RESEARCH Proposal ON INTERNAL CONTROL OVER CASH IN AWASH

INTERNATIONAL BANK SHARE COMPANY

Proposal SUBMITTED TO THE DEPARTMENT OF accounting

Addis ababa UNIVERSITY

Name: juhar Areb aragaw id no: ugr/0521/12

ACKNOWLEDGMENTS

I intended to my supporters and the Branch Manager of Awash international Bank Ato
Dessalegn Chemera for his support in interviewing and devoted his time for me to get the
necessary information.
TABLE OF CONTENTS

I INTRODUCTION

1.1 .Background of the study…………………………………………5

1.2. Company Profile………………………………..........................6

1.3. Statement of the Study………………………………...............7

1.4. Objects of the study……………………………….....................8

1.5. Significance of the study………………………………...............8

1.6. Research Design and Metrology……………………………….....8

1.6.1. Population and Sampling technique…………………….8

1.6.2. Types of data collection………………………………........9

1.6.3. Methods of data analysis and interpretation…………..9

1.7. Scope and limitation of the study………………………………….9

1.8. Organization of the study………………………………................9

II.LITRATURE REVIEW

2.1. Introduction to internal control system………………………..11

2.1.1. Means of achieving internal control system……………11

2.1.2. The purpose of a system of internal control…………..14

2.1.3. Internal control classification………………………........15

2.1.4. Internal control Procedures……………………………….17

2.1.5. Internal control of bank in activities ……………………..19

2.1.6. Typical Deficiencies in internal control………………….19

2.1.7. A result of weakness cash control……………………….20

2.2. Internal control over cash……………………………………….….21

2.2.1. The main objective of internal control over cash…..21

2.2.2. Elements of internal control over cash………….……23

2.2.3. Controlling cash receipts and payment……..……….24

III DATA ANALYSIS AND INTERPRTATION

3.1. Internal control over cash payment…………………..…27

3.2. Internal control over cash receipt……………………….28

3.3 Internal control over Physical Cash……………………..28

IV.SUMMARY,

CONCULUSIONS AND RECOMMENDATIONS.

4.1 Summary and conclusion……………………………………..33

4.2. Recommendations………………………………..................34

Lists of Abbreviations

1. AIB-Awash International Bank

2. C.P.O-Certified Payment order

CHAPTER ONE

INTRODTION

1.1 BACKGROUND OF THE STUDY

Internal control encompasses the policies and procedures that an organization

establishes to ensure that it operates in accordance with management’s intentions

and that accountability is maintained for all transactions. This includes the

methods adopted by the organization to safe guard its assets, to check the

accuracy and reliability of its accounting data, to promote operational efficiency,

and to encourage adherence to prescribed managerial policies.

Internal control are put in to place largely to allow management to monitor

operations, identify business risks, and generate pertinent financial and nonfinancial information,
or internal controls are designed and implemented so that

management can run the organization. Internal controls also ensure that

responsibilities are met.

Internal controls are established to provide reasonable assurance that;

transactions are executed in accordance with management’s authorization are

recorded as necessary to permit the preparation of accurate financial statements

and to maintain accountability for the organization’s assets, access to assets is

restricted to instances authorized by management, and assets are Periodically

compared with the accounting records,boyh to determine the accuracy of the

records and to account for the assets.

Cash, the most liquid asset and prone to theft or misplacement. Accordingly it is

important to have internal control to authorized personnel.

The extent of the internal control adopted by a business is limited by cost

considerations. It is not feasible a cost stand point to establish a control structure

that provides absolute protection from fraud and waste.

1.2 Company Profile

Back ground of AIB

Awash international bank (AIB) was established as the first private

commercial bank (post1991) on November10,1994 by 486 founder

shareholders with a paid-up capital of birr 24.2 million and started banking

operations on February13,1995.Over a decade the number of shareholders

and the amount of capital and reserves has increased and millions,

respectively, and the registered capital is 300 million and for the near future

it increased to 500 million birr. Currently,

Objective and Corporation mission

-To meet the needs of the emerging private sector for quality and dependable

domestic and international banking services.

