Internal Control System in Manufacturing Industries

Internal Control System in Manufacturing Industries

Since internal control is a very important aspect of the function of management there is the need to have an in depth study of the subject.Many studies have already been done on the subject, therefore the researcher seek the review works already done on the subject as this will help to provide an insight into the research.

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There are many definitions already given to the word internal control.  This will depend on the organization and what it trade on like manufacturing company being study in this work internal control is being applied in area of stock, cash staff (organization) etc.

Internal control can be defined according to the consultation committee of accounting bodies in the united kingdom as the whole system of controls, financial and otherwise established by the management in order to carry on the business of an enterprise in an orderly and efficient manner ensure adherence to management polices, safeguard the assets and secure as far as possible the completeness, reliability and accuracy of records, the individual component of an internal control system are known as controls or internal controls.  Since internal control comprises of internal audit and internal check, there is a need for one to study the internal audit critically and efficiency control.

Internal audit may be defined as an independent review or appraisal within an organization of the accounting financial and other operations as a basis for protective and constructive sincere to management.  It is conducted by the company’s own specially assigned staff and whilst dealing prosily with accounting and financial matters, may be applied also to any other aspect of the operative of the organization.

Internal auditing is a staff function rather then a live function.  Therefore the internal auditor does not exercise direct authority over other person in the organization whose work he reviews. The internal auditor appraise policies, plans procedures and record but his review and appraised do not in any case relieve the other persons in the organization of responsibilities assigned to them.

The emphasis in many smaller companies eg (life Breweries Onitsha) is directed towards the review of the accounting records for accuracy and the properly protective function involved in counts of cash funds, bank reconciliation inspection of securities, internal counts and check of payroll preparation and distribution, the title of internal auditor is sometimes gives to a line executive who supervises the accounting function and has no real auditing responsibility.

For examples executive of the line office staff took to the internal audit group for help in supplementing their own visit to the field.  They recognize that without the help of the internal auditor in checking on adherence to company policies and procedures of the various plant.

Their problem of control would be considerably increase and they find it reasoning to know that there is an independent appraisal group out in the field checking operations for any serious discrepancies.

However, in many small companies the function is properly recognized and much valuable work is performed by internal auditors who operate alone or have one or two assistants.


Section 202 (S. 202) of the financial regulation provide that vouchers must be numbered consecutively and promptly posted to the cash book.  This will prevent fraudulent use of vouchers which is an authority for cheques to be made to the person named there on usually referred to as the payee. Similarly, S 828 mandates that cancelled cheque leaves and receipts must be retained in the cheque and receipt books.

S 15 C10) places a responsibility for signing certificates on vouchers on all officers involved with writing checking, passing and payment of vouchers.

S 29 state that is when money is paid to the bank the paying-in-ship and the duplicate (and triplicate were use) must be analysed as to

  1. Cheque
  2. Postal orders
  3. Money orders
  4. Notes
  5. Coins

The duplicate must be examined to see that it bear an acknowledgement of receipt by the bank and that the analysis has neither been altered, added to nor substituted for after the lodgments.

S 1414 emphasis that accounting officer most issue instruments for systematic inspection of irregular internal of the cash held by their subordinates.  A record of such inspections must be kept.

S 2039 specifically mentioned that officer controlling expenditure will ensure that a complete and detailed internal check (not to be confused with an internal audit) is executed on each payrolls before payment and that the officers employed on the internal check are officers other than those who have been currently employed on the preparation of the payroll.  The voucher under the little of “checked by” will be signed by the officer directly in charge of the internal check.

S 2203 – S 2208 are actively devoted to duties and responsibilities of the internal audit.  S 2203 provide that the internal auditor should carryout detailed audit of the accounts and records and the examination of the system and procedure in force issues special reports if necessary, when in his opinion, the attention of the accounting officer and the accountant in charge must be called to an irregularity in the accounting record or an apparent weakness in the accounting records to any apparent in attention to the reports of the auditor general or to earlier internal audit reports issue by him.

In these companies where a system of stock verification is available, they will ensure that control of the stock verification staff and direct their programme of inspection (FR3306).

