OXFORD BROOKES UNIVERSITY

RESEARCH AND ANALYSIS PROJECT ON AN INVESTIGATION INTO THE OPERATIONAL COSTS AND BENEFITS OF INTERNAL AUDIT AND REVIEW IN NESTLE FOODS PLC, NIGERIA.

BY: OBISIKE FRANCIS EMEZI

ACCA NUMBER: 2181131

NOVEMBER, 2012.

CHAPTER ONE
PROJECT OBJECTIVES & RESEARCH APPROACH 1.0 INTRODUCTION

The objective of going into this project is to explore the cost and benefits of internal audit function in Nestle Foods Plc. Apart from our research focus on Nestle Foods, the conclusion dram from this work can also be generalized to other organizations be it in the private or public sector. The approach to this RAP is mainly primary in nature. This is because using the secondary sources of data may not give a clear indication of the issues regarding the cost benefit analysis of internal audit and review function. Therefore, I have taken my time to visit the Corporate Head Office of the company here in Nigeria to gather information regarding the subject matter.

1.1

REASONS FOR CHOOSING THE TOPIC

1.1.1 I have decided to explore this topic because internal audit functions have been very controversial in many organizations. Some people feel that internal audit is a mere duplication of the accounting function; they feel that internal audit is an unnecessary bureaucracy arguing that since the accounts of companies are being audited by external auditors as a statutory requirement, then there is no need of having any other form of check on those accounts, in effect, this school of thought see internal audit as a waste of resources. 1.1.2 On the other hand, there has been this argument of the role of external auditors in identifying fraud and error in financial statements of clients entities (ISA 240). However, the ISA 240 makes it clear that it is the responsibility of management to put in place appropriate measures to detect fraud and error in financial statements while the duty of the external auditor is to express an independent opinion on the financial statements regarding the agreement of the financial statements to subsidiary books and compliance to acceptable accounting framework. In the light of this irreconcilable difference, I decided to undertake this research to get an insight into this argument. 1.1.3 The RAP will also help my professional development in internal audit functions as I intend to go into assurance services on completion of my ACCA studies as an internal auditor. The outcome of this RAP will also help me to do better in the exams of the Institute of Internal Auditors (IIA) in future.

1.2

REASONS FOR CHOOSING NESTLE FOODS PLC

1.2.1 I have decided to use Nestle Foods Plc as my research frame because of its multinational status and its significance in the global nutritional and child care development. As a global firm, its activities are felt by every region of the world in terms of product differentiation, distribution network, human resources base and corporate social responsibility. In Nigeria alone, Nestle Foods Plc has been ranked as one of the best places employees can find themselves. The companys motto Good Food; Good Life is appealing. 1.2.2 The organizational culture is second to none. Their product range is useful to people of all races. Some nursing mothers even use Cerelac as a substitute for breast feeding their babies; though quite discouraged by the World Health Organization (WHO). 1.2.3 The company have a wide product range such as; baby foods, bottled water, cereals, confectionery, coffee, frozen foods, dairy products, drinks, food condiments, healthcare products, ice cream, pet care, sport nutrition and weight management products. There is nobody who does not consume their brands on earth. 1.2.4 Nestl Foods have a good corporate governance culture. Its headquarters in Switzerland is staffed with a high caliber of staff transverse all business units. With this, it is possible for an analyst to get hold of facts and figures with which to make propositions and possibly reach conclusions on contentious issues in management, finance, health and nutrition.

1.3 AIMS & OBJECTIVES OF THE RESEARCH WORK The following are some of the objectives of the chosen project topic: 1.3.1 To identify the relationship between the benefits Nestle Foods Plc derives from internal audit and the cost of running the internal audit department. 1.3.2 To identify whether not having an internal audit function in Nestle Foods Plc will not affect the profitability and shareholder value of the company. 1.3.3 To explore the possibility of having any other form of internal control different from internal audit. 1.3.4 To give other companies an insight into the desirability of having an internal audit department. 1.3.5 To try as much as possible to draw a conclusion in the argument among the schools of thought that see internal audit as an unnecessary bureaucracy and those who still stand in support of internal review activities.

