Internal Audit Control In Government Establishment


With regards to coverage of this study, the research intends to review the following; Historical Background (origin) of auditing, historical background of project development institute (PRODA) Enugu, purpose of auditing, selection of auditors internal auditor, importance, reliance on the auditors, internal control system evaluation and preparation of audit report.


When business were mainly small and conducted by small proprietors and partnerships as they were until he development of limited companies (in the nineteenth century), there was not much demand of need for audit work or indeed for complex accounting.

The passing of first company’s Act, introduced by Gladstion in 1944 set the scene 1.  As soon as there as separation between the providers of capital for a business (shareholders) and its management (directors): there developed a need for an audit examination or accounts to safeguard shareholders interests. A first, companies auditors were appointed from among its shareholders but the work they did was probably not very effective.

Under the 1844 Act, registered companies were required to appoint one or more auditors but there was no guidance as to their qualifications or independent.

“1844 to 1990 witnessed monotonous event in the history of auditing”.  The joint stock act of that year which made possible the separation of ownership also created a new dimension in the requirements for periodic financial statements.

The period from 1960 to present was regarded as the period when the auditors can be said to have recognized their duties and responsibilities in the auditing arena as well as in the areas of reported financial statement.  The period has been in the world at large in these veins.

  1. Establishment of consultative Committee of Accountancy, Bodies in United Kingdom (CCAB) and similar body in United State of America (AAB).
  2. Establishment of Internal Federation of Accountants (IFA) audits off spring; international auditing practice committee.
  3. Judicial reversal earlier decision affecting auditors and accountants
  4. The challenges of Auditors of the computer revolution
  5. African Association of Accountants (AAA).

The purpose which has always been existed when managers report to owners are that the owners may not believe the report, “the report may contain error, not disclosed fraud, be advntly misleading the deliberately misleading  or the  report may fail to disclose relevant information” 3.

The solution to these problem lies in appointing an independent person called an auditor to investigate the report and report his findings.  A further point is that modern companies.  The examination of the accounts of such company by independent experts trained as assessment of financial information is of benefit to those who controls and operate the organization as well as owners and outsiders.

The auditor should be an independent person who is appointed to investigate the organization, its record and financial statement prepared from them and thus form an opinion on the accuracy and correctness of the financial statements and records.

The primary purpose of an audit is to enable “the fair view” or the cause to say that they do not.

Another purpose of auditing is to appraise results properly so that the board can knowledgably know the strategy and performance objectives which management undertake, and to create dialogue between the company and its shareholders about the past and future performance, standards for which the company will subsequently be hold accountable by its shareholders.


The method of selection of auditors has important role to play as it is being considered by the public shareholders, and companies directors.  The desirability, of a competent independent auditor is widely recognized.  There are many methods of selecting an auditor, some corporations have the board of directors to nominate the auditors followed by the shareholders election for the appointment of an audit committee from the board for directors.

In all cases, regardless of the method of selection used, the choice of the auditor should be given access to the records that work should be performed well.  The auditor should be invited to attend meeting of the directors and stockholders so that person present may ask him questions so that he may maintain current relationship with the affairs of the client.


The internal auditor if an employee of the internal audit department engaged in work on behalf of the company, although the nature of his work requires that he shall be given an element of independence while engaged in auditing work.

According to Millichamp A.H. “Internal Audit Control, by an internal audit constitutes and element of internal control system established by management” 4.

In the article title “A case in support of internal auditors written by E. Bayo Ajaji, he defined “Internal Auditors as person employee of the company which takes care of the internal control process, which operates by appraising and reporting on the effectiveness of the controls”5.

Thus the objective of the internal auditor is to assist management in discharging its responsibilities and to evaluate compliance with corporate procedures.

Any business organization before carrying out its objectives, must  first of all plan what it intend to do.  It must establish system and policies for each control areas, example, cash account, stock accounts, sales and debtors control including setting up a suitable organizational structure to ensure a satisfactory and economic division of responsibilities.