S 2204 goes further to say that ‘that internal auditor-in-charge will ensure that the program of audit extends to cover all the records of the various department or unit in order to satisfy himself that:-

  1. Safeguard introduced for the prevention or the prompt detection of fraud and loss of cash or stones a plant are adequate.  Normal safeguard include the observation if government and departmental regulations and instructions for existence and internal checks.
  2. The system for the control of the collection of revenue is adequate, and that all monies recorded have been promptly brought to account to the correct head and subhead.
  3. The system for the control of expenditure is adequate and that all payments made are paid to the right person from the correct head and subhead and are made for the purpose for which they were authorized.
  4. The system for the control of the issue and consumption of stores is adequate that all issue are properly authorized by the right person.
  5. There are adequate means for the verification by him of all cash, stores and plant head.
  6. The accounting records are accurate “in addition to the off mentioned, the auditor will also be responsible for the provision of S. 2205-2208 the S2205 states that “the internal auditor in charge will maintain under his personal control, a register to record the progress of the audit.  The register will normally be in column form of not less that thirteen (13) columns, to record in the first column, the specific task to be undertaken is the first course of internal audit, and the officer –in-charge of each task will initiate in the appropriate extension of the specific last for each month. The inspection of headquarters accounts or control officer will normally be on a continuous basis through out the year while inspection of separate units might be on a periodical basis.


Section 3201 or 32023 deals with the books and forms account while S3304-3308 that the supervision and custody of stores.

The details are as follows: S 3202 provides that separate ledger is necessary for each store and that aims should be arranged in alphabet Leal order and clearly indeed while S.3203 provides the proper stores ledger is necessary.

s.3304 states that the store keeper or officer –in-charge of store or section of a store who will in each case be specifically nominated writing is personally responsible for:-

  1. Checking, handling and storage of receipt.
  2. Care of store, includes proper stocking with the observations.
  3. Issue of store supported by authority vouchers and ensuring that such issues are checked before they are properly packed.
  4. Progression of store issue so that items of old stock are issue before new stocks.
  5. Maintained of stock within limits
  6. Avoidance of west and irregular issue
  7. Periodical verification of stock balances with tally cards ledger balances and for reporting any discrepancies revealed including damaged or deteriorated story excess stores or absolvent stores.

S.3305 goes further to state that:-

The store keeper or officer-in-charge of stores or section of a store is personally responsible for:

  1. Existence and observation of security regulations, which should include prevention of unauthorized access,
  2. Frequent inspection of the store room, giving special attention to the prevention of illegal entry.
  3. Ensuring that the store room is not in good condition(repair).
  4. The store-keeper or officer in charge of a store or section of a store is required to be present when the store rooms are open and in any use, most visit the store room daily.  He is solely responsible for the keys and no delegation of duties of locking up his parnutled except in the special circumstances which may require more then one officer to be specifically authorized or when more than one locj is in use for security, all such circumstances special instructions the required, which must be approved after consultation  will the auditor-general.

S.3307 writes on inspection of stores and the report there on while S3307 states that report of inspections will provide the result of the following checks:-

  1. A test verification of additions and subtraction in the store ledger and a test comparison of the ledger entire will receipt and issue vouchers:
  2. A test comparison of the ledger balance with the actual stock and tally cards,
  3. An examination of security measures stores or excess store are needed, together with any necessary recommendation.
  4. An examination of the book and register in use which should be up-to-date and the relevant vouchers properly filled.

s.3308 provides that officers to whom plant and tools has been issued for current use will make periodical checks to ensure that no shortages exist.  Any discrepancies should be reported to the Head of division department.


     The financial regulation goes further to enumerate guideline on store issue producers.  S.350, 3902, 3903, 3902 and 2908 provides attained pre-cautionary measure on issue of store authorization checking, recording and chromyl of stores.  The provisions are analyzed below:-


  1. Issue will be made on the authorization of a numbered stores requisition, a numbered combined stores requisition voucher or a stores transfer requisition.  In case of issue of stock from unallocated stores, the requisition etc must be signed by the officer authorized to income and expenditure who must ensure that finds are available.

ii.  Requisition will be prepared in duplicate the original of which should be said to the stores issuing department.  Quantities will be written in bolt words and figures and each type of article required will be given an item member.  To prevent unauthorized additions, a line will be drawn immediately below the last entry.  The requisitions form will be clearly marked original and duplicate.

  1. when a combined requisition / issue voucher is used three copies will be sent to the store issuing department and the original  will become the issue voucher.  After issue of the stores, the original and one copy of the voucher should be sent to the requisition who will sign and return the original to the issuing officer, as acknowledgement.