1.4 BRIEF HISTORY OF NESTLES GLOBAL In 1867, a Swiss based German pharmacist called Henri Nestle used a combination of cow milk, wheat flour and sugar to save the child of a neighbor in Cham Switzerland. This was the beginning of the journey which gave birth to the multinational organization today called Nestle Foods Plc. Before then, there had been an Anglo-Swiss European Milk Condensed Company established in 1866 by two Americans, Charles and George Page. In 1905, the European Milk condensed company merged with Nestle to form the present day company. The 1st World War caused a lot of setbacks to the company but by the end of the war, the company had more than 40 factories in different parts of the world. Today, the company has its presence in every parts of the world because of its diverse customers base and its ever important product brands. The company is managed by a team of fifteen Executive Board members headed by a Chairman. An organization chart of the company can be sighted in the appendix. The company has a good corporate governance structure which can be depicted from the board committees in place such as audit committee, nomination committee, compensation committee and corporate governance committee. The separation of the position of Chairman (Peter Brabeck) and Chief Executive Officer (Paul Brucke) is also a pointer to that. The company has several brands of products dealing with nutrition, baby foods, weight management, pet care, drinks, dairy products, frozen foods, dairy products, bottle water and cereals to mention but a few. The company has ten business principles covering how they deal with: 1. Nutrition, health and wellness. 2. Quality Assurance 3. Consumer Communication 4. Human rights in business activities 5. Leadership and personal responsibility 6. Safety and health 7. Agriculture and rural development 8. Suppliers 9. Environmental Sustainability, and 10. Water. In Nigeria, Nestle Foods prides itself as the market leader in nutritional and baby foods products. The company is quoted on the Nigerian stock exchange and its shares are of significant value that any investor will want to buy them.

The internal audit function in Nestle Foods is of global scale. The internal auditors travel from its headquarters in Switzerland to other business units and regions carrying out audit of business processes. The company has other subsidiaries such as Nestle Research Centre, Nestle Nespresso, Nestle Professional, Nestle Petcare, Nestle Water, Nestle Health Sciences, Nestl Institute of Health Sciences and Nestle Nutritional Institute. The company has presence in 83 countries, own 461 factories, and has more than 328,000 employees. In 2011 the company made a total turnover of $90.7 billion. The corporate head office is situated at Nestle Avenue 55, 1800 Vevey, Switzerland. In Nigeria the corporate is located at Industrial Avenue 22-24, Ilupeju, Lagos.

1.5 EXPLANATION OF RESEARCH FRAMEWORK The major sources of information for this project work are text books on auditing and ethics, particularly the BPP Study Text on F8, journals downloaded from the website of the Institute of Internal Auditors (IIA), Articles in Student Accountant magazines of ACCA, web pages of Nestle Global and questionnaire administered on the staff of Nestle Foods Plc in Nigeria. The framework I developed is to carry out a detailed survey to find out if the resources (both implied and physical) invested in running an internal audit department is a waste or if it adds value to the achievement of corporate objectives.

CHAPTER TWO REVIEW OF INTERNAL AUDIT AND RESEARCH METHODOLOGY 2.16 RESEARCH METHODOLOGY In order to appreciate the perception of staff of Nestle Foods Plc on the costs and benefit of internal audit/review on the organization, we need to know the method adopted in collecting data, the statement of the research question, the research design, the sampling techniques data collection instrument and the limitation of the study. This paragraph tries to explore the method adopted by the researcher to generate data with which analysis was made before final conclusions. 2.17 STATEMENT OF RESEARCH QUESTIONS This RAP is trying to search for answers bothering on questions frequently asked in order to get justification for the enormous cost incurred by organizations to manage internal audit department especially in Nestle Foods Plc, the subject of our research. Some questions begging for answers are: 2.17.1 Is there really any need to have a dedicated staff for the purpose of monitoring internal controls? Is it necessary to have an internal audit function? Does the internal audit department achieve the purpose for which it is established? Will the control environment function properly even without the presence of internal auditors? Is the opportunity cost of having an internal audit department commensurate with its benefits? Is the opportunity cost of having an internal audit department commensurate with its benefits? Is the operational and finance cost of maintaining an internal audit department justified in view of the alternative uses of scare resources?