-To expand and diversity commercial banking services in response to the

growing demand of customers.

-To contribute towards the economic and social development of the country
and

-To operate profitably in a sustainable manner.

Major Activities

-To mobilize all of deposits (savings, demand and time) and pay interest on

interest-bearing accounts

-To provide loans and advances to its customers, including long term

investment/project financing.

-To provide international banking services such as

Imports operation

Exports operations

-Handles foreign currency transactions, namely

Buying and selling travelers’cheques

Buying and selling foreign currency notes

-maintain and operating non-resident accounts

-To provide deposit services in foreign currency for Ethiopian Nationals and

foreign national of Ethiopians of Ethiopian Origin provides advice on

banking, Finance and investment to its customers.

Finally Awash International Bank at the beginning starts by 137 employees

with five branches and has 11,042 customers, now currently has 1573

employees and branches are increased to 42.

1.3 Statement of the Study

One of the management top priorities is to establish and maintain a strong

internal control of cash at awash International Bank. Any huge organization

is required to produce financial statements, should have accounting

Policies, internal control systems and procedures, internal controls can only

be as good as the people working with them. Good internal controls seek to

mitigate the occurrences of dishonesty, misuse and mistakes will occur,

Therefore the reason to undertake this paper is to test the weakness and

strengths of internal control over cash of awash International Bank in order

to adhere in accordance either the general rule or regulation accepted

universally.

1.4 Objective of the Study

In view of the above information and Statement of the problem, the

objectives of this study are;

General Objective of the study

To assess the methods and procedures designed by management of awash

international Bank to safe guard assets especially cash and to identify

strength and weaknesses of internal control over cash.

Specific Objective of the Study

-To asses the internal control over cash receipt of the company

-To identify and evaluate internal control over cash payment of the company

-To asses internal control over physical cash of the company

-To asses cash movement analysis

1.5 Significance of the study

This research will be significant for:

-It identifies the strength and weakness of Awash International Bank in its

internal control over cash

-It contributes to knowledge, further research and literature in the area.

1.6 Research Design and Methodology

1.6.1 Population and Sampling Technique

Relevant information of data is collected through the interview and

examined observation, presented in a condensed and systematic way of

using audited financial statement and indicates the result in the form of

percentage.

1.6.2 Data collection Methods:

The researcher tried to use primary and secondary data collection methods.

The researcher collected data by interviewing responsible officers and

observation preparing schedule for interview related to internal control over

cash, search for primary data documents like cash receipts and payment

voucher and annual audit reports and secondary source of data like

brochure, magazine and others.

1.6.3 Method of Data Analysis and Interpretation:

To be more understandable the data is presented on graphical

representation accompanied by relevant explanation.

1.7 Scope and limitation of the Study

The study focuses on internal control over cash of AIB Bahir Dar branch .A

maximum of 5 years audited financial statement are used to analyze the

internal control over cash of the company and to make recommendation.

Investment of idle cash and budget is not part of the study.

Some documents are not given for out side parties. So I cannot present full

documents in anxieties par of the paper, and due to time constraint I am

unable to gather more information.

1.8 Organization of the study

The study is composed of four chapters. The first chapter deals with

introduction part of the study; this is back ground of the study, statement of

the problem, and significance of the study. The second chapter deals with

literature reviews. The tired chapter indicated analysis of interpretation of

data and the fourth chapter is conclusion, summary, and recommendation

will be presented.

CHAPTER TWO

Literature Review

Introductions to internal control system

Internal control is the plan of organization and the methods a business

use to sale guard assets, provide accurate and reliable information,

promote end improve operational efficiency, and encourage adherence to

prescribed managerial policies.

Internal control is a process affected by entity board of directors,

management and other personal designed to provide reasonable

assurance regarding the achievement of objective in the following

categories.

Reliability of financial reporting

Compliance with appreciable lows and regulations

Emergency and effectiveness of operations.

