INTERNAL CONTROL SYSTEM OF JAMUNA BANK LTD

Presentationn on

Submitted By:

Name ID

Mir Mohammed Belal 1022114557

Hasan Mohammed morshed 1022114667

Joyosree Ghosh 1022114684

Saifuddin ahmed 1022114559

Nishat yesmin sonia 1022114586

Mohammed Sahab Uddin 1022114613

Ms Fatema Zohara

Assistant professor,

department of accounting,

Premier University

Acknowledgement

What is internal control: An entity’s system of internal control consists of policies and

procedures designed to provide management with reasonable assurance that the company achieves its objectives and goals

Internal control indicate the whole system of controls employed by management in the conduct of the business.

Or Internal control assist management and staff of the

organization to acheive organization objectives.

Background of the Report:

• As a requisite for mid-term exam of Auditing subject we are given this assignment of Bachelor of Business Administration, premier university Chittagong(PUC).we were selected this topic to work. Internal control System provide a descriptive framework of Internal Control as well as management under the regulation provided by Bangladesh Bank. This report treats internal control & management system as an essential learning in Bank management.

• This report has been prepared under the supervision of

Ms. Fatema Tuz zohra, lecturer Department of Accounting, Premier university Chittagong(PUC).

Objectives of the report:

The broad objective of the report is to analyze the Internal Control Systems of Jamuna Bank Limited. Specific objectives are as followes

• Efficiency and effectiveness of activities • Reliability, completeness and timelines of financial and

management information • Compliance with applicable laws and regulations. • Accountability to the Board. • To observe the practice of modern technology over cash

receipt, payment, security and management sector.

Principles of internal control

Separation of duties

Clear description of responsibilities

Non-concentration of

power and confidence

Job rotationMechanisation of

work

Auto checking system

Prescribed format

Physical, mechanical and

electronic control

Separation of duties: Separation of duties involves splitting responsibility

for bookkeeping, deposits, reporting and auditing. The further duties are separated, the less chance any single employee has of committing fraudulent acts. For Bank with accounting employees, sharing responsibilities between two or more people or requiring critical tasks to be reviewed by co-workers can serve the same purpose. if these functions are not separated, there may be the scope of cash embezzlement.

Clear description of responsibilities: Responsibilities of the workers must be clearly stated so that there may be no room for doubt or confusion in future.

Principles of internal control

Principles of internal control

c)Non-concentration of power and confidence: power to and confidence on an individual should not be allowed to concentrate. If it is so, the chance of committing fraud increases.

d) Job rotation: job rotation is an important tool for both motivation and control of chances of fraud. One individual is not interested to work in the same table for long time. On the other hand, it creats opportunities for collusion. So it is recognized as an important canon of sound organization.

e) Mechanisation of work: mechanisation of operations helps to avoid manipulation of operations. So it reduces the chances of frauds and errors and improves efficiency.

Principles of internal control

h) Physical, Mechanical and electronic controls: Use of physical, mechanical, and electronic controls is essential. Physical controls relate to the safeguarding of assets. Mechanical and electronic controls also safeguard assets and enhance the accuracy and reliability of the accounting records.

F) Auto-checking system: To prevent frauds and errors, the works should be arranged in such a way thaat the work of one employee should get automatically checked by others.

g) Prescribed format: Use of prescribed format for documents relating to receipts, payments, orders, and invoices reduces the chances of creating false documents.

Major components of internal control(COSO) Model

Components of internal control

Control Environmen

t

Riskassessment

Control activities

Information and

communicating

monitoring

A. The Control Environment

The control environment is concerned with the actions, policies, and

procedures that reflect the overall attitude of the client’s top management, directors, and owners of an entity about internal control and its importance. The

elements of internal control are: 1. Integrity and ethical values2. Commitment to competence

3. Board of directors and audit committee4. Management’s philosophy and

operating style5. Organizational structure

6. Assignment of authority and responsibility

7. Human resource policies and practices

B. Risk Assessment

Risk assessment is the process the board and management use to identify and analyze risks that could keep the bank from achieving planned objectives.The assessment should help

determine what the risks are, how they should be managed, and what controls are needed. Risks can arise or change

because of circumstances such

C. Control ActivitiesControl activities include the policies, procedures, and practices

established to help ensure that bank personnel carry out board and management directives. These activities help to ensure that the board and management manage and control risks that could

affect bank operating performance or cause financial loss. Control activities involve all levels of personnel in the bank, including senior management as well as front line personnel.

