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PROJECT TOPIC AND MATERIAL ON THE IMPACT OF INTERNAL CONTROL SYSTEM ON MANUFACTURING INDUSTRIES: A CASE STUDY OF EVANS MEDICAL PLC.
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- Name: THE IMPACT OF INTERNAL CONTROL SYSTEM ON MANUFACTURING INDUSTRIES: A CASE STUDY OF EVANS MEDICAL PLC.
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This study investigated the impact of internal control system on manufacturing industries using Evans Medical Plc. as a case study. Primary data were employed through structured questionnaire administered to industry selected using convenience sampling. Based on Committee of Sponsoring Organization Treadway Commission (COSO) updated framework, six determinants of internal control that includes control environment, risk assessment, control activities, information and communication, monitoring, and information technology were examined to determine their influence on the financial and operational performance of small businesses. Frequency counts, percentage, and multiple regression were used to analyse the data obtained. The results showed that these determinants have significant effect on the efficiency of operations of the selected small businesses, which consequently enhanced their profitability. The study concluded that internal controls, grounded in the COSO Model, have significantly positive effects on small business profitability and survivability. Thus, this study recommended that industry strengthen their control environment through mechanisms such as a commitment to integrity, ethical values and competence. This will make effective the control environment and help improve performance levels.
TABLE OF CONTENTS
Title Page i
Table of Contents vii
List of tables x
CHAPTER ONE: INTRODUCTION 1
1.1 Background to the study 1
1.2 Statement of the problem 4
1.3 Objectives of the study 6
1.4 Research questions 7
1.5 Statement of the hypotheses 7
1.6 Significance of the study 7
1.7 Justification of the study 8
1.8 Scope of the study 8
1.9 Definitions of terms 9
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction 10
2.1 Conceptual frame work 10
2.2 Theoretical frame work 13
2.3 Literature on subject matter 20
CHAPTER THREE: METHODOLOGY
3.0 Introduction 28
3.1 Area of study 28
3.2 Research Design and Sources of Data 28
3.3 Study Population and Determination of Sample Size 30
3.4 Instrumentation 30
3.5 Procedure for Data Collection and Data Analysis 31
3.6 Limitations of the study 32
CHAPTER FOUR: DATA ANALYSIS, FINDINGS AND DISCUSSION
4.0 Introduction 33
4.1 Findings of the study 33
4.2 Test of hypothesis 41
4.3 Discussion of findings 44
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings 46
5.2 Conclusion 47
5.3 Recommendations 47
5.4 Proposal for further studies 48
LIST OF TABLES
Table 4.1.1: Gender of the respondents 33
Table 4.1.2: Age of the respondents 34
Table 4.1.3: Status of respondents 34
Table 4.1.4: Years of Experience of the Respondents 35
Table 4.1.5: Educational Background of the Respondents 35
Table 4.1.6: Status/Position of the Respondents 36
Table 4.1.7: Does internal control system play any significant role in manufacturing institutions in Nigeria? 36
Table 4.1.8: Does internal control system in Evans medical Plc. improve the quality of manufacturing sector? 37
Table 4.1.9: Is there any significant differences in the internal control variables across the various categories of the Nigerian manufacturing industry? 37
Table 4.1.10: Is there any effective, implementation and adoption of internal control system in Evans medical Plc? 38 Table 4.1.11: Is there any problem confronting the staff of Evans medical Plc. in enhancing quality control system? 38 Table 4.1.12: Does internal control system have any impact on the quality of production management? 39
Table 4.1.13: Does internal control system have significance effect on the performance of the Nigerian manufacturing industry? 39
Table 4.1.14: Is there any significant relationship between internal control
system and manufacturing industry? 40
Table 4.1.15: Is there a proper recording and reporting for financial transaction and this leads them to attaining a better internal control system? 40
Table 4.2.1: Testing of the 1st Hypothesis 42
Table 4.2.2: Testing of the 2nd Hypothesis 44
INTRODUCTION 1.1 BACKGROUND TO THE STUDY
Organizations face internal and external forces that call for a strategy to help them continue to be relevant and competitive in the business environment (Strickland, 2012). The organisations’ ability to meet their objectives with respect to remaining competitive and relevant rests largely on the policies and strategies as well as the effectiveness of procedures established to safeguard their operations (Kaplan, 2012). Originating from the agency theory and buttressed by the contingency theory are internal control systems (ICS) which ensure effective management of resources in addition to effective and efficient operations (Jokipii, 2014). Owing to the changing competitive surroundings, the extent to which ICS of organisations must be extensively structured to safeguard continuous increase in returns has become obvious (Ndungu, 2013). ICS are systems made up of procedures and policies that help to safeguard a company’s assets, provide trustworthy financial reporting, enhance compliance with rules and regulations and achieve efficient and effective operations (Omani-Antwi, 2014). These systems of procedures and policies, according to Gray and Manson (2016) are usually associated with internal and external communication processes of an organisation, as well as procedures for managing corporate finance, the preparation of accurate and reliable financial reports on a timely manner, and the maintenance of inventory records and properties.