2.17.2 2.17.3 2.17.4

2.17.5

2.17.6

2.17.7

It is hoped that at the end of the field work, these questions would have been answered. 2.18 DATA COLLECTION INSTRUMENT

The data used for analysis in this RAP have been gathered through primary and secondary sources. This is because, apart from the secondary sources through study texts, web pages, articles, journals and publications from professional associations such as Association of Chartered Certified Accountants (ACCA) and Institute of Internal Auditors (IIA), the researcher have also administered questionnaires on staff of Nestle Foods Plc to get responses from them on our research questions. Those responses will be used to analyze data collected so as to make a conclusion. 2.19 RESEARCH DESIGN To achieve the objective of this RAP work, careful surveys have been carried out in which staff of the organization participated actively. The method of sampling carried out covered a substantial percentage of staff of Nestle Foods Plc. Questionnaires has been administered on the staff for data collection purpose only. However, staff remained anonymous for confidentiality. 2.20 SAMPLE SIZE To ensure that returned questionnaires are sizeable, a total of seventy questionnaires were distributed. This sample will make up the population for my study. These seventy personnel were drawn from various departments and encompass various stratus of the organization hierarchy ranging from operational, tactical and strategic management positions.

2.21 SAMPLING TECHNIQUES The sampling method adopted is a stratified random sampling in which staffs were grouped into strata according to their managerial level. In return every stratum was sampled on a simple random sampling method. 2.22 LIMITATION OF STUDY This research work have not been conducted without attendant difficulties, one of the problems encountered is the inability to collect questionnaires distributed from some of the respondents. The problem of confidentiality was resolved by giving respondents the assurance that their responses will be kept confidential and only used for the purpose of this RAP project.

Time constraint was also evident. However, the researcher had to strike an appropriate balance between work and study to ensure that the work is finished within the time frame needed to submit this work by the Oxford Brookes University. Financial limitations were also experienced. But given the fact that whosoever needs gold must dig very deep, the problem of finance is the least encumbrances encountered. The dearth of internet facilities in Nigeria was also glaring but the support given to me by my employer by giving me access to the company network helped me to overcome this barriers.

CHAPTER THREE
DATA ANALYSIS, CONCLUSIONS AND RECOMMENDATIONS

2.1

INTRODUCTION

The nature of the work of internal audit depends on the need for the internal audit function as determined by management, thus, internal audit is an independent appraisal function established by management to monitor, review and evaluate internal controls put in place for proper conduct of business. In the light of the need to reduces losses, improve efficiency and the reliability of financial reports, have prompted firms to set up internal audit departments, be it as it may, some schools of thought are of the opinion that the resources invested in running an internal audit department is not commensurate with benefits derived therein. However, Corporate Governance Codes have greatly emphasized the need to maintain an internal audit department as a tool for Enterprise Wide Risk Management (ERM) (Tunrbull Report, 2005). Internal auditing has in recent years been used by management as a risk management tool. According to the Committee for Sponsoring, Organization of the Tread Way Commission (COSO), risk management is vital as an enterprise wide strategy; hence internal review seem not to be negotiable in businesses. The nature of internal audit activities in an organization depends on its size. Some smaller firms internal audit function may comprise of one staff, while in some, the function may be fused with other functions. Quoted firms like Nestle Nigeria Plc are statutorily required by the stock exchange to set up an internal audit department to be staffed by competent hands for effectiveness. Some organizations are of the view that the financial and operational costs may not be commensurate with its benefits. This debate is the focus of this research paper.

2.2 THE NEED FOR INTERNAL AUDIT FUNCTION As stated earlier, management is responsible for setting up an internal audit function. However, several factors may trigger off the need for management to consider running a separate internal audit function. Some of such reasons are:

2.2.1 The occurrence of an unusual event in the company, for example the fraud or wastage of raw materials. 2.2.2 The need for expansion or the result of expansion into new business fields in which the company have no proper knowledge about. 2.2.3 Management perceptions of the need for internal control enforcement and risk management, this could be attributed to a change in the risk appetite of the organization. 2.2.4 Regulatory demand may also cause an organization to set up internal audit\review function, for instance, the case of Sarbanes Oxley (SOX) in USA. 2.2.5 An organizations control culture will also be a determinant of having internal audit department. If an organization place a high degree of importance on internal controls, no matter its size or financial background, such a company will inevitably opt for internal audit function. 2.3 THE SCOPE OF INTERNAL FUNCTIONS IN NESTLE FOODS PLC

