1

THE IMPACT OF INTERNAL CONTROL

SYSTEM ON REVENUE GENERATION:

(A CASE STUDY OF POWER HOLDING COMPANY OF

NIGERIA (P.H.C.N) OKPARA AVENUE ENUGU)

LIST OF FIGURES

Figure 2.1 Classifications of Departments Goals and Objective

Figure 2.2 Classification of Business objectives and related

risks
 2

ABSTRACT

The objective of this study was to evaluate the internal

control system in operation at power holding company of
Nigeria Plc in Enugu State with a view to knowing its impact
on revenue generation in the state. A sample of 40 was
selected for the study randomly. The questionnaires were used
in gathering the primary data while secondary data were
 3

collected from the work of others in the form of literature

review. The data collected were analyzed using the chi-square
(x2) as the statistical tool to determine the valuation of the
hypothesis. The findings concluded that weak internal control
system encourages collusion fraud loss of revenue,
embezzlement and computation. This have always impeded
the company’s ability to effectively supply electricity to
customers and there from generate revenue. Internal audit
system ensures operations compliance with set policies,
promoting accuracy and reliability of transactions recording.
In addition, effective internal control system ensure effective
recommends the remodeling of the company’s internal control
system and strengthening of the investigating unit. The
components sectors of the present corporate Power Holding
Company of Nigeria PLC should be unbundled into separate
distinct independent entities that handle generation,
transmission, distribution and marketing. It further
recommends that prepaid meters should be seen as an
alternative to further accumulate debts.
TABLE OF CONTENTS

Title page i

Certification ii

Dedication iii

Acknowledgement iv
 4

List of figures v

Abstract vi

Table of contents vii

CHAPTER ONE: INTRODUCTION

1.0 Background Of The Study 1

1.1 Statement Of Problem 6

1.2 Objective Of The Study 8

1.3 Significance Of The Study 8

1.4 Scope and Limitation Of The Study 9

1.5 Research Hypothesis 10

1.6 Research Questions 11

1.7 Historical Background of Power Holding Company of

Nigeria 12

1.8 Definition of Terms 14

CHAPTER TWO:

REVIEW OF RELATED LITERATURE

2.1 What is Revenue? 17

2.2 What is Internal Control System 18

2.3 Objectives of Internal Control System 20

2.4 Types of Internal Control System 21

 5

2.5 Components of Internal Control System 23

2.6 Functions of Internal Control System 56

2.7 Roles and Responsibilities. 58

2.8 Internal Control System And The Auditors 62

2.9 Operation Of Internal Control System At Power Holding

Company Of Nigeria 64

2.10 Limitation Of Internal Control System 71

CHAPTER THREE

RESEARCH METHODOLOGY

1.1 Research Design

73

1.2 Sources Of Data

74

1.3 Population Of The Study

75

1.4 Sample Size

75

1.5 Description Of Questionnaire

76
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1.6 Method of Data Analysis

76

1.7 Statistical Test For Hypothesis

77

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRTATION

4.1 Data Analysis and Interpretation 78

4.2 Test Of Hypothesis 84

4.2.1Hypothesis One 84

4.2.2Hypothesis Two 86

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND

RECOMMENDATION

5.1 Summary Of Findings 88

5.2 Conclusion 89

5.3 Recommendation 90

5.4 Suggestions For Further Investigation 91

Bibliography 92

Appendices 96
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CHAPTER ONE

INTRODUCTION

1.0. BACKGROUND OF THE STUDY

Every organization has a purpose, which includes making

some product and rendering some services at a price. For

normal operations of the business organization, it is the

product or services of the firm that cause cash receipts

(revenue) to flow into the firm. Revenue is associated with

products or service of a firm as source of expected cash

receipts. Revenue is an event; an increase that applies

definitely to value that is monetary. This increase occurs

because the firm undertakes certain activities or there is any

performance by the firm.

Revenue therefore refers to the monetary event of asset

valves increasing in the firm due to the physical event of

production or sales of the firms’ products or services.

In Kam (1987:237), Financial Accounting Standard

Board(FASB) defines revenue as inflows or other

enhancements of assets of an entity or settlements of its

 8

liabilities (or combination of both) during a period from

delivery or producing goods, rendering service or other

activities that constitutes the entity’s ongoing major or central

operations. In addition, Hongreen et al (2002:568) described

revenue as inflows of asset (almost always cash or accounts

receivables) received for products or services provided to

customers.

On the basis of the above, National Electric Power

Authority now Power Holding Company of Nigeria is a

government owned public utility establishment enjoying

almost total monopoly in generating, transmitting and

delivering electricity to all homes and businesses in Nigeria.

According to the establishments customer service chartered

(2004), her mission as a service industry is to satisfactorily

meet customers electricity demand in the most cost effective

manner using proven technology and well motivated customer

friendly work force with adequate consideration for the

environment.

Her goals include:

I. To continuously improve her service to her customer.

 9

II. To realize full payment for timely accurate and complete

billing of electricity delivered.

III. Institutionalise business and commercial orientation

among the work force.

IV. Gradually aiming at closing the gap between demand and

supply by upgrading and expanding, generating,

transmission and distribution of infrastructure.

V. To improve skills and motivation of staff.

To achieve the above mission and goals, the management of

the establishment must adopt measures to ensure that

available resources are prudently used to obtain valve for

money from resources allocated to them. Management in turn

should generate operational data with which they evaluate the

efficiency and effectiveness of their operation. It is fundament

aspect of management stewardship responsibility to provide

interested parties with reasonable assurance that their

organisation is effectively controlled and that the accounting

data it receives on a timely basis are accurate and dependable.

 10

Developing a strong system of internal control provides this

assurance.

Thus internal control is defined as the whole system of

control, financial and otherwise established by the

management in order to carry on the business of the

enterprise in an orderly and efficient manner to ensure

adherence to management policies safeguard the assets and

secure as far as possible the completeness and accuracy of the

records. In addition the American institute of Certified Public

Accountants in 1949 defined internal control as comprising

the plan of organisation and all the coordinate methods and

measures adopted within a business (or non profit making

body) to safeguard its assets, check the accuracy and

reliability of its accounting data promote operational efficiency

and encourage adherence to prescribed managerial policies. A

‘system’ of internal control extends beyond those matters

which relate directly to the functions of the accounting and

financial department.
 11

However, it is an established fact that all the business

units and service centre of power holding company of Nigerian

plc in Enugu state are often plagued by accounting and

administrative control problems as it affect revenue generation

and other assets. As a result the establishment revenue base

has assumed a downward trend.

It has also been shown that despite considerable investment,

public service delivery by the establishment is widely perceived

to be unsatisfactory and deteriorating from bad to worse.

The complete dependence on capital grants allocation from

government is also known. What is not known is the degree to

which internal control weaknesses and reduced allocation

from government contribute to the problem.

The incidence of internal control weaknesses unsatisfactory

and deteriorating service delivery have the undesired effect of

not only weakening the establishment’s ability to provide

electricity supply effectively, but also encourages collusion,

fraud, asset conversion, genuine and deliberate mistakes,

corruption, lack of transparency and accountability for

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revenue collection and accountability for revenue collection

and other assets. For the enhancement of the attainment of

the mission and goals, it is therefore necessary that these

hindrances be removed. It is against the above background

and evaluate that this research carried out to examine and

evaluate the internal control system in operation at holding

company of Nigeria in Enugu state.

1.1 STATEMENT OF PROBLEM

The incidence of internal control weaknesses, unsatisfactory

and deteriorating service delivery have the undesired effect of

not only weakening the company’s ability to effectively provide

electricity supply but also encourages collusion, fraud,

embezzlements, loss of cash (revenue), assets conversion

genuine and deliberate mistakes, corruption, lack of

transparency and accountability for revenue collection and

other assets. Despite considerable investment, public service

delivery is unsatisfactory and degenerating. The company is

not able to break even and sustain itself from the revenue
 13

obtained there from. This impacts so negatively on the

company’s existence.

For the enhancement of the attainment of the mission and

goals of the company, it is therefore necessary that these

hindrances be removed. The management of the company

should familiarize themselves with internal control procedures

that will ensure effective service delivery and the desired

revenue generation.

Unfortunately, there has a dearth of adequate information in

this regard. No determined effort has been made to investigate

the problem of weak internal control over service delivery and

revenue generation. Therefore the main motivating factor

underlying this study is the desire to break new grounds with

the intent of shedding more light on this problem and seeking

avenues for solving it.

Thus, the purpose of this study is to examine and evaluate the

internal control system in operation at power holding company

of Nigeria in Enugu state with a view of knowing its impact on

revenue generation in the state.

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1.2 OBJECTIVES OF THE STUDY

The main objective of this study is to evaluate, the internal

control system in operations at power holding company of

Nigeria in Enugu state.

Other objectives of the study are:

I. To examine the types and techniques of internal control

system for revenue generation adopted by Power Holding

Company of Nigeria in Enugu state.

II. To determine the impact of internal control system on

revenue generation.

III. To identify the strengths and weaknesses of the system of

internal control in all departments in power holding company

of Nigeria in Enugu state.

