CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
Every organisation both profit and non-profit has its objectives and goals in mind to achieve (Chukwu, 2012). For a profit making organisation, the goal is to satisfy the expectation of the owners through the maximization of expected return on capital. The size and scope of Small and Medium Scale enterprises may be small but they still require efficient running of their organization. This is where internal control becomes relevant.As a result of the increase in accounting scandals in recent years, the internal control function has received impressive attention as an important contributor to effective corporate governance and financial reporting. This is because a high quality internal control function focuses on improving financial reporting through ensuring standard compliance. ( Prawitt, Smith and Wood,2008).
According to Chukwu (2012), for an organisation to carry out its business there must be some resources put in place for the smooth running of the organisation like, materials. machines, money etc. These need to be well co-ordinated in order for the success of the organisation to be achieved .These factors are used by a group of persons known as management. Management can neither exist without an organisation as both are inseparable. The system of internal control therefore provides assurances to management on the dependability of the accounting data used in the decision making of the organisation.An internal control system has been found to be so significant to organisation especially in the assurance of the reliability and accuracy of the financial reports. Besides, it is a subject that receives too little attention in the management literature (Changchit,Holsapple and Madden,2001 ).
Similarly, quality of an organisation’s internal control system has significant impact on the accuracy of management guideline. Likewise, firms that disclose ineffective internal control system have larger tendency of experiencing management errors in their operation than those firms that report effective internal control system (Feng, and McVay, 2009). Therefore, it is the responsibility of management of an organisation to ensure that effective internal control system is put in place that will ensure the achievement of organisational established objectives. This is because establishment and supervision of effective internal control systems are the responsibility of management not auditors(Changchit, Holsapple, and Madden, 2001). At the same time effective internal control system are fundamental drivers toward earnings quality (Church and Schneider, 2008). In the same vein, effective internal control system has an essential role to play in a firm’s success (Jokipli, 2010). In line with the above issue, effective internal control system could also play an important role in ensuring the effectiveness of internal audit.Internal control systems are integral component of any organization’s managerial process be it process of small and medium scale enterprises or not. It should be established in order to provide reasonable assurance that the operations are carried out efficiently and effectively.
Organizations establish systems of internal control to help them achieve performance and organizational goals, prevent loss of resources, enable production of reliable reports and ensure compliance with laws and regulations. An internal control system comprises the whole network of systems established in an organization to provide reasonable assurance that organizational objectives will be achieved.