2.1.1 MEANS OF ACHIVEING INTERNAL CONTROL

For purpose of financial statement audits the policies and procedures

used by an entity to achieve internal control are referred to as the entity’s

internal control structure.

Internal control structures vary significantly from one organization to the

next depending on such factors as the size nature of operations and

objectives of the organization for which the structure was designed. Yet

certain features are essential to satisfactory internal control in a most

and large scale organization. The internal control structures of all large

organizations include five components.

The control environment

Risk assessment
The (accounting) information and communication system.

Control activities

The control environment

The control environment sets the tone of an organization by influencing

the control consciousness of people. It may be viewed as the foundation

for the other component of internal control. Control environment factors

include integrity and ethical values commitment to competence bound of

directors or audit committee management’s philosophy and operating

style organizational structure human resource policies and practices and

assignment of authority and responsibility.

Risk Assessment

Management should carefully consider the factors that affect the risk

that the organization’s objectives will not be achieved. When considering

the financial reporting objectives there risks include the threats to

preparing financial statements in accordance with generally accepted

accounting principles. The following factors might be indicative of

increased financial reporting risk.

Changes in organizations regulatory of operating environment.

Changes in personnel

Implementation of a new or modified information system.

Rapid growth of the organization

Change in technology affecting production processes or information

systems.

Introduction of new lines of business products or processes

The accounting information and communication system

Information and communication systems capture, process and report

information to be used by parties both within and outside the

organization. An organization’s accounting information system consists of

the methods and records established to identify assembly analyze

classify, record and report an entity’s transactions and to maintain

accountability for the related assets.

Accordingly an accounting information system should

Identify record all valid transaction

Describe on a timely basis the transactions is sufficient detail to permit

proper classification of transactions for financial reporting.

Measure the value of transactions in a manner that permits recording of

transactions in the proper accounting period.

Present properly the transactions and related disclosures in the financial

statements.

Control activities

Are policies and procedures that help ensure the managements directives

are carried out. Those policies and procedures help ensure that actions
are taken to address the risks that face the organization. While there are

many different types are generally relevant to an audit of the

organization’s financial statements.

Performance reviews

Information processing

Physical controls

Segregation of duties

2.1.2 The purpose of a system of internal controls

It assure that assets that belong to the business later pries are received

when tendered, are protected while in the custody of the enterprise are

used only for authorized while in the custody of the enterprise are used

only for authorized business purposes. Such a system consists of

administrative control and accounting control. (Whittington and pony,

1995)

Good internal controls are essential to assuring the accomplishment of goals

and objectives. They provide reliable financial reporting for management

decisions. They ensure compliance with applicable laws and regulations to

avoid the risk of public scandals. Poor or excessive internal controls reduce

productivity, increase the complexity of processing transactions, increase

the time required to process transactions, increase the time required to

process transactions and add no value to the activities.

Good internal controls help ensure efficient and effective operations that

accomplish the goals of the unit and still protect employees and assets.

Administrative control- includes but is not limited to the plan of

organization and the procedures and records that are concerned with the

decision processes leading to management’s authorization of transactions,

such authorization is a management function directly associated with the

responsibility for achieving the objectives of the organization and is the

starting point for establishing accounting control of transactions.

Accounting control:- comprises the plan of organization and the

procedures and records that are concerned with the safeguarding of assets

and the reliability of financial records are consequently are designed to

provide reasonable assurance that:

a) Transactions are executed in accordance with management’s general

or specific authorization.

b) Transactions are recorded as necessary (1) to permit preparation of

financial statements in conformity with generally accepted accounting

principles or any other criteria applicable to such statements and (2)

to maintain accountability for assets.

c) Access to assets is permitted only in accordance with management’s

authorization.

d) The recorded accountability for assets is compared with the existing

assets at reasonable intervals and appropriate action is taken with

respect to any differences.