1.3 SIGNIFICANCE OF THE STUDY

This study is significant for the following reasons:

 15

i. These studies will highlight the accounting and

administrative control problems plaguing power holding

company of Nigeria in Enugu state.

ii. It will enable managers of services, organizations and

government owned public utility establishments to bring the

accounting and the internal control procedures inherent in

them in conformity with internal accounting standards and

practises.

iii. It will help government owned establishments to assess

then internal control measures and make amends where

necessary.

iv. The study could arouse further research into some other

further research into some other functional areas in the

company by students and accountants. It will also help to

broaden (my) researchers’ knowledge.

1.4 SCOPE AND LIMITATION OF THE STUDY

Although the study was to evaluate the internal control system

in operation at power holding company of Nigeria in Enugu

 16

state, to ensure accurate and reliable data collection it was

limited to the study of the internal control measures at the

Enugu district unit of power holding company of Nigeria plc.

This covers internal control as it affects revenue generation

(handling of cash) assets control administrative control and

manpower control as well.

The researcher due to the following could not take a wider

range of study:

i. Inability to have access to some relevant documents from

the officials in the company.

ii. Financial and time constraint, which confined the

researcher to only Enugu destruct unit.

1.5 RESEARCH HYPOTHESIS

Based on the objectives of this study the following null and

alternative hypotheses were developed.

Ho1`: Effective internal control does not ensure effective service

delivery and desired revenue generation.

 17

HA1: Effective internal control system ensures effective service

delivery and desired revenue generation.

Ho2; Weak internal control system does not encourage

collusion, fraud, embezzlement, loss of revenue, assets

conversion and computation in power holding company of

Nigeria.

HA2: Weak internal control system encourages collusion,

fraud, embezzlement, and loss of revenue, assets conversion

and computation in power holding company of Nigeria.

1.6. RESEARCH QUESTIONS

The following are a few of the questions, which were asked in

the questionnaire in the carrying out of this research work.

1. Does the internal audit system ensure that operations

comply with set policies and promote accuracy and reliability

of transactions?

2. Are internal /external auditors independent of those

whose functions they appraise?

 18

3. Based on the evaluation of the internal control system, is

it effective and efficient?

4. Is the accounting and operational routine sit out in an

accounting Manuel?

1.7. HISTORICAL BACKGROUND OF NATIONAL ELECTRIC

POWER AUTHORITY (NOW POWER HOLDING COMPANY OF

NIGERIA)

National Electric Power Authority was established by Decree

No.24 of 1st April 1972 with the amalgamation of the

Electricity Corporation of Nigeria (ECN) and the Niger Dam

Authority (NDA). Electricity Corporation of Nigeria was the

brainchild of the 1960 independence in Nigeria whereas the

Niger Dam Authority existed and was the source of power

during the colonial era.

National Electric Power Authority was empowered to maintain

an efficient, coordinated and economic system of electricity

supply to all channels of the nation.

 19

ENUGU DISTRICT BUSINESS UNIT OF POWER HOLDING

COMPANY OF NIGERIA IN ENUGU STATE.

Following the unbundling of NEPA into 18 successor

companies in tandem with the Electric Power Sector Reform

(EPSR) Act 2005. Enugu Electricity Distribution company plc

is one of the 18 companies that emerged from power holding

company of Nigeria seguel to the on-going power sector reform.

Enugu Electricity Distribution Company is among the

eleven electricity distribution-marketing companies in

Nigerian. The corporate Affairs Commission registers it under

the Nigeria Law. The company was granted operational License

in 2006 by the Nigerian Electricity Regulatory Commission

(NERC).

It has 14 business districts. It is in charge of 5 states in

south east geopolitical zone namely Abia, Anambra, Ebonyi,

Enugu and Imo state. The registered office is okpara Avenue

PMB 01287 Enugu.

The day-to-day administration of the company and

formulation policies rests on the shoulders of the (CEO) Chief

 20

Executive Officer. The Chief Executive Officer is ably assisted

by Department heads (Assistant general managers) that are in

charge of various departments. The departments include

technical services customers, human resources and

administrative, finance and accounts, audit public affairs and

legal.

The business is overseen by business managers who

routinely report to the chief executive officer all this are to help

facilitate prompt attention to customer issues and distribution

of power.

1.8. DEFINITION OF TERMS

REVENUE: This describes the amount of money a company

generates in a set period of time through the sale of products

or services.

INTERNAL CONTROL SYSTEM: This is the whole system of

control, financial and otherwise established by the

management in order to carry on the business of the

enterprise in an order to carry on the business of the

enterprise in an orderly and efficient manner.

 21

AUDITING: An activity earned on by the auditor when he

verifies or examines accounting information determines the

accuracy and reliability of the accounting statement and

reports and then expresses his opinion.

CONTROL ACTIVITIES: Policies and procedures that

management has established

AUDIT: An independent examination of and the subsequent

expression of opinion upon the financial statements of an

organization.

INTERNAL CHECK: This is the allocation of authority and

work in such a manner as to afford checks as the routine

transactions of day to day work by means of the work of one

person are being proved independently by another or the work

of a person being complementary to that of another.

 22

CHAPTER TWO

REVIEW OF RELATED LITERATURE

The accounting and administrative system of an entity

may be simple, or they may be massive and complex.

Independent public accountants; internal auditor, managers

will be required to make periodic studies of the accounting and

internal control such a system. It could be impracticable, if

not imposing procedures affecting all types of transactions and

plans.

There will therefore be a need for the system internal

control system to exist or be established in the organization to

ensure simplified in the organization to ensure simplification

in the accounting and the whole system, this is not only

acceptable but also desirable and necessary.

In order to fully understand the subject matter of this

topic it is necessary to review the opinions of others in this

field.

In this chapter, the following subheadings will be

discussed;

1. What is revenue?
 23

2. What is internal control system?

3. Objectives of internal control system

4. Types of Internal control system

5. Components of internal control system

6. Functions of internal control system

7. Internal control and the auditor

8. Operation of internal control system at power Holding

company of Nigeria.

9. Limitations of internal control system.

2.1 WHAT IS REVENUE

Revenue refers to the monetary event of asset values

increasing in the firm due to the physical event of production

or sales of the products or services. Some companies also

receive revenue from interest, dividends or royalties paid to

them by other companies. Revenue may also refer to the

amount in a monetary unit received during a period of time.

Revenue is associated with products or services of the firm as

the source of the expected cash receipts the asset value

increasing in the firm occurs because the firm undertakes

certain activities or there is performance by the firm. The

 24

above may not be achieved without a sound internal control

system in that organization or company.

Thus in Kam (1989:237) FASB defined revenue as inflows

or other enhancements of assets of an entity or settlements of

its liabilities (or combination of both) during a period from

delivery or producing goods, rendering services or other

activities that constitutes the entity’s ongoing major or central

operations.

2.2 WHAT IS INTERNAL CONTROL SYSTEM

The concept of internal control is still being viewed by

many people from a narrow perspective as being the steps

taken by a business to prevent employee’s fraud. Actually

such measures are rather a small part of internal control. It is

a fundamental aspect of managements responsibility to

provide interest parties with reasonable assurance that their

organization is effectively controlled and that the accounting

data it receives on a timely basis are accurate and dependable.

This assurance is provided by developing a strong system of

internal control.
 25

In accounting and auditing, internal control is defines as

a process effected by an organization’s structure, work and

authority flows, people and management information systems

designed to help the organization accomplish specific goals or

objectives it is a means by which an organizations resources

are directed, monitored and measured. It plays an important

role in preventing and detecting fraud and protecting the

organizations resource both physical and intargetable e.g

trademark.

Millichamp (1992:79) says that internal control system

refers to 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, safeguarded assets

and as far as possible the completeness and accuracy of the

records the individual components of an internal control

system are known as controls or internal controls.

In addition Meig’s et al (1982:139) further refers to

internal control system as consisting of all measures employed

by an organization to:
 26

i. Safeguard assets from waste fraud and inefficient use.

ii. Promote accuracy and reliability in accounting records.

iii. Encourage and measure compliance with company

policies and

iv. Evaluate the efficiency of operation.

Internal Control extends beyond the accounting and

financial functions. Its scope is company indent and touches

all activities of the organization. It includes the methods by

which top management delegates authority and

responsibilities. It should be concerned with the efficient use

of resources to achieve a previously determined objective or set

of objective. The need to perform audit engagement in

accordance with Companies and Allied Matters Decree (CAMD)

1 of 1990 and strict adherence to Generally Accepted Auditing

Standard (GAAS) has prompted the need for internal control in

organizations.

2.3 OBJECTIVES OF INTERNAL CONTROL SYSTEM

The objectives of internal control system includes:

a. To carry on the business in an orderly and efficient

manner to ensure adherence to management polices safeguard

 27

its assets and secure the accuracy and reliability of the

records.

b. To make and keep books, records and accounts which in

reasonable detail, accurately and fairly reflect the transactions

and the dispositions of the assets of the issuers.

c. To devise document and maintain a system of internal

accounting control sufficient to provide assurance that;

i. Transactions are executed in accordance with

managements general or specific authorization.

ii. The recorded accountability for assets is compared

with the existing assets at reasonable intervals and

appropriate action is taken with respect to any difference.

iii. Transactions are recorded as necessary to permit

preparation of financial statements in conformity with

generally accepted accounting principles or any other criteria

applicable to such statement.

