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THE EFFECTIVENESS OF INTERNAL CONTROL SYSTEM AND IT’S IMPACT ON THE ACTIVITIES OF PRIVATE LIMITED COMPANIES (A CASE STUDY OF PHINORMA NIGERIA LIMITED NGWO)

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OF THE STUDY 

The concept of internal control system is becoming increasingly useful in the practice of modern audit that it will be worth while understanding the subject matter and the role it plays in the effective management of a business enterprise. The existence of internal control system in an organization is of great assistance to both the management and the auditions of such an organization.Not only does it aid the management in the process of decision making, it also provide a base upon which the auditions place reliance when carrying out his audit. With a sound knowledge of the system of internal control operative in a firm, one can easily make a valid judgement on why a firm failed or succeed in its business within the period under review. According to Holmes (1964, 78) who maintained that as business organization have grown in physical size, as operations have expended in complexity, and as transactions have supplies itself promptly with reliable data based on the objectives of assets presentation, error elimination and income determination. The method of procedures adopted by a business to control its operations provides the management with an assurance that the data available are authentic and factual.Such system of control comprises measurers taken by an organization for the purpose of protecting its resources against waste and fraud, ensuring accuracy and reliability of accounting and operating data, seeming compliance with company’s policy and evaluating the level of performance in all the sections company. In the words of Meigs (1997, 8) the basic principle of internal control in that no one person should handle all phase of a transaction from beginning to the end. He remarked that when business operations are organized that two or more employees are required to participate in every transaction; the work of one employee gives proof of the accuracy of the work of another.

The primary aim of any organization is to achieve a maximum profit at a minimum cost. This is made possible by the institute of internal control system which acts as a canopy section of an organization. This type of control existing in a firm therefore plays a very important role in the sense that it helps in the efficient conduct of the firms business consequently. Internal control has been defined by the institution of chartered accountant of England Wales (vol. xix no 17, 36) as the while system of controls, financial and other wise established by 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 secure as far as possible the completeness and accuracy of the records. It could be inferred from the above definition that internal control system embraces other controls such as internal check and internal audit which operates by appraising and reputing the effectiveness of other control. This will minimize errors, fraud and ensure the presentation of accurate and reliable data. The success of failure of an enterprise depends on a large extent on how effective the system of control is, therefore the hope of the researcher that this study will not only be useful to both employers and employees in the private limited companies but also to investors and provided of capital to both public and private enterprises. 

1.2  STATEMENT OF THE PROBLEM

According to Osuala (1987, 36) the statement of problem serves to elaborate upon the information in the title of the study. This study is concerned with the examination of internal control system and its impact on the business of PHINORMA Nig. Ltd Ngwo. The problem could be categorized as general control and application control which firm the basic of internal control system in any organization. A research project has two important parts namely: – The question posed and the answers. The researcher seeks to find out the extent to which the system of internal control on PHINORMA Nig LTD Ngwo influences the business by addressing them to the following questions:- 1. Are all transactions from beginning to the handled by the same set of individuals? 2. How far has the existence of internal audit helped to minimize errors and fraud in the company? 3. Are employees being supervised made to know their responsibilities and the consequence of failing to carry them out? 4. Does all staff see the company’s goal as a joint responsibility? 5. Does the company take adequate step to safeguard their assets including debts being owned to it?

1.3  OBJECTIVE OF RESEARCH

The objective of research implies the aims of the researcher in the undertaking the research. It is an overview of the study itself and related very much to its problem in view of the problem state and subsequent questions posed the objectives of this research include the following:

1. To assess the strength and weakness of internal control system in PHINORMA Nig Ltd Ngwo with the view to determining their ability to minimize fraud.

2. To discuss as far as possible how mismanagement in the manufacturing sector could be curtailed through the institution of a good internal control system.

3. To ascertain how far the internal control system in PHINORMA had aided the management in the realization of their organization’s objectives.

4. To make necessary recommendation on how to correct lapses which may be discovered at the course of this research.

5. To increase the knowledge of research on the internal control system operative in PHINORMA Nig Ltd Ngwo.

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