The framework for internal control systems developed by the Committee of Sponsoring Organization of Treadway Commission (COSO) argue that every sound system of internal control must have five components namely: control environment, risk assessment, control activities, information and communication and monitoring of internal control (COSO, 2009).
According to Pickett (2015), these components interact among each other, forming an integrated system that reacts dynamically to changing conditions. In essence, the ICS is intertwined with the entity’s operating activities and is fundamental to the successful operation of the enterprise (Steinberg, 2016).
Theoretically, the positive association between the variables of internal control systems and performance is firmly grounded in the agency theory. As advocated by Sharma (2002), the agency theory is based on the assumption of separation of ownership and control wherein managers are autonomous and are likely to increase their personal gains at the expense of owners. For this reason, the agency theory stresses that in order to align managers‟ interests with those of the organization, firms implement management control systems, which consist of various control mechanisms, including, monitoring systems, and internal controls to resolve goal conflicts (Zimmerman, 2016).
The proponents of the contingency theory, on the other hand, posit that the best way to organize a firm is contingent on the environment in which it functions (Richard, 2007). Thus according to the contingency theory, a company would achieve its goals when it is organized based on the environment in which it relates (Richard, 2008). Consistent with COSO (2009), the contingency theory claims that different kinds of controls should be put in place to accomplish different objectives while considering the business environment so as to achieve performance targets (Chenhall, 2008; Jokipii, 2014; Luft & Shields, 2008).
From the empirical perspective, the positive relationship between the COSO internal control systems variables and performance is not quite clear. Muraleetharan (2016) posits that internal control-performance relationship is influenced by some but not all of the internal control systems variables. According to Muraleetharan, risk assessment, control activities as well as monitoring of the COSO framework for internal control variables influence the positive link, while the relationship using control environment and information and communication fails to lend itself to prediction. On the contrary, results from Njeri (2014) have revealed that all elements except information and communication of the COSO framework of internal control systems predict the positive relationship.
To augment the findings of Muraleetharan (2016) and Njeri (2014), results from Europe on the study of enterprise risk management and performance have shown a negative relationship between high levels of enterprise risk management and performance (Eikenhout, 2015). Per these findings, the relationship between the elements of internal control and performance is not quite clear. To add to the foregoing discussion, the literature on ICS lacks studies on the conditions of ICS and performance as well as differences in the components of internal control systems.
Performance measures have been viewed from several perspectives by academic and professional researchers. Bourne et al, (2008) define performance measurement as metrics used to quantify and compute an action’s efficiency and effectiveness. Performance assessment, according to Smith (2010), could be financial or non-financial. Financial performance measures are those which use financial performance indicators such as profit margin, return on assets and return on equity in measuring organisational performance. Non-financial performance measures, on the other hand, rely on performance indicators that are non-financial such as quality of service, resource utilisation, innovation and competitive performance (Epstein, & Manzoni, 2015).