2.4 TYPES OF INTERNAL CONTROL SYSTEM

The internal control system consists of two main categories;

a. Administrative control

b. Accounting control
 28

2.4.1 ADMINISTRATIVE CONTROLS

Defliese, et al (1975:85) says administrative control is not

Limited to the plan of the organization and the procedures and

records that are concerned with the decision processes leading

to management authorization of transactions. As a

management function, authorization is directly associated

with the responsibility for achieving the objectives of the

organization and is the starting point for establishing account

control of transactions.

The importance of administrative control is reflected in

the fact that the prime responsibility of management is to

operate the organization within the available resources, it

must be able to operate at acceptable cost, and use its limited

resources in an efficient manner.

To accomplish the above, management must develop the

requisite policies needed to promote efficiency in every area of

activity. These policies must be implemented through proper

personnel selection, training and management.

 29

2.4.2 ACCOUNTING CONTROLS

These comprises the plan of organization and the

procedures, measures and records that are concerned with the

safeguarding of assets and the reliability of financial records

and consequently are designed to provide reasonable

assurance that transactions are executed in accordance with

management general or specific authorization.

The above definitions indicate that accounting control is

designed to bring about accurate and suitable recording and

summarization of only authorized financial transactions.

Failure by Power Holding Company of Nigeria Management to

install and effectively maintain such a control means that the

objectives implicitly in the above definition would not be

achieved. A direct consequence of this is the high incidence of

loss or error.

2.5 COMPONENTS OF INTERNAL CONTROL SYSTEM

Internal Control Systems generally have certain

characteristics that give the organization reasonable

assurance that administrative and accounting controls are

functioning properly.
 30

According to Bodnar et al (1998:169-184) and county of

orange internal audit department (2003: 780) an organizations

internal control system consist of five interrelated components

as follows: control environment, Risk assessment, control

activities, information and communication and monitoring. All

the five internal control components must be present to

conclude that internal control is effective.

2.5.1 CONTROL ENVIRONMENT

An organizations control environment is the foundation

of all other components of the internal control system, its

sometimes referred to as the tone at the top of the

organization. The control environment is the collective effect

of various factors on establishing, enhancing or mitigating the

effectiveness of specific polices and procedures.

In otherwords, the control environment sets the overall

tone of the organization and influences the control

consciousness of the employees. Factors that characterize the

control environment are as follows:

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2.5.1.1 ORGANIZATIONAL STRUCTURE

This is defined by the patterns of authority and

responsibility that exists within the organization. The formal

organization structure is often denoted by an organizational

chart, which indicates the formal communication patterns

within an organization. An informed organization structure

exist where regular communication pattern do not follow the

lines indicated by the formed organization structure.

2.5.1.2 COMMITMENT TO COMPETENCE

There should be procedures to ensure that personnel

have the capabilities commensurate with their responsibilities.

Inevitably, the proper functioning of any system depends on

the competence of those operating it. The qualifications,

selection and training as well as the innate personal

characteristics of the personnel involved are important

features to be considered in setting up any control system.

2.5.1.3 INTEGRITY AND ETHNICAL VALUES

A control environment should be fostered that

encourages the highest levels of integrity, personal and

professional standards. Many organizations have adopted

 32

ethnics, codes of conduct that specify guidelines for

conducting business in an ethnical manner.

The code of conduct is often written in legal style

language that focuses on land that might be broken potential

ethnical violations present a significant loss exposure for the

organizations. Such exposures include the possibility of large

fines or criminal prosecution against both the company and its

executives.

2.5.1.4 MANAGEMENT PHILOSOPHY AND OPERATING

STYLE

Effective control in an organization begins with and

ultimately rests with management philosophy. If management

believes that controls are important, then it will see to it that

effective control policies and procedures are implemented.

This control conscious attitude will be communicated to

subordinates through the management operating style.

Management enhances the control environment when

they behave in an ethnical manner creating a positive “tone at

the top” and when they require that same standard of conduct

from everyone in the organization. When the Management

 33

pays only lip service to the need for control, then control

objectives will not be achieved.

2.5.1.5 ATTENTION AND DIRECTION PROVIDED BY THE

BOARD OF DIRECTORS AND ITS COMMITTEES.

An organizations board of directors is the interface

between the stockholders who own the organization and the

organizations operating management. Stockholders exercise

control over management through the functions of the board

of directors and its committee.

Typically, the board of directors’ delegate’s specific

functions to various operating committees such as the audit

committees, which should be independent of an organization

management. It is composed primarily of outside members of

the board of directors. The audit committee is usually

changed with overall responsibility for the organizations

financial reports, including compliance with existing laws and

regulations. The audit committee nominates public accounts

discusses the scope and nature of audits with public

accountants review and evaluates reports prepared by the

organizations public accountants.

 34

2.5.1.6 MANNER OF ASSIGNING AUTHORITY AND

RESPONSIBILITY

i. A formal organization chart, a written document is often

used to indicate the overall assignment of authority and

responsibility in an organization. The organization chart is

often accompanied by a formal job descriptions and

statements of work assignment. Written memoranda policy

manuals and procedure manuals are other common means

used to formally assign authority and responsibility within an

organization.

ii. Budgeting: This in a management activity set for the

entire organization a swell as for each subunit. Detailed

operating budgets are prepared for subunits to evidence

management’s plan concerning operating of each subunits and

to serve as the device by which managements plans are

commence to subunits.

Budgeting data are used to plan and control the activities

within a firm. A budget is a control that sets forth a financial

plan and /or an authorized amount of resources that may be

utilized be a sub unit in performing its functions.

 35

2.5.1.7 HUMAN RESOURCE POLICIES AND

PROCEDURES

Personnel are the key components in any control system

personnel should be competent with capabilities and training

commensurate with their duties.

i. Segregation of Duties: Responsibility for specific tasks

in an organization should be clearly designated by manuals,

jobs description or other documentation. Effective segregation

of duties depends to a considerable extent on the precise ad

detailed planning of all procedures and the careful assignment

of functions to various people in the organization. The details

of the procedures should be set forth in a memoranda that

also shows explicit assignment of duties to individuals

department and employees.

Written procedures, instructions and assignments of

duties will prevent duplication of work, overlapping of

functions, omission of important functions,

misunderstandings and other situations that might weaken

the internal accounting controls. Such notes typically form

the basin of a formal manner or procedures and policy.

 36

ii. Supervision: This is the direct monitoring of personnel

performance by an employee who is so charged. Proper

supervision is necessary to ensure that duties are being

carried out as assigned.

iii. Job Rotation and Forced Vacations: This allows

employees to check or verify the operations of other employees

by performing their duties for a period of time irregularities

that may have been committed by an employee may be

disclosed while the employee is on vacation with his or her

duties assumed by another employee.

Job rotation allows more then one employee to become

familiar with certain duties and procedures so that the

replacement of employees in cases of emergency is less

difficult. It serves as a general check on the efficiency on

vacation or who has been rotated to another job.

2.5.2 RISK ASSESSMENT

This is the second of the five components of internal

control system concerned with identifying, analyzing and

managing risks that affects the company’s objective.

 37

2.5.2.1 DETERMINE GOALS AND OBJECTIVE

The central theme of internal Control is (1) to identify

risks to the achievement of an organizations objective and (2)

to do what is necessary to management those risks. Thus,

setting goals and objectives is a precondition to internal

controls. If an organization does not have goals and objective,

there is no need for internal control.

At the organization level, goals and objectives are

presented in strategic plan that includes a mission statements

and broadly defined strategic initiatives. At the department

level, goals and objectives must support the organizations

strategic plan. Goals and objectives are clarifies in the

following categories.

a. Operations: The risks and related objectives pertain to

the achievement of the basic mission(s) of a department and

the effectiveness and efficiency of its operations, including

performance standards and safeguarding resource against

loss.

b. Financial Reporting: These risks and related

objectives pertain to the preparation of reliable financial

 38

reports including the prevention of fraudulent public financial

reporting.

c. Compliance: These risks and related objectives pertain

to adherence to applicable laws and regulations.

The following table illustrates these concepts.

Fig. 2.1 Classification of a department’s goal and objective

OBJECTIVES CLASSIFICATIONS

i. Payroll: provide service and support to the

organization

ii. Processing: Compensation/withholding; Operations (O)

Compensation rates and payroll

deductions should be accurately and

properly entered into the payroll system

Iii Each accounting period prepare journal Financial (F)

entries for payroll deductions and related

adjustments.

Iv Processing: Authorization; personnel Compliance (C)

management should properly and

accurately maintain all compensation

 39

documentation

v. An employee master file that is accurate O, F, C,

and complete should be maintained

Source: Understanding internal controls, country of

Orange internal audit department, California, March, 2003;

p.11.

