INTERNAL AUDIT STRUCTURE AND PERCEIVED FINANCIAL STATEMENT FRAUD
ABSTRACT
This study is motivated by a desire to examine internal audit structure and perceived financial statement fraud. In light of the empirical review and other discussions, a number of questions arose as to whether users perceived greater financial statement fraud prevention when internal auditors function reports to the audit committee than when it reports to senior management, to verify if there is lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function as well as to determine if internal auditors consider to be more and more important and the value and responsibility in activity of preventing and detecting fraud seems to be bigger. The population of this study constitutes all commercial banks quoted in the Nigeria Stock Exchange. Questionnaire was administered to staff of some selected banks operating in Nigeria. Data was collected and analyzed using the simple percentage, descriptive statistics and Z-test. This study revealed among other things that users perceived greater financial statement fraud prevention when internal auditor function reports to the audit committee than when it reports to senior management. It is recommended that an external auditor should come in after the audit report of the internal auditors, this will be of great relevant to the audit profession because the internal auditor can be influence because they are employee of the organization.
TABLE OF CONTENTS
    CHAPTER ONE: INTROUCTION
Background to the Study                    
Statement of the Problem                    
Objectives of the Study                        
Research Hypothesis                        
Scope of the Study                            
Significance of the Study                    
Limitation of the Study                        
Research Methodology                        
References            
CHAPTER TWO: LITERATURE REVIEW
2.1    Internal Audit                            
2.2    Fraud                                
2.3    Importance of Internal Audit                    
2.4    Auditors’ Responsibilities                    
2.5    Outsource Versus Insource Internal Audit            
2.6    Theoretical Perspectives on Financial Fraud        
2.7    The Role of the Financial Auditor in Preventing and
    Detecting Financial Fraud                 
    References                                
CHAPTER THREE:    RESEARCH MEHTODOLOGY
3.1    Introduction                            
3.2    Research Design                            
3.3    Population                                
3.4    Sample Size                            
3.5    Sample Technique                    
3.6     The Research Instrument                    
3.6    Method of Data Analysis                        
References                            
CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION
4.1    Introduction                        
4.2    Descriptive Statistics                     
4.3    Test of Hypothesis                     
CHAPTER FIVE:    SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1    Summary of Findings                    
5.2    Conclusions                        
5.3    Recommendations                    
Bibliography                            
Appendix                            
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
According to Adeniji (2004:354) and ICAB (2006:206) fraud is an intentional act by one or more individuals among management, employees or third parties, which results in a misrepresentation of financial statements.
Fraud can also be seen as the international misrepresentation, concealment, or omission of the truth for the purpose of deception/manipulation to the financial detriment of an individual or organization which also includes embezzlement, theft or any attempt to steal or unlawfully obtain, misuse harm the asset of the organization, (Adeduro, 1998 and, Bastley and Drover 1972), Fraud increased considerable over the recent years professionals believe this trend is likely to continue.
In recent years, the internal auditing functions have more emphasis in public and private organization because fraud and embezzlement cost organization millions of dollars annually. Some companies create more demand for internal auditing fuctions and statistics show that companies have become effective in fraud policies material reduction in financial losses (Supocic, 2010).
There are two classical categories of audit in business, namely, the external and the internal audits. Both started as tools to prevent and detect fraud. While the external audits started in the middle ages to maximize the yield of the serfs, the internal audit started after the 1929 disaster in wall street (Barlev, 2004).
The institute of internal auditor (2004) defined internal auditing as an independent activity that aims at providing reassurance and consultations designed to increase and improve the added-value to the organization’s operations. It helps the organization to accomplish its objectives by systematic and rigorous approach to evaluate and improve efficiency in risk management, monitor and control processes.
Despite the increasing focus on internal audit, there has been little research on the benefits and importance of this function. Some studies used an agency cost framework to illustrate the value relevance of the internal audit function (e.g., Carey, Tanewski & Simnett 2000; Carcello, Hermanson & Raghunandan, 2005).
Alleyne, Persaud, Greenidge & Sealy (2010) described fraud as any intentional deceit to deprive another person of their property or right, two category of fraud are fraudulent, financial reporting and misappropriation of assets. The Institute of Internal Auditors (2008) defined a fraud as “any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain”.
As it has been defined in accounting standards reports, fraud is “an intentional act that results in a material misstatement in financial statements that are the subject of an audit” (AICPA, 2008). There are two ways in which a material misstatement could occur with respect to fraud: misappropriation of assets and fraudulent financial reporting. Misappropriation of assets, as the name suggests, refers to the theft of company assets that may result in the company’s financial statements being materiality misstated (AICPA, 2008),
DeZoort and Harrison (2008) found that external auditors perceive more responsibility for detecting fraudulent financial reporting than they do for misappropriation of assets and corruption.
Rahahleh (2010) indicated that developed countries called for attempts to regulate the internal audit as well as giving it more attention as a tool for achieving monitor and control to reduce the financial and administrative illegal practices.
However little is known of fraud detection procedures outsides the developed countries (Alleune at al., 2010). In spite of the availability of a framework and standards for the professional practice of internal audit that are fulfilled and applicable worldwide as well as in certain Arab countries, however, no framework for the professional practices of internal audit in Jordan has been adopted or developed (Rahahleh, 2010).
This study assesses the internal audit structure and perceived financial statement fraud prevention.