To ensure that these control are working as planned, there must be a body or department specifically, assigned to appraise the working of each of the policies, and that is internal audit department.

The objectives of the internal auditing in any company includes:

  1. They re-assure management that their management for “internal control” have been adequate, economical and have operate satisfactorily;
  2. To identify and draw attention of the management to weakness in control or measures which are commercially unsound
  3. To make suggestions for improved performance and prevention of future short comings.

Present day society is dominated by large organizations, that have a significant impact on almost every aspect of modern life.  Because of their pervasiveness, these organization must behold accountable to society by keeping invested external parties informed of their action.

To monitor the actions of these organization must be hold accountable to society by keeping invested external parties.

One method of communication but only one method is the dissemination of economic data.  Typically, the external group is unable individually to verify the accuracy of this information on, therefore in order to ensure that the data is necessary for the external parties collectively to audit or review such data.


“Only a properly planned audit can ensure that he audit is performed in a professional manner with the auditor being independent of his job”6. In planning for an audit, these three factors should be considered:

  1. manpower requirements: – To ensure that an adequate audit

is performed, it is necessary to study the client and the native of that particular company and select auditing with the appropriate skills and work experience.  Example, “if the accounting system is heavily personnel that have an adequate computer background to the audit for audit efficiently, the auditor should exercise reasonable care adndeligence”7.


  1. Timing of audit work, audit procedures should be conducted at certain times. It is incumbent upon the auditor to anticipate and plan for these procedures.

It may be necessary for the auditor to simultaneously control

and account, or otherwise verify under posited, cash at bank and negotiate securities at eh balance sheet data.



The auditor should study and evaluate the internal control system to determine the nature, extent and timing of audit procedures to be used during the examination of the records and accounts.

“internal audit control, companies the plan of organization and all the coordinate methods and measure adopted within check the accuracy and reliability of the its accounting data, promote operational control and encourage adherence to prescribed managerial polices”7.

Administrative controls, this is the internal audit control that relate to the promotion of operational control and encourage adherence to management policies management primary objectives, as it is believed, is the maximization of profits.  Conversely the auditors primary objectives should be to determine whether management financial statements are prepared in accordance with generally accepted accounting principles.

In the case of capital budget preparation, the auditors should be concerned with capital projects in process.

The auditor may use capital budget analysis prepared by the client to monitor the project for possible cost overruns which may necessitate a written down of the cost incurred for the project.

Accounting control: this is concerned with internal audit control that relate to the safeguard assets and protect the client from incorrectly accounting, for the movement of assets.  The auditors is concerned with these accounting control is concerned with these accounting controls, because several accounts are affected by the movement of these assets.  The auditors is concerned with the accounting for the physical protection of cash, suppliers inventories another assets.  Procedure should be designed to ensure that the initial recording of sales of scrap, such accounts as cash, inventory and gain or less accounts for disposal of assets may not be in error.

Internal control system should be designed to provide reasonable assurance that:

  1. transitions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets;
  2. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action taken with reference to any differences, for capability in accounting control in the evaluation of internal audit control system the auditor should considered it as a responsibility to review or audit the following: –
  3. auditing of cash system
  4. auditing of credit sales system
  • auditing of inventory system
  1. auditing or property, plant and equipment
  2. auditing of liabilities
  3. auditing of stock and owners equity
  • auditing of investment
  • auditing of nominal accounts

“Before the formation of an opinion on the financial statements and records, the auditor should gather evidence to determine whether the cash accounts is fairly stated in accordance with generally accepted accounting principles”.

The auditor should study, evaluate and test how cash systems, cash receipt and disbursement.

  1. Cash Receipts System: ‘A’ may have a variety of sources of cash including cash sales, dividend income, and proceeds from the sale of plant assets.  The internal control system for such receipt should be designed in a manner that will ensure that only authorized transactions are processed, consistent with corporate policies.