Being a management service, internal audit/review scope in Nestle Foods Plc encompasses all facets of the company. In the first instance, new staff is given induction on risk awareness and risk management on joining the organization. In general, the under listed summarises the coverage of internal audit in Nestle Foods Plc: 2.3.1 Value for Money Audit (VFM) dealing with the assessment of the economy, efficiency and effectiveness, (3Es) of business processes. 2.3.2 Financial audit dealing with ensuring that the organizations financial resources are not fraudulently handled or misappropriated. 2.3.3 Ensuring that accounting records are reliable and produced on timely basis. 2.3.4 Ensuring compliance with regulatory requirements in all activities of the company. 2.3.5 Helping to minimize the abuse of the companys information technology by staff and other users. 2. 4 ADVANTAGES OF INTERNAL AUDIT

The following could be attributable to the benefits which firms may derive by running an internal audit function: 2.4.1 Prevention and detection of fraud and error. 2.4.2 Maintaining the integrity of financial reports 2.4.3 Ensuring compliance with corporate governance codes thereby creating a good image for the firm. 2.4.4 Identifying emerging business risks so as enabling management redirect business strategy. 2.4.5 Protects companys assets, through physical verifications, confirmations and inquiries.

2.4.6 Internal audits could help to reduce the cost of external audit jobs since they assist the external auditors in some of their assignments.

2.5

CHALLENGES OF RUNNING AN INTERNAL AUDIT DEPARTMENT

Despite the several benefits accruing from setting up the internal review function, it does not remove the challenges that are enumerated below: 2.5.1 The cost and benefits are strictly a matter of controversy, hence the object of this RAP work. 2.5.2 Collusion by staff to conceal facts which may hinder internal audit attention to risky events. 2.5.3 Unintentional errors which do not constitute a motive to put the company in a precarious position which internal audit is established to mitigate. 2.5.4 Management over ride of controls which is the greatest shortcomings of internal audit. It has been proved on several occasions of how senior management personnel circumvent controls to achieve selfish interests in divergent from goal congruence. 2.5.5 Managements unwillingness or inability to effect internal audit recommendations when necessary. This point is akin to the issue raised in 2.5.4 above. In this instance, some executives find it difficult to implement recommendations of internal audit reports thereby undermining the effectiveness of internal audit.

2.6

TOOLS USED FOR INTERNAL AUDIT ASSIGNMENTS

Internal Auditors apply several techniques in the course of carrying out their function so as to give far reaching reports to management; 2.6.1 Internal Checks: involve using arithmetical checks on transactions to verify their accuracy. 2.6.2 Analytical Review: involves examining transactions to get reasonable assurance that they have been executed in line with management directives contained in operational manuals. 2.6.3 Confirmations and Inquiry: involving getting contacts with internal and external parties about facts surrounding the companys activities. 2.6.4 Observation: involving on the spot experience of processes to evaluate its appropriateness for example; being present at inventory counting.

2.7

RELATIONSHIP WITH EXTERNAL AUDITORS

The presence of an internal audit function enhances the job of the external auditors. In this case, the external auditors may decide to rely on the job of internal audit which gives cost saving benefit to the company. The external auditors may liaise with the internal audit in the area of stock counting and preparation of trial balance and subsidiary books of account. However, the reliance on the output of the internal audit will depend on how the external auditor perceives the quality of internal audit function. Some of the criteria that may be considered are; the qualification of internal audit staff, the existence of a documented internal control procedure and the areas of concentration of internal audit function. 2.8 RELATIONSHIP WITH AUDIT COMMITTEE

In Nigeria, the Company and Allied Matters Act (CAMA 1990, revised 2004), makes it mandatory for all quoted firms to constitute an audit committee which will comprise of three shareholders and three non executive directors (NEDs). One of the points of reference of the audit committee members is to strengthen the position of internal auditors in the company by liaising with them on implementation of internal controls objectives and enhancing their independence. The significance of the audit committee is to ensure that management does not override internal controls and also serve as a contact point of the internal and external auditors in discussing issues regarding perceived break down of controls by executive directors on internal controls.