S. 3902:  All local punches of stores must be authorized by the officer controlling expenditure and the local purchase order (L.O.P)must be signed by the responsible officer, the sign LPO’s will be sent to the firm concerned and a register containing the names of all such officers will be kept.

S.3903 vouched on stores purchased in Nigeria the cost of which exceeds #500.  it provides that such purchase must be obtained by contract after public tender except as otherwise specifically authorized by the commissioner of finance.

Condensation of this regulation must not be attempted by trekking down a single order exceeding the limit into several order for lesser amounts.

S.3902 further states that the:

i.        L.P.O will be prepared in words and figures and that the order will be ruled off after the last item.  The original and duplicate of the order will be submitted to the supplier, who will return the original with the invoice or bill.  When payment is made, the original of the order together with the invoice or bill be attached to the voucher.

ii.       The triplicate copy will be sent to the store keeper if the goods are to be taken in charge.  The quadruplicate will remain in the book.

iii.      Any alteration to the wording on a local purchase order must be signed by officer authorizing the order.

S.3908 provides that:

i.        If the original and/ or duplicate of local purchase order is before delivery of the goods, the issuing officer will inform the supplier of cancellation immediately.  The copy of the orders must be recorded from the store keeper, replaced in the order book, and the triplicate and quadruplicate suitably endorsed. A fresh L.P.O may then be insured.  A report should be made to head of division/ department and to the accountant general who will arrange for a notice of loss to appear in the federation of Nigeria official gazette.  A copy of such notice shall be for warded to the auditor general of the company.

ii.       If a local purchase order is lost after the goods have been delivered and supplier may obtain payment after signing on the payment voucher, a form of indemnity protecting government in the event of other payment for the same delivery.

Finally, S.3909 states that all used and partly used L.P.O books will be kept under lock and key and suitable precautions will be taken at all times to prevent the getting into authorized hard.


Dapo Alowe in his artide “keeping records of business operation”, stressed the essence of proper recording system. Among the records, sale records, and cash records, purchasing and stock records.

He was of his opinion that suppliers register and fill help in negotiating price, delivery and terms of business while purchase order fill keeps track of all that has been ordered.  Inventory control, he said can be in two forms, physical stock taking which is suitable in buck stores and money value which is suitable where stock items are numberous, for instance, supermarkets and departmental stores.  He however, mentioned that in spite of the number of item, periodical stock taking is still essential to verify the inventory item by item.  He further enumerated the importance of stock/bim cards out of stock sheet, price book, returned goods register and good received note (GRN).


Under these headings, he recommended way bills, invoiced cash sales tickets, daily sales, summary. Sales plan which he said is similar to budget and is for a specific period.


          He advocated the reconciliation of cash daily for entry into cash receipt journal.

He further enumerated the essence of bank reconciliation which he said was done to determine whether the cheque book stub agree with the bank records.

Contributing in his article, government auditors and financial accountability, J.O.E Ogbimi recognized the need for shareholders to be assured that their money is being properly utilized and for the benefit of the company as a whole and that for shareholders to obtain this assurance.  It is reasonable that persons who are relevantly competent should periodically examine and report on what management has done with their money.

In this plat form, it is also necessary that in government establishments periodical examination should be carried out to ensure that tax payer’s money is judiciously utilized.

Business times, Monday April 16, 1994 vol. 1. No. 66 p. 16.

In this article, internal control system and fraud in both Nigeria public sector or organization.

Bode Fayemi of the department of accountancy and finance, University of Ilorin, was of the opinion that majority of frauds in the establishment can be traced to lapses in the internal control system and the existence of poor control environment in the companies. He said that control is necessary (essentially) a management function that deals with the measurement and corrective of the performance of staff with a view to achieving organizational objectives with maximum efficiency and at minimum costs.  He gave four stages of control viz.

  1. Setting standard
  2. Measuring performance against standard
  3. Feedback of result and
  4. Correcting deviations from standards

He gave five consideration of an effective control system.

Firstly, the control must be relevant to the size of the job that is being performed.

Secondly, variations from standards must be reported immediately.

Thirdly, distribution of duties must be properly set out so as to identify person responsible for the variation.

The official journal of the institute of chartered accountant of Nigeria.  The Nigeria accountant July/September, 1987, vol.Number 31.