From the above it is obvious that a clear set of goals and

objectives is fundamental to the success of a department.

Specifically, a department of work unit should have;

(1) A mission statement

(2) Written goals and objectives for the department as

a whole and

(3) Written goals and objectives for each significant

activity in the department (see diagram below).

(4)
 40

Department Department Activities to Activity level

Mission Goals and Achieve goals Goals and
objectives And Objectives
objectives

Furthermore, goals and objectives should be expressed in

terms that allow meaningful performance measurements.

There are certain activities, which are significant to all

departments such as budgeting, purchasing goods and

services, hiring employees, payroll, evaluating employees and

safeguarding property and equipment.

Thus all departments are expected to have appropriate

goals and objectives, policies and procedures and internal

controls for these activities.

2.5.2.2 IDENTIFY RISK AFTER DEFINING GOALS

Risks assessment is the identification and analysis of

risks associated with the achievement of operations financial

reporting and compliance goals and objectives. Thus in turn,

forms a basis for determining how those risks should be

managed.

To properly manage their operation, managers need to

determine the level of operations, financial and compliance

 41

risk are writing to assume. Risk assessment is more of

management’s responsibilities and enables management to act

proactively in reducing unwanted surprises. Failure to

consciously manage those risks can result in reduced

assurance that goals and objectives will be achieved.

a. Risk identification: A risk is anything that could

jeopardize the achievement of an objective. For each of the

departments objectives risk should be identified. Asking the

following question helps to identify risks.

 What could go wrong?

 How could we fail?

 What must go right for us to success?

 Where are we vulnerable?

 What arrest do we need to protect?

 How could someone steal from the department?

 How could someone disrupt out operations?

 How do we know if our objectives are being achieved?

 On what information do we most rely?

 On what do we spend the most money?

 42

 How do we bill and collect revenue?

 What is our legal greatest exposure?

It is important that risk identification be comprehensive at

he department level and at the activity or process level for

operations financial reporting and compliance objectives

considering both external and internal risks factors.

Usually several risks can be identified for each objectives.

Using the previous example, the following table

illustrates the concepts discussed so far. The identified risks

relates to the goals and objectives previously determined.

Fig 2.2 Classification of department objectives and

related risks;

GOALS AND BUSINESS RISKS

OBJECTIVES OBJECTIVE

CLASSIFICATIO

i. Payroll. Provide services Transactions may not be

and support to the processed or processed

organization incorrectly.

ii. Processing: Compensation/ Operations (0) Statement may be

 43

withholding: compensation misstated due to entry

rates and payroll omission, incorrect

deductions should be coding, duplicate journal

accurately and promptly entries or improper cut-

entered into the payroll offs.

system

ii. Each accounting period Financial (F) Employment laws and

prepare journal entries for regulations may be

payroll, payroll deductions violated resulting in five

and related adjustments penalties and litigation

iv. Processing: Authorizations Compliance (C) Incorrect data in the

Personnel Management master file could result

should properly and in incorrect wage

accurately maintain all payment

compensation

documentation

v. An employee master file O, F, C Payroll withholdings

that is accurate and may be incorrect award

complete should be incentives recognition

 44

maintained etc may not be reflected

on the master file.

Sources: Understanding internal control, county of orange

Internal Audit Department, California. March, 2003; P.14

b. Quantitative and Qualitative cost: When

evaluating the potential impact of risk, both quantitative and

qualitative cost needs to be addressed. Quantitative costs

include the cost of property equipment, or inventory, cash

naria loss, damage and repair cost, cost of defending a lawsuit

etc.

Qualitative costs can have wide ranging implications to

the organizations. These costs may include loss of public

trust loss of future grants, gifts and donations, injury to the

organizations reputation, violation of laws public health and

safety and also default on a project.

c. Risk Analysis: After risk have been identified a risk

analysis should be performed to priorities those risks:

 Estimate the potential impact if the risk were to occur

consider both qualitative and quantitative cost.

 45

 Assess the probability of risk occurring.

 Determine how the risk should be managed decide

what actions are necessary.

Prioritizing helps department focus their attention on

managing significant risks lie risks with reasonable likelihoods

of occurrence and large potential impacts).

d. Factors to guide a Department through its Risk

assessment:

 Make sure the department has a mission statement

with written goals and objectives.

 Assess risks at the department level and activity at

process levels.

 Complete a business control worksheet for each

significant activity or process in the department

prioritize these activities or process which are most

critical to the success of the department and those

activities which could be improved the most.

 Make sure that all risks identified at the department

level are addressed in he business controls work sheet.

2.5.3 CONTROL ACTIVITIES

 46

Control activities are actions supported by policies and

procedures that help assure management directives to address

risks are carried out properly and closely. In the same way

that managers are primarily responsible for identifying the

financial and compliance risks for their operations, they also

have live responsibility for designing, implementing and

monitoring their internal control system.

There is the need to distinguish between preventive and

detective controls for better understanding of control activities.

The indent of these controls is different. Preventive controls

attempt to deter or prevent undesirable events from occurring.

They are proactive controls that help to prevent a loss.

Examples of preventive controls are separation of duties

proper authorization, adequate documentation, and physical

control over assets.

Detective controls, on the other hand, attempt to detect

undesirable acts. They provide evidence that a loss has

occurred but do not prevent a loss from occurring. Examples

of detective control are reviews, analysis, reconciliation,

physical inventories and audits.

 47

Both types of controls are essential to an effective

internal control system. From a quality stand point,

preventive control are essential because they are proactive and

emphasis quality.

However detective control plays a critical role providing

evidence that the preventive controls are functioning and

preventing losses.

Control activities include; Approvals, authorities,

verifications, reconciliation’s, review of performance security of

assets, segregation of duties and control over information

systems and are further explained as follows:

2.5.3.1 APPROVALS/AUTHORIZATION (PREVENTIVE)

An important control activity is authorization approval.

Management authorizes employees to perform certain

activities and to execute certain transactions within limited

parameters. In addition, management specifies those

activities or transactions that need supervisory approval before

they are performed or executed by employees.

Authorization is the delegation of authority it may be

general or specific. Giving a department permission to expand

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funds from an approved budget is an example of general

authorization. Specific authorization relates to individual

transactions, it requires the signature or electric approval of a

transaction by a person with approval authority.

Approval of a transaction means that the approver has

received the supporting documentation and is satisfied that

the transaction by a person with approval authority is

appropriate, accurate and complies with applicable laws

regulations, policies and procedures. Approvers should review

supporting documentation, question unusual items and make

sure that necessary information is present to justify the

transactions before they sign it. Signing blank forms should

not be done.

Approval authority may be linked to specific naira levels.

Transactions that exceed the specified naira levels would

require approval at a higher level. Under no circumstance

should an approver tell some one to sign on behalf of the

approver or share this password with another person. To

ensure proper segregation of duties the person initiating a

transaction should not be the person who approves the

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transaction. A departments approval levels should be

specified in a department policies and procedures usual.

2.5.3.2 RECONCILIATIONS (DEFECTIVE)

Broadly defined, reconciliation is a comparison of

different sets of data to one another, identifying and

investigating differences and taking corrective actions when

necessary to resolve differences. Reconciling monthly financial

reports of files copies of supporting documentation or

departmental accounting records is an example of reconciling

one set of data to another. This control helps to ensure the

accuracy and completeness of transactions that have been

charged to a departments account.

To ensure proper segregation of duties, the person who

approves transactions or handles cash receipts should not be

the person who performs the reconciliation. A critical element

of the reconciliation process is resolved differences. It does

not do any good to note differences and do nothing about it.

Difference should be identified, investigated and explained.

Corrective actions must be taken when necessary if

expenditure is incorrectly charged to a departments account,

 50

then the approver and reconciler should ascertain that the

correcting journal voucher was posted. Reconciliation should

be documented and approved by management.

2.5.3.3 REVIEW OF PERFORMANCE (DETECTIVE)

Management review of reports, statements, reconciliations and

other information is an important activity. Management

should review such information for propriety, consistency and

reasonableness.

Reviews of performance provide a basis for detecting

problems. Management should compare information about

current performance of budgets forecasts, prior periods, or

other benchmarks to measure the extent to which goals and

objectives are being achieved and to identify unexpected

results or unusual conditions, which require follow-up.

Managements review of reports, statements, recon and

other informations should be documented as well as the

resolution of items noted for follow-up.

2.5.3.4 ASSET SECURITY (PREVENTIVE AND

DETECTIVE)
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Liquid assets, assets with alternative uses, dangerous

assets vital documents, critical system and confidential

information must be safeguarded against authorized

acquisition, use or disposition. Typically, access controls are

the best way to safeguard these assets. Examples of access

controls are as follows; locked door, keypad system, and key

system, badge system locked filing cabinet, guard, computer

password, menu protection and data encryption.

Departments that have capital assets or significant

inventions should establish perpetual inventory control over

these items by recording purchase and issuances.

Periodically, a person who is independent of the purchase

authorization and asset custody functions should physically

count the items. The counts should be compared to balances

per the perpetual records.

