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This study centered on the Role of Auditors in effective financial management in the Rural, Community Banks Financial institutions in the Asutifi North District. Over the years, rural financial institutions have been concerned with the inefficient performance of their duties. This coupled with wastage and fraud associated with the institutions led to the closure of some these banks in recent years. More often than not, management of these institutions has been accused of mismanagement and misappropriations. This compelled management to institute internal control systems with the aim of streamlining day to day activities and operations in such a way as to minimizing or eliminating inefficiencies thereby improving profitability. Early detection of waste and fraud only possible provided there exist an effective Internal Audit Department who should be in the position to make recommendations to management for improvement.
The success of every organization depends on how effective and efficient their managerial and financial control systems are put in place. This study is designed to come out with the fact that, the existence of Internal Audit in the rural and community banks has helped to reduce or minimize embezzlement.
The study revealed that the internal control system of rural and community banks is sound due to the Internal Audit function of the institution.
The study found out that, the Audit Department which is charged to be the watch over of the internal controls, keep management informed about the operations of the internal controls.
Recommendations have been made for the department to be well resourced. This would help the department to perform its "watch-dog" functions satisfactorily by assessing internal controls very frequently. This would help the department keep management informed about the operations in the system and recommendations made to improve the efficiency of the controls. The ultimate effect is the promotion of operational efficiency and effectiveness in public institutions.
Organizations normally establish internal mechanisms and techniques in order to carry out its activities in an efficient and effective manner. These mechanisms are mostly referred to as internal control. Whittington & Pany (1995) defined internal control as, "the individual component of the whole system of controls, financial and otherwise established by management in order to carry on the business of the organization in orderly and efficient manner, ensure adherence to management policies, safeguard assets and secure as far as possible the completeness and accuracy of the records". Auditing also seeks to ensure an effective system of internal control.
An internal control system cannot provide management with conducive evidence that their objectives are reached because of inherent limitations. Such limitations include:
Management's usual requirement that the cost of an internal control is not disproportionate to the potential loss which may result from its absence.
Most internal controls tend to be directed at routine transactions rather than non-routine transactions.
The potential for human error due to carelessness, distraction, mistakes of judgment and the misunderstanding of instructions.
The possibility of circumvention of internal controls through the collusion of members of management or employees with parties outside the entity.
The possibility that a person responsible for exercising an internal control could abuse that responsibility for example a member of management overriding an internal control.
O'reilly, McDonnel, Winograb, Gerson& Jaenicke(1998) defined auditing as "A systematic process objectively obtained regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users".(p.647)
In the 19th Century, auditors were expected to prevent or detect fraud and error. In the early 20th century, attention shifted to the certifying of accuracy in accounts. Around 1948, the "true and fair" view was introduced.
Currently, there is pressure on the auditor to work towards the prevention and detection of fraud. The public still expects auditors to act as financial "policemen", even though in law, this is not part of their function. The profession as a whole has restricted pressure to widen the scope of its responsibilities to include the detection and reporting role, especially in the face of ever increasing unsubstantiated claims against firms. Nevertheless, the legal requirements to report fraud, where it is detected or suspected have been widened.
The roles of auditors are stated in the Auditing Standard which is supposed to be a guide to all auditors as stated by Millichamp, (1996). Below are some of the roles of auditors in achieving effective financial management:
Advising the head of departments on internal control measures to be put in place to reduce risk in accounting and financial matters.
Examining the efficient and effective utilization of resources allocated to public offices and makes the necessary recommendations for improvement where necessary.
Ensure that expenditures are in line with approved budgeted estimates
Performing other special duties that may be assigned to them.
Misappropriation and misallocation of resources, theft and other fraudulent practices have become the order of the day. This is mainly caused by people at top management levels and even staff in the middle and lower ranks in most organizations and institutions, more particularly those in the financial industry. The result being that most of such organizations and institutions end up recording huge losses which in turn affect the smooth running of their operations.
It is therefore believed that most of these organizations and institutions do not have internal control systems as well as competent internal auditors or even if they do, such systems may not be functioning as intended.
This is what has moved the researcher to conduct this research, in order to be able to identify the strength and weaknesses in the internal control systems as well as roles of internal auditors of Rural and Community Banks and other financial institutions in the Asutifi North District.
To achieve the objectives of this study, the following research questions were posed:
What are some of the ways of assessing the effectiveness of the Internal Auditing Department of the Rural and Community Banks?
