AN EVALUATION OF THE ROLE OF INTERNAL AUDITORS IN AN ORGANIZATION

[A CASE STUDY OF COCA-COLA, IBADAN]

CHAPTER ONE

1.1           INTRODUCTION

Internal Audit Units are established in organizations in order to assist members of the Organization in the effective discharge of their responsibilities, monitor the use of resources and make recommendations for the improvement of the organizational operations.

The day-to-day operation of an organization is delegated to the management by the Board of Directors. The head of the management often referred to as the Managing Director and Chief Executive Officer serve as a link between the Board of Directors and the management.

An internal auditor is employed as an agent of the management for ensuring effective working of Internal Control System. Independence of auditor is a cornerstone for the quality of his performance.

However, it is practically difficult for an internal auditor to possess any reasonable degree of independence in mind and attitude because of the management influence and scope of the work. It needs to be emphasized that internal audit function as an integral part of the internal control system is concomitant to good corporate governance.

The purpose of internal audit in big companies is to ensure that the account on which the auditor is reporting disclose a true and fair view of the transaction summarized within the period under examination. To ensure completeness and effectiveness in big companies, auditing is very important, the major work covered in the exercising of auditing include examination of internal control, the system of bookkeeping and account, to ensure whether they are appropriate for the nature of the business or activities being carried out by the client and whether all the transactions have been properly recorded under the system. The existence of any internal audit units in big companies is a sign of good control system. If properly conducted, internal audit units can have a great impact on the effectiveness and efficiency of big companies.

Adeniji (2004) suggest that internal audit as an independent appraisal activity established within an organization as a service to it. It is a control, which functions by examining and evaluating the adequacy and effectiveness of other controls.

Adams (2002), opined that internal auditing is an independent appraisal actively for the review of operations as a service to the management. Internal auditor here is one who is employed by the management of an enterprise who may or may not attain minimum academic or professional qualification, that is he may not be a member of any recognized body e.g. ICAN, ANAN.

It is in the view of the above that this study would be conducted to find out the role played by an internal auditor in big companies through proper installation of effective Internal Control System in big companies. Internal control system is examined by internal auditor in order for him to know if the control system is effective. He does this by carrying out compliance test. Internal check is done in order to prevent and detect errors and fraud. It involves the arrangement of bookkeeping and other clerical duties.

Internal Audit is a review of the operations, procedures and records of the business. Internal Auditing is itself an Internal Control which operates by appraising and reporting on the effectiveness of the other controls. Thus, its main objective is to assist management in discharging its responsibilities and to evaluate compliance with corporate procedures. It is often assigned for reviewing the accounting system and related Internal Controls, monitoring their operation and recommending improvement thereto, and also the examination of financial and operating information.

Aquaisua (2004) opines internal audit as the process of continuous review of financial transactions in order to ensure that they are working as the management intends. All the regulations, instructions, accounting system or procedures and rules set should be controlled to ensure that they are working as prescribed. It assures management of the adequacy and appropriateness of the system of internal controls by testing their operations. Usually, Government, financial instructions provide that the Accounting Officers of Ministries or Departments or (non-ministerial) departments will ensure that, subject to the availability of staff, an internal audit unit be established to provide a complete and continuous audit of accounts of revenue, expenditure, plant, allocated stores and un-allocated stores where applicable.

Omoya (1984) suggests that the duty of the internal auditor, who should be responsible to accounting officer will be to audit account and records and for the examination of the systems and procedures in force. His report should be submitted to the Accounting officer copying the Auditor-general of his state. He should have an audit programme which should be submitted to the Accounting Officer and for the acceptance of the Accountant General and Auditor General. Such programmes should ensure that the programme of audit will extend to cover all the records of the ministry, department or unit, in order to satisfy himself that:

i)                  The safeguards introduced for the prevention of the prompt detection of fraud and loss of cash or stores or plants are adequate. Normal safeguards include the observance of government and departmental regulators and instructors and for existence of internal checks.

ii)                The system for the control of the collection of revenue is adequate and that all monies received have been promptly brought to account to the correct head and sub-head.

iii)             The system for the control of expenditure is adequate and that all payments made are properly authorized and correct, that they are paid to the right person, for whom they were authorized.

iv)             The system for the control of the issue and consumption of stores is adequate, that issues are made to the right person and are used for the purpose for which they are authorized.

v)                There are adequate means for which the verification is done by him, of all cash, stores and plant held.

Bigg and Davies (1994) postulates, Internal Auditing is an independent objective assurance and consulting actively designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk Management Control are governance processes. Independence is established by the organizational and reporting structure.

Objectivity is achieved by an appropriate mind-set, the internal audit activity evaluates risk exposures relating to the organization’s governance, operations and information system in related to:

i)                  Effectiveness and efficiency of operations

ii)                Reliability and integrity of financial and operational information

iii)             Safeguarding of assets

iv)             Compliance with laws, regulations and contracts

Based on the result of the risk assessment, the internal auditors evaluate the adequacy and effectiveness of how risks are identified and managed in the above areas. They also asses other aspects such as ethics and values within the organization, performance management, communication of risk and control information within the organization in order to facilitate or good governance process

The internal auditors are expected to provide recommendations for improvement in those areas where opportunities or deficiencies are identified, while management is responsible for internal controls, the internal audit actively provides assurance to management and the audit committee that internal controls are effective and working as intended.

