AN APPRAISAL OF INTERNAL AUDITING AS BASIS FOR PREVENTION OF

ERRORS AND DETECTION OF FRAUDS IN NIGERIAN BANKS: A CASE STUDY

OF GUARANTY TRUST BANK.

BY

MACAULAY ONYEKA J.
MATRIC NO: 10/0419

CHAPTER ONE

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 CHAPTER ONE

INTRODUCTION

1.0 INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Auditing is an independent examination of an expression of opinion on the financial

statement of an enterprise or organization by an appointed auditor in pursuance of that

appointment and in compliance with any relevant statutory obligation. It aims at providing

solution to the inevitable problem of credibility in report and accounts. It prevents and detects

errors and frauds and also produces a report of the true and fairness of the financial statement.

They also obtain full understanding of the operation under review. (Okoli, 2012)

The Chartered Institute of Public Finance and Accountancy (CIPFA), as cited by

Johnson (1996:47), defined internal audit as “an independent appraisal function within an

organization for the review of activities as a service to all levels of management. It is a

control which measures, evaluates and reports upon the effectiveness of internal control,

financial and otherwise, as a contribution to the efficient use of resources within an

organization.”

Jocelyn (2003:67) traces the definition of internal auditing given by the Institute of

Internal Auditors as “an independent appraisal function established within an organization to

examine and evaluate its activities as a service to the organization.” The objective of internal

auditing is to assist members of the organization in the effective discharge of their

responsibilities.

According to the Institute of Internal Auditors (1991), the internal audit unit is

expected to review the means of safeguarding assets and where appropriate, verify the

existence of such assets.

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The survival of every organization depends on its effective and efficient utilization of

resources (both financial and non-financial). The impact of internal audit has grown

tremendously in most organizations in the recent past. This can be attributed partly to the

growth of the organizations, which entails widely extended operations and the need to ensure

that the organizations policies and basic accounting controls are observed at every facet of the

organization. Again it can be observed as a measure by management to ensure that the

government regulations concerning the operations of organizations, both public and private

are duly complied with so as to guard against conflicts and inconsistence with the law. As the

organization expands and supervisory responsibility broadens, the head can no longer have

personal knowledge of every aspect of the organization. It becomes impossible for him to

control or monitor the continuing effectiveness of all controls. This calls for the delegation of

this responsibility to a separate department called the internal audit department. Internal

Audit Department is a department set up by management, usually manned by a chartered

Accountant, as established in section 358 of the companies Act 1976, to receive the activities

of other employees thereby enhancing controls in the organization. (Okoli 2012)

The internal audit unit is vested with the power of independent checks, in order to

assess compliance with established rules and regulations of the organization (Okoya, 2002).

1.2 Statement of the problem

Any organizations can be at risk of fraud, which would lead to the collapse of the entire

organizations, causing major losses to investors, an important legal cost, affecting directly to

key individuals, and loss of confidence in capital markets. Publicized fraudulent behavior by

key executives has negatively impacted the reputations, brands, and images of many

organizations worldwide.

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Despite the fact that preventing fraud techniques do not assure that fraud will not be

committed, they are the first line of defence in reducing the risk of fraud. A key to preventing

fraud is to promote awareness of the board as well as awareness of the entire organization on

program of fraud risk management, including the type of frauds that can occur.

Whereas, one of the most powerful, to prevent fraud is recognize the detection control

which is effective. Combined with the control and prevention, detective controls improve

efficiency of a fraud risk management program by demonstrating that prevention and controls

are working as intended and by determining if fraud happens. Although detective controls

may provide evidence that fraud has occurred or is occurring, they do not intended to prevent

fraud.

Every organization has to face the problem of fraud, however not all fraud occurs can

be prevented. It is important that organizations must consider both preventing fraud and

detecting fraud.