Missing items should be investigated, resolved timely and

analysed for possible control deficiencies, perpetual records

should be adjusted to physical counts if missing items are not

located.
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2.5.3.5 SEGREGATION OF DUTIES (PREVENTIVE AND

DETECTIVE)

Segregation of duties is critical to effective internal

control. It reduces the risk of both erroneous and

inappropriate actions. In general no one person should

initiate transaction, approve the transaction, record it,

reconcile balances, custody or handle assets and review

reports. All the functions should be separated among

employees. When these functions cannot be seperated,

detailed supervisory review of related activities is required as a

compensating control activity.

Segregation of duties is a deterrent to fraud because it

requires collusion with another person to perpetrate a

fraudulent act. Specific examples of segregation of duties are

follows:

 The person who requisitions the purchase of goods or

services should not be the person who approves the purchase.

 The person who approves the purchase of goods or

service not be the person who reconciles the monthly financial

reports.
 53

 The person who approves the purchase of goods or

services should not have custody of checks.

 The person who opens the mains and prepares a

listing of checks received should not be the person who makes

the deposit.

 The person who opens the mail and prepares a listing

of checks received should not be the person who maintains the

accounts receivable records.

2.5.3.6 INFORMATION SYSTEMS

Organization employees use a variety of information

system mainframe computers, local areas and wide areas

networks of mini computers and personal computer single

user workstations and personal computers, telephone systems

etc.

The need for internal control over these systems depends

on the importance and confidentiality of the information and

the complexity of the application that reside on the systems.

There are basically two categories of control over information

systems.

General Control and application controls

 54

a. General Control: (Preventive and Detective): General

controls apply to entire information systems and to all the

applications that reside on the systems. General control

consists of practices deigned to maintain the integrity and

availability of information processing functions, networks and

association application systems. These controls apply to

business application processing in computer centers by

ensuring complete and accurate processing. These control

ensure that correct data files are processed processing

diagnostics and errors are noted and resolved, application and

functions are processed according to established schedules,

file backups are taken at appropriates intervals recovery

procedures for processing features are consistently applied

and actions of computer operators and system administration

are system administrators are reviewed.

Additionally, these controls ensure that physical security

and environmental measures are taken to reduce the risk of

sabotage vandalism and destruction of networks and

computer processing centers.

 55

Finally, these controls ensure the adoption of disaster

planning to guide the successful recovery and continuity of

networks and computer processing in the event of a disaster.

b. Applications Control: (Preventive and Detective):

Applications are the computer programs and processes

that enables us to conduct essential activities, buying

products, paying people, accounting for revenues and

expenditures and forecasting and monitoring budgets.

Application controls apply to computer application

systems and include input controls (e.g edit checks)

processing controls (e.g record counts) and output controls

(e.g error listing), which are specific to individual applications.

Application controls consist of the mechanisms in place over

each seperate computer system, which ensure that authorized

data is completely and accurately processed. They are

designed to prevent, detect and correct errors and

irregularities as transactions flow through the business

system. They ensure that the transactions and programs are

secured, the systems can resume processing after some

business interruption, all transactions are corrected and

 56

accounted for when errors occur and the system process data

in an efficient manner.

When a department decides to purchase or to develop an

application, department personnel must ensure the

application include adequate controls:

(1) Input Control

(2) Processing controls and

(3) Output controls

1. Input control: Ensure the complete an accurate

recording of authorized transactions by only authorized users,

identify, rejected, suspended and duplicate items and ensure

resubmission of rejected and suspended items. Examples of

input control are error listings, field checks, limit checks, self-

checking digits, sequence checks, validity checks, key

verification, matching and completeness checks.

2. Processing Control: Ensure the complete and

accurate processing of authorized transactions. Examples of

processing controls are run to run control totals, posting

checks, end of file procedures, concurrency control, controls

files and audit trails.

 57

3. Output Control: Ensure that a complete and

accurate audit trail of the results of processing is reported to

appropriate individuals for review. Examples of output control

are listing of master files changes, error listings, distribution

registers and review of output.

2.5.3.7 BALANCING RISKS AND CONTROLS

To achieve goals, management needs to effectively

balance risks and control. By performing this balancing act

“reasonable assurance can be attained. At it relates to

financial and compliance goals being out of balance causes the

following problems:
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EXCESSIVE RISKS EXCESSIVE CONTROL

Loss of assets Increased bureaucracy

Poor business decisions Reduced productivity

Non compliance Increased Complexity

Increased regulations Increased cycle time

Public scandals Increase of non-value activities

In order to achieve a balance between risks and controls,

internal controls should be proactive value added and cost

effective.

2.5.4 INFORMATION AND COMMUNICATION

Information and communication are essential to effecting

control, information about an organization’s plans, control

environment, risk, control activities and performance must be

communicated up, down and across an organization.

Reliable and relevant information from both internal and

external sources must be identified captured, processed and

communicated to the people who need it in a form and time

frame that is useful. Informations system procedure reports

containing operational, financial and compliance related

 59

information that makes it possible to run and control an

organization.

Information and communication systems can be formal

or informal.

Formal information and communication systems which

range from sophisticated computer technology to simple staff

meetings should provide input and feed back data relative to

operations, financial reporting and compliance objectives such

systems are vital to an organization success. Just the same

informal conversations with customers supplies, regulation

and employees often provide some of the most critical

information needed to identify risks and opportunities.

When assessing internal control over a significant activity

(or process) the key questions to ask about information and

communication are as follows:

 Does our department get the information it needs from

internal and external sources in a form and time frame that is

useful?
 60

 Does our department get information that alerts it to

internal or external risks (e.g legislative, regulatory and

developments)?

 Does our departments get information that measures

its performance information that tells the department whether

it is achieving its operations, financial report and compliance

objectives?

 Does our department identify, capture and process

and communicate the information that others need (e.g

information used by our customers or other department) in a

form and time frame that is useful?

 Does our department provide information to others

that alerts them to internal or external risks?

 Does our department communicate effectively

internally and externally?

Nevertheless, communicating with people and gathering

information to people in a form and time frame that in useful

to them is a constant challenge. When completing a business

controls work sheet for a significant activity or process in a

 61

department evaluate the quality of related information and

communication systems.

2.5.5 MONITORING

Monitoring is the assessment of internal control

performance over time it is accomplished by on-going

monitoring activities and by separate evaluations of internal

control such as self-assessments peer reviews and internal

audits. The purpose of monitoring is to determine whether

internal control is adequately designed, properly executed and

effective.

Internal control is adequately designed and properly

executed if all five internal control components are present

and functioning as designed. Internal control is effective if the

board of directors, the management and departmental

management have reasonable assurance that;

 They understand the extent to which operations

objectives are being achieved.

 Published financial statements are prepared reliably.

 Applicable laws and regulations are being complied.

 62

While internal control is a process, its effectiveness is an

assessment of the condition of the process at one or more

points in time. Just as control activities helps to ensure that

actions to manage risks are carried out, monitoring helps to

ensure that control activities and other planned actions to

effect internal control are carried out properly and timely and

that the end result is effective internal control.

On going monitoring activities include various management

and supervisory activities that evaluate and improve the

design, execution, and effectiveness of internal control.

Separate evaluations on the other hand such as self-

assessments and internal audits are periodic evaluations of

internal control components resulting in a formal report on

internal control. Self-assessments are performed by

department employees internal audits are performed by

internal auditors who provide an independent appraisal of

internal control.

2.6 FUNCTIONS OF INTERNAL CONTROL SYSTEM

a. To provide reliable data management must be provided

with accurate, timely as well as dependable information that

 63

will aid them in an informed decision-making concerning the

operations of the business. It keeps management informed as

to whether the financial position is sound operation profitable

and interdepartmental relations harmonies.

b. To encourage adherence to prescribed policies. Decision

made by management becomes company policies. To be

effective, this policy must be communicated throughout the

company and consistently followed. Internal control aids in

securing compliance with company policy. Management

equality has a direct responsibility of maintaining accounting

records and producing financial statements that are adequate

and reliable. Internal Control provides assurance that this

responsibility is being met.

c. To promote operational efficiency. The controls within an

organization are meant to prevent unnecessary duplication of

efforts, protect against wastes in all aspects of the business

and discourage other types of inefficient use of resources.

This will enhance the use of minimal or limited resources of

the organization to achieve maximum productivity regarding

 64

profits realization and other co-operate objectives of the

organization.

d. To the independent public accountant, the quality of

internal controls in force determines the pattern of their

examination; of course they study and evaluate the system of

internal control from time to time.

e. Internal accounting control system ensures that the

values of assets remain at their true and fair values.

f. It ensures the existence of division of labour, providing

that one person does not do the handing of a transaction or

economic activity from the beginning to the end.

2.7 ROLES AND RESPONSIBILITIES

According to the committee of sponsoring organizations

(COSO) framework, everyone in an organization has

responsibility for internal control to some extent. Virtually all

employees produce information used in the internal control

system or take other actions needed to effect control. Also, all

personnel should be responsible for communicating upward

problems in operations, non-compliance with the code of

 65

conduct or other policy violation or illegal actions. Each major

entity in corporate governance has a particular role to play;

a. Chief Executive Officer (C.E.O): The CEO has

Ultimate responsibility and ownership of the internal control.