Control activities involves;

1. Performance reviews (review of actual against budgets, forecasts)

2. Information processing (checks for accuracy, completeness, authorization)

3. Physical controls (physical security) 4. Segregation of duties.

D) Information and communication:

An effective internal control system requires that there are adequate and comprehensive internal financial, operational and compliance data, as well as external market information about events and conditions that are relevant to decision making. Information should be reliable, timely, accessible, and provided in a consistent format.

An effective internal control system requires effective channels of communication to ensure that all staff fully understand and adhere to policies and procedures affecting their duties and responsibilities and that other relevant information is reaching the appropriate personnel

E) Monitoring

• The overall effectiveness of the bank’s internal controls should be monitored on an ongoing basis. Monitoring of key risks should be part of the daily activities of the bank as well as periodic evaluations by the business lines and internal audit.

• There should be an effective and comprehensive internal audit of the internal control system carried out by operationally independent, appropriately trained and competent staff. The internal audit function, as part of the monitoring of the system of internal controls, should report directly to the board of directors or its audit committee, and to senior management

Internal control over cash

Before receiving cash from depositors in Pay-in-Slip / Credit Voucher the concerned cash official(s) shall:

Verify / check the (a) Title of Account, (b) A/C Number, (c) Amount in Words and Figures, (d) Date, etc. written on Pay in Slip / Credit Vouchers with the records of computer program and shall satisfy on their correctness and genuineness.

Carefully check and Count the Currency Notes Write down denomination Affix Cash Receivedstamp Make entry of particulars of the Cash Received Verify entries / Particulars of Pay-in-Slip / Credit Voucher with

those of the Cash Receiving Register Keep Cash in the Drawer of Cash Counter under lock and Key

(within Counter limit) during transaction hours.

Receipt of Cash:

Payment of cash

While Paying Cash against debit instruments namely Cheques, Demand Drafts , Pay Order , Pay Slip , SDR, FDR, etc. and also against other debit instruments issued under scheme deposits of the Branch as well as Cash Debit Vouchers, the following formalities have to observed.

• Verify Genuineness & Authenticity of the instrument, make posting, passing & cancellation of the Cheques and, thereafter, count relevant cash and note down denominations there against on reverse/ back side of respective instruments/ vouchers.

• Obtain 2nd signature of payee/ recipients on the back of the instruments, affixing stamp and cancellation of instruments.

• Enter particulars of instruments/ Cheque in Cash payment register in Serial order and write down that serial number in a red circle to be made on the face of the instruments.

Cash control

Safe Custody of Cash (after transaction)

Cash balance of the counter at the end of a day together with Cash in Safe (if any) shall be preserved in the ‘Fire Proof Iron Safe’ of Branch’s Vault for Safe-Triple-Custody until next reopening of the Vault. But before storing cash in the Iron Safe, the Triple Custodian shall additionally ensure that entire cash i.e. Closing Balance of the day as per Cash Position Book (Balance Cash of Cash Counter and remaining Cash Iron Safe) are accurate and correct.

Vault Register Cash In-Charge shall Maintain Vault Register for keeping

record of Cash Movement to and from the Iron Safe. Denominations of Cash in Hand mentioned in the Cash Balance Book must match with the denominations recorded in the Vault Register at the end of day’s transaction.

Cash control

•Safety / Security of Strong Room during Transaction Hours :

Strong Room / Vault must be kept Closed / Locked during transactions hours under Joint Control of two key holders from Triple Custodians and both the Joint Controllers must be present whenever the strong room is re-opened during the Day / Office Hours. Cash Incharge must keep his / her hand balance (exceeding counter limit) in a steel box under lock & key in the strong room.

•Rotation of Cash Officers’ Duty : Rotation of duties between Paying and Receiving Cash Officials

should be made at regular monthly frequency.

• Surprise Verification of Cash: Head of Branch shall make surprise verification by physical

counting of entire Cash-in-Safe at least once a month and shall confirm its accuracy with the remarks “Entire Cash Checked and Found Correct” on the particular page of Cash Position Book under his / her signature.

Inventory control(Wasp control system)

To serve its thousands of customers Jamuna Bank ordered large quantities of supplies, including deposit slips, banking forms, pens, paper and more. It relied on between 50 and 60 outside vendors to supply about 160 items.

Using Inventory Control’s purchase order function, the bank sets minimum ordering levels which helps to quickly generate purchase orders. When items are received into inventory, they are scanned using a barcode scanner and checked against the original purchase order. Input errors are virtually eliminated. The bank knows exactly how much inventory is on hand at all times.

Inventory control

• The first spreadsheet, which tracked vendors, included between 50 and 60 tabs (one for each vendor) and 160 rows (one for each item). As items were received in stock, they were noted in the appropriate cell. Managing this spreadsheet took about one and a half to two hours per week.

