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INTERNAL CONTROL AND PERFORMANCE OF COMPANIES USING COMPUTERIZED ACCOUNTING SYSTEM
Due to the rapid growth of modern technology and computerization, there is increase in computer usage in organizations this tends to increase fraudulent practices. This study therefore aims at the examination internal control in computerized accounting system and its effect on the profitability and efficiency of a company. In this study, the primary source of data which is the questionnaire was used and the chi-square (X2) hypothetical test instrument was employed to carry out the data analysis and to test the formulated hypothesis. From the analysis, it was found that an occasional evaluation and review of internal control system increases profitability and efficiency, enhances workers efficiency and also helps in reducing fraud. It was therefore concluded that as technique, internal control is a very important aspect of an organization and therefore recommends to the management whose duty is to ensure the smooth and effective operation of the organization to ensure an occasional evaluation of the internal control system, to establish an internal audit department and to ensure a sound and effective internal control system to enhance business operations.
TABLE OF CONTENTS
Title Page i
Table of Contents vi
1.1 Background to the Study 1
1.2 Statement of the Problem 4
1.3 Objective of the Study 5
1.4 Research Questions 6
1.5 Research Hypotheses 6
1.6 Scope of the Study 8
1.7 Significance of the Study 9
1.8 Limitation of the Study 10
1.9 Definition of Terms 11
1.10 Organization of the Study 12
1.11 Summary 13
REVIEW OF LITERATURE 16
2.1 Conceptual Issues 16
2.1.1 Concept of Internal Control. 16
2.1.2 Management of Internal Control 18
2.1.3 Installation of an Effective Accounting System 20
2.1.4 Employees Code of Conduct 21
2.1.5 Objectives of Internal Control 21
2.1.6 Essential Features Of Internal Control 23
2.1.7 Internal Check and Internal Audit 28
2.1.8 Internal Audit as an Instrument of Effective Internal Control 33
2.1.9 Principles of Internal Control 34
2.1.10 Definition of a Computer 38
2.1.11 Management Information System (MIS) 39
2.1.12 Executive Information System (EIS) 40
2.1.13 Internal Control in a Computerized Accounting Organization 40
2.1.14 System Development Control or Implementation Control 46
2.1.15 The Computer Software 51
2.1.16 System Analysis 53
2.1.17 Stages of System Analysis 54
2.1.18 A Computerized Organization 55
2.1.19 Information System Audit 55
2.1.20 The Computer System 57
2.1.21 Importance of internal Control 59
2.1.22 Limitations of Internal Control 61
2.2 Theoretical Issues 63
2.2.1 Contingency Theory 63
2.2.2 Management Theory 64
2.3 Empirical Issues 64
2.4 Summary 69
RESEARCH METHODOLOGY 72
3.1 Introduction 72
3.2 Research Design 73
3.3 Population and Sample Size 74
3.4 Sampling Technique 77
3.5 Methods of Data Collection 78
3.5.1 Questionnaire Design 79
3.5.2 Questionnaire Administration 80
3.5.3 Questionnaire Assumption 80
3.6 Techniques of Data Analysis 81
3.7 Summary 81
DATA PRESENTATION AND ANALYSIS 83
4.1 Introduction 83
4.2 Data Presentation 83
4.2.1 Analysis of Other Research Data 85
4.3 Analysis of Data 90
4.4 Test of Hypotheses 96
4.5 Summary 107
DISCUSSION, CONCLUSION AND RECOMMENDATIONS 109
5.1 Discussion of Findings 109
5.2 Conclusion 111
5.3 Recommendation 112
1.1 Background to the Study
Internal Control is defined as a system of policies and procedures a firm employs to safeguard the firm assets, ensure accurate and reliable accounting records and information, promote efficiency and measure in compliance with established policies (Ronteltap, 2007). Horngren and Foster (1990 also defined internal control as “the set of accounting and administrative controls and practice that helps to ensure that approved and appropriate decisions are made in an organization. They further stated that internal controls include both accounting control and administrative controls and explain them thus: Accounting control comprises the methods and procedures that are mainly concerned with the authorization of transactions, the safeguarding of assets and the accuracy of the accounting records. Good accounting controls help increase efficiency; they help decrease waste, unintentional errors and fraud while administrative controls comprise the plan of organization and all methods and procedures that help management planning and control of operations.
It also manages and assures that organizations resources both tangible and intangible are systematically directs, monitored and measured (Foster, McClain, 2010). Also, according to the British Auditing Guidelines, Internal Control is defined as the whole system of controls, financial and otherwise, established by the 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 and secure as far as possible the completeness and accuracy of the records.
From the above definition, internal control extends beyond financial and accounting matters and the custody of company’s assets. It includes the means designed to promote, govern and check upon various activities for the purpose of ensuring that the enterprise objectives are met. Companies need internal control to co-ordinate and monitor the affairs of the organization to ensure that the objectives are met. Internal control is established in a computerized accounting system whenever the client adopts computer-based accounting system for financial accounting and reporting purpose. The possibility of error and frauds in a computerized accounting system is much larger than the manual system, and the likelihood of discovering such errors is minimal.
Therefore, there is need for a well designed internal control system to be instituted in an organization to monitor the daily operations of the organization. This responsibility of establishing such an adequate system of internal control in a computerized accounting system lies with the management of the organization. The essence of internal control is to prevent and detect errors and irregularities in order to conduct business in a proper and efficient manner.
The effectiveness and efficiency of internal control in a computerized accounting system can enhance profitability through the following essential elements: The logical plan of the organization, a well designed accounting structure, an internal audit function, segregation of duties of staffs and competent well trained technical personnel; recording and custody that ensure that the funds and properties of the organization are kept and handled properly. Managerial supervision is also an important feature for internal control system. They must understand their own role in the internal control system as well as how individual activities relate to the work of others. They must have a means of communicating significant information upstream. There also needs to be effective communication with external parties such as customer, supplier, regulators and shareholders (Au and Kumar, 2011). The directors should review the company’s financial operation at regular intervals and this requires segregation of duties and the introduction of internal check. Internal control is so overwhelming that it determines either the success or failure of an organization.
The profitability and efficiency of a computerized accounting system can be achieved when there is a consistent check on the activities and transactions taking place in the organization to ensure that the systems is being properly and effectively operated on by competent staffs.
1.2 Statement of the Problem
Effectiveness of internal control techniques on a company using a computerized accounting system should be considered most important in every organization, because the task of internal control techniques is to prevent and detect fraud in the organization. For this purpose organizations give much importance to the internal audit which is generally a feature of large companies, it is a function provided either by employees of the entity or sourced from an external organization to assist management in achieving corporate objective. Internal audit can play a key role in assessing and monitoring internal control techniques and procedures. Therefore, internal control is needed to achieve efficiency and effectiveness of operations in a company. Thus, this study aims to find out the extent of the perception of internal control, internal control techniques, a computerized accounting system and how it can reduce fraud in a company using computerized accounting system.
1.3 Objective of the Study
1. To determine if an occasional evaluation and review of the internal control system will lead to an increase in efficiency and profitability of an organization using a computerized accounting system.
2. To deter the effective application of internal control in a computerized accounting system and the efficiency of workers.
3. To determine if the internal control strategy put in Place will reduce computer fraud and occurrence of computer fraud.
1.4 Research Questions