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ACCT 2002 - Managerial Accounting: Introduction to Financial Planning and Analysis
Walden University
1.1 Background to the Study
Internal control is a process designed to provide reasonable assurance regarding the achievement
of effectiveness and efficiency of operations, reliability of financial reporting and compliance
with applicable laws and regulations.
Ratcliffe and Landes (2009) state that people at every level of an organization affect internal
control. Internal control is, to some degree, everyone's responsibility. Within organizations
administrative employees at the department-level are primarily responsible for internal control in
their departments.
The writers further allude that effective internal control helps an organization achieve its
operations, financial reporting, and compliance objectives. Effective internal control is a built-in
part of the management process (i.e., plan, organize, direct, and control). Internal control keeps
an organization on course toward its objectives and the achievement of its mission, and
minimizes surprises along the way. Internal control promotes effectiveness and efficiency of
operations, reduces the risk of asset loss, and helps to ensure compliance with laws and
regulations. Internal control also ensures the reliability of financial reporting. Internal control can
provide only reasonable assurance - not absolute assurance regarding the achievement of an
organization's objectives. Effective internal control helps an organization achieve its objectives;
it does not ensure success. There are several reasons why internal control cannot provide
absolute assurance that objectives will be achieved: cost/benefit realities, collusion among
employees, and external events beyond an organization's control.
Internal Control Process consists of five interrelated components that include; control (or
Operating) environment, risk assessment, control activities, information and communication and
monitoring. All five internal control components must be present to conclude that internal
control is effective. (Ratcliffe and Landes 2009)
1.2 Statement of the Problem
Internal control is a pertinent ingredient in the management of public funds in public institutions.
This is so because of its ability to expose malpractices and seepage of public funds into the
wrong accounts. It is also deemed to initiate the culture of accountability and transparency.
Operational internal controls are vitally important and the absence of these types of controls
represents a significant weakness in the management of any organization that employs a
significant number of people. (Wright R 2009)
Operational internal controls are controls designed to prevent organizations suffering financial
damage as a result of a member of the organization making an inappropriate operational
decision. Absence of operational internal controls will lead to disaster, failure to adhere to
internal control procedures can lead to disaster, and these often include physical internal
controls. Cost effectiveness of control systems has traditionally been recognized in the auditing
profession, although in earlier texts it was considered in terms of the need for controls to be
“practical and efficient” (Irish, 1966) as quoted in (Wright R 2009) and is still mentioned within
auditing texts including Arens et al. (2007). While these texts discuss the need for cost
effectiveness, no method of calculation is given.
One of the most outstanding problems is determination of the cost of internal control in relation
to the real losses that might be incurred without these controls. The cost of the control could
probably be equal to or less than the maximum expected loss from failure due to the decision not
to implement the control multiplied by the probability of such a loss occurring.
Internal controls by their nature are not just financially orientated but should integrate the aspects
of operational controls. A challenge to many organizations has been to ensure efficacy in terms
of the operational and financial controls internally. This in other times poses many challenges as
it presents both negative and positive effects to the performance of an organization.
The controls need to be contained within operational procedures, including such operational
activities as production and the process of revenue generation for this case. Thus controls are not
just restricted to financial matters, but cover the entire gamut of business activities.
Organizations can be very rigid or quite loose and fluid in their internal structure, and how the
members interrelate with one another. The impact of the internal control depends on individual
organization and much more on how it is done. The problem at hand is that many firms have
been carrying out internal controls that have over time been criticized for their inability to
mitigate the problems to which they were meant to solve.
This study will be out to establish the real impact of these internal controls on the performance of
organizations. The independent variables that will be looked at include; control environment, risk
assessment, control activities, and information and communication while the key dependent
variable will be performance of the organization.
1.3 Research Objectives
1.3.1 Main Objective
The main objective of this study is to evaluate the impact of internal control procedures on
revenue collection in Eldoret Municipal Council.
1.3.2 Specific Objectives
1. To investigate on the nature of internal control procedures in the Eldoret
Municipal Council
2. To investigate on the possible effects of internal control procedures on the
revenue collection of the Eldoret Municipal Council
3. To find out the challenges that follows the application of internal control
4. To establish Relationship between internal control procedures and the amount of
revenue collected
1.4 Research Questions
a) What is the nature of internal control procedures in the Eldoret Municipal Council?
b) What are the possible effects of internal control procedures on the revenue collection of the
Eldoret Municipal Council?
c) What are the challenges that follow the implementation of internal control procedures?
d) What is the relationship between internal control procedures and the amount of revenue
1.5 Significance of the Study
the findings of the study provided useful information for policy makers and planners so as to
enhance the positive aspects of their internal controls while correcting the negative aspects of the
same. The findings informed the Eldoret Municipal Council on the possible way forward for
their internal controls so as to ensure good performance in terms of revenue collection. The study
also aspires to contribute to the wealth of knowledge that can be referenced for future further
1.6 Scope of the Study
The study basically was concerned with the impact of the internal controls to the performance of
Eldoret Municipal Council. It was carried out in the Eldoret Municipality especially in the
municipal’s headquarters. The respondents were the mayor, councillors, internal auditors, the
accountants, the council’s manager and the members of the advisory committees.
1.7 Conceptual Framework
Figure 1.7 a conceptual model on the impact of internal control on the organizational
Source: Researcher
Political interference
Natural calamities
Extraneous Variable
Figure 1.7 shows a model that starts with assessing the factors that constitute internal control
practice. Assessment of these entire factors is aimed at establishing their influence on
performance of an organization (Eldoret Municipal Council). Depending on the way these
aspects of internal controls are adopted or implemented, they can either lead to poor or good
performance. The implication of this is that when the aspects are well adopted or implemented
they will lead to good performance of the organization. The vice versa is deemed to happen if
there is poor adoptability or implementation of these practices.
Arens, A., Best, P., Schailer, G., Fiedler, B.,Elder, R., & Beasley M.,(2007) Auditing and
Assurance Services in Australia, an Integrated Approach, 7th Edn., Pearson Education
Australia, Sydney
Altamuro, J., Beatty, A., 2007. Do internal control reforms improve earnings quality? Working
Paper, The Ohio State University.
Ashbaugh-Skaife, H., Collins, D., Kinney, W., 2007. The discovery and reporting of internal
control deficiencies prior to SOX-mandated audits. Journal of Accounting and
Economics 44, 166-192.
Ashbaugh-Skaife, H., Collins, D., Kinney, W., LaFond, R., 2008. The effect of SOX internal
control deficiencies and their remediation on accrual quality. The Accounting Review 83,
Ball, R., 2004. Corporate governance and financial reporting at Daimler-Benz (DaimlerChrysler)
AG: From a “Stakeholder” toward a “Shareholder Value” Model. In: Leuz, C., Pfaff, D.,
Hopwood, A., (Eds.). The Economics and Politics of Accounting. London: Oxford
University Press, 103-145.
Campbell, Mary Campbell, and Gary W. Adams (2009) Adding Significant Value with Internal
Controls, New York State Society of CPAs
Wright R (2009) Internal Audit, Internal Control and Organizational Culture, Unpublished PhD
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