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CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Internal control or an internal control system is the integration of the activities, plans, attitudes, policies, and efforts of the people of an organization working together to provide reasonable assurance that the organization will achieve its objectives and mission. Every organization has a purpose, which includes making some product and rendering some services at a price. For normal operations of the business organization, it is the product or services of the firm that cause cash receipts (revenue) to flow into the firm. Revenue is associated with products or service of a firm as source of expected cash receipts. Revenue is an event; an increase that applies definitely to value that is monetary. This increase occurs because the firm undertakes certain activities or there is any performance by the firm. Revenue therefore refers to the monetary event of asset valves increasing in the firm due to the physical event of production or sales of the firms’ products or services. In Kam (1987:237), Financial Accounting Standard Board(FASB) defines 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 service or other activities that constitutes the entity’s ongoing major or central operations. In addition, Hongreen et al (2002:568) described revenue as inflows of asset (almost always cash or accounts receivables) received for products or services provided to customers. Thus internal control is defined as the whole system of control, financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner to ensure adherence to management policies safeguard the assets and secure as far as possible the completeness and accuracy of the records. In addition the American institute of Certified Public Accountants in 1949 defined internal control as comprising the plan of organisation and all the coordinate methods and measures adopted within a business (or non profit making body) to safeguard its assets, check the accuracy and reliability of its accounting data promote operational efficiency and encourage adherence to prescribed managerial policies. A ‘system’ of internal control extends beyond those matters which relate directly to the functions of the accounting and financial department. Internal control system is the strength of every organization, has become of paramount important today in banking sectors. The reason being that the control systems in any organization is a pillar for an efficient accounting system. It has also been shown that despite considerable investment, public service delivery by the establishment is widely perceived to be unsatisfactory and deteriorating from bad to worse. The need for the internal control systems in the organizations, especially in banking industries cannot be undermined, due to the fact that the organizations which has a crucial role to play in the economic development of a nation is now being characterized by macro-economic instability, slow growth in real economic activities, corruption and risk of fraud.

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