EVALUATION OF INTERNAL AUDIT MECHANISM ON FINANCIAL PERFORMANCE OF SELECTED BEVERAGE FIRMS: CASE STUDY OF LAGOS STATE

CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

An entity should put in place its own system of controls in order to achieve its objectives (Mwindi, 2008). A system of effective internal controls is a critical component of company management and a foundation for the safe and sound operation of organizations. However, ineffective internal controls lead to ineffective programs and eventually resulting in losses (Olumbe, 2012). Recent incidence of company failures and accounting frauds square measure principally preceded by failure in companies control structures (Anyanzwa, 2013). Internal controls square measure meant primarily to boost the dependability of economic performance, either directly or indirectly by increasing answerableness among data suppliers in a company (Jensen, 2003). Internal controls give associate degree freelance appraisal of the standard of social control performance in polishing off assigned responsibilities for performance (Beeler et al, 1999). Fadzil et. al, (2005) aforesaid that a good internal control system unambiguously correlates with structure success in meeting its performance target level. Internal Control keeps a company heading in the right direction toward its objectives and also the action of its mission. They promote effectiveness and potency of operations, reduces the danger of plus loss, and helps to confirm compliance with laws and rules. Control additionally ensures the dependability of economic coverage (all transactions square measure recorded which all recorded transactions square measure real, properly valued, recorded on a timely basis, properly classified, and properly summarized and posted). An Organization with effective system of internal control is expected to achieve its objective efficiently and effectively. However the overall purpose of the concept is to help an organization achieve its mission, promote orderly, economical, efficient and effective operations and produce quality products and services consistent with the organization’s mission, safeguard resources against loss due to waste, abuse, mismanagement, errors and fraud. It also promotes adherence to laws, regulations, contracts and management directives as well as develop and maintain reliability financial and management data, and accurately present that data in timely reports (Magara, 2013).

1. STATEMENT OF PROBLEM

Recent corporate accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to two disparate yet logical outcomes. First, Internal Auditing skills have become crucial in untangling the complicated accounting manoeuvres that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed corporate governance. Increasingly, company officers and directors are under ethical and legal scrutiny. Both trends have the common goal of responsibly addressing investors ‘concerns about the financial reporting system. However there has been laxity in implementation of internal audit findings and recommendations. This research will specifically look at internal audit mechanism on financial performance of beverage firms. This study will have a look at the internal audit function in private firms, the role they play in the organisation, internal audit and asset management and how the effect on financial performance.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine evaluation of internal audit mechanism on financial performance of selected beverage firms. Other general objectives of the study are:

1. To examine the level of practice and internal audit function in private firms.

2. To examine the level of improvement in the financial performance of private firms.

3. To examine the effect of internal audit mechanism on financial performance of beverage firms.

4. To examine cost management and its effect on financial performance of beverage firms.

5. To examine the relationship between effective internal audit and financial performance of private organizations.

6. To suggest ways in which internal auditing will aid in assisting the private firms to achieve their goals and objectives.

1.4 RESEARCH QUESTIONS

1. What is the level of practice and internal audit function in private firms?

2. What is the level of improvement in the financial performance of private firms?

3. What are the effects of internal audit mechanism on financial performance of beverage firms?

4. What is cost management and its effect on financial performance of beverage firms?

5. What is the relationship between effective internal audit and financial performance of private organizations?

6. What are the ways in which internal auditing will aid in assisting the private firms to achieve their goals and objectives?

1.5 RESEARCH HYPOTHESES

H₀₁: There is no effect of internal audit mechanism on financial performance of beverage firms.

H₀₂: There is no significant relationship between effective internal audit and financial performance of private organizations.

1.6 SIGNIFICANCE OF THE STUDY

The study is intended to benefit the following:

Beverage firms: Who will obtain details on how internal controls can help find lasting solutions to numerous external and internal financial challenges which hinder effective production and service delivery.

The study findings will be of immense importance in the sense that they will assist management of beverage firms to realize how internal controls can affect its operations and financial performance.

Academicians and researchers- this study is intended to add knowledge to previous studies done on internal controls by primarily focusing on beverage firm’s production and service delivery. The study shall therefore serve as a reference for further research on the topic of relationship between internal controls and financial performance.

1.7    SCOPE OF THE STUDY 

The study is based on evaluation of internal audit mechanism on financial performance of selected beverage firms: case study of Lagos state.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Financial Performance: the process of quantifying the efficiency and effectiveness of an action. Organizational performance is achieved by comparing the value that an organization creates using its productive assets with the value that owners of these assets expect to obtain (Armstrong & Baron, 2010).

Segregation of duties: the concept of having more than one person required to complete a task. In business the separation by sharing of more than one individual in one single task is an internal control intended to prevent fraud and error (Gordon, & Miller, 2012).

Cash reconciliations: the process of verifying the amount of cash in a cash register as of the close of business. The verification can also take place whenever a different clerk takes over a cash register (Amaka, 2012).

Internal Audit: An internal audit is the examination, monitoring and analysis of activities related to a company’s operations, including its business structure, employee behavior and information systems. Internal audit regulations, such as the Sarbanes-Oxley Act of 2002, have increased corporate requirements for performing internal audits. Audits are important components of a company’s risk management as they help to identify issues before they become substantial problems, such as attempts to steal intellectual property.