Accounting Project Topics

Internal Audit as an Instrument of Management Control

Internal Audit as an Instrument of Management Control

Internal Audit as an Instrument of Management Control

Chapter One


The major objective of this study is to examine the internal audit as a tool for enhancing management control in Michika’s local government. Therefore, this project intends to accomplish the following specific objectives;

  1. Identify various factors that militate against internal auditing from achieving its objectives,
  2. Assess the effect of inadequate management control on the development of local government in Nigeria.




This chapter review related literatures on the subject under consideration. It specifically considers the nature and scope of auditing, the concept of internal audit, internal control, the concept of management control and the internal audit in the local government setting.


The origin of audits dates from ancient times when the land owners allowed tenant and farmers to work on their land, while the land owners themselves did not become involved in the business of farming. The landowners relied upon overseers to the account of stewardship given by the tenants (Adeniyi, 2004). In those days, the receipts and payments of an establishment were read to the hearing of an individual termed as the “auditor”. The word “auditor” was derived from the Latin verb “Audire” which means “to hear” (Kola, 2007).

In the early days of auditing, the prime qualification for the position of auditor was reputation (ability to report and give unbiased opinion on the truth and fairness of the financial statement).

It is possible to find evidence of audits of one form or another, going back over many centuries with auditing, probably having its origin in the ancient Egypt. Auditing like the type we have today began in sixteen-century Europe. The “Golden Age” of Elizabeth I, witnessed a major development in international exploration and trade (Johnson, 2003). As commerce developed, it became common for the number of participation in an enterprise to increase more significantly. Those who provide the financial backing for a venture would often not be prepared to take any of the “physical risk” or endure any of the “physical hardship” involved in it execution.

In Nigerian, the companies Act of 1968 can be regarded as the first comprehensive enactment to require all incorporated companies to have their annual financial statement audited. Under provision of the 1968 companies Act, the company‟s auditor was required to examine and report on the balance sheet, which the company presented to its shareholders (Nwanku, 2006).

The 1968 companies Act was replaced by the companies and Allied Matter Act (CAMA) 1990 as amended 2009 which equally required auditors of companies to examine and report on the financial statement to be presented to the shareholders (CAMA, 1990).

It has become increasingly common, and seen as a good practice to adopt effective and efficient internal control system and for organization to set-up internal audit department and for the external auditor to alter their audit approach to take account of the work of the internal audit. Internal auditor in a critical factor in determining the quality of an organization‟s internal control, and its development has made a major contribution to modern audit practice (Adeniyi, 2004).

According to Millichamp (2002), auditing is an exercise whose objectives is to enable auditors to express an opinion whether the financial statement give a true and fair view (or equivalent) of the entity‟s affairs at the period end, and of its profits or loss (or income and expenditure) for the period ended and have been properly prepared in accordance with the applicable reporting framework. In his view, Taxmann‟s (2004), had it that, audit is an exercise of examining the financial statement to enable the auditor to express an opinion whether the financial statement are prepared, in all material aspect, in accordance with an identified financial reporting frame work. Messier (2003), view auditing as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and event to ascertain the degree of correspondence between those assertions and published criteria and communicating result to the interested users. Whittington and Pany, (2004) on their part, view auditing as a process, which involves searching and verifying the accounting records, and examining other evidence supporting the financial statement. Adeniyi (2004), defined auditing as the independent examination of/and expression of opinion on the financial statement of an enterprise by an auditor in pursuance of their appointment and in compliance with any relevant statutory obligations.

Auditing is an independent examination of the expression of an opinion on financial statement of an enterprise by an appointed auditor, in accordance with his terms of engagement and the observations of statutory regulations and professional requirement (Kabiru, 2007). Awe (2008) defines auditing as an independent examination of the books and accounts of an organization by a duly appointed person to enable that person give an opinion as to whether the accounts give a true and fair view and comply with relevant statutory guidelines. The American Accounting Association (1971) in its Statement of Basic Auditing Concepts in Hayes et al. (1999) described auditing as: a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to interested users.