Globally, ICS are important to the performance of the insurance industry since they play critical roles in any economy (Committee of European Insurance and Occupational Pensions Supervisors [CEIOPS], 2008). In view of its significance in insurance undertakings, the Conference of European Insurance Supervisors (CEIS) agreed, during its 118th Session, to create a working group with the task of bringing into being a framework on ICS for the insurance sector (CEIOPS, 2008). To argue further, the inspection manual of the Japanese Insurance Authority [JIA] (2017) also maintains that directors must develop a befitting system to secure the sound and appropriate management of the insurance company’s business. This means that ICS are paramount to the performance of the insurance industry in the global world. The performance of both private and public institutions in Ghana also depends largely on sound systems of internal control. To buttress this point, the then president of Ghana, Mr. J.A. Kuffour, being aware of the impact of internal control on performance, urged all public sector chief executives to develop and implement effective internal control systems at the second annual internal auditors‟ forum organised by the Internal Audit Agency (IAA) in Accra in 2007 (Ekow, 2012).
1.2 STATEMENT OF THE PROBLEM
In the ambiance of the globalization of business operations and the increasing use of information technologies, complexities of business transactions, and business risk, the role of internal controls as a corporate governance mechanism is becoming increasingly important (Jovanović & Ljubisavljević, 2016). This is because in one of the earliest contributions, Bastia (2013) maintained that the management of the complexities following globalization increased the need for adequate internal control systems which in turn control risks as well as pursue business performance.
Drawing on the agency theory, ICS play a vital role in enhancing the performance of institutions (Ahiabor & Mensah, 2013). Due to the sensitivity and crucial role of ICS, researchers have strived to evaluate its consequence on firm performance (Ejoh & Ejom, 2014; Mawanda, 2013; Muraleetharan, 2016; Noel, 2015; Oyoo, 2014; Simangunsong, 2014). Nonetheless, some of these studies are limited in scope in terms of choice of internal control dimensions used. For instance, Noel employed two components, while Mawanda and Oyoo used three out of the five variables of COSO framework of internal control systems. This makes their findings not comprehensive for decision making purposes and often generated weaker R-square. This is because COSO posits that for ICS to be effective, all five elements must work together in an inter-related and coordinated manner.
On the other hand, the known comprehensive studies in the accounting literature are very difficult to follow for the reason that they have yielded different results (Muraleetharan, 2016; Widyaningsih, 2014). While the study of Muraleetharan revealed that risk assessment, control activities in addition to monitoring influence the positive association between internal controls and performance, Widyaningsih on the other hand submits that control environment, control activities and monitoring predict the positive relationship.
In addition, some of the existing studies on internal controls such as Dineshkumar and Kogulacumar (2017), Chebungwen and Kwasira (2014) and Ejoh and Ejom (2014) also suffer methodological weaknesses. These researchers focused on examining how internal controls influence performance but used only correlation method which makes their results and findings inconclusive. This is because correlation, according to Fink (2013), is appropriate to estimate associations or relationships between variables and not the extent of one variable causing or predicting the outcome of the other. Similarly, there are few known studies that have been conducted in Nigeria regarding internal control systems. These works including Gyebi and Quain (2013) and Nkuah, Tanyeh and Asante (2013) were geared towards companies other than those in the Ghanaian insurance sector. Furthermore, the very few works geared towards the insurance industry in Nigeria, including Oscar-Akotey et al, (2013) and Boadi et al, (2013) focused on financial performance of life insurance companies in Ghana and the determinants of profitability of insurance firms in Ghana respectively. To add to the foregoing discussion, the literature on ICS lacks studies on the conditions of ICS and performance as well as differences in the components of internal control systems. The implication of the above discussion is that a gap exists in the literature concerning the effect of ICS on the performance of companies in the insurance industry, conditions of ICS and performance and differences in the ICS components among the companies in the industry. This is because, notwithstanding the importance of internal controls to the performance of organisations (Njeri 2014), there is no known study that has looked at the influence of internal control systems on the performance of industries in the Nigeria Sector. Therefore in a bid to fill this gap and add to the existing body of knowledge, the researcher examines the effects of the five elements of internal control systems on the performance of industries in the Nigeria Sector.