The individual in this role sets the tone at the top that affects

the integrity and ethnics and other factors that create the

positive control environment needed for the internal control

system to thrive. Aside from setting the tone at the top, much

of the day-to-day operation of the control system in delegated

to other senior managers in the company, under the

leadership of the CEO.

b. Chief Financial Officer (CFO): Much of the internal

control structure flows through the organizations under the

leadership of the CFO. In particular controls over financial

reporting fall within the domain of the chief financial officer.

The audit committee should use interactions with the CFO

and others as a basin for their comfort level on the internal

control over financial reporting. This is not intended to

suggest that the CFO must provide the audit committee with a

level of assurance regarding the system of internal control over

 66

financial reporting rather through interactions with the CFO

and others, the audit committee should get a gut feeling about

the completeness, accuracy, validity and maintenance of the

system of internal control over financial reporting.

c. Controller/Director of Accounting or Finance:

Much of the basis of the control system comes under the

domain of this position. It is key that the controllers

understand the need for the internal control system is

committed to the system and communicates the importance of

the system to all people in the accounting organization.

Further, the controller must demonstrate respect for the

system though his or her actions.

d. Internal Audit: A main role for the internal audit

team is to evaluate the effectiveness of the internal control

system and contribute to its ongoing effectiveness with the

internal audit team reporting directly to the audit committee of

he board of directors and/or the most senior levels of

management, it is often this functions that plays a significant

role in monitoring the internal control system. It is important

to not that many non-profit making organizations are not large

 67

enough to employ an internal audit team. Each organization

should assess the need for this team and employ one as

necessary.

e. Board of Director/Audit Committee: A strong, active

board in necessary. This is particularly important when an

executive or management team controls with tight reins over

the organization and the people within the organization. The

board should recognize that its scope of over sight of the

internal control system applies to all the three majors areas of

control: over operations, over compliance with laws and

regulations, and over financial reporting. The audit committee

is the boards first line of defense with respect to the system of

internal control over financial reporting.

f. All Other Personnel: The Internal control system is

only as effective as the employees throughout the organization

that must comply with it.

Employees throughout the organization should

understand their role in internal control and the importance of

supporting the system through their own actions and

 68

encouraging respect for the system by their colleagues through

the organization.

2.8 INTERNAL CONTROL SYSTEMS AND THE AUDITOR

The introduction of a well-developed system of internal

control is the responsibility of the management. But it is a

matter of concern for the auditor though he has no authority

to recommend and prescribe that certain rules and procedures

should be adopted by the business. He can simply guide and

help if required to do so. What is expected from him is he

must possess an expert’s knowledge of such procedures. In

the second standard of filed work set out by the AICPA, it is

made clear that “ there is to be proper study and evaluation of

the existing internal control as a basis for reliance thereon and

for the determination of the resultant extent of the rests to

which auditing procedures are to be restructed”.

Thus, the aim behind the study of internal control by an

auditor is to establish a basis for reliance on the system of this

control so as to enable him to assess the extent to which he

should apply tests during the course of audit.

 69

This much is certain that if there is a good system of

internal control, the work of an auditor becomes quite easy.

He can very conveniently rely on test checking.

However, it depends upon special circumstance of a

particular case as to how far internal control would be helpful

in the audit work. The following points would be helpful in

screening the internal control system:

1. Study of accounting routine, its weaknesses and sources

from which they would arise.

2. Financial powers vested in the various officials and the

circumstances in which they are to be used.

3. Study of limits of inspection over financial and other

accounting duties.

4. Whether some mechanical appliances are used to prevent

any defalcation of cash etc and

5. Whether any device of checks and balances is used to

measure the success of accounting methods of techniques.

The auditor should also have in mind:

 70

a. The likelihood of collusion as well as combination of

duties, which would enable someone conceal

irregularities.

b. The likelihood of collusion between close relatives each

working in the same department or organization.

c. The extent to which employees in position of trust,

especially those handling cash failing to take regular

annual leave or vacations.

The auditor can be in a position to perform audit efficiently

provided there is a good and effective internal control system

in use. However, it does not mean that he can take shelter

under the system and shirk his duties. The entire

responsibility is his and there is nothing to protect him if he

does his work carelessly and with negligence.

2.9 OPERATION OF INTERNAL CONTROL SYSTEM AT

POWER HOLDING COMPANY OF NIGERIA

In designing a system of internal control, the personnel

should be segregated by functions into those who initiates or

authorize transactions and those who execute transactions.

 71

From the standpoint of internal control, the

establishment’s transactions cycle may be divided into:

a. Revenue Cycle: Events related to the distribution of

goods and services to the customers, other entities and the

collection of related payments.

b. Expenditure cycle: Events related to the acquisition of

goods and services from other entities and the settlement of

related obligations.

c. Production Cycle: Events related to the transaction of

researches into goods and services.

d. Finance Cycle: Events related to the acquisition

and management of capital funds including cash.

Each of the transaction cycle will have exposure (risk i.e

sometimes financial consequences). Management should

develop detailed control objective for each transactions cycle

objectives provide a basis for analysis. Once the control

objectives have been slated, management may collect

information to determine the extent to which control objectives

are being achieved in each of the organizations transaction

cycles.
 72

The specific control objectives for each transaction cycles

drawn from the concept of an internal control structure are as

follows:

a. Revenue cycle:

i. The customers should be authorized in accordance with

management’s criteria.

ii. The prices and terms of good and services provided

should be authorized in accordance with management’s

criteria.

iii. All shipments or movements of goods and services

provided should result in billing to the customers.

iv. Billings to customers should be accurately and promptly

classified. Summarized and reported.

b. Expenditure cycle:

i. Vendor should be authorized in accordance with

management’s criteria.

ii. Employees should be hired in accordance with

management’s criteria.
 73

iii. Access to personnel payroll and disbursement record

should be permitted only in accordance with management

criteria.

iv. Compensation rates and payroll deductions should be

authorized in accordance with management’s criteria.

v. Amounts due to vendors should be accurately and

promptly classified, summarized and reported.

c. Production cycle:

i. The production plan should be authorized in accordance

with management’s criteria

ii. Costs of goods and service manufactured or produced

should be accurately and promptly classified summarized and

reported.

d. Finance Cycle:

i. The amounts and timing of debts transactions should be

authorized in accordance with management’s criteria.

ii. Access to cash and securities should be permitted only in

accordance with management’s criteria.

 74

2.9.1 BASIC CONTROLS

Basic controls are those controls necessary for the

completeness and accuracy of accounting records. These

include such techniques as: -

i. Pre-numbering original documents. For examples

vouchers and purchase invoices.

ii. Maintaining total accounts to provide an independent

overall control over the ledger to which they related.

iii. Detail checking of document or according record against

another. Examples, the comparison of cheque invoice and

goods received notes.

iv. Authorization of documents after examination and

checking by the head of other charges sections and head of

payroll (Salaries) section before any processing monthly

reconciliation of cash book with bank statements.

vi. All service centers and customer care centers of the

establishment render monthly returns and use/unused

receipt book.
 75

vii. Taking out periodic trial balances to check the

arithmetical accuracy of the book –keeping for the final

account.

2.9.2 OPERATIONAL CONTROLS

These are designed to ensure the continued and proper

operation of safeguarding assets. At power Holding company

of Nigeria, operational control entails the following:

i. It measures and corrects performance. O’ Daniel

(1996:32) maintains that “control is essentially a management

function that deals with the measurement and correction of

the performance of subordinates with a view to achieving

organizations objectives with maximum efficiency and at

minimum cost”.

ii. It brings about efficiency. Internal Control consists of the

measures designs to promote operational efficiency and to

encourage adherence to managements policies.

iii. It provides control of activities. According to Louis

(1989:95) if management is to direct the activities of a

business according to plan every transaction should go

 76

through four steps. It should be authorized, approve,

executed and recorded,”

2.9.3 INTERNAL AUDITING

This is an important element of internal control internal

auditors are professional employees with the responsibility of

investigating throughout the establishment, the efficiency of

operations in every departments or unit. They study and list

the system of internal control and report to the district

Business Manager on their findings or problems, which

require strengthening of internal controls.

2.9.4 ELECTRONIC DATA PROCESSING

MACHINES/COMPUTER SYSTEM

The audit procedures adopted in the audit of electronic

data processing are not basically different from that of

manual. An electronic data processing system and machines

are of great importance in the functioning of internal control.

Because of the possession of great data processing speed,

daily processes involving cash receipts, cheques can provide

management with a continually up to data cash receipt

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journal, cheque register, customer accounts ledger and cash

balance.

Computers are outstanding and can prepare reliable

bank reconciliation even when cheques and cash are

outstanding. It can provide current information for cash

planning and for cashing.

2.10 LIMITATIONS OF INTERNAL CONTROL SYSTEM

Although internal control system is highly effective in

increasing the reliability of accounting data and in protecting

against frauds, no system of internal control is error free.

