FINAL YEAR PROJECT

CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL REVIEW

Concept Of Internal Audit

According to the institute of internal auditors (2009 as cited izedonmi 2021) internal audit is
define as an independent and objective assurance and consulting activity that aims to add value
and enhance and organization operations. By employing a systematic and discipline
approach ,internal audit help organizations achieve their objectives by assessing and improving
the effectiveness of risk management ,control and governance processes.

According to Jurchescu (2010 as cited izedomi 2021), defined internal audit as an independent
appraisal activity within an organization that provides a review of operations to support
management. Internal auditors, as employees of the organization, use systematic and methodical
approaches to evaluate and enhance the efficiency and effectiveness of internal controls, risk
management, and management processes, ultimately helping the organization achieve its
objectives.
According to Unegbu and Kida (2011), internal audit is a component of an organization's internal
control system designed to ensure adherence to established policies and procedures, ultimately
supporting the achievement of management objectives.

FINANCIAL CONTROL

According to Buhari (2001), financial control refers to the process of ensuring that government
financial resources are managed in accordance with relevant laws, regulations, and accounting
standards.
Anfayo (2016) defines financial control as a process that ensures proper utilization of funds for
authorized purposes, involving monitoring and evaluation of actual performance against set
standards

According to Sani (2009), financial control in local governments, like other ministries,
departments, and agencies (MDAs), involves two types:
i internal and external controls. Internal financial controls include measures such as issuing
financial authorities (e.g., warrants), appointing committees for specific services, centralizing
payments, preparing annual budget estimates, and setting authority limits.
ii External financial controls, on the other hand, involve oversight from parliament, state and
federal governments, the general public, and external auditors. As noted by Adams (2004),
public sector entities fund their services through various sources, including internally generated
revenue, allocations from the Federation Account, borrowing, and leasing.

Financial control has been a cornerstone of effective public sector management throughout
history. According to Mainoma (2007), financial control refers to measures taken to safeguard
financial resources from waste, misuse, or misappropriation. Governments have long recognized
the importance of financial control, enforcing it through instruments like civil service rules,
financial regulations, and treasury accounting manuals (Akpata, 2010). These guidelines ensure
accountability and transparency in public financial management.

The significance of financial control is underscored by Anfayu (2010), who emphasizes that
effective financial control is essential for organizational functioning. Financial discipline, a key
aspect of financial control, involves judicious allocation and utilization of scarce resources to
maximize benefits.

PUBLIC SECTOR AUDIT

Public sector audit has a long history of striving for transparency, accountability, and efficiency
in government operations. The need for proper structuring of audit operations has been
underscored by numerous scandals, including the 1992 Forex Scandal at the Bank Negara
Malaysia, the 2002 Scorpene Submarine Scandal, and the National Feedlot Corporation's
Scandal (2014). These incidents highlight the challenges faced by internal audit in ensuring
public expenditure efficiency, financial transparency, and accountability.
Over time, the scope of public sector audit has expanded beyond government agencies to
include non-profits, for-profit enterprises, and other publicly sponsored organizations (Goodson
et al., 2012). Today, public sector organizations operate at various levels, including international,
national, regional, and local.

The governance framework guiding public sector organizations emphasizes policies and
procedures that promote ethical and responsible operations. Despite these efforts, the history of
public sector audit is marked by instances of failure, underscoring the need for continued
improvement and reform.

According to the Institute of Chartered Accountants of Nigeria (ICAN, 2021), value for money
audits evaluate whether public sector institutions achieve optimal outputs while minimizing
inputs. This approach differs from traditional financial audits, which focus on compliance with
financial reporting standards. Value for money audits are built around the Three Es: include

1. Economy Audit: Acquiring resources at the lowest cost without compromising quality (Eze &
Uchenna, 2020).
2. Efficiency Audit: Optimizing resource utilization to achieve intended results (Adegbite, 2021).
3. Effectiveness Audit: Assessing whether public programs and policies meet their objectives
(INTOSAI, 2019).

The public sector is embracing digital transformation to boost efficiency and accountability. This
literature review explores the significance of digitalization in government accounting, highlighting
its benefits. Early research by the Government Accountability Office (GAO) in 2010 identified
challenges to digital adoption, including limited funding, technical expertise, and resistance to
change. However, studies show that digitalization can significantly enhance public sector
efficiency, with successful transformations often relying on collaboration between government
agencies and the private sector.

OBJECTIVE OF PUBLIC SECTOR AUDIT

Public sector auditing promotes good governance by:

i.Providing independent and objective information to enhance accountability and transparency.

ii.Fostering confidence in public fund management and organizational performance.

iii.Supporting oversight bodies in monitoring and correcting government activities.

iv. Driving improvement through knowledge, analysis, and recommendations.