2.9

COSTS OF RUNNING AN INTERNAL AUDIT FUNCTION

To keep an internal audit department involves a cost centre. Several operational and financial costs are enumerated below: 2.9.1 2.9.1.1 2.9.1.2 2.9.1.3 FINANCIAL COSTS/OPERATIONAL COSTS The salaries of internal audit staff. The costs of recruiting, training and retraining of internal audit personnel. The cost of furniture, accommodation, fittings and equipments needed to run an internal audit dept. 2.9.1.4 The cost of other financial benefits due for internal audit staff such as medicals, accommodation of staff, pensions and gratuities are also enormous. The cost of travels of internal audit staff from one region to another for firms whose businesses are globalised or have a group structure such as Nestle Foods Plc. OPPORTUNITY COSTS

2.9.1.5

2.9.2

These could be seen from the following: 2.9.2.1 The opportunity cost of using internal audit staff for other activities, for instance, the productivity that would have been achieved if an internal audit staff is drafted to production or marketing functions. The cost of losing an already trained internal audit staff to other companies. This is one of the glaring costs which established firms such as Nestle Foods always incur. Competitors will always seek to pull audit personnel from such blue chips to come and use the wealth of knowledge gathered from such companies to their own benefit. The opportunity cost of investing the financial resources channeled into internal audit function to other profitable ventures by the company and earning higher returns on investments.

2.9.2.2

2.9.2.3

2.10

THE NATURE OF INTERNAL AUDIT

Generally, the internal audit is a management service. Therefore, the department is made to be independent. However, the extent of independence is arguable but highly dependent on organizational structure and culture. In Nestle Foods; the internal audit is accountable to the Audit Committee being a subcommittee of the Board of Directors comprised of equal number of EDs and NEDs. In some companies, particularly unquoted ones, the internal audit is accountable to only the ED or MD as the case may be. This border between other functional department and internal audit is aimed at promoting the independence and objectivity of the internal audit staff. This enhances their neutrality in making judgments thereby ensuring the integrity of the internal audit function. Internal audit is a management appraisal function independent of other line functions used to implement operational policies to ensure that the organizations activities are carried out in a most economical manner, assets safeguarded, compliance with regulations achieved and the integrity of financial reports maintained (BPP Study Text ACCA F8, 2011). The terms of reference of internal audit functions are always determined by management. This determination will be based on managements risk appetite and the general risk exposure of the companys business line. Some businesses are riskier than others; therefore the extent of internal audit functions to be adopted by organizations will depend on the susceptibility of their business to risk. A financial institution for instance, will be prone to risk than a service organization.

2.11

STAFFING OF INTERNAL AUDIT IN NESTLE FOODS

Internal audit functions do not necessarily have to be performed by qualified accountants only (although advisable), this is because the internal audit function is dynamic and changes according to the nature of risks facing a business. Therefore, the department is staffed by people from various disciplines who are trained for the specific purpose of the areas of need. Risk areas are finance, procurement, receivables management, information technology (IT), inventory management and accounting. However, the department is headed by a qualified accountant who has supervisors reporting to him from the segments in which they are given supervisory roles these supervisors oversee the audit officers who carry out the daily routine checks, observations and other techniques adopted by internal audit in carrying out their work. The strategy adopted by different organizations in carrying out review functions differ but mostly reflects the risk appetite of management. Some organizations also outsource to accountancy firms. In extreme cases there may be co-sourcing which involves a combined effort between an external party and companys internal audit personnel. This method of managing the internal audit function has its own merit and demerits. Outsourcing and co sourcing may avail the company the right caliber of staff needed to effect internal audit assignments since the staff will be coming from specialized accounting firms, the set up cost of internal audit may be avoided. However, the issue of confidentiality may be a challenge while outsourcing or co sourcing internal audit functions, secondly independence may be compromised since the external personnel may be subjected to ethical threats, above all, ethical issues arise where accountancy firms perform other functions for same client other than assurance engagement. Notable is the case of Arthur Andersen and Enron Corporation in the United States. 2.12 TRADE OFF BETWEEN COSTS AND BENEFITS OF INTERNAL AUDIT FUNCTION

