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THE IMPACT OF INTERNAL AUDIT ON FRAUD DETECTION AND PREVENTION

  • Department: ACCOUNTING
  • Chapters: 1-5
  • Pages: 50
  • Attributes: Questionnaire, Data Analysis, Abstract
  • Views: 576
  •  :: Methodology: Primary Research
  • PRICE: ₦ 5,000
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ABSTRACT

The purpose of this study is to examine the impact of  Internal Audit on fraud detection and prevention with Power Holding Company of Nigeria as a case study.

Information and data were collected through the use of research questionnaires and company’s financial statement. The research questionnaires distributed were 30 of which 23 were  completed and returned by the respondents. The hypothesis formulated were tested  using chi-square statistical tool.       

The study reveal that internal audit plays an important role in the public sector. 

CHAPTER ONE

BACKGROUND TO'THE STUDY

1.1   INTRODUCTION

Saying that fraud is an important (however not loved) part of business, is nothing new. Fraud is a million dollar business, as several research studies reveal. Among them are important surveys of Price Waterhouse & Coopers (PwC, 2007) and of the Association of Certified Fraud Examiners (ACFE, 2006). The study conducted in the United States by the ACFE in 2004-2005 and the worldwide study, held by PwC in 2006-2007 yields the following insights. No industry seems to be safe and bigger companies seem to be more vulnerable to fraud than smaller ones. Small businesses however suffer disproportionate fraud losses. 43% of companies worldwide have fallen victim to economic crime in the years 2006 and 2007. The average financial damage to companies subjected to the PwC survey was US$ 2.42 million per company over two years. Participants of the ACFE study estimate a loss of 5% of a company’s annual revenues to fraud. Applied to the 2006 United States Gross Domestic Product of US$ 13,246.6 billion, this would translate to approximately US$ 662 billion in fraud losses for the United States only. These numbers all address corporate fraud, more precisely internal fraud.

About the way fraud is detected, both studies of PwC and the ACFE stress the importance of tips and chance. However, as a number two detection means in studies, internal audit and internal control systems can have a measurable impact on detecting fraud. The more control measures a company puts in place, the more incidents of fraud will be uncovered.

Organizations allocate lots of resources to internal audit and control sto prevent internal fraud. These costs, together with the costs of fraud, represent a large economic cost for the business environment.

Academic literature is currently investigating the use of data mining for the purpose of fraud detection. Brockett et al. (2002), Cortes et al. (2002), Est´evez et al. (2006), Fanning and Cogger (1998), Kim and Kwon (2006) and Kirkos et al. (2007) are just a few examples of a more elaborated list of articles concerning the hot topic of fighting fraud. Although a lot of this research may be framed in different settings -going from different techniques to different fraud domains-, there are two characteristics that stand for all executed research up till now: the focus is on external fraud and a predictive data mining approach is applied for fraud detection. We however are interested in internal fraud, since this represents mainly these large costs in the PwC and ACFE surveys. Further, we are convinced that not fraud detection alone, but detection in combination with prevention, is of priceless value for organizations. We use the term fraud risk reduction for encompassing both fraud detection and prevention.

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