However, for a coin there must be two sides. Two or more

dishonest employees working in collusion can detect the

system temporarily. Carelessness by employees and

misunderstanding of instructions/procedures can cause a

breakdown in controls. The inherent limitations includes the

following:

i. A good system of internal control can become ineffective

as a result of employees fatigue and indifference.

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Ii In the performance of the procedures of internal control

errors occur due to carelessness, misunderstanding of

procedures and other inherent mistakes.

iii. Personal and professional associations within the

management structure makes it difficult to detect fraud.

iv. A well-formulated system of internal control can be

destroyed by employees’ lack of confidence and co-operation.

v. Management is frequently in the position to override

control which it has itself set-up. Control can be abused by

the person on whom the authority is vested upon for his

personal gain.

vi. Overly rigid control hamper the actions and decisions of

individuals, artificial limiting an employees response to the
variety of his or her tasks. Accountability and pressures for
performance may boomerang. Rigid control system may create
the types of actions that the control were designed to prevent.
vii. Adequate accounting and management staff may be
lacking and thus making a way for inadequate managerial
supervision, ineffectiveness and a breakdown of the control
system.
viii. Cost will prevent management from ever installing an
ideal system.
 79

CHAPTER THREE
RESEARCH METHODOLOGY

The aim of this chapter in to present in detail the

methods used in this research. This focuses on the various

method used by the researcher to obtain data.

Research methodology involves and orderly manner

employed in collection, interpreting and analyzing of data used

in this study, which involves selection of sample, population,

and research data as well as the statistic tool of analysis.

3.1 RESEARCH DESIGN

A research design can be described as an outline or plan

from which an activity can be carried out (Nworgi, 1999:23). It

provides the procedural outline for the conduct of any given

investigation.

This research work is designed to study how internal

control system affects revenue generation in power Holding

Company of Nigeria. This covers all the P. H. C. N., which is

represented with the branch at Okpara Avenue. However the

findings will be generalized to all.

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3.2 SOURCES OF DATA

In order to collect as much relevant material on this

study as possible, a number of methods of data collection were

used.

However for good understanding of the revenue

generation both primary and secondary sources of data used.

As a matter of facts filed research work in form of personal

interview, questionnaires were administered together for the

purpose of this work.

3.2.1 PRIMARY DATA

Primacy sources of data were used on this study mainly

as they provide basic reliable and concrete information from

the respondents. The questionnaire was the major source of

my data collection. The information got were analyzed and

findings drawn. Personal interviews were conducted in scenes

where adequate and accurate information was not obtained

through the use of questionnaires.

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3.2.2 SECONDARY DATA

There are information’s already in existence before the

conduction of this research works. It constitutes a stepping

stone in most research works, assignments, Internet searches

etc just in this case. This is because the knowledge acquired

from reading and collecting materials done by others will help

me generate primary data. Library research was also done, the

in of text books journals and other published materials.

3.3 POPULATION OF THE STUDY

This study “the impact of internal control system on

revenue generation in power Holding company of Nigeria

considers time and resource available. The research was only

limited to the staff of the power holding company Okpara

Avenue of various departments. The population of the staff of

company is 40.

3.4 SAMPLE SIZE

This is the number of respondents the questionnaire was

administered to the entire population being 40 respondents

were given questionnaire and all was returned correctly filled.

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Therefore this number makes up the sample size for this

research.

3.5 DESCRIPTION OF QUESTIONNAIRE

This questionnaire involved for the research work was

typed questions personally issued to the respondents so as to

enable them fill in their options to the questions asked. The

questions were in form of Yes or No structures to enable the

respondent with limited knowledge of the study areas to

answer them with minimum accuracy.

3.6 METHOD OF DATA ANALYSIS

This involves the procedures adopted in analyzing the

hypothesis used in the research. The null hypothesis (Ho) and

the altering alive hypothesis (Ha) were analyzed using

percentages and chi-square.

The percentages were used to calculate the numbers of

respondents who answered Yes or No. The presentation is in a

tabular form. The chi-square (X2) was used to test the

hypothesis put forward in chapter one and from the answers

gotten from the questionnaires and personal interview. The

use of chi-square is important where there are two or more

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population proportion chi-square is used to test the validity of

the result of the correlation coefficient it should however be

stressed that the correlation coefficient measures the direction

of the association among two variables.

3.7 STATISTICAL TOOL FOR TEST OF HYPOTHESIS

The chi-square (X2) was used to test the hypothesis. The

chi-square test (X2) is an important extension of the

hypothesis testing and is used to compare an actual or

observed distribution with a hypothesized or expected

distribution. It is often referred to as goodness of fit test. The

value of chi-square was computed using the formula

X2 = Σ (Fo - Fe)

Fe

Where Fo = observed fervency

Fe = expected or theoretical frequency

The observed and expected frequency

Σ = summation
Σ (FO-Fe)2 sum of all deviations squared
Fe and weighted
 84

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

This chapter is concerned with data presentation

analysis and interpretation of data collected from both primary

and secondary sauces. The data were collected through the

use of questionnaires and data unless adequately analyzed

makes little or no meaning to anybody.

A total of 40 questionnaires copies were sent out and it

was all returned. This presents 100% response. The analysis

presented is solely done by using simple percentage based on

the response form employees of power holding company of

Nigeria Enugu business district on which the questionnaire

was administered.

4.1 DATA ANALYSIS AND INTERPRETION

The analysis and interpretations of data are shown in

tables
 85

QUESTION 1

RANK OF RESPONDENTS

TABLE 1

Variables Respondents Percentage (%)

Senior manager 2 5

Manager 3 7.5

Assistant managers 5 12.5

Officer I, II or III 15 37.5

Other 15 37.5

Total 40 100

From the responses to question I in the questionnaire in

table I above only two respondents or 5% indicted that they

should position of senior manager 3 or 75% are manages, 5 or

12% are Assistant managers, 15 or 37.5% hold position of

Officer I, II or III and or 37.5% indicated that they hold other

positions not mentioned in the table.

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QUESTION 2: EMPLOYEES YEARS OF SERVICE

TABLE 2

Variables Respondents Percentage (%)

Les then 3 yrs 10 25

4-6 years 7 17.5

7-9 years 10 25

10 years and above 13 32.5

Total 40 100

From the responses to question 2 in the questionnaire,

table 2 indicates that 10 or 25% of the respondents have work

under power holding company of Nigeria between 0 and 3

years 7 or 17.5% between 4-6 years, 10 or 25% between 7-9

years and 13 or 32.5% between 10 years and above.

Question 7: Does the internal audit system ensure that

operations comply with set policies and promote accuracy and

reliability of transaction?
 87

Table 3

Variables Respondents Percentage (%)

Yes 40 100

Total 40 100

From the response to question 7 in the questionnaire in

table 3, 40 respondents or 100% agreed that the internal audit

system ensures that operation comply with set policies and

promotes accuracy and reliability of translations.

Question II: Are external/internal auditors independent of

those whose function they appraise?

Table 4

Variables Respondents Percentage (%)

Yes 31 77.5

No 9 22.5

Total 40 100

From the response to the question 11 in the

questionnaire. In table 4, 31 respondents or 77.5% agreed that

 88

the internal/external auditors are independent of those whose

functions they appraise i.e their employers only 9 or 22.5%

respondents indicted otherwise.

Question 13: The impact of internal control system on

service delivery and revenue generation

Table 5

Variables Respondents Percentage (%)

Yes 35 87.5

No 5 12.5

Total 40 100

From the response to question 13 in the questionnaire.

In table 35 respondents or 87.5% agreed that internal control

system have some impact on service Delivery and revenue

generation. It is evidenced that customers are provided with

credible bills based on proper tariff for electricity consumed

within the billing month and the expected revenue realized.

The internal control system is effective and efficient. 5

respondents or 12.5% indicated other use they considered the

internal control system to be ineffective and inefficient

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Question 14: Internal control operational procedures

Table 6:

Variables Respondents Percentage (%)

Yes 40 100

No - -

Total 40 100

From response to question 14 in the questionnaire, in

table 6, 40 respondents or 100% said that the accounting

policies and operational procedures are set out in a manual.

This clearly communicates specific responsibilities to

individual staff; facilitate training of new staff and enable one

to review and monitor the internal control system.

Question 10: Evaluation of internal control system

Variables Respondents Percentage (%)

Yes 36 90

No 4 10

Total 40 100
 90

From the response to question 10 in the questionnaire.

In table 7, 36 respondents or 90% indicated that there has

been periodic review and examination of the internal control

system by an external auditor in the past. This helps in the

effective assessment of the control activities and monitoring of

the internal control system while 10 respondents or 10%

stated otherwise.

4.2 TEST OF HYPOTHESIS

In this section, the research hypotheses stated in the

chapter one are tested. The statistical tool employed is chi-

square (X2) as indicated in chapter three of this study. The

hypothesis could be stated as thus

4.2.1 HYPOTHESIS ONE

Ho 1: Effective internal control system does not

ensure effective service delivery and desired revenue

generation.

Ha 1: Effective internal control system ensures effective

service delivery and desired revenue generation.

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TEST DATA: The data for the validation of the hypothesis

above is presented below.

