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EFFECTIVE INTERNAL CONTROL SYSTEM AS A MEASURE OF FRAUD

PREVENTION IN THE PUBLIC SERVICE
(Accounting)
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EFFECTIVE INTERNAL CONTROL SYSTEM AS A MEASURE OF FRAUD

PREVENTION IN THE PUBLIC SERVICE

(A CASE STUDY OF BOARD OF INTERNAL REVENUE ENUGU STATE)

PROPOSAL

The purpose of this study is to analyze the effectiveness of the internal control system of

the board of internal Revenue Enugu State.

It cannot be over emphasized here that an effective internal control system does not only

ensure financial accuracy of transactions, but it reduces trade to the barest minimum. A

good internal control system can only operate in a fairly large organization that employs

a good number of staff.

It is also important to note that there is high rate of fraudulent practices in government

ministries and parastatals today and the Board of internal revenue is not an exception.

That is why the internal control system must not only be put in place, but is also having

to be effective in removing such irregularities.

Similarly, the research work will be grouped into five chapters, in which chapter one

contains the introduction. This will give us a skeletal framework of the study and also sub

topics such as statement of the problem and so on.

Chapter two contains the literature review which will give the details of the topic and also

the meaning of the topic.

Chapter three contains the research methodology and techniques which will show the

methods through which the survey and the sources of data will be carried out.

Chapter four contains the presentation and the analysis of data which further gives the

information suitable.

Chapter five finally contains a workable recommendation proffered from the findings

derived. These findings will help the management of the board of internal revenue Enugu

State to improve on the effectiveness of their internal control system.

TABLE OF CONTENTS

Title Page

Dedication

Acknowledgement

Proposal
CHAPTER ONE

1.1 Introduction

1.2 Statement of Problem

1.3 Purpose of Study

1.4 Relevance of the Study

1.5 Methodology and Hypothesis Statement

1.6 Scope and Limitation of Study

1.7 Definition of Terms.

CHAPTER TWO

2.1 Introduction

2.2 Organizational Chart

2.3 Personal Income Tax Duties

2.4 Other Revenue Duties

2.5 Planning Research and Statistics

2.6 Administration and Finances

2.7 Relationship between Internal and External Auditor

2.8 Internal Audit as an Effective Internal Control System.

2.9 Factors that will be considered by an external auditor before

relying on the work of the internal auditors

2.10 Audit committee.

2.11 Relationship between the audit committee and the external auditor.

2.12 Essentials of internal control

2.13 Internal check

2.14 Types of internal control system at board of internal revenue Enugu

state

2.15 Areas of work where internal and external auditors overlap at the

board of internal revenue Enugu state.

2.16 Areas of work where internal and external auditors overlap at the

board of internal revenue Enugu state

2.17 Fraud

2.18 Difference between fraud in the organization

2.19 Reference
CHAPTER THREE

3.1 Research methodology

3.2 Primary data

3.3 Validity and reliability of the questionnaire

3.4 Personal interview

3.5 Observations

3.6 Statistical tools and mathematical manipulation

3.7 Research design

3.8 Selection of sample

3.9 References

CHAPTER FOUR

4.1 Introduction

4.2 Field survey

4.3 Presentation and analysis of data

4.4 Section a part of the questionnaire

 4.5 Section B part of the questionnaire

4.6 Data analysis

4.7 The procedure for reporting fraud at the board of internal revenue

4.8 Testing of hypothesis

4.9 Hypothesis 1

4.10 Hypothesis 2

4.11 References

CHAPTER FIVE

5.1 Summary

5.2 Recommendations

5.3 Conclusion

5.4 Bibliography

5.5 Appendix

CHAPTER ONE

1.1 INTRODUCTION
 The Institute of Charter Accountants defines the concept internal control

system as “The whole system of control 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 policies, safeguard

the assets and secure as fact as possible the completeness and accuracy

check and internal audit” fraud is a threat common to most organizations. It is

a threat to the effective utilization of resources and as such, it will always

remain an important concern to management.