To what extent do auditors play their role effectively to achieve judicious financial management in financial institutions?
In what ways could auditor's performance be improved
What are the recommendations as to what can be done to ensure that a proper internal audit department is established?
Is the independence of the auditor an essential tool for effective auditing?
The main objectives of this study are to
Examine the effects of the internal control and the reasons for the internal control systems in Rural and Community Banks.
Determine the problems facing the proper use of internal control in the organizations and find efficient solutions.
To find appropriate ways to improve the effectiveness of management decision making and the efficiency of internal control in the business process.
To foster compliance with rules and regulations and ensure that reliance is placed on the financial statement of Rural and Community Banks and even where reliance can be placed, the extent to which such reliance can be placed; and
Know and study the meaning of auditing and who an auditor is, as well as their roles to achieve accurate financial management in financial institutions.
The study focused on Asutifi Rural Bank Ltd at Kenyasi in the Asutifi North District as a case study. This was due to time and resource constraints. Thought the research should have been extended to cover all Rural Banks to give a fair representation of the internal control systems and the role of Internal Auditors in the financial institutions, the researcher hopes that the results from the selected bank will give a fair representation.
Methodology (Research Design, Data collection and data analysis)
For this study, the descriptive method will be utilized. In this method, it is possible that the study would be cheap and quick. This descriptive type of research utilizes observations in the study.
The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study.
To come up with pertinent findings and provide credible recommendations, this study will utilize two sources of research: primary and secondary. Primary research data will be obtained through this new research study. Questionnaire survey and in-depth interview will be conducted on key Staffs of the Rural Bank in Asutifi North. Its purpose will be to examine the effects of the internal control and the reasons for the internal control systems in Rural and Community Banks On the other hand, the secondary research data will be obtained from previous studies on the same topic. The secondary data includes magazines, text books and journals from libraries.
Data shall be collected from multiple sources, allowing for a number of different perspectives to be taken into consideration in the development of the recommendations.
The data sources that will be examined include:
· A review of the appropriate research literature. This includes examining studies where budgetary control had been used either in a research or organizational setting.
· An examination of the regulations and practices related to budgets and budgetary control in local governance.
Instruments to be used
A self-administered questionnaire, or the type of questionnaire that is usually completed by respondents (Saunders et al, 2003), will be constructed by the researcher to gather the needed data.
The use of the questionnaire provides the researcher with the ability to test the views and attitudes of the respondents.
The survey-questionnaires also will use open-ended questions to obtain as much information as possible about how the interviewee feels about the research topic. Interviews will take between one and two hours. The questions that will be used during the interview will be based on the research questions for this project; they shall be reviewed, refined and approved by the project supervisor. The researcher will design a semi-structured interview. Here, the researcher will encourage the interviewee to clarify vague statements and to further elaborate on brief comments.
Population of the study
In order to achieve the desired of the study, the researcher identified three (3) categories of persons as their study population. These are made up of
The Head of Internal Audits (3 heads from 3 institutions)
Audit Staff (4 staffs from 3 institutions)
Non Audit Staff (3 staffs from 3 institutions)
Due to financial constraints and time factor, this limited sample size of twenty-four (24) respondents will be considered. The researcher hopes that the finding based upon the above sample size will reflect views of the whole population. The institutions to cover includes: Asutifi Rural bank, Mid West Financial Services and Ahafo Community Bank.
Significance of the study
The research work would help readers to know the job description of the auditors in a particular financial institution. Besides, it shall help students understand and appreciate the inter-relationship existing between internal control systems.
Moreover, the finding would assist the authorities concerned to adopt and implement effective and efficient audit system. The research report would help auditors to act well in their advisory capacity to the management of Rural and Community Banks in all operational matters and be tactful in performing their functions. It will also help other researchers in similar research work.
Possible research limitations
One major problem faced in the conduct of this research was that of finance. Another problem was the acquisition of relevant information for the research work. Some personnel at the Audit Service and those at the selected Rural and Community Banks in the Asutifi North District were reluctant to give out information to the researcher for the study since they considered such information as confidential.
Also it was not easy combining lectures and work with the project work. There was always pressure on the researcher as he had to attend lectures, attend to official duties and undertake such a project at the same time.
Brief overview of study area (if applicable)
Differences in opinion have long existed about the meaning and objectives of internal control systems. Many people interpret "internal control" as the step taken by businesses to prevent fraud; both misappropriation of assets and fraudulent financial reporting. Furthermore, the importance of internal control has an equal role in assuming control over manufacturing and other institutions and organizations.
