable.
The system of internal control provides assurance to management of the dependability of the
accounting data used in the decision making of the organization. Management use internal
control as a tool to check it staff due to the fact that managers are not able to monitor the
activities of the organization. It therefore adopts the internal control in such a way that the
system checks itself and any irregularity within the system is been detected and corrected. To
ensure that the system checks itself, management could use devices such as segregations,
supervision of work and acknowledgement of performance.
The effective arrangement and implementation of this control system would ensure proper
management. High-profile organizational failures typically lead to the imposition of additional
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rules and requirements, as well as to subsequent time-consuming and costly compliance efforts.
However, this obscures the fact that the right kind of internal controls—enabling an organization
to capitalize on opportunities while offsetting the threats—can actually save time and money, and
promote the creation and preservation of value. Effective internal control also creates a
competitive advantage, as an organization with effective controls can take on additional risk.
According to Chambers (1995), Cosserat (1999), Ridley and Chambers (1998), internal Controls
are systems comprising of the control environment and control procedures. They further state
that the internal control systems include all the policies and procedures adopted by the directors
and management of an entity to assist in achieving their objective of efficient conduct of its
business, including adherence to internal policies, the safeguarding of assets, the prevention and
detection of fraud and error, the accuracy and completion of the accounting records and timely
preparation of reliable financial information. Successful organizations ensure that they attain and
consolidate continued survival in a competitive environment Drucker (1999). Thus successful
organizations set performance measures that focus attention that identifies and communicates the
success, support organization learning and provide a basis for assessment and reward (Brown,
1996).
1.2 Statement of problem
We might not really understand the impact of internal control system in an organization until
probably we run an organization void of internal control system. Because internal control is so
important to the reliability of financial statements, there are times when the internal control
system should be examined closely. Examining the design of internal controls can be extremely
beneficial and is usually much less costly than an audit of the organization wide financial
statements .Control itself exists to keep performance of an organization within what is expected
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by the organization, control built within a process is internal in nature and takes place with a
combination of interrelated components such as social environment affecting behavior of
employees, information necessary in control and policies and procedures (COSO 2001).The
absence of adequate internal control measures exposes the financial management of an
organization to certain threats such as:
Improper use of organizational resources and funds, due to inadequate internal control to
keep a proactive check on the way the resources and funds are utilized.
Non-existence of Value for Money requisites and principles in the management of
organizational resources and funds.
Financial and operating reports and data are not relevant, reliable and misrepresent what
they purport to represent.
Non-availability of appropriate mechanism to ensure that policies, plans, procedures,
statutory requirements and regulations that govern the operation and reporting process of
the organization are been complied with across the organization
1.3 Objective of study
The overall purpose of this research work is to evaluate and determine the impact of internal
measures in an organization and its significance in making it a basis for decision making in
Unilorin .A well-defined organizational structure helps management to run the business in an
orderly manner. This enhance operational and efficiency, which is the important features of
internal control. Specifically, this research work stands to achieve the following objective.
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To determine the impact of internal control to proper use of organizations funds and
assets.
Appraise the economy, efficiency and effectiveness with which resources are employed.
Appraise the relevance, reliability and integrity of management, financial and operating
data and reports
Review the systems established to ensure compliance with those policies, plans,
procedures, statutory requirements and regulations which could have a significant impact
on operations.
1.4 Research Questions
The following research question guided this study:
What is the impact of Internal Control on the proper use of organization funds and
resources?
Are the efficiency, effectiveness and economy of the planned use of resources and
assets duly considered before making decision among alternatives?
What is the level at which financial and operating reports and data relevant, reliable
and accurate for making decisions?
How soon and how often is non-compliance with operating and reporting policies,
plans, procedures, statutory requirements and regulations been detected and acted
upon in the organization?
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1.5 Statement of Hypotheses
The following four (4) hypotheses were formulated and tested in this study.
Hypothesis one
H0: Internal control system is not relevant in the proper use of funds and asset
H1: Internal control is relevant in the proper use of funds and asset
Hypothesis two
H0: Internal control negatively affects management control and decision making
H1: Internal control positively affects management control and decision making
Hypothesis three
H0: The existing system of controls does not facilitate efficient, effective, and economic
utilization of resources
H1: The existing system of controls facilitates efficient, effective, and economic utilization of
resources
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Hypothesis four
H0: Sound internal control system does not bring about relevant and reliable financial,
management and operating data and information
H1: Sound internal control system bring about relevant and reliable financial, management and
operating data and information
1.6 Significance of the Study
This research finding will provide a conceptual frame work and standard against which
organizations could assess their internal control system and their effectiveness. Also the result of
the study will contribute to identify the gap within the system of internal control in educational
institutions. It is also believed that invaluable benefits to management and those charged with
governance in educational institutions, will establish on how the internal control system will
ensure of improving the financial performance and ultimately serve as a basis for management
control and decision making. To the researcher who will be interested on the same idea, it will
provide the proper path, of what this research could not cover considering its limitations.
The result of this research work will also help the educational institutions to sit up in following
the control measures in their day to day management. Moreover this research is to partially fulfill
an academic requirement for the award of a bachelor‘s degree it is expected that
recommendations will be provided to complement the policies by the regulatory bodies and the
efforts of education sector in addressing problems.
Decision making is one area that is given a lot of prominence all over the world, it has been
widely researched. A lot of literature has been written on decision making, and external auditors
normally place an emphasis on internal controls as a measured to ensure sustainable and improve
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management control, however, it is the perception of the researcher that there are still gaps in the
research so far done. This study will therefore try to establish the linkage between internal
controls and improved management control and decision making.
1.7 Scope and Limitations of study
The study mainly focused on internal control system and its impact on the management control
and decision making of an organization, it will be only concentrated on testing internal controls
apparel with internal audit, so as to assess the risk so management within the organization. The
proper internal control is the easier way of attaining (the university plans and objectives) on
understanding this i will be concentrating on the administrative department within the
educational institution (university), to assess whether the educational institution comply with
rules and regulations governing them. The period of study is 2014/2015 academic session.
In this study, no limitations were experienced.
1.9 Organization of the study
This research work is structured as a five chapter work such that the background information,
statement of the research problem, scope and limitations of the study, research hypotheses and
definition of terms is covered by chapter one.
Chapter two focuses on the theoretical and conceptual framework relevant to the study, related
literatures were also reviewed.
Chapter three for research methodology, research design, population and sample size, research
instruments, method of collection and data collection technique.
Chapter four is devoted to data presentation and analysis and interpretation of result.
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Chapter five is meant for conclusion, recommendation and suggestion for further studies.
1.10 Definition of Terms
The following definitions are defined in the context for which they are used in this research work;
Internal control
This can be defined in accounting and auditing, is a process for assuring achievement of an
organization’s objectives in operational effectiveness and efficiency, reliable financial reporting,
and compliance with laws, regulations and policies.
Management
It is defined as the process of planning, organizing coordinating and controlling the activities of
an organization. It is seen as a group of people who monitor and control the organization
activities towards the achievement of the organization objectives.
Control
Is an exercise performed in the present to achieve a plan drawn up for the future.
Decision making
This can be regarded as the cognitive process resulting in the selection of a belief or a course
action among several alternative possibilities.
Financial statement
A financial statement is a formal record of the financial activities of a business ,person, or other
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entity. Relevant financial information is presented in a structured manner and in a form easy to
understand.
Risk
This is the potential of losing something of value.
Effective internal control
Reasonable assurance that the entity‘s operational objectives are achieved, the published
financial statements are reliably prepared, and applicable laws and regulations are complied with.
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