Fraud needs to be deleted and potential fraud needs to be prevented. Effective

internal control system is vital for the survival of any organization it serves as

a check on fraudulent activities of the management and employees an

organization and it brings about solutions to likely fraudulent acts in an

organization.

Management is totally responsible for establishing the internal control system

in an organization.

Auditing today is based on internal control. A client during the course of financial period

so because it is client during the course of so because it is undesirable for an auditor to

carry out a hundred percent check on all the transactions enters this.

Internal control system is a necessity in large organizations especially where

management is removed from day to day routine operations of the organization. Internal
control system include controls exercised by management which comprise of rules and

regulations as well as procedures set up by organizations bearing also the problems set

up by organizations bearing in also the problem of limited resources.

If the internals control system is effective in an organization, it ensures maximum use of

resources and also reduces to the barest minimum fraud.

The need for affective internal control system therefore cannot be over-emphasized. It is

important because of the existence of risks and also all form irregularities in an

organizations term of flatly, the major frauds in public and private enterprises can be

traced to lapse in the internal control system and the existence of poor control

environment in organization.

An effective internal control system and its fraud preventive measures in an organization

will help to prevent fraud and errors in an organization thereby reducing fraud to its

minimum than when internal control is not in existence or when there is weakness in the

system.

1.2 STATEMENT OF PROBLEM

Internal control system is an important system for the survival of any public sector. It

becomes imperative that the internal controls should be kept alive and under close

watch. The strategies is for effective functioning of an internal control system are followed:

i. ORGANIZATION

The parastatal must have clear corporate objective, plan, policy and duties of the

employees should be clearly defined. There should be clear policy objectives, from where

controls could be made if an organization has no plan, control could not be

possible. Organizational control is the primary and most important control within an

enterprise it is concerned with the inter-relationship of the whole complex activities of the

enterprise, its divisions, units and standards, methods or procedures of concluding the

affairs of the enterprise and defines the precise function and purpose of every section

and its authority in relation to other section. This is where an organization responsibilities

and duties are clearly stated.

ii. SEGREGATION OF DUTIES

Absolutely, basic to the concept of internal control system is the segregation of the

duties of the employee to ensure that no one person is able to record and process a

complete transaction. Particular importance must be attached to the total separation of

the function of ‘Authorization’, ‘Execution’, ‘Custody’ and ‘Recording’.

iii. PHYSICAL
 These are mainly concerned with the custody of the assets and involves procedural

and security measures designed to ensure that access to assets is limited to authorized

personnel. These include direct and indirect control. The physical controls are very

important in respect of valuable, portable, exchangeable assets or close in possession.

iv. AUTHORIZATION AND APPROVAL

All transactions require authorization and approval by an appropriate and responsible

person. All transactions should be reviewed and seen to be carried out in the public

sectors modes or procedures of doing things before they are approved.

v. PERSONNEL

There should be procedures to ensure that personnel have capabilities commensurate

with their responsibilities inevitably, the proper functioning of any system depends on the

competence and integrity of those who are to operate it. Right person should be put in

the right position, at all times.

vi. SUPERVISION

Any system of internal control should have means of supervision by responsible

officials for the day to day transactions and their recording thereof, it is through

supervision that the controls’, effectiveness are ensured. If the rules, procedures etc are

installed without supervision, they can not function effectively.

vii. ARITHMETICAL AND ACCOUNTING

These are the controls within the recording function which check that the transactions

to be recorded and processed have been authorized and that they are all complete and

that they are accurately processed such controls include checking the arithmetical

accuracy. However, for every coin, there must be two sides. It is necessary to

acknowledge that internal controls have inherent limitations which include:

i. Internal controls tend to be channeled at routine

transactions. The one-off or unusual transaction tends not to be the

subject of internal control.

ii. Likely human error caused by stress of work load, alcohol,

carelessness, distraction, mistakes of judgment, and the

misunderstanding of instruction.

iii. A requirement that the cost of an internal control is not

disproportionate to the potential loss which may result from it absence.

iv. The possibility of circumvention of controls either alone or

through collusion with parties outside or inside the public sectors.

v. Management override of controls.

vi. Abuse of responsibility

 vii. Human cleverness – no matter how secure the computer code

is designed to prevent access, there is always lacker who gets in.

viii. Changes in environment making controls inadequate.

ix. Fraud

However, the inherent limitations of internal controls are the reasons why auditors are

required to always perform some substantive tests of material items as well as relying on

internal controls.