A system of internal controls is not designed primarily to detect errors but

rather to reduce the opportunity for errors or dishonesty to occur. In

effective system of internal controls no one person should carry out all

phases of a business transaction from beginning to end.

The system of internal control frequently may be improved by physical

safeguard computer help to improve the efficiency and accuracy of the

record keeping function cash registers safes and renumbered business

forms are very helpful in safeguarding cash and controls must be supervised

with care if it functions effectively. (Mosich, 1989)

2.1.3 Internal control classification

The concepts of internal control and management control are broad in

scope. Amide at describing entire control systems. The specific control

procedures used in these systems may be classified using the following four

internal control classifications.

a. Preventive detective and corrective preventive controls deter problems

before they arise hiring highly qualified accounting personnel

appropriately segregating employee duties and effectively controlling

physical access to assets, facilities and information are effective

preventive controls because not all control problems can be prevented

detective controls are needed to discover control problems as soon as

they arises examples of detective controls are duplicate checking of

calculations and preparing bank reconciliations and monthly trial

balances corrective controls remedy problems discovered with

detective controls they include procedures taken to (1) identify the

cause of a problem (2) correct resulting errors or difficulties and (3)

modify system so that future problems are minimized or eliminated.

Examples include maintaining back up copies of key transition and

master file and adhering to procedures for correcting data entry errors

as well as those for resubmitting transactions for subsequent

processing.

b. General and application:- general control are designed to ensure that

an organizations control environment is stable and well managed to

enhance the effectiveness of application control are used to prevent,

detect and correct errors and correct and irregularities in transactions

as they are processed.

c. Administrative and accounting administrative help ensure operational

efficiency and adherence to managerial policies in contrast accounting

controls help safeguard assets and ensure the reliability of financial

records.

d. Input processing and output:- controls can also be classified

according to where they are implemented in the date processing

cycle.(marshal B- Romney,1999)

2.1.4 Internal Control Procedure

Internal control is important for every business no matter what its size

each step in the accounting process of a firm should be planned to

ensure accuracy honesty and efficiency an essential technique for

achieving these goals is to divide responsibility so that every major

accounting routine involves two or more employees and the work of

one person in addition to division of responsibility accountants use a

number of other widely recognized techniques to design internal

control procedures for a business (GLENCOE-macmillan/McGRAWHill pp-285)

Control procedure is those policies and pressures in addition to the

sub elements of the control environment and features of the

accounting system that management has established to meet its

objectives there are potentially many such policies and procedures in

any entity. However they generally fall in to the following four

categories these are:-

1. Adequate separation of duties

2. Proper authorities of transaction and activities

3. Adequate documents and records

4. Physical control over assets and records.

Adequate separation of duties

A fundamental concept of internal control is that no one

department or person should handle all aspects of a transaction

form beginning to end we have already discussed the segregation of

responsibilities among departments in similar manner no one

individual should perform more that one of the functions of

authorizing truncations recording transactions and maintaining

custody over assets.

Physical control over assets and records

These control activities include the physical Security over both

records and other assets safeguarding of records may include

maintaining control at all times over un-issued pre numbered

documents as well as other journals and ledgers and restricting

access to computer programs and data files.

Performance review

These controls include reviews of actual performance as compared

to budgets forecasts, and period performance relating different sets

of data to one another and performing overall reviews of

performance. Performance reviews provide management with an

overall indication whether personnel at various levels are effectively

pursuing the objectives of the organization.

Information processing

A variety of control activities are performed to check the accuracy

completeness and authorization of transaction the two broad

categories of information processing controls include general

controls which apply to all information processing activities and

application controls which apply only to a single application an

internal control device of wide applicability is the use of serial

numbers on documents serial umbers provide control over the

number documents issued cheque tickets sales invoices purchase

orders stock certificates and many other business papers can be

controlled in manner (Whittington and pany 1995)

2.1.5 Internal control of banking activities

Accountants usually recommend that the following measures be taken to

achieve internal control over banking activities.

1- Access to check book should be restricted to a few designated employees

when not in use the check book should be kept in a locked drawer or

cabinet.