Audits are typically classified into three types: Audits of financial statements, operational audits and compliance audits. Audits of financial statements examines financial statements to determine if they give a true and fair view or fairly present the financial statements in conformity with specified criteria (Adeniji, 2004; Okezie, 2008; Appah, 2011). Operational audit is a study of a specific unit of an organization for the purpose of measuring its performance. According to Hayes et al. (1999), operational audits review all or part of the organization‟s operating procedures to evaluate effectiveness and efficiency of the operation. Effectiveness is a measure of the extent to which an organization achieves its goals and objectives. Efficiency shows how well an organization uses its resources (Oshisami, 2004). Compliance audit is review of an organization„s procedures to determine whether the organization is following specific procedures, rules or regulations set out by some higher authority. According to Oshisami (2004), compliance audit provides examination of financial statements, accounts and reports and their compliance with applicable regulations to certify that: there are effective controls over revenue, expenditure, assets and liabilities; there are proper accounting records of the resources, operations and encumbrances; the accounting and financial reports are sufficiently accurate, reliable, timely and useful and fairly represents the transactions, events and conditions reported upon and applicable laws and regulations have been complied with. Akinbuli (2010) and Hayes et al. (1999) reported that several theories of auditing were made to specify and determine the audit functions. Some of these theories include:

The policeman theory: This theory of auditing was purely on the arithmetical accuracy and on the prevention and detection of fraud. This theory makes the auditor to detect and prevent errors and fraud in organizations.





This chapter describes the methodology used by the researcher in conducting the study and accumulating the data for the study. It comprises of the research design, population of the study, sample size, sampling techniques, method and sources of data collection and data analysis techniques.


For the purpose of this study, the researcher adopts the survey research design. Survey research design is one in which relative elements of the population with a common attributes are chosen with a view to representing the entire population. Moreover, the outcome of the studied and selected group is normally adequate and sufficient, which is use as a basis for generalization. The survey method normally paves way for a researcher to make use of interview, questionnaire, discussion and observation or any combination of them. This study administered questionnaire to elicit primary data and documentary data which is well utilized.


The population of this study comprises all the staff of audit, account, administrative and personnel departments of Michika local government council.




A total of 70 questionnaires were distributed to the employees of accounting, administrative and internal audit of Michika local government. After the questionnaires were completed by the respondents and returned, they were screened and sorted out by the researcher. The detail of the returned questionnaires shows that out of 70 questionnaires sent out, 66 only were completed and returned, while 1 was not returned and 3 were rejected because they were not properly completed. Hence 94.29% of the respondents returned their questionnaires.





The paper has identified the importance of internal audit in the management of local government resources. Without internal audit, an effective internal control system that will enhance management control and effective management of resources cannot be established. The paper also has made an attempt at identifying and discussing the problems hindering effective operation of internal control system in local government. In order to achieve management control, various controls that can be put in place safeguard the assets of the local government, ensure compliance with all the relevant legislation, policies and objective as well as ensure that all the records are accurate and complete have been discussed.

Summary of Findings

There is internal audit in Michika local government headed by the internal auditor appointed by the local government service commission. The internal auditor ensures that payment are verified, properly vouched for, and made to the intended party. Similarly, the local government uses the payment receipts and adjustment vouchers in the discharge of their accounting function. However the existence of unqualified staff of internal audit and account departments limits the application and proper adherence to the accounting procedures which is prerequisite for achieving management control.

Furthermore, it is observed that internal auditors work towards achieving management control but attitudes of the top officers of the local government has been one of the major problems hindering the local government from achieving management control in the local government since they consider their order as a last order and not intending to listen to suggestion from their subordinate.

Similarly, it is discovered that lack of auditors independence is limited to some extent, since most a times are considered a unit under the finance department. The study also found that general supervision could enhance management control in the local government.


In this study, the internal audit function of Michika local government has been examined and it was obvious that internal audit enhance management control in the local government system, it improve the quality of internal control, prevent fraud and enhance transparency.


An effective management control to be achieved there must be internal control system with minimum number of weakness. In developing the internal system, the following issues should be considered; there must be an adequate separation of duties, ensure proper procedure for authorization of transactions, a continuous physical control of assets and records, a one in a while staff rotation, an adequate documentation and recording of transactions, and clean line authority and responsibility, there should also be a proper organization chart that ensures supervision.

Similarly continuous effort should be made by the local government to adhere strictly to the maintenance of accounting records.

The local government should review current training facilities to encourage auditing and accounting staff to receive professional training in any institution of learning in Nigeria.

There should be prompt collection of all sums due to the local government. Revenue collectors should report to the immediate superior, any default in payment from any revenue and issue receipts for all payment made.

Lastly, for the internal audit to enhance management control there must be independence of internal audit department from finance and any other department in the local government and it should not receive influence from any other department.

Limitation of the Study

Some of the major limitations to this research work include time constraint, access to auditing text and paper, and financial constraints.


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