Some are also of the view that, internal control is set in an organization for fraud prevention, believed that internal control has an equal role in assuring control processes.
Such differences in interpretation also exist in the Committee of Sponsoring Organizations (COSO) that internal control is a process affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
Reliability of financial reporting
Effectiveness and efficiency of operations
Compliance with applicable laws and regulations
The definition recognizes that internal control cannot realistically provide absolute assurance that an organization's objective will be achieved.
Such differences in interpretation of internal control systems also exist in the professional publication issued by the American Institute of Certified Public Auditors, Institute of Certified Auditors and the Research Foundation of financial Executive Institution.
The colonial administration as far back as 1910 ensured that financial as well as qualitative records with the various organizations were audited in Ghanaian institutions to ensure the efficient management of their resources. With the increase in size and complexity of business organizations, it became necessary to institute control measures over all aspects of business activities with the passing of the procurement bill into law by Parliament in Ghana in 2003.
As a result of a number of instances of fraudulent financial reporting in the 1970's the major accounting organizations sponsored the National Commission on fraudulent financial reporting (The Tread Way Commission) to study the factors that are associated with fraudulent reporting and to make recommendations to reduce the incidence.
The commission made a number of recommendations that are expected to direct and address internal control systems. For example, the commission emphasized on the importance of competent auditors and involved audit committee. It also called on the sponsoring organizations to integrate the various internal control concepts and definitions so as to develop common criteria to evaluate internal controls.
It was not until the early 1990's that various professional organizations worked together to develop a consensus on the nature and scope of internal control systems.
No activity can be undertaken without any amount being spent. The writing of this thesis is no exception. This project is under no sponsorship. That is, the researcher is the sole financier of this undertaking. The estimated inputs expected to go into writing of this thesis have been spelt out below:
Feeding and refreshments
Work plan /schedule
Proposal to be submitted latest by 22nd September 2012
Complete literature review by 27th October 2012
Complete fieldwork by 31st December 2012
Complete analysis by 24th February 2012
Give presentation on 30th March 2012
Complete final report by 26th May 2012
This chapter discusses the theoretical position of other authors on the role of auditors in effective financial management. It has being organized under the sections:
Principles of auditing
Roles and responsibilities of auditors
The relevance of internal auditing
Independence of auditors as a tool for effective audit
2.1 Principles of Auditing
According to Taylor & Glazen (1994), Auditing is defined as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to assertain degree of correspondence between these assertions and established criteria and communicating the result to interested users. Auditing is also defined as an independent examination of, and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligations. The council of institute of
Chartered Accountants, Ghana ICA (GH) has been used to secure maintenance of professional standards among persons who are members of the institute and to take such steps as may be necessary to acquaint such persons with the methods and practices necessary to maintain such standards. The Council of the institute of chartered Accountants (Ghana) sets out rules and practices as to the technical standards to be applied in company audit work and as to the manner in which these standards are to be applied in practice. These standards and principles set by ICA (Gh) include the following.
Due professional care
Training and proficiency
Sufficient understanding of internal control
2.1.1 Due Professional Care
Due professional care is required in the conduct of audit and in preparation of the audit report. This standard requires the auditors to plan and carry out every step of the audit engagement in an alert and diligent manner. Full compliance with standard would rule out any negligent act or material omissions by the auditors.
2.1.2 Training and Proficiency
A technical knowledge of the industry in which the client operates is part of the personal qualifications of the auditor set by ICA (Gh). A firm must not accept an audit engagement without first determining that members of its staff have the proficiency needed to function effectively in that particular industry.
An opinion by the independent auditors as to the fairness of a company`s financial statement is of questionable value unless the auditor is truly independent. Consequently, the auditing standard States that, "in all matters relating to the assignment, independence in mental attitude is to be maintained by the auditor." This perhaps is the most essential factor in the existence of the audit profession.
2.1.4 Sufficient Understanding of Internal Controls
The auditors' understanding of the client, its environment, and internal controls allows the auditors to determine what can go wrong to cause the financial statement to be material misstated. In areas where risk is high the auditors must plan and perform more extensive audit procedures. Effective internal control provides assurance that the client's records are reliable. When the auditors find this type of internal control, the quality of other evidence required is much less than if controls are weak.
