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;
- What is revenue?
- What is internal control system?
- Objectives of internal control system
- Types of Internal control system
- Components of internal control system
- Functions of internal control system
- Internal control and the auditor
- Operation of internal control system at power Holding company of Nigeria.
9. Limitations of internal control system.
- 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 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.
- 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. 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:
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
- 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 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.
- TYPES OF INTERNAL CONTROL SYSTEM
The internal control system consists of two main categories;
- Administrative control
- Accounting control
- 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.
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.