The debate among analysts and professionals regarding the relationship between the costs and benefits of internal audit is a controversial one. This is because, the role of internal audit is not so pronounced that novices regard them as not being worth its costs. But the recognition given to the need for internal audit by various international and national frameworks goes a long way to show that despite all odds, internal audit functions are worthwhile. In Nigeria for instance, listed companies are required by the Stock Exchange to keep an internal audit function and an Audit Committee. The same goes for the UK Turnbull Report (2005) and the Sarbanes Oxley Act (2002) in USA. It is not easy to measure the benefits of internal audit (Journal of Chief Finance Officers & US Presidential Council on Integrity and Efficiency, 2005). However, internal audit acts as a deterrent to staff with dubious character from carrying out their acts. This is because they may be detected

by internal audit personnel. In this way, the risk of fraud is eliminated or reduced to an acceptable level. Thus, unquoted firms are implored to assess the need for internal audit functions before making investment into the venture. A reaction to this could be sensed in the manner in which some small unquoted firms merge internal audit with other functions. 2.13 REPORTS OF INTERNAL AUDITORS As stated earlier in 3.10, the internal audit department is accountable to top management. Therefore, their reports are always addressed to them for implementation. These reports do not have any statutory layout; it can take any form but naturally, internal audit reports could cover issues like: scope of the audit assignment, purpose of the report or assignment, background information, results of findings, summaries, opinions and/or recommendations. Like every other report, internal audit reports are expected to be accurate, timely, brief, complete, clear and objective. Objectivity is a major issue in this respect because internal auditors are expected to be independent in their approach to their work. Independence involves being in a state of the mind to take good decisions without the undue influence of a third party. 2.14 CHARACTERISTICS OF AN IDEAL INTERNAL AUDIT FUNCTION

Every human activity have minimum standard expected of it to be adjudged acceptable. In the case of internal audit assignment, three key issues are very relevant in order to make the output from their function reliable and value laden. Independence is key to internal audit functions. This attribute entails that internal auditors should not be involved in line functions in which they will be made to review afterwards. This will ensure that the internal audit function is absorbed of all forms of self review threat in order to guarantee objectivity. Secondly, internal auditors need to be competent in their functions. This will involve getting the right caliber of staff to undertake internal audit functions. This could be guaranteed through professional development, training and retraining of internal audit staff. Above all, internal auditors need to be abreast of their duty of confidentiality to their bosses (top management). The duty of confidentiality is necessary as it will help to preserve the integrity of internal audit functions. 2.15 DIFFERENT TYPES OF CONTROLS

According to a journal posted on the Website of Vanderbilt University, there are two forms of control activities available to organizations namely, preventive controls and detective controls. An attempt is made to throw light on the effectiveness of these controls. 2.15.1 PREVENTIVE CONTROLS

These are controls designed by management to discourage the breakdown in processes which might lead to non achievement of corporate objectives. Preventive controls involve segregation of duties, authorization and approval limits, and security of assets, to mention a few. These activities are deliberately articulated by management to ensure that the possibility of a individual carrying out a complete cycle of a transaction is discouraged. 2.15.2 DETECTIVE CONTROLS These are mechanisms put in place by management to ensure that breakdown in business processes are discovered, corrected and appropriate disciplinary actions taken against the perpetrators. Activities which constitute detective controls are: variance analysis, reconciliations, internal checks and audits. It can be seen from this that internal audit falls into the detective control thereby confirming the requirement of ISA 240 that management is responsible for designing controls which are appropriate according to the circumstances of the organization to detect fraud and errors. Variance analysis is used to assess an activity in relationship to a benchmark. Reconciliations are used to check the causes of differences between related but different records kept by different people, for instance, bank reconciliation statements used to check the causes of difference between office cash book and bank statements. Physical check involves the physical appearance to see for oneself the existence and authenticity of an asset or an activity. Audit on the other hand is the generic name any activity which involves appraisal function relating to the review business processes to determine their adequacy with relation to corporate strategy.

3.0 INTRODUCTION Out of a total of thirty five administered on respondents, thirteen of them were returned. I have used simple percentages, graphs and charts to show analysis of responses. In the concluding paragraph attempts have been to draw conclusion from the responses. The analysis sheet is in appendix 2. 3.1 THE STRUCTURE OF THE QUESTIONNAIRE The questionnaire has been divided into two sections. The first section shows the characteristics of the respondents in terms of their functions in the company, academic and professional background, the area of study and their management cadre. An understanding of the sample respondents will help us to get an insight into their (respondents) psychology of internal audit and review function.