Fourthly, there must be good control environment. Management must possess and demonstrate good leadership qualities.

He observed that internal control, like any other system, consists of input, processing unit and output. The input he said are the objectives, standards, polices and plans, financial resources, etc, which are processed. The result of the evaluation is to know what is happening in the organization and perhaps what will happen in further and this take corrective measures.  He called on management to ensure conductive environment at all times.

He further recognized the functions of the internal and which he said cannot be effectively performed if it is not independent from excessive control.

The independence must include, independence is scheduling his activities in determining what to investigate and method of investigation (LE COMP bell 1955 P.87) they will enable him to detect and report frauds.  For him to  be independent, the head of the unit must be responsible to an officer of a higher rank.

He cited countries like Italy where audit department scrutinized transactions before they are settled. Under such a system, according to him, it would be difficult to exonerate the audit in use of any amount or fraud and it is administratively cumber some.

He was of opinion that the independence does not help in certain situation because employees usually do not report identified fraud for fear of being slaked or even being killed.  Thus, he said renders internal control useless.

He advocated for employment of trained  competent auditors.

In conclusion, he celled for the establishment of audit department in each department gives appropriate reward and protection for auditor and promulgation of decree imposing stem punishment of fraudulent acts.


          In this part of the study, foreign auditor who wrote article and book on internal control and related copies are to be considered.  These include A.H Millichamp Ceshie R. Howard, D.E Vickery; 1983 Koontz, O. Donnel and Edcihrich and Several others.

A.H Millichamp, (1991) gave two ways by which the auditor must convince himself of the reliability of this by using the vouching approach that is, by examining each individual entry and vitrifying or vouching it or he can:

  1. Determine that there is a system for recording transactions, preparing documents and entry up company’s books and records.
  2. Determine that there is a system of procedures which if effectively applied all the times will ensure that the records are reliable;
  3. Determine that the system has been so applied, he also give a brief description of and definition of internal check viz:-

The check on the day to day transaction which operates continuously as part of the routine system whereby the work of one person is proved independently on is complementary to the work of another, the objective being the prevention or early deflection of fraud and errors.  It include matters such as the delegation and allocation of authority and the division of works, the method of recording transaction,  and the use of independently ascertained totals against which a large number of individual items can be proved’.

He enumerated seven characteristics of a good internal control system namely:

  1. Segregation of duties
  2. Proof measures, e.g trial balance pricelist
  3. Acknowledgement of performance by signature, internals, rubber stamp etc.
  4. Protection device like safes, lowed ash registers etc.
  5. Formal transfer of responsibility for goods.
  6. Pre-review
  7. Post review
  8. Verification, review and amendment of the system
  9. Internal audit
  10. Management control

He also grave three essential structure of all internal control system viz:-

  1. The plan of the organization
  2. Authorization, recording and custody procedures
  3. Management supervisor and review

He summarized the various types of contracts as laid down by the auditing standard and guidelines as:-

  1. Organization
  2. Segregation of duties
  3. Physical
  4. Authorization and approval
  5. Arithmetical and accounting
  6. Personal
  7. Supervision
  8. Management

B.G Vickery wrote on “internal check” which he said denotes the systematic organization of clerical duties and routine in such a way as to ensure that fraud and irregularities are impossible without collision and that innocent mistakes are detected and corrected at an early stage.

This necessitates a sub-division of duties by means of which no one person is responsible for the entire work in connection with anyone transaction”.

Koontz O’Donnel and Weihrich gave eight qualities of a good control system namely:-

  1. Control should be tailored to plan and position.
  2. Control should point up exceptions of critical points
  3. Control should be tailored to individual managers and their personalities.
  4. Control should also be flexible
  5. Control should be objective
  6. Control should take corrective action
  7. Control should be economical

Koontz O’ Donnel and Ideihrich management MacGraw Hill international Book company, 1983 7th Edition P.734.



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Internal Control System in Manufacturing Industries


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  1. Raja faisal says:

    Thank you sir. I learn more knowledge from your notes.

  2. odama patrick says:

    I need project topic on the impact of internal control on the performance of manufacturing company

  3. jaseemlal says:

    sir could u pls pass this project
    atleast that questionnaire

  4. adewumi yemisi busola says:

    Pls I nid a material on a topic: An appraisal of the effectiveness of the internal control system of a manufacturing company (a case study of Cadbury ikeja)

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