RESPONSIBILITY

Auditors in both the private and public sectors have fundamental responsibilities, including
preparing reports that provide a true and fair view of an organization's financial state, as
mandated by law. They must also perform their duties with professionalism, skill, and care.
Additionally, auditors are expected to adhere to specific codes of conduct outlined in auditing
standards.

REGULATORY FRAMEWORK OF INTERNAL AUDIT IN NIGERIA PUBLIC SERVICES

According to Okolo (2001 as cited in izedonmi 2021), a country's resources belong to its citizens,
and governments manage these resources on their behalf through various agencies. To ensure
transparency and accountability, governments are required to render annual accounts, which are
subject to audit as mandated by the Nigerian Constitution. This audit is a legal requirement for
government-owned organizations, ensuring that accounts are correctly and fairly reported.
The Nigerian Constitution (Section 85(1)) establishes the office of the Auditor-General for the
Federation, responsible for auditing public accounts. As mandated by the Constitution and the
Audit Act of 1956, the Auditor-General's role includes:

i.Auditing accounts of public sector organizations

ii.Inquiring into financial transactions involving federal public funds

iii.Ensuring accountability and transparency in government financial management

The Auditor-General's powers extend to internal auditors in government agencies, corporations,

and commissions. As a result, Section 1701 of the Financial Regulation requires:

- Ministries and government offices to establish internal audit units

- These units to conduct continuous audits of accounts, records, revenue, expenditure, assets,
and stores

MANAGEMENT CONTROL PUBLIC SECTOR

Woolf (1986 as cited izedonmi 2021) sees public sector as the part of the economic and
administrative life that deals with delivery of goods and services by or for the government. Also,
public sector can be referred to as that part of economy and administrative life which is owned
and controlled by the public usually through government agencies that provide goods and
services.

A management control system is a broad term that encompasses management accounting

systems and also includes other controls such as personnel or clan controls. Chenhall (2003)
mentioned that Management control systems not only focus on the provision of more formal,
financially quantifiable information to assist managerial-decision making but also concentrate on
external information related to markets, customers, competitors, non-financial information, a
broad array of decision support mechanisms and informal personal and social controls. It has
been observed worldwide that the public sector organizations have been encouraged to develop
market based mechanisms of control which are financial or budgetary, performance indicators,
performance based pay, competition through privatization and contracting out, and the
introduction of internal market models (OECD, 1995). To establish these types of control in
public sector organizations it is necessary to allocate human, physical, technological and
financial resources in a better coordinated way. A well designed management control system can
play a pivotal role in this regard. Groot and Budding (2008) pointed out a good number of New
Public Management (NPM) reforms related to the improvement of Planning and Control of
government entities. Jansen (2004) also argued that adoption of NPM implies that the emphasis
in management control of governmental organizations needs to change from a focus on
information concerning input to information on other elements of the transformation process.
In the public sector there has been a long tradition that the public organizations provide utilities
and services to the fabric of society. A movement away from this situation has emerged and
emphasis is put on efficiency, economy, effectiveness, and streamlining managerialism. The
public sector copied some of these control tools from the private sector. Some of the control
tools they have come up with have been implemented on a modified basis and some of the
control tools are unique to the public sector, and these constitute the innovation in the public
sector. Mulgan and Albury (2003) defined innovation in the public sector as the creation and
implementation of new processes, products and services and methods of delivery, which result
in significant improvements in the efficiency, effectiveness or quality of outcomes. In the public
sector some innovations are transformational because it represents a substantial departure from
the past. Other innovations are incremental in nature.

ROLE OF INTERNAL AUDITORS IN MANAGEMENT OF NIGERIAN IN PUBLIC

Internal auditors play a crucial role in helping management achieve organizational objectives by
performing their audit functions.

According to Abdullahi (2007 as cited in izedonmi 2021), the functions of internal auditors
among others include: engaging in a continuous and independent examination of the accounts
and records of the organization; examining the system and procedures in force and the extent to
which they are still relevant to the achievement of the organization's objectives; reporting to the
top management on the completeness, accuracy, reliability, cost of maintenance and control
procedures, attest to the efficiency and effectiveness with which then entity services on its
operation; assures the management of the extent of compliance with laid down procedures and
of the scope for taking remedial action, where necessary; state and review his schedules of
duties in writing to the management periodically; ensure that accounts are prepared in
accordance with the rules and regulations as they may from time to time be reviewed apply all
possible tests to confirm that the account under review are correct and the information and
certificates supplies can be relied upon; checks the arithmetical accuracy of the books of
accounts.