The second section concentrated on questions which focused on the significance of internal audit, its benefits and the costs incurred in by the oganisation. In this part, sixteen questions were thrown to the respondents and their answers are represented with pie charts followed by a brief explanation of the observations. 3.2 ANALYSIS OF DATA COLLECTED SECTION A 1. The educational and professional background of respondents shows that 54% were first degree holders, 38% are diploma holders, while 8% have professional certifications. This is shown in this bar graph:

THE EDUCATIONAL BACKGROUND OF RESPONDENTS

60 50 40 30 20 10 0 DIPLOMA 1 ST DEGREE PROF QUAL

2. Investigations into the functional areas of the respondents in Nestle Foods revealed that 58% work in accounts and finance function, 8% in marketing and human resources respectively while another 8% did not indicate their roles in the company. However, 24% indicated that they work with the procurement department. A line graph can illustrate this thus:

FUNCTIONAL AREAS OF RESPONDENTS

70 60 50 40 30 20 10 0 Accounts & Finance Marketing Dept Human Resources Procurement

3. Inquiring into the area of study of respondents, it was observed that 69% of them are from the management field, 8% studied engineering while 23% were from the sciences. A pie chart illustrates this:

DISCPLINES OF RESPONDENTS

Management Engineering Sciences

4. In order to know the caliber of staff that responded to the survey, a sample of the managerial level were made. It was observed that 46% of the respondents are middle level managers, 38% are operational level staff while 16% are strategic management officers. I used a bar graph to illustrate this:

MGT CADRE OF RESPONDENTS

Strategic Level

Operational Level

Middle Level

10

15

20

25

30

35

40

45

50

SECTION B 1. The question seeking an answer on the effect of internal audit function on the line functions in the company, the observation showed that 31% of respondents do not feel the effect of internal audit functions on their jobs, 8% are undecided about this issue while 61% feel the impact of Internal audit functions. This is shown in the following pie chart:

IMPACT OF INTERNAL AUDIT FUNCTIONS ON RESPONDENTS' ROLES

NO IIMPACT HIGH IMPACT UNDECIDED

2. On the staffing of Internal Audit department in Nestle Foods Plc, 92% of respondents confirmed that the IA dept do not have more staff than other depts., while 8% are undecided about the size of the staffing. No respondent had a contrary opinion to the assertion made by the respondents who said the IA dept is not staffed than other depts. This response is shown as:

STAFFING OF INTERNAL AUDIT DEPT

DO NOT HAVE MORE STAFF THA OTHER DEPTS UNDECIDED HAVE MORE STAFF

3. Investigating into the implementation of Internal Audit reports, 85% of respondents confirmed that management implements internal audit reports while 15% were undecided about this question. This indicates that the management of Nestle Foods Plc does not pay lip service to the implementation of internal audit reports and recommendations. The likely effect of this is that the control environment in Nestle is strong. This chart depicts the assertion:

IMPLEMENTATION OF IA REPORTS

MGT IMPLEMENTS UNDECIDED MGT DO NOT IMPLEMENT

4. Inquiring into the usefulness of internal audit functions, it was observed that 30.7% of respondents argue that internal audit functions is useful in the areas of detecting fraud and

error, 38.6% see the usefulness of internal audit from the area of monitoring controls and another 30.7% portend that internal audits functions helps to ensure that the companys activities are carried out in compliance with rules and regulations guiding the geographical locations of the company. None of the respondents were indifferent in this question. This is shown in the pie chart below:

USEFULNESS OF INTERNAL AUDIT

DETECTING FRAUD AND ERROR MONITORING OF CONTROLS COMPLIANCE WITH INTERNAL CONTROLS

5. An investigation into whether Nestle Foods Plc can operate without an internal audit function, 77% of respondents cannot imagine how Nestle Foods Company can operate without an internal audit function, 8% believes the company can operate without internal audit while 15% were undecided. This indicates a high desire for internal audit function in the Nestle. The chart below gives a view of this:

POSSIBILITY OF OPERATING WITHOUT INTERNAL AUDIT

POSSIBLE NOT POSSIBLE UNDECIDED

6. Internal audit functions are not statutory for unquoted firms. This option makes some firms not to have internal audit departments. However, an insight shows that 84.6% of respondents suggest that internal audit functions should be made compulsory for all companies while 15.4% are undecided in this regard. This is shown in this pie chart:

COMPULSORY STATUS OF INTERNAL AUDIT

SHOULD BE COMPULSORY SHOULD NOT BE COMPULSORY UNDECIDED

7. Regarding the role of internal audit in mitigating losses, 69% of respondents agreed that internal audit helps to curtail the risk of financial and material losses, 8% were indifferent while 23% suggest that internal audit do not necessarily help to mitigate financial losses. This observation can be shown diagrammatically as:

MITIGATION OF LOSSES

YES NO UNDECIDED

8. A closer look into the role of internal audit in ensuring the survival of Nestle Company shows that 77% of respondents agree that internal audit is valuable to the survival of the company while 16% do not agree. 7% were indifferent to this question. Here is a pictorial view of this assertion:

ROLE OF INTERNAL AUDIT IN ORG. SURVIVAL

VALUABLE ROLE NOT VALUABLE UNDECIDED

9. I inquired if there are other forms of control which can serve as an alternative to internal audit, the proportion of respondents who says that other controls can function better than internal audit is 15.4%, 8% were indifferent while 76.6% argue that there is no other controls that can alternate internal audit function. This is shown as:

ALTERNATIVE FORMS OF CONTROLS

IA IS THE BEST IA IS NOT THE BEST UNDECIDED

10. On the issue of whether the cost of internal audit function is a drain on the companys finances, 85% of respondents do not agree that internal audit costs are heavy on the company while 8% portend that internal audit costs are heavy burden on Nestle Foods Plc, 7% were undecided. This chart explains further:

COST BURDEN OF IA ON NESTLE FOODS PLC

COST EFFICIENCY COST INEFFICIENCY UNDECIDED

11. On the overall relevance of internal audit functions, 84.6% of respondents agree that internal audit is very relevant despite the set up costs while 15.4% were undecided. None of the respondents argued that internal audit is not relevant. This is rather controversial since none of the respondents argued against the proposition but some did not take a position in the argument. This result is shown in the chart below:

OVERALL RELEVANCE OF INTERNAL AUDIT

VERY RELEVANT NOT RELEVANT UNDECIDED

3.3

RECOMMENDATIONS AND CONCLUSIONS

Given the globalization of the operations of Nestle Company, the survey conducted have shown that it is good for organizations to establish internal audit functions if their resources can afford one. However, smaller companies, the need for internal audit should be assessed on periodic basis. The costs of internal audit notwithstanding, is not a good reason for companies to overlook the necessity of having an internal audit function. In conclusion, the following points are necessary to be noted when carrying out a cost benefits analysis of internal audit: 3.3.1 Internal audit functions affect almost every operations of Nestle Foods Plc. 3.3.2 The internal audit department in Nestle does not have more staff than other departments. This could also be a strategy adopted by management to keep the overhead cost of internal audit under control. 3.3.3 The management of Nestle Foods Plc does not sweep internal audit reports under the carpet. Internal audit reports are acted upon, this attitude helps in creating a good control environment thereby strengthening the independence of the internal audit department. 3.3.4 The internal audit function in Nestle Food Plc plays several significant roles in the operations of the company. Some of those roles are: detecting fraud and error, monitoring of controls and ensuring compliance with laws and regulations while carrying out the activities of the company.

3.3.5 The survey has also revealed that Nestle Foods Plc cannot compromise the role of internal audit function in its business strategy. 3.3.6 There is need for countries to make laws requiring all registered entities whether quoted or not, to establish internal audit functions. This will help in improving risk management attitudes thereby militating against the possibility of corporate failures such as the case of Enron, Parmalat and Xerox, to mention but a few. 3.3.7 The internal audit function in Nestle Foods Plc supports the survival of the firm thereby helping in protecting shareholders wealth. 3.3.8 Though there are other forms of controls, none of them is more effective than the internal audit function in Nestle Foods Plc. 3.3.9 Finally, the operating cost of internal audit function in Nestle Foods Plc is not a heavy financial burden as to discourage its continuity. Therefore, internal audit is relevant and should be supported.