• The second spreadsheet included about 40 tabs (for branch offices and the various departments at headquarters), plus about 160 rows (one for each item).

Parties responsible for internal control

• Everyone in an organization has responsibility for internal control.

1. Board of Directors: The Board of Directors of bank is responsible for ensuring that an adequate and effective internal control system exists in their organization and that the senior management is maintaining and monitoring the performance of that system. Moreover, Board should periodically review the internal control systems and the significant findings.

2. 2. Management: Senior management of banks have the responsibility for implementing strategies and policies as approved by the board; developing processes that identify, measure, monitor and control risks incurred by the bank; maintaining an organizational structure that clearly assigns responsibility, authority and reporting relationships; ensuring that delegated responsibilities are effectively carried out; setting appropriate internal control policies; and monitoring the adequacy and effectiveness of the internal control system.

Parties responsible for internal control

• Other personnel: Internal control is, to some degree, the responsibility of everyone in bank and therefore should be an explicit or implicit part of everyone's job description. Virtually all employees produce information used in the internal control system or take other actions needed to effect control. Also, all personnel should be responsible for communicating upward problems in operations, noncompliance with the code of conduct, or other policy violations or illegal actions.

• Internal Auditors: Internal auditors play an important role in evaluating the effectiveness of control systems, and contribute to ongoing effectiveness. Because of bank position and authority in an entity, an internal audit function often plays a significant monitoring role.

• 5. External auditors: bringing an independent and objective view, contribute directly through the financial statement audit and indirectly by providing information useful to management and the board in carrying out their responsibilities.

Questioniar

a) Does the board periodically review policies and procedures to ensure that proper controls have been instituted?

b) Is there a system in place to monitor compliance with policies and procedures and to report to the board instances of noncompliance?

c) When instances of noncompliance are reported, does the board take appropriate follow-up action and ensure effective action through testing?

d) Does management provide the board and the board’s representatives complete access to bank records?

e) Do the board and management appropriately evaluate risks when planning for new products or activities?

f) Do the board and management discuss and appropriately consider control issues when planning for new products and activities?

g) Are audit personnel or other internal control experts involved in control discussions when the bank is developing new products and activities?

Questioniar

h)Do policies and procedures exist to ensure critical decisions are made with appropriate approval?

i) Do processes exist to ensure independent verification of an appropriate sample of transactions to ensure integrity?

j) Are the reports generated for operational, financial, managerial and compliance-related activities sufficient to properly manage and control the institution?

K)Do accounting, information, and communication systems ensure that the bank’s risk-taking activities are within policy guidelines?

L)Does the board review the actions management takes to deal with material control weaknesses and verify that those actions are objective and adequate?

M) Do audit reports contain sufficient detail? N) Are audit reports timely enough to allow for resolution

and appropriate action?

Questioniar

Limitations of COSO model The Framework recognizes that while internal control

provides reasonable assurance of achieving the entity’s objectives, limitations do exist.

Limitations may result from the: • Suitability of objectives established as a precondition to

internal control • Reality that human judgment in decision making can be

faulty and subject to bias • Breakdowns that can occur because of human failures

such as simple errors • Ability of management to override internal control • Ability of management, other personnel, and/or third

parties to circumvent controls through collusion • External events beyond the organization’s control.

Findings• From the analysis of Internal Control ystem the Jamuna Bank Ltd,

we have found the following major issues: • Duties relating to both, cash receipts and cash payments are

effectively allocated, so that, no one has an exclusive control over the ransactions.

• The policies, procedures and principles of Internal Control System of Jamuna bank are not elaborately and logically explained in the “Internal Control and Compliance Manual”

• There is a system of insuring that cash, cheques, etc collected by the authorized representative of the bank, are recorded, deposited and reconciled promptly..

• There is adequate insurance against theft, fraud, misappropriation o f cash etc.

• There is a system of regular reconciliation of cash in hand as per the books of account and the physical balance in hand.

• The bank regularly conducts an internal audit of receipts as well as the payments.

Recommendation Though Jamuna Bank Ltd has a strong internal control system

but nothing is perfect in this world. So, in order to ensure better internal control system Jamuna Bank should take deep attention on the followings:

• • The policies, procedures and principles of Internal Control System ofJamuna bank should be more elaborately and logically explained in the “Internal Control & Compliance Manual” in accordance with its banking activities and accounting standards.

• • Jamuna Bank should take necessary steps to make habituated the officers with internal control and compliance activities.

• • Officials’ should give equal importance on compliance of Jamuna bank and actual work.

• • The bank should take appropriate corrective action to avoid employees’ misunderstanding.

• • Jamuna Bank should take preventive action to avoid employee collusion.