According to Salisu (2007 as cited in izedonmi 2021), internal auditors should function in a
manner that ensures their independence, conducting special investigations as required by
management. They should review the accounting system and related controls to determine their
adequacy, compliance, and cost-effectiveness, and agree on the plan with the Accounting
Officer prior to approval by the Audit Committee. Internal auditors should also report quarterly to
the Audit Committee and the Accounting Officer. Additionally, they should develop and maintain
a charter for the internal audit department that reflects its core responsibilities, authority, and
reporting relationships. Furthermore, internal auditors should develop and obtain proper approval
for goals, audit work schedules, staffing plans, and financial budgets for the internal audit
department. To maintain their proficiency, internal auditors should obtain an adequate amount of
continuing education to stay current on trends in accounting and auditing. Finally, they should
conduct scheduled and special audits, making recommendations for improvement wherever
necessary.

According to Millichamp (2000), internal auditors are responsible for verifying system operations
through investigation, recording, and testing of controls. As stipulated in the Financial
Regulations (2009), internal auditors should submit special reports to the Accounting Officer and
the Directorate of Finance and Accounts, highlighting any irregularities in accounting records or
weaknesses in procedures. Furthermore, the Financial Regulations (2009) empower the Head of
Internal Audit to maintain a register to track audit progress, ensuring that tasks are monitored
and completed. This register helps prevent unfinished work and supports audit staff in
addressing challenges.

2.2 THEORETICAL REVIEW

This study is grounded in two theoretical frameworks that explain the demand for internal audit
services.

AGENCY THEORY

Various theories, including Agency Theory and Stakeholder Theory, have been used to explain
public sector audit practices and accountability. This study is grounded in Agency Theory.

The Agency Theory defines the relationship between a principal and an agent, where the
principal delegates work to the agent for a fee (Adams, 1994 as cited in Onowu 2025 ). This
theory can also be understood as the process of entrusting the management of resources to
another person or group (Millicamp & Taylor, 2008). The Agency Theory is relevant to internal
auditing, as it assumes that agents (managers and directors) should act in the best interests of
their principals (shareholders). However, agents are often accused of prioritizing their own self-
interest over the interests of the shareholders.

This leads to a lack of trust between the parties, as monitoring the agents' actions may be
necessary. The Agency Theory suggests that auditing emerges as a solution to mitigate conflicts
of interest and moral hazards that arise from the agent's self-interest. The theory highlights the
importance of oversight and accountability in ensuring that agents act in the best interests of the
principals.

LENDING CREDIBILITY THEORY

According to the lending credibility hypothesis, an audited financial statement can enhance
stakeholders' trust in management's stewardship (Volosin, 2007 as cited in Onowu 2025).
Financial reporting requirements impact various groups in the corporate world, including
shareholders, managers, creditors, employees, and government entities. Annual reports are
provided to shareholders, who make judgments based on financial reporting and management's
performance. As stewards of the company, management has a responsibility to act in the best
interests of shareholders.

The auditor, appointed by shareholders, presents findings to stakeholders, with the primary goal
of ensuring the accuracy of financial reporting and operational performance. An auditor's report
aims to boost stakeholders' confidence in the company's security and reduce the likelihood of
manipulative accounting practices. Ultimately, an audit is a review of a company's financial
accounts to verify the reliability of the information (Letza, 1996), providing stakeholders with
assurance about the company's financial position.

2.3 EMPIRICAL REVIEW

Olagbegi (2021) investigated “Internal Audit Quality and Public Sector Managements In
Nigerian”. This study aims to empirically investigate the impact of internal audit quality on public
sector management in Nigeria. Specifically, it examines the relationship between internal audit
variables, such as financial controls and management controls, and public sector efficiency and
management. The study utilized primary data collected through a questionnaire survey of 150
respondents from internal audit departments, ministries, agencies, parastatals, and commissions
in Ondo State, with 144 valid responses received. The data analysis techniques employed
included simple percentage, descriptive statistics, and categorical least square regression.
Firstly, internal audit quality factors, including internal audit competence, objectivity, challenges,
and performance, were found to have a positive and statistically significant relationship with
financial controls in the selected Nigerian public entities. This suggests that high-quality internal
audits can contribute to improved financial management and control. Secondly, the study found
that internal audit quality factors, such as competence, objectivity, challenges, and performance,
had a positive and statistically significant relationship with effective management controls in the
selected public entities. This implies that internal audits play a crucial role in ensuring that public
sector organizations are managed efficiently and effectively.
Thirdly, the study discovered that internal audit quality factors, including competence,
objectivity, challenges, and performance, had a positive and statistically significant relationship
with public sector service delivery in the selected entities. This highlights the importance of
internal audits in enhancing the overall performance and service delivery of public sector
organizations. Based on these findings, the study recommends that internal auditors and public
sector management teams actively participate in the management of public sector entities to
enhance managerial performance. By doing so, public sector organizations can leverage the
benefits of high-quality internal audits to improve their overall performance and service delivery.
Onowu, Azali and Agapia (2025) research the “Public Sector Audit Practice and Accountability of
Government Organization in Nigerian “This study investigated public sector audit practices and
accountability in Nigerian government organizations, with a focus on examining the relationship
between audit practices and accountability. The research was guided by specific objectives,
including:
Determining the relationship between financial audit and financial accountability,Examining the
relationship between financial audit and management accountability,Investigating the
relationship between financial audit and administrative accountability,Analyzing the relationship
between regulatory/compliance audit and financial, management, and administrative
accountability.The study adopted a correlation research design, with a population of 150 Federal
Ministries, Departments, and Agencies in Rivers State, Nigeria, and a sample size of 15. Primary
data was collected and analyzed using descriptive statistics and simple regression analysis.The
findings revealed:A significant relationship between financial audit and financial
accountability,No significant relationship between financial audit and administrative
accountability,A significant relationship between regulatory/compliance audit and financial
accountability,No significant relationship between financial audit and management
accountability, as well as regulatory/compliance audit and management accountability,A
significant relationship between regulatory/compliance audit and administrative
accountability.Based on these findings, the study concluded that financial audit plays a crucial
role in promoting financial accountability in government organizations. The study recommended:
Maintaining financial audit practices to promote financial deepening,Hiring effective and
professional external auditors to independently evaluate public organization accounts,Ensuring
that public organization management positions are free from political influence to prevent
corruption and embezzlement.