2.2 Roles and Responsibilities of Auditors
The role of the auditor has changed with time. In the 19th century, auditors were expected to prevent or detect fraud and error. In the early 20th century, attention shifted to the certifying of accuracy in accounts. Around 1948, the "true and fair" view was introduced. Currently there is pressure on the auditor to the prevention or detection role as the public expects auditors to act as financial "policemen" even though in law, this is not part of their functions. The legal requirement to report fraud, where it is detected or suspected has been widened.
The auditor's responsibility towards error, fraud and irregularities is to design his work so that he can have a reasonable expectation of detecting those which might impair the truth and fairness of the financial statement. Accordingly, he should seek reasonable assurance that those irregularities, fraud and errors which are material and might impair the truth and fairness have not occurred, or if they have occurred they have either been corrected or properly disclosed in the financial statement.
The audit is however, subject to an unavoidable risk that some material misstatement will not be detected even though the audit is properly planned and performed. This is because fraudulent conduct is often deliberately concealed and all internal controls and audit procedures are subject to inherent limitations.
2.3 The Relevance of Internal Auditing
A lot of authorizes had defined Internal Auditing in some many way. These are some of the definitions: Taylor and Glazen (1994) defined Internal Auditing as "an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization".(p.452). Besides, Okai (1996), Millichamp (1993) and the Association of Certified Chartered Accountants (ACCA) 1992, also referred to Internal Auditing is an "independent appraisal activity within an organization for review of operations as a service to management".
Millichamp (1993) explained further that Internal Audit objectively examines, evaluates and reports on the adequacy of internal control as a contribution to the proper, economic and efficient use of resources.
ACCA (1992) and Millichamp (1993) emphasized on essential elements of internal auditing. They include the following:
Independence : The Internal Auditor should have independence in terms of organizational status and personal objectivity, which permits the proper performance of his duties. The Internal Auditor should not be influenced or controlled in any way.
Staffing and Training: The Internal Audit Unit should be appropriately staffed in terms of numbers, qualification and experience having regard to its responsibilities and objectives.
Relationship: Internal Auditor should seek to foster constructive working relationships and mutual understanding with management, External Auditors, any other review agencies and where one exist, with audit committee.
Reporting and follow-up: The Internal Auditor should ensure that findings, conclusions and recommendations arising from each internal audit assignments are communicated promptly and accurately to the appropriate management level. The Internal Auditor must provide comprehensive report on regular basis and give recommendations for changes.
Due care: The Internal Auditor cannot be expected to give total assurance that control weaknesses, but should exercise due care in fulfilling his responsibilities.
Evidence: The Internal Auditor should obtain sufficient, relevant and reliable evidence on which to base reasonable conclusions and recommendations.
Planning, Controlling and Recording: The Internal Auditor should adequately plan, control and record his work. As part of the planning process, the internal auditor should identify the whole range of system within the organization.
2.3.1 Objectives of Internal Auditing
Robertson & Okai (1996) agreed that the objectives of internal auditing are to assist members of the organization in the effective discharge of their responsibilities.
Internal auditing has the objectives of furnishing members of the organization with analysis, appraisal, recommendations, counsel and information concerning the activities reviewed.
The Internal Auditor is therefore concerned with any phase of the organization where he provides a service to management. The work normally involves going beyond the accounting and financial records to obtain understanding of the operations. To achieve these objectives, the Internal Auditor undertakes the following functions:
Ascertaining the reliability and relevance of management data developed with the organization.
Ascertaining the effectiveness of established policies and plans and recommending operative improvements.
Reviewing and appraising the soundness, adequacy and application of accounting, financial and other operating controls and recommending effective controls at reasonable cost.
Millichamp (1993) also shares the same view with Okai.
2.3.2 Scope of Internal Audit
The Institute of Internal Auditors described the scope of internal auditing as encompassing the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance and carrying out assigned responsibilities. Specifically the scope includes the following:
Reviewing the reliability and integrity of financial and operating information and the means used to identify measure, classify and report such information.
Reviewing the systems established to ensure compliance with those policies, plans, procedures, laws and regulations which could have a significant impact on operations and reports and determining whether the organization is in compliance.
Reviewing the means of safeguarding assets and as appropriate, verify the existence of such assets.
Appraising the economy and efficiency with which resources are employed.
According to Whittington & Pany (1995), the scope involves reviewing operations or programmes to ascertain whether results are consistent with established objectives and goals and whether the operation or programmes are being carried out as planned.