STATEMENT OF THE PROBLEM
Coram et al. (2008) assessed whether organizations with internal audit function are more likely to detect and self report fraud than those without internal audit function. They also assessed whether organizations that use an in-house internal audit function are more likely to detect and self-report misappropriation of assets fraud than organizations that completely outsource their internal audit function. They concluded that organizations with internal audit function are more likely to detect and self report fraud than those that don’t have internal audit function, and organizations that having some in-house internal audit function are more effective in detective and self reporting fraud than completely outsourcing internal audit function.
Bota-Avram (2008) investigated the evolution of the approaches of fraud from internal audit’s point of view, by showing value of internal auditors in fraud prevention and detection and showing difference in approach between organizations that choose to insourcing or outsouring internal audit. The conclusions drawn were that internal auditors are considered to be more and more important and the value and responsibility in activity of preventing and detecting fraud seems to be bigger, although IIA (2004) states “internal auditor should not have the expertise of a person whose primarily responsibility is to detect ajnd to investigate fraud”. Outsouring of internal audit may lead to better independence of internal auditor and insoucring of internal audit may lead to better independence in internal auditor and insourcing internal audit could has advantage that they know the environment and the culture of the company.
James (2003) examined the effects of internal audit structure on perceived financial statement fraud prevention in USA. The study concluded that users perceived greater financial statement fraud protection when internal auditor function reports to the audit committee than when it reprts to senior management. They also concluded that there is lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function.
Against this backdrop, the following research questions are raised:
Does users perceived greater financial statement fraud prevention when internal auditor function reports to the audit committee than when it reports to senior management?
Is there lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function?
Do internal auditors consider to be more and more important and the value and responsibility in activity of preventing and detecting fraud seems to be bigger?
Is there significant relationship between internal auditing units and financial statement fraud prevention?
Do organizations with internal audit function more likely detect and self report fraud than those without internal audit function?
OBJECTIVES OF THE STUDY
The objective of this study to examine internal audit structure and perceived financial statement fraud prevention.
The specific objective are:
To determine if users perceived greater financial statement fraud prevention when internal auditors function reports to the audit committee than when it reports to senior management.
To verify if there is lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function.
To find out if internal auditors consider to be more and more important and the value and responsibility in activity of preventing and detecting fraud seems to be bigger.
To determine if there is significant relationship between internal auditing units and financial statement fraud prevention.
To ascertain if organizations with internal audit function more likely to detect and self report fraud than those without internal audit function.
RESEARCH HYPOTHESIS
The following hypotheses have been formulated to serve as a base for this research;
Hypothesis I
Ho:    Users does not perceived greater financial statement fraud prevention when internal auditor function reports to the audit committee than when it reports to senior management.
H1¬:    Users perceived greater financial statement fraud prevention when internal auditor function reports to the audit committee than when it reports to senior management.
Hypothesis II
Ho:    There is no lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function.
H1¬:    There is lack of evidence supporting enhanced user confidence resulting from outsourcing the internal audit function.
Hypothesis III
Ho:    Internal auditors are not considered to be more and more important and the value and responsibility in activity or preventing and detecting fraud seems to be bigger.
H1¬:    Internal auditors considered to be more and more important and the value and responsibility in activity of preventing and detecting fraud seems to be bigger.
Hypothesis IV
Ho:    There is no significant relationship between internal auditing units and financial statement fraud prevention..
H1¬:    There is a significant relationship between internal auditing units and financial statement fraud prevention.
SCOPE OF THE STUDY
This study is undertaken to examine internal audit structure and perceived financial statement fraud prevention. The population of the study is the entire quoted banks in the Nigeria Stock Exchange, while the sample size is some selected banks operating in Nigeria. In using time series, data from a period of five years is used (i.e. 2007 to 2011).
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between internal audit structure and perceived financial fraud prevention and thus boosting the empirical evidence from Niger. Furthermore, given the empirical nature of the study, the outcome of this study would aid policy makers and regulatory bodies in the economic modeling and policy simulation with respect to the selected variables examined in the study.
The result of the study would be of benefits to government, investors and corporations in examining the effectiveness of the internal audit structure and perceived financial fraud prevention.
It will also be useful in stimulating public discourse given the dearth of empirical researches in this area from emerging economies like Nigeria. Finally, it would also add to the available literature on the area of study while also providing a platform for other researchers who may want to further this study.
LIMITATION OF THE STUDY
The major constraints of this project are sourcing enough materials for this buildup. This is as a result of newness of the subject of research. Also, the uncooperative attitude of some respondent greatly affected the adequate collection of data from the fieldwork.
RESEARCH METHODOLOGY
This study will make to with both the primary and the secondary data. The primary source of data collection will base on the information obtained through questionnaires administered to elite respondents, while the secondary data will rely on the existing literatures on the subject matter, e.g. textbooks, journals, article etc.
A total of 100 questionnaires will be administered to respondents. Thereafter, Z-test statistical tool will be used to test the hypothesis.
 REFERENCES
Adeniji, A. (2004): Auditing and Investigation. Lagos, Value Analysis Publishers.
ICAN (2006): Financial Reporting and Audit Practice. Lagos, VI Publishing Ltd.
Adeduro, A.A. (1998): “An investigation into frauds in banks”. An unpublished thesis of University of Lagos.
Bostley R.W.B. and Dover C.B. (1972): Sheldon’s practice and law of banking, 10th ed, London, Macdonald and Evans.
 

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