1.3 OBJECTIVES OF THE STUDY

They are:-

1. To ensure that management policies are implemented

appropriately

2. To ensure the existence of a structures framework for efficient

and effective channeling resources.

3. To ensure that there is important and accurate documentation

that can provide information on which significant based.

4. To ensure timely records of relevant strategic ad tactic decision

are based.
 5. To ensure that vital and expensive assets on which operation of

the organization critically depends on are prevented from misuse and

misappropriation.

1.4 RESEARCH QUESTION

From prior debated and research on internal control system in public sectors, educationist

have suggested the following ways of fraud prevention in the public sector which are

adequate reporting of agents stewardship, internal and external checks of the various

parastatal by the auditors and reduction in the frequency occurrence of errors in their

account.

Equally the scholars in the same vein have suggested that some of the likely problems

associated with auditing of public sectors accounts are absence of qualified manpower

inadequate accounting resources and facilities, time and administrative interference by

other tier of government.

In attempt to examine the proposal and problems of internal audit in public sector, the

following questions have been advance which include:

a) Does this organization have an internal audit department?

b) Are staff usually rotated on their job from time to time?

 c) Are the accounting records kept in this organization useful to

the internal audit department?

d) Are accounting records kept for all the operations of this

organization?

e) Is the major cause of fraud in this organization negligence.

f) Are adequate disciplinary actions usually taken against staff

who alleged to have committed fraud?

g) In your own view, do you think there is need to audit this

organization?

h) Does internal auditors perform its duty with reasonable care

and skill?

i) Is the internal audit department well staffed with qualified

staff?

1.5 SIGNIFICANCE OF THE STUDY

The relevance of this study is in its attempt to find out and evaluate those factors

responsible for effective internal control system in the board of internal revenue (BIR)

Enugu State, Nigeria.

The significance will include the following:

 1. To ensure, the researcher finds out problems encountered in

relation to the internal control system and make appropriate

recommendation for improvement.

2. To serve as a guide for organization having weak internal control

systems to improve on the quality of theirs and their intern make it more

effective.

3. To serve as guide to others who are likely to carry on

research on this study in future.

1.7 DEFINITION OF TERMS

In this study the researcher will try as much as possible to explain

technical terms used during the course of study. They are as follows:

1. INTERNAL CONTROL

In the AICPA’S codified standards covering auditing practice

(320:09). Internal control is defined as “Internal control comprise the

plan if organization and all of the co-ordinate methods to safeguard its

assets check the accuracy and reliability of its accounting data, promote

operational efficiency and encourage adherence to managerial policies.

It is the whole system of controls financial and otherwise established by

the management in order to carry on the business of the company in an

orderly67 and efficient manner.

2. AUDITORS

It is a firm of professional accountants all parties one or more of whom is

responsible for the control of the audit and signing of the audit report on

behalf of the firm.

3. INTERNAL AUDIT

The standards for the professional practice of internal auditing released

in may 21978 defined internal auditing as an “independent appraisal

function established within its activities as a service to the organization”

4. INTERNAL AUDITORS

Auditors that have been employed by the management of organizations,

individuals, companies, partnership, and government as well as other

agencies.

5. EXTERNAL CHECK

It is defined as the checks on the day today transactions, which operate

continuously as part of the routine system where the work of one person

is proved independently by another person.

6. AUDIT COMMITTEE

It is a committee setup by the shareholders to examine the directors’

report and make recommendation on the annual general meeting

7. EXTERNAL AUDITORS

These are independent professional Accountants (qualified) often

refereed to as independent to as independent auditors or certified public

Accountants.

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