1.2           BACKGROUND OF INTERNAL AUDITING

The proliferation of large, dispersed, complex corporation starting early in twentieth century, spurred the accelerated development of the internal audit function. The Institute of Internal Auditors (IIA) was founded in 1941, largely in response to this development and modern internal auditing owes much of its early expansion of the scope of internal audit activities and the professionalization of the practice of internal auditing.

The development of professional under pinning for the profession however did not come all at once. It was not until 1947 that the Institute of Internal Auditor issued its first statement of responsibilities.

The code of ethics was issued in 1968 and standard in 1979. The first Certified Internal Auditor (CIA) exams were written in 1974, indicating that, there was that time deemed to be a recognized body of knowledge available for internal audit professionals. The potential value of the internal audit function came later to the public sector motivation. The United States Congress first recognized the potential contribution of internal audit in 1950, in requiring by statute that each executives agency include internal audit in the agency’s of internal control.

In 1973, the Treasury Board made it mandatory for all departments and agencies to internal audits performed on their systems of financial administration. Direction 9.1 of the policy started, departments hall have financial audit performed, which include:

Reviewing and appraising the effectiveness and efficiency of department system of financial administration including the safeguarding of assets. Ascertaining the extent of compliance of department systems and procedures with financial policies, regulations and other instruction of parliament, treasury board and the department of agency.

The internal audit policy component of review policy made no substantive changes to the scope of internal audit, but bolstered the professional under pinning of the practice by integrating treasury board and Institute of Internal Auditors Standards and ethics provision. Also in this policy, frequency requirements were dropped and the concept of risk based audit planning was introduced.

1.2.1    STATEMEMT OF THE PROBLEM

Internal audit provide advantages to the management, it is a tool of ensuring effective implementation of Internal Control System and infact, and it allows such internal control system to be reviewed where necessary. With internal audit, management policies are seen to be complied with and adequate information is made available for the management for decision making.

This research focuses on the weaknesses of internal audit units in an organization, that make it impossible for an internal auditor to carryout its duty at a specific time.

Problem of Appointment: The appointment of internal auditors has been encouraged by some officials who would want to manipulate financial control system so as to promote their fraudulent tendencies.

Problem of Qualification: Since the law does not stipulate a minimum qualification required of an internal auditor, it is not impossible to find out that some internal auditors do not possess the needed qualifications required.

Also to ascertain the level of independence of our auditors and if indeed they have been able to use their professional skills to check and correct the mis-happening in the organization.

Finally, which is the main focus of the research work, the role and evaluation of internal audit in an organization, to check how internal auditors are being frustrated by the chief executives, which makes it difficult to disclose information.

1.3      OBJECTIVES OF THE STUDY

The objectives of this study:

1.     To examine the role the internal audit play in an organization

2.      To identify problems hindering effective operations of internal audit in Coca-Cola company

3.     To examine the preventive measures to applied by internal auditor in coca-cola company 

4.     To offer recommendations based on the findings of the study.

1.4      RESEARCH QUESTIONS

This research work proposed to assess the role of internal audit in big companies and to ensure adherence and effectiveness of audit work in big companies. The study would see to provide answers to the following research questions:

i)                  How does internal audit enhance the effectiveness and efficiency of operations of coca-cola company?

ii)                What are the problems that are likely to be encountered by the internal audit in carrying out its duties?

iii)             How independent is internal audit in coca-cola company?

iv)             What are the problems militating the effective operations of internal audit in coca-cola company?

1.5      SIGNIFICANCE OF THE STUDY

The main significant of this research is that it would enlighten the management on the importance of both internal auditing and internal control. Also people who are not in the system such as those in the academic cycle will have a picture of what internal audit and the role played in coca-cola company and organization.

The management benefits from this work by knowing the actual picture of their Internal Control so as to know whether or not it is reliable. Also, government is not left behind in that when completed the research would undoubtedly identify to the government areas where attention would be greatly placed in order to sanitize the system for better revenue generation.

External auditors also benefits from this research work, this is because internal auditor can assist external auditor in familiarizing himself with the accounting system, and act as a liaison between the external auditor and other members of the client staff.

This study would serve as a reference material to students and researchers who would want to conduct further researches/studies on internal auditors in big companies.

1.6      SCOPE OF THE STUDY

The scope of this research is limited to the area of an evaluation of the role of internal auditors in an organization a case study of coca-cola company, Ibadan, Lagos state Branch. The company is used as the case study. The research tends to highlight the ways in which internal audit is carried out in organization and how the internal audits in itself is. The scope of this research will also focus its attention to the status of the internal auditor, his responsibilities, independence practice as well as the problems encountered in the course of carrying its duties and the possible solutions to the problems. It is hoped that the information gathered will greatly reflect the generality of organization.