COMPUTED X2 VALUE FOR HYPOTHESIS ONE

Table 4.2.1

Response No of respondents Expected FO-FE (FO-FE)2 (FO-FE)2

variable (FO) freq (FE) FE

Yes 35 20 15 225 11.25

No 5 20 -15 225 11.25

Total 40 40 0 450 22.5

From the response to question 13 in the questionnaire

Decision: The table 4.2.1 shows that the computed X 2 22.5

with 1 degree of freedom, that is (2-1) (2-1), the theoretical

value of X2 at 5% level of significance is 3.84 which is less

than the computed X2

This implies that effective internal control system

ensures effective service delivery and desired revenue

generation
 92

4.2.2 HYPOTHESIS TWO

Ho2: Weak internal control system does not encourage

collusion fraud embezzlement, loss of cash (revenue) assets

conversion and Corruption in power holding company of

Nigeria PLC

Ha2: weak internal control system encourages collusion,

fraud, embezzlement, loss of cash (revenue), assets conversion
and corruption in Power Holding Company of Nigeria PLC.

TEST DATA: The data for the validation of the hypothesis

above is presented below

COMPUTED X2 VALUE FOR HYPOTHESIS TWO

Table 4.2.2

Response No of respondents Expected FO-FE (FO-FE)2 (FO-FE)2

variable (FO) freq (FE) FE

Yes 30 20 10 100 5

No 10 10 -10 100 5

Total 40 40 0 200 10

From the response to question 12 in the questionnaire

DECISION: Table 4.2.2 shows that the computed X2 is 10

with 1 degree of freedom that is (2-1) (2-1) the theoretical value

 93

of X2 at 5% level of significance is 3.84 which is less then the

computed X2 level

We therefore reject Ho2 and accept Ha 2 this implies that

weak internal control system encourages collusion, fraud

embezzlement, loss of revenue assets conversion and

Corruption in Power Holding Company of Nigeria PLC.

 94

CHAPTER FIVE

SUMMARY OF FINDINGS CONCLUSION AND

RECOMMENDATIONS

This chapter summarizes the findings draws conclusion

and makes recommendation on this project entitled The

impact of internal control system on revenue generation in

Power Holding Company of Nigeria in Enugu State.

5.1 SUMMARY OF FINDINGS

Based on the analysis of data collected and interpreted

the research summaries the findings as follows:

The internal control system in operation has some impact

on service delivery and revenue generation. It was discovered

that the company adopts various types and techniques of

internal Control to satisfactorily meet customer electricity

demand, provide credible bills based on proper tariff for

electricity consumed within the billing month and therefore

generate revenue.

The company adopts measures, which ensures that no

one individual can control both the recording function and the
 95

procedure relative to processing a transaction thereby

segregating their duties.

Internal audit system at the company ensures that

operations complies with set policies and promotes accuracy

and reliability of transactions recorded.

The study also revealed that opportunities for collusion,

fraud, loss of revenue, embezzlement, assets conversion and

corruption arises as a result of weak internal control system.

Periodic evaluation of the internal control system by an

external auditor is used to effectively access the control

activities and detect fraudulent practices.

5.2 CONCLUSION

The incidence of internal control system weaknesses have

always impeded the ability of Power Holding Company of

Nigeria in Enugu state to effectively supply electricity to her

customers and therefore generate potential revenue. As such

her contribution to the improvement of national goals and

objectives is not very satisfactory.

On the basis of the above the main objective of this study

was to evaluate the internal control system in operation at

 96

Power Holding Company of Nigeria in Enugu State and various

points were made. Reveals that internal control system plays

a major role in prudently managing the resources and funds

entrusted to public sector managers.

The company has an organizational structure denoted by

organizational charts, which indicated formal communication

patterns within the organization.

RECOMMENDATIONS

Having examined and evaluated the internal control

system in operation at Power Holding Company of Nigeria PLC

in Enugu state, the study makes the following

recommendations.

i. Internal control system and the investigating units at the

company should be remodeled and strengthened to position

them to discharge their duties effectively and efficiently.

ii. The component sectors of the present corporate Power

Holding Company of Nigeria should be unbundled into

separate distinct independent entities that handle generation

transmission, distribution and marketing.

 97

iii. Secure a culture charge within the various cadres of staff

that focuses on customer satisfaction, quality service rendition

and transparency in service delivery and procurement process.

iv. To continuously improve her service of provision of

electricity of adequate quality to all customers and delivering

credible bills to all customers within the billing month. The

company should more to establish more customer care centers

to mitigate complaints or wrong, billings, non receipts of bills

disconnection improper address and wrong names.

v. Prepayment meters should also be seen as an alternative

to further accumulation of debts

5.4 SUGGESTIONS FOR FURTHER INVESTIGATION

Having examined and evaluated the internal control

system in operation at Power Holding Company of Nigeria PLC

in Enugu State, the researcher suggests a further study on the

effectiveness of debt profile in the company.

 98

BIBLIOGRAPHY

TEXT BOOKS

Adeleke, J.O (2009). Audit Investigation and assurance

Services.

Bodnar, G. and William. S. (1998). Accounting Information

Systems: Prentice Hall Upper Saddle, N Jersey, (7 th

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Daniel, A. (1989). Accounting: London Pitman Press LTD.

Defliese, P. (1975). Montgomery’s Auditing: New York, John

Wiley and Sons INC.

Eze, J.C. (2005). Principles and Techniques of auditing:

J.T.C. Publishers.

Eze, O. and Agbo, B. (2005). Research Method basic issues and

methodology: Benalice publications.

Hongreen, C. and Datar M. (2002). Cost Accounting A

managerial Emphasis: new Delhi, Prentice Hall, (10 th

Edition).

Igwenagu, C. (2006). Basic Statistics and Probability: Prince

Press communication.

Kari, V. (1989). Accounting Theory: California Hayward, July.

 99

Louis, E.B. (1998). Principles of Management: Homewood,

Richard D. Irwin Inc.

Meigs, R. and Whittington, O. (1982). Principles of Auditing:

Richard D. Irwin Inc. Homewood, Illinois (7th edition).

Millichamp, A.H. (1992). Auditing: An Instructional Manual for

Accounting Students: Elbs – Df. Publication LTD,

London.

Nwabueze, P. (2000). Basic principles of Auditing: m’cal

Communications Intl.

Oxford Accounting Dictionary (2005) University Press.

JOURNALS

American Institute of certified Public Accounts (2005). Audit

Committee tool kit: New York Inc.

Anoruo, C. (2004). Unbundling and its dynamics: NEPA News,

March – May.

County of Orange (2005). Understanding Internal Control:

Internal Audit Department California March.

Jenide, A. (2005). Understanding the Electric Power sector

Reform Act: The Guardian Tuesday June 14.

 100

NEPA (2004). Customer Service Charter: Webmaster @ PHCN

Nigeria.

NEPA (2004). The Fight against Corruption: NEPA review March

– April.

University of California (2003). Understanding Internal Control:

A Reference Guide for Managing University Business

Practices University of California.

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APPENDIX

QUESTIONNAIRE

Dear Respondent,

Please Tick {√} right where appropriate and supply

additional information where necessary.

1. What position are you occupying?

A. Senior Manager B. Manager

C. Asst. Manager D. Officer 1,11,111

E. Others (Please specify)

2. For how long have you held the position?

A. Less then 3 years B. 4-6 years

C. 7-9 years D. 10 years and above

3. There is segregation of duties or separation of duties

among the employees and such reduces the risks of both

erroneous and inappropriate actions

A. Yes B. No

4. Do you have an organization chart of the financial

accounts department?

A. Yes B. No
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5. Are consumers provided with credible bills based on

proper tariff for electricity consumed within the billing

months?

A. Yes B. No C. Not always

6. Are consumers able to authenticate any demand by staff

of Power Holding Company of Nigeria for any form of payment

for service materials, billings meter etc.

A. Yes B. No

7. The Internal audit system ensures that operations

comply with set policies and promote accuracy and reliability

of transaction recording?

A. Yes B. No

8. Do power Holding company of Nigeria realize full

payment for timely, accurate and complete billing of electricity

delivered?

A. Yes B. No

9. Has there been any periodic review and evaluation of the

past twelve months?

A. Yes B. No
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10. Based on your evaluation of the internal control system is

it effective and efficient?

A. Yes B. No

11. Are Internal/External Auditors Independent of those

whose functions they appraise?

A. Yes B. No

12. Collusion, fraud, embezzlement, loss of revenue, assist

conversions and corruption arises in your as a result of

internal control Weakness?

A. Yes B. No

13. Does the Internal control System have any impact on

service delivery and revenue generation?

A. Yes B. No

14. Is the accounting and operational routines set out in an

accounting mannual?

A Yes B. No

15. Do your company maintain a system of regular and

formal performance appraisal?

A. Yes B. No
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16. What in your opinion do you see as problems currently

facing the internal system at Power Holding Company of

Nigeria? State them.

……………………………………………………………………………….

17. What do you suggest as solution to the problems listed in

No. 16.

………………………………………………………………………………