When fraud appears in a business, people always ask question: "How did it happen?" This

question raises the question of whose responsibility to prevent and detect fraud. Therefore, to

arrest this ugly phenomenon, the management of the organization has to set up internal audit

department. This department will be charged with the objectives of monitoring the activities

of these employees and effecting management control. Many people who read financial

statements believe that auditors are ultimately responsible for the preparation of financial

statements. Some people also think that the auditors have responsibility to detecting all

errors, fraud, and unlawful acts. The role of the auditors is to express an opinion on the

financial statements. It is important to remember that while auditors do have important

responsibilities, management (director

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of the company) is primarily responsible for the fairness of the company’s financial

statements.

1.3 Objectives of the Study

The main objective of this study is to examine the significance of internal audit as

basis for the prevention of errors and detection of frauds in Nigerian banks. Among other

objectives are;

 To examine the occurrence of frauds in Nigerian banks..

 To determine the roles which an internal audit department can play in

financial organizations

 To ascertain how internal audit department have contributed to the overall

performance of the organization.

 , To ascertain how auditor use internal control to detecting and preventing

fraudulent activities.

1.4 Research Questions

 What are the causes of frauds in Nigerian banks?

 What roles does the internal audit department play in financial organizations?

 To what extent does internal audit department contributed to the overall

performance of the organization?

 How does auditor use internal control in detecting and preventing fraudulent

activities?

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1.5 Research Hypothesis

Hypothesis 1

HO: Internal audit have not played a significant role in the overall performance of an

organization.

H1: Internal audit have played a significant role in the overall performance of an organization.

Hypothesis 2

HO: Effective internal audit does not help to detect errors and prevent frauds in an

organization

HI: Effective internal audit helps to detect errors and prevent frauds in an organization

1.6 Significance of the Study

There is the need for internal audit to be effective so to create improvement in the banking

sector. Positive improvement in the banking sector will definitely benefit the Organization

which could also help in preventing and detecting errors and frauds.

1.7 Scope and Limitations of the Study

Scope, here refers to the length of capacity to which the research work can be

studied. However, the scope of this study is designed to cover management function of

internal auditing with particular reference to guaranty trust bank plc.

While the limitations here refers to what can make the researcher’s work slow or in

other case affect the research study negatively. These may include:

 Lack of Internet Services

 Access to required Information

 Time Restraints

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  Finance

1.8 Definition of Terms

INTERNAL AUDITING

This is an independent appraisal function established within an organization to examine

and evaluate its activities, as a service to the organisation. It assists members of the

organisation in the effective discharge of their obligations.

INTERNAL CONTROL

This is the whole system of control, financial or otherwise established by management in

order to carry on the business of the enterprise in an orderly and efficient manner, ensure

adherence to management policy, safeguard the assets and secure as far possible the

completeness and accuracy of the accuracy.

INTERNAL CHECK

Internal check is the checking imposed on the day to day transaction whereby the work of

one person is proved by an independent person’s (auditor) to ensure that the laid down

procedures are followed, the objective prevention and detection of errors and frauds.

SUBSTANTIVE TEST

These are tests of transactions and balances and other procedures such as an analytical

review, which provide audit evidence as to completeness, accuracy and validity of the

information contained in the accounting records or in the financial statement.

FRAUD

Fraud contains a series of irregularities and illegal acts characterized by intentional

Deception or misrepresentation, which an individual knows to be false or does not

Believe that is true.

ERRORS

Errors are unintentional mis-statement or mistake due to negligence or ignorance.

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References

Audit Act. (1956). Companies and allied matter decree 1990.

Adeniji, A. (2004). Auditing & Investigation. Lagos: Value Analysis .

Badara, M. S. (2012). The role of internal auditors in ensuring effective financial control at

local government level. Research journal of finance and accounting , 57.

M., D. (. (2012). The role of internal audit in financial institutions. British Journal of

science , 72-73.

N., C. (2001). "Basic Principle of Financial Management". Enugu: El'Denmark.

Sunday, O. (2003). "Effective internal Audit for Efficient internal control System".

Jocelyn, T. (2003), Accountability and Audit".Internationanal Journal of Government Audit. Vol 30.
No 2, April

Johnson, I.E. (1996), Public Sector Accounting and Financial control. Surulere:Financial Training
Nigeria, 2nd Edition