Eneislk(2025) conducted a topic titled “Value for Money Audit and Public Sector Accountability
of Federal Government Agency Nigeria “This study examined the relationship between value for
money audit and public sector accountability in federal government agencies in Nigeria. The
research focused on 90 federal government agencies, with a sample size of 250 determined
through judgmental sampling technique. A structured questionnaire was used to collect primary
data, with 240 out of 250 distributed questionnaires collected and analyzed.The study utilized
Pearson Product Moment Correlation to analyze the formulated hypotheses, with the aid of
Statistical Package for Social Sciences (SPSS) version 22. The findings revealed that: Economy
audit, efficiency audit, and effectiveness audit have a significant relationship with public sector
accountability in federal government agencies.
Based on these findings, the study concluded that value for money audit positively influences
public sector accountability. The study recommends:Adopting cost-saving measures and
budgetary discipline to ensure prudent spending of public funds,Conducting regular economy
audits to identify and eliminate unnecessary expenditures, Improving resource allocation and
management to minimize inefficiencies in government operations.These recommendations aim to
enhance public sector accountability and promote efficient use of resources in federal
government agencies.

Bingiar and Sawyer (2020) studies “ The Significant of Auditing in Pubic Sector “The accounting
system, including auditing, in Nigeria's public sector was modeled after the British system due to
colonial influence prior to the country's independence in 1960. As a result, the civil service
operational systems in Nigeria closely resemble those of the British Government. Following this
historical development, federal and state governments established ministries, parastatals, and
audit departments, headed by the Auditor General, to ensure accountability of public funds.
However, despite reasonable objectives and changes in the civil service structure, auditors in the
public sector have encountered problems. These challenges have hindered auditors from
expressing valid opinions on audited accounts and have affected the performance of ministries
and departments.
This research aims to identify strategies for addressing audit problems in Nigeria's public sector.
The study's objectives include : Identifying audit lapses in government accounts,Addressing
problems associated with audit practices.To achieve these objectives, the study will utilize
primary and secondary data sources, including: Observations,Interviews,Questionnaires,Books,
Journals,Conference papers,Magazines, Unpublished materials.The study will employ simple chi-
square statistical methods for data analysis.Identify problems associated with government
audit,Provide solutions or minimize these problems,Introduce efficiency into government
accounting and auditing practices,Enhance the quality of government financial statements for
users.

Sabeeha,Jassim,Nammer,Raad and Ruslan (2024) Investigated “ The Role of Digitalization in

Improve Accountability and Efficiency in Public Service “The increasing adoption of digital
technology has transformed operational practices across various sectors, including the public
domain. In public service accounting, digitization plays a vital role in enhancing accountability
and efficiency.This article explores the impact of digitalization on public sector accounting, with
a focus on its effectiveness and accountability. The study highlights the benefits of leveraging
digital technology, including:Enhanced accounting procedures,Minimized human errors,Improved
transparency,Comprehensive audit trails,
Prevention of fraudulent activities.The findings suggest that automating accounting processes
through digitalization can:
Improve productivity and reduce costs associated with human accountants.However, a
successful transition to a digital accounting system requires:Strategic planning and addressing
potential challenges, such as data security concerns and resistance to change In conclusion,
digitalization is essential for enhancing accountability and operational efficiency in public service
accounting. Governments worldwide should invest in developing advanced digital accounting
frameworks and carefully plan their implementation to reap the benefits of a digitalized public
sector accounting environment.