The scope of internal auditing therefore means the extent of work the internal auditor is expected to carry out.
2.3.3 Internal Audit Report
According to Arens & Loebbecke (1994), audit report is the final stage in the audit process, which is the communication of the findings to users. Report is different in nature, but in all cases they must inform readers of the degree of correspondence between qualified information and established criteria. The auditor should report on the matters outlined in systems control and with the accuracy of information given to management and give recommendations for changes.
Millichamp (1993) and Okai (1996) also stated that the internal auditor is to provide timely, accurate and comprehensive report to management on regular basis.
Robertson (1996) explained that the reporting stage is the internal auditor's opportunity to capture management's undivided attention. Internal audit reports are usually considered 'open' until a formal written reply to the recommendations is received from the management of the audited unit or department. The reply which goes to the same people, who receive the audit report, indicates which recommendations were implemented and which were not. Only after the written response is received is the audit considered 'closed'.
Another procedure unique to internal audit reporting is the criticisms and recommendations which are usually reviewed with the audited management before they are included in a final report.
2.3.4 The Relationship between Internal and External Auditors
According to Arens & Loebbecke (1994), there are both differences and similarities between the responsibilities and conduct of audits by internal and external auditors. The primary difference is whom each party is responsible to.
The external auditor is responsible to financial statement users who rely on the auditor to add credibility to the statements. The internal auditor is responsible to management. There are many similarities between the two groups. Both must be competent as auditors and remain objective in performing their work and reporting their results. They both for example, follow similar methodology in performing their audits.
External auditors rely on internal auditors through the use of the audit risk model. External auditors typically consider auditors effective if they are independent of the operating units being evaluated, competent and well trained and have performed relevant audit tests of the internal control structure and financial statements.
Millichamp (1993) explained that internal and external auditors have common interest. These common interests include:
Continuous effective operation of such system.
Adequate accounting system and
Ensuring compliance with statutory and regulatory requirements.
2.4 Independence of the Auditor as a Tool for Effective Auditing
Taylor & Glazen (1994), explained that all the standards in the code of professional conduct, perhaps no other is more important than independence, which they defined as "ability to act with integrity and objectivity". Independence precludes certain relationship that may appear to impair objectivity in rendering auditing and other attestation services.
In providing all other services, a member should be objective and avoid conflicts of interest.
According to Arens & Loebbecke (1994), independence in auditing means taking an unbiased view point in the performance of audit tests, the evaluation of the results and the significance of the audit tests, the evaluation of the results and the significance of the audit report.
An internal auditor should be independent in facts and independence in appearance. Independence in fact exist when the auditor is actually able to maintain an unbiased attitude throughout the audit, where an independence in appearance is the result of others interpretation of this independence.
Robertson (1996) explained that although internal auditors cannot be disassociated from their employers in the eyes of the public, they seek operational and reporting independence. Operationally, internal auditors should be independent when obtaining evidence in the sense of being free from direction on constraints by management. Independence and objectivity are enhanced by having the authority and responsibility to report to a high executive level and to the audit committee of the board of directors.
The goal of the internal auditors is to measure practical independence from the control of direct influence of operating managers whose functions, operations and results they may assign to audit. Practical independence enables internal auditors to be objective in reporting findings without having fear for their jobs. The independence of the auditor is seen as when he carries his work freely and objectively.
2.4.1 Rules of Professional Conduct
The Institute of Chartered Accountants (Ghana), requires the observance of strict rules of conduct as a condition of membership. The Institutes' by-laws specifically require members to refrain from misconduct. The misconduct includes any act or default likely to bring discredit to members themselves, the Association or the Accountancy profession. Some of the rules of professional conduct are:
2.4.2 Integrity, Objectivity and Independence of Auditors, Areas of Risk
Millichamp (1993), Okai (1996), explained that, an auditor must approach his work with integrity and objectivity. The approach must be in a spirit of independence of mind. Both Millichamp and Okai further enumerated a number of instances which may threaten the independence of the auditor. These factors are as follows:
Undue dependence on an audit client.
Family and other personal relationship.
Beneficial interest in shares and other investments.
Loans to and from clients.
Acceptance of undue Goods and services (Hospitality):
Actual or threatened litigation.
Conflict of interest. Conflict of interest should not exist between an auditor and his client. Example, acting for competing clients for instance, an auditor cannot advice two companies competing for the same contract.