1.3 OBJECTIVE OF THE STUDY
The general objective of this study was to examine the effect of internal control systems on the performance of the manufacturing industry in Nigeria.
Specifically, the study sought to:
1. Assess the condition of internal control systems and performance of the Nigeria manufacturing industry.
2. Investigate whether there are significant differences in the internal control systems in the Nigerian manufacturing industry.
3. Examine the effect of internal control systems on performance of the Nigeria manufacturing industry.
1.4 RESEARCH QUESTIONS
The following research questions are set to achieve the objectives of the study.
1. What are the conditions of internal control systems and performance of the Nigerian manufacturing industry?
2. What are the significant differences in the internal control systems in the Nigerian manufacturing industry?
3. What are the effect of internal control systems on performance of the Nigeria manufacturing industry?
1.5 STATEMENT HYPOTHESIS In order to achieve objective 2 and 3, the following research hypotheses are formulated. The null hypotheses 1 and 2 relate to objective 2 and 3 respectively.
HYPOTHESIS ONE Ho: There are no significant differences in the internal control variables across the various categories of the Nigerian manufacturing industry.
HYPOTHESIS TWO Ho: Internal control systems have no significant effect on the performance of the Nigerian manufacturing industry.
1.6 SIGNIFICANCE OF THE STUDY
This study is vital in that it offers a knowledge contribution and a policy contribution. It will significantly serve as literature that would add to academic knowledge in the area of internal control systems for the manufacturing industry in Nigeria. It will also provide intuitions to support future research regarding internal control systems for this manufacturing sector. This is because to the best of the researcher’s knowledge there has not been any prior study on the effect of internal control systems on performance of the Nigerian manufacturing sector.
As for the policy contribution, the owners and management of the Nigerian manufacturing industry can resort to the findings and recommendations of the study to create or redefine effective internal control systems that will help to achieve their performance target. It will also help the policy makers in the industry to formulate appropriate policies that will enhance growth in the manufacturing industry in the country.
1.7 JUSTIFICATION OF THE STUDY
The outcome of this study will be a little guide for the manufacturing industry on a proper recording and reporting for financial transaction which lead them to attaining a better internal control system.
The research will also serve as a source base to other scholars and researchers interested in carrying out further research in this field in future. The study therefore will extend the frontiers of the existing literature by emphasizing the impact of internal control system in manufacturing industry.
1.8 SCOPE OF THE STUDY This research study is designed to focus on the impact of internal control system on manufacturing industries. This research is also designed to find out if actual the non-operation of effective internal control system has been the cause of administrative mismanagement. The data to be used will be gathering mainly from the various departments in the organization
1.9 DEFINITION OF TERM Internal Control: is a whole system of control financial and otherwise established by the management in order to carry on the business of the enterprises in an orderly and efficient manner, ensure adherence to management policies. Industry: a geographical entity where production takes place. Firm performance: Firm performance denotes company respondent’s personal assessment of their company’s efficiency and effectiveness in ensuring the achievement of organisational goals. It covers financial and non-financial performance indicators of the building block model developed by Fiztgerald and Moon (2006) for measuring firm performance in the service industry. The financial indicators are return on asset and liquidity. The non-financial indicators also capture customer base, quality of service, flexibility, resource utilisation and innovation. Safeguard: to protect something from harmful or damages. Misappropriation : intentional illegal use of property or funds of another person for one’s own use or dishonestly in funds entrusted to one’s cares Mismanagement: – managing something badly. Fraud: the crime of deceiving in order to gain something such as money and goods for personal interest. Embezzlement: – theft or misappropriation of funds placed in one’s trust or belonging to one’s employer
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