THE IMPACT OF INTERNAL CONTROL SYSTEM IN A MANUFACTURING INDUSTRY WITH A SPECIAL REFERENCE TO COCO COLA AND ANAMMCO COMPANIES

Chapter One

INTRODUCTION

1.1      Background of the Study

The sizes, capabilities, and complexities of modern companies even the smallest requires internal control in the activities of the organization. As an organization grows, the management needs more formal information system in order to maintain control. The control can no longer be carried out by the man on top. Since the organization is now complex, and subject to such influences without that one person can possibly hope to exert the detailed and sophisticated control needed. The management therefore, needs assurance that the accounting data it receives are accurate and dependable. This assurance is provided in large part by developing strong system of control that comes from within the functioning of the organization itself. This strong system is the internal control system. It is the system where each level of management acts as a siege so far as possible. Adverse factors are dealt with on the spot by lower management before they grow to worse.

The institute of chartered accountants of Nigeria defined this internal control as the whole system of control, financial, personal, operating and good information management system and otherwise established by the management in order to carry on the business of the enterprise to achieve their aim and set objectives in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets the assets of the organization and secure as far as possible the completeness and accuracy of record. This definition recognizes that a system of internal control extends beyond to the functions of accounting and financial departments infact, the concept of internal control is so vast that it effects all the assets of business, all liabilities, the revenue and expenditures, periodic operating reports, statistical analysis and dissemination therefore, it also taught across standard costing training programmes designed to aid the personnel in meeting their responsibilities, internal audit and every aspect of the operation.

The main purpose of internal controls can be deducted from the above definition are:

1)         To ensure adherence to management policies.

2)         To safeguard the assets of the organization.

3)         To secure as far as possible the completeness and accuracy of records.

4)         To evaluate the level of performance in all divisions of the company

Infact, internal controls aid in the efficient operation of a business. The increased size of business units have encouraged the adoption of different methods which will both increase the efficient of the business and act as a safeguard against fraud and error which adversely affect profitability. The basic divisions of the elements of internal control are:

       Plan of Organization

Plan should cover the activities of both management and staff at all levels stating clearly their duties responsibilities and their power to authorize various activities of the business.

       Authorization, Recording and Custody Procedures:

Where these are concerned, the financial and accounting controls should be as such as to facilitates efficient working, at the same time obviate any chance of fraud or error arising.

       Management Supervision and Review:

Management should constantly review and give consideration to the financial position and financial procedures within the organization. This may include the use of an internal audit department, but not necessarily so. Budgeting control whereby variances are revealed and investigated special reviews of department systems may also take time apart from normal internal audit procedures.

However every company designs its own internal control according to the needs of the establishment or the area in question needs to be in relationship with the cost benefit. All departments needs to be scrutinized properly before an adequate and strong system which will provide all the necessary informations that can be understood and concise form can be designed. The success and continued existence of all manufacturing companies and all business enterprises lies on the internal controls that exist there. In other words, the internal control system is the key to profitability of all manufacturing companies.

1.2      Statement of the Problem

Although internal control is highly effective in increasing the reliability of accounting data and in protecting against fraud and errors and promoting the efficiency and growth of the organization no system of internal control is fully proved. Today, there are news of bankruptcy and folding up of many manufacturing companies due to some problems like:

i)            Lack of raw material for production of enough goods for quantity demanded of the people;

ii)          Different companies have not been manufacturing or producing the expected or projected number of units.

iii)        Most companies have not been adhering to the system of internal control. It is being neglected and poorly operated.

iv)        Internal control in most companies is not operational rather it held in principles;

v)          Lot of money is lost through non adherences to internal control system thereby denying its expected profit.

1.3      Objectives of the Study

The objectives of this study include among other things:

i)            To examine the extent to which management have designed, installed and operated the internal control;

ii)          To expose the areas of weakness in operation of the system and how it effects the productivity and hence profitability. Profitability here is related to the level of internal control system;

iii)        To examine the extent the internal controls have gone in bringing about efficiency in the operation of manufacturing industries;

iv)        To recommend approaches to proper designing, installation and operation of an adequate internal control, system which will improve and ensure further survival of manufacturing firms.

1.4      Research Questions

1)         To what extent has internal control system, improved the activities of the manufacturing industry?

2)          Can in adherent to the system of internal control affect the profitability of the manufacturing companies?

3)         Has internal control system reduces the chances of fraud and errors in the manufacturing companies?

1.5      Hypothesis

Hypothesis I

H_o:  Manufacturing companies have failed to maintain strict and efficient internal control over their cash.

H₁:  Manufacturing companies have maintained strict and efficient internal control over their cash.

Hypothesis II

Ho₂:  Lack of knowledge of internal control system by the staff has negatively affected its application in running of the business.

H₁:  Knowledge of internal control system by the staff has positively affected its application in running of the business.

Hypothesis III

H_o:  The weakness in internal control system of manufacturing companies affects the projected profit of the companies.

H₁:  The weakness in internal control system of manufacturing companies does not affect eh projected profit of the company.

1.6      Significance of the Study

This work will undoubtfully be of a great help to management of various manufacturing companies and other business enterprises. The importance of it brings the dream of designing and internal control system and throws more light on the need for adequate system of control which helps in bringing efficiency in operation and achievement of objective which leads to increased profitability of the company it shows that areas of weakness of internal control and suggests appropriate measures of correcting those weaknesses. It also moves on the state the negative effect of poor internal control operation which most at times lead to leakage in the projected profits. This will help waken most companies in order to tighten their loose ends, maximize profit, survive and succeed. Others who will benefit from this work are other researchers on this topic, it will help them for further researcher. The researcher found this work invaluable to his academic advancement because it has exposed him to so many things which ordinary he would not have come across.

<p class="MsoNormal" style="font-family: 'lucida grande', tahoma, verdana, arial, sans-serif; font-s

Get this material NGN 5,000

Message Us on WhatsApp  »