2- Pre numbered check forms should be used periodically; the numbers of

the blank forms remaining should be verified to make sure that all forms

can be accounted for.

3- Before checks are signed they should be examined by a person other

than the one who prepared them they should be matched against the

approved invoices or other payment authorizations.

4- The monthly who prepares the checks and records them in the check

book should not be the one who mails them to the payees.

5- The monthly bank statement should be received and reconciled by

someone other than employees who handled, and deposited the cash

receipts and issued the checks.

6- All deposit receipts canceled checks, and bank statements should be

filed for future references this creates a strong audit trail for the

checking account.

2.1.6 Typical deficiencies in internal control

Evidence of the internal control system`s failure to prevent or detect

misstatements of accounting or bookkeeping information.

• Evidence then the system is failing to safeguard assets from loss

damage or misappropriation

• Evidence of the intentional override of the system by those in

authority.

• Evidence of failure to perform the task that are part of internal

control structure

(Such as reconciliation not being prepared in a timely and accurate manner)

• Evidence of willful wrong doing by employees or management

• Evidence of manipulation falsification, or alteration of accounting

records or supporting documents:

• Evidence of intentional misapplication of accounting principles and

• Evidence that employees or managers lack the qualifications and

training of fulfill their assigned functions.

• Most internal control measures can be circumvented or over come

• Collusion is when two or more employees work as a team with the

purpose of defraud the firm

2.1.7 Problems that arise a result of weakness in cash control

1. Kiting: - us a means of over station bank balances either to conceal a

cash shortage or to increase cash reported on balance sheet

2. lapping:- to cover a cash theft an employee defers recording of cash

receipt from one customer and covers the shortage with receipt from another

customer or a fraud involving abstracting cash from a customer and

covering the resulting shortage with subsequent cash collection from

another customer.

Lapping typically occurs when one employee records cash in both the cash

receipt journal and account receivable ledger

Lapping will be reviewed by unsupported discrepancies found while

confirming account receivable balance.

3. Window dressing:- is attempt by management to improve the liquidity of

the company it is an action taken shortly before the balance sheet date to

improve the cash position or to crate an improved financial picture for

example cash receipt journal is held open for a few days after the close of

the year. (Whittington and pany. 1995)

2.2 Internal Controls over Cash

Because cash is negotiable readily spend able and sassily transported it is

important for proper internal control to be in place to protect this asset.

Accordingly it is the policy of the company that the following internal control

over cash is implemented throughout the organization.

1. Access to cash must be limited all funds should be kept secure at alltime fund should be kept
in safe locked box. All funds except for the

imprested cash must be deposited in accordance with the daily

deposit policy.

2. Cash operation must be subject to daily supervisory review to

minimized the potential for mistakes in cash operation and /or

misappropriation of cash, cash duties should be separated among

employee so that in all instances one person will check the work

performed by another

All cash must be completely and accurately recorded in the financial

records of the company to insure this transmittal form should be

prepared.
2.2.1 The main objective of internal control over cash

company`s system of internal control over cash must be

sufficient to provide reasonable assurance that the following

objectives are full field.

1) Recorded cash transition are valid

The systems do not permit the inclusion of factious or nonexistent transaction for example the
record cash balance is

exist?

2) Transaction are properly authorized

If a transaction are not authorized takes place it could result

in fraudulent transactions. And it could also have the effect

of wasting on destroying cash is any discernment is receipts

authorized before actually performed.

3) Existing cash transactions are recorded (completeness)

- The client procedure must provide control to prevent the omission of

cash transaction from records.

- Does the existing cash transaction are record?

- Does the existing cash transaction are record?

4) Transactions are properly valued (valuation)

Avoid error in calculating the recording transaction.

5) Transaction are properly classified (classification)

- The proper account classification according to the company`s

- Chart of account

6) Transaction are recorded at proper time

Failing to record at a time it look place may increase

- The likely hood of omitting the transaction or

- Recording at the improve account