The auditor should ensure that cash receipts are deposited promptly, at least once a day.  Such a procedure will minimize the possibility of loss or misplacement.  All cash should also be deposited in the bank and not used to pay invoices or met other cash disbursements.  Such procedure would help to protect against the possibility  of recording data on basis, which is a violation of generally accepted accounting principles.  The auditor should employ a principles.  The auditor should employ a procedure that would result in a thorough understanding of the system.  This would enable the auditor to evaluate the strengths and weakness of the system and to determine the audit approach.

  1. Cash Disbursement:- This includes; payments to vendors, employees and a variety of creditors.  The auditors’ study of the cash disbursements system, after which the auditor should evaluate its adequacy.

The credit sales is a vital part of the overall internal audit control system in  most companies.  This system encompasses the receipts of an order from a customer.

The processing of credit sales transactions has a significant impact upon the financial statements of the customer such importance effects the auditors design of the audit plan.  To fight against this, an appropriate audits effort should be devoted to study and evaluate the credit sales system.  Also the auditor might find or useful to construct an internal audit control model that can be used as a norm for he evaluate of an accounting system.

Since several authorization takes place before a transaction can be processed, the authorization should be for each individual transaction and not general transaction.

The authority to sell a company is good should reside in the sales department.

The sales order must be approved by the credit manager, before any credit sales should be made.  The auditor should conduct a study of the credit sales system so that he can gain a knowledge of accounting control procedure being utilized, after which he can form a preliminary evaluation of the credit sales system upon completion of the evaluation process, the auditor can then consider the nature, timing and extent of the auditing procedure to use.


“Inventory is defined as goods held for resale”8 or for use in the manufacture of goods to be sold.  A major accounting objectives, is the valuations of ending inventory and he measurement, of the cost of goods sold.  In the allocation process of inventory, whether done by utilization or periodic inventory system, or by perpetual inventory system the auditor should ensure that he cost pool is a proper representation of historical product, and that this cost is, allocated between the balance sheet and the income statement consistent with general accepted accounting principles.

The auditor in auditing the inventory should review the accounting system to determine the internal control system is adequate.

The proper execution of a transaction in the investors purchase system should depend up upon authorization, for the purchase, actual receipt of inventory and the receipt of an invoice from the vendor.  The auditor should therefore, review documents that exhibit specific authorization to obtain reasonable assurance that the transaction is executed as authorized.

The auditor should have a review that transactions which have been executed are recorded in their proper amount, in their correct account and in the appropriate accounting period.

In companies where a system of stock verification is available, he will  assume the control of the stock verification staff and direct programme of inspection.



Proper plant and equipment on fixed assets are asses that form the productive capacity of a copany”9.

These assets are not required for resale but rather are used in the operation of a company’s business.  Their lives may extent over several years.  The auditor should study and evaluate the fixed asset internal control system.

In designing inadequate internal control system for fixed assets.  It is important to separate the authorization responsibility the recording responsibly.

The auditor should review whether these responsibilities were separated.  The auditor should review whether any transaction outside those with proper approval were processed.

The authority to purchase fixed asset should rest on the board of directors even though they may decide to delegate the authority.  The auditor should also review, to ensure whether the disposal are accounted for properly, and the validity of approval of disposals by the corporate officials.  Once the fixed asset purchase or disposition is authorized internal control procedures should be devised to ensure reasonably that the transaction is recorded and accounted for properly, in the appropriate period.  Eh auditor should look for transactions not journalized, review sales contrast and invoices.


Liabilities may be in form of current contingent and long term.The first step in the audit of current liabilities, example, account payable is to gain control of the universe which comprises the balance shown in the general ledger.  This is done by acquiring a trial balance.  The trail balance should be stated by the auditor and total is traced to the general ledger control card.

The individual balance contained on listing should be reviewed by the auditor after the arithmetic accuracy of the listing has been proved.

The propitiatory of an individual balance is determined by tracing the amount of the appropriate accounts payable subsidiary ledger card or to the appropriate entry in the voucher register.

In addition to tracings from the trail balance to other supporting data, the auditor should trace from the account payable subsidiary ledger or voucher register to the trail balance to ensure that obligations in the accounting records were not committed from the trail balance.

“Long-term liabilities are used to identify obligations whose liquidation does not require the use of resources properly of long-term liabilities include mortgages, bonds and not payable.

In audit of long-term debt, the first step is to prepare an account analysis detailing the activity in the account for current year.



“Stock holders equity of a company financial statement represents sources of assets either contributed by shareholders or earned and retained by the company”11.

The principle responsibility of the auditor should be to verify all entries in the equity account to permit him to be certain that they have been properly authorized, stated a the correct amount and reflect generally accepted accounting principles”12.

The auditor should study the capital stock internal control system to provide him with an opportunity to document and understand the system.

The auditor should determine that the process from the sale fo stock are in agreement with the sale of stock are in agreement with the board’s authorization.

“If the sales of capital stock involves the receipt fo non-monetary seets”13, the board of directors will be responsible for the assignment of the value to the property received as well as to the contributed capital amounts.



Investment may include purchase of common stock, preferred stock bonds, commercial papers, certificates of deposit.

The auditor should as the client to prepare a summary of investment changes to gain control over all transactions that have had an impact on the investment account during the year.



It is usually not nature of the nominal account that will prohibit the civilization of an audit approach similar to that used in auditing a permanent account.  The primary reason for different approach is the volume of detail transaction presented in the accounts.

“Nominal accounts are the income statement account”14.

All nominal account must be checked carefully by the auditor so that he may be satisfied that the whole of the transactions of the business have been correctly classified and include in the final accounts.  The audit approach to be used in reviewing the nominal account should include:

Determining of the consistency of data evaluation of internal audit controls, test of transaction which include substantive and compliance test.  The auditor may ask the client to prepare an analysis of the nominal and balance sheet accounts.

The account analysis is verified by the auditors by reviewing the client calculations, tracing amounts to approve invoiced and review cancelled cheques.  The expenses should be verified in conjunction with notes payable and accursed interest payable.


The auditors in relying on other should take steps to satisfy himself of the competence and independent of the other auditors.  Such steps might include the use of questionnaires, letter of enquiry, review of working papers, direct oral communication and where necessary, and if possible, direct access to the records of subsidiary not auditing by him if any.


The audit process culminates in preparation of the audit report.  The audit report serves as the method of communication between the auditor and the uses of the report.  The wording of the auditor report should be carefully chosen to avoid misunderstanding.

Prior to the preparation of the audit report, the auditor should perform additional task of reviewing, subsequent events and all evidential matter.

In course of reviewing subsequent event, the auditor should be responsible for the discovery and reporting of significant events that occurred after the normal audit and before the preparation of the report.

The auditor should review all the evidential mater like the working papers and independent review.

The reviewing o working paper process involves the senior auditor reviewing the working papers of the junior auditors, the audit manager reviewing the working papers of senior and junior auditors.  The purpose of the review is to determine the completeness and relevance of working papers.  The independence review involves the establishment of a special department that will review the working papers before an opinion is formed.

The members of this department should not be staff of the regular audit.  After considering that the audit working papers are complete, an opinion can be formulated and an audit report prepared.

Example of a completed report is shown below: –

Completed Audit Work: 

“To the Board of Directors. PZL Company we have examined the related operations and balance sheet of PZL Company as at December 31, 1998 with generally accepted standards and accordingly included such test of the accounting records and such other procedures as we considered necessary in the circumstances.

In our opinion. Accompanying records and operations present fairly, the financial position of PZL Company and the results of its operations for the year ended and in conformity with generally accepted accounting principles applied on a basis consistent with that of proceeding years”15.

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