Project on

SBI MUTUAL FUND

Submitted to

Gujarat University for the degree of

Master in Commerce
Faculty: Commerce
Subject: Management
By
Patel Akruti K
Neeldeep College of Commerce, Ahmedabad
College Seat No: 3570

Year: 2016-2017

Exam Seat No:

Year: 2016-2017

Under the guidance of

Prof. Birva Bhavsar

NEELDEEP COLLEGE OF COMMERCE

NEELDEEP COLEGE OF COMEMRCE

AHMEDABAD

CERTIFICATE
This is to certify that Ms.Akruti K. Patel has worked and
completed her project work for the degree of MASTER IN

COMMERCE in the faculty of COMMERCE in the subject of

Management on Title of project work to be written SBI MUTUAL
FUND under my supervision. It is her own work and facts reported by
her personal findings and investigations.

Name & Signature of guide

Prof. Birva Bhavsar

Name & Signature of Professor in charge

Dr. Ajay D. Shah

Principal of the Institute

Declaration by
student
I the undersigned Ms. Akruti K. Patel

here by, declare that this

project work entitled SBI Mutual Fund

is a result of my own

research work and has not been previously submitted to any other university
for any other examination.
I here by further declare that all information of this document has
been obtained and presented in accordance with academic rules and ethical
conduct.

College Seat No: 3570

Exam Seat No:

Place: Ahmedabad

Year: 2016-2017
Year: 2016-2017

Name & Signature

(AKRUTI K. PATEL)

ACKNOWLEDGEMENT
I readily acknowledge my indebt ness to my parents whose support, dedication
and honest efforts have given me an immense help in doing this project.
It gives me immense pleasure to express my deep sense of gratitude and
appreciation to my external guides, Prof. Birva Bhavsar

whom constant

encouragement and valuable suggestions gave back bone support in completing this
project.
I take the opportunity to thanks to Dr. Ajay D. Shah for motivating,
encouraging, guiding and supporting at every step and sparing his valuable time for me.
Last but not the least I record my sincere thanks to all beloved and respectable
persons who helped me and could find any separate mention.
Above all I praise GOD the most beneficial, the most merciful that I have been
able to complete my training project successfully.

(AKRUTI K. PATEL)

ABSTRACT

This project work which is a causal or explanatory survey was designed to

assess the effectiveness and importance of internal controls. The main purpose
of this project work is to assess how effective internal controls help to prevent,
detect and deter frauds and also safe guarding of bank assets.
The globalization of economy, technological advancements, complexity of
business and allegations of fraudulent financial reporting have recently
sharpened the Ever-increasing attention on internal controls and internal auditing.
Simultaneously, The capital markets have seen many new financial instruments
and players being Introduced, making the transactions and operations more
complex. In this context,Internal audit is to be carried out on the basis of standing
laws and regulations, which Generally include also the policies and decrees of
state as well as rules and by-laws of Enterprise.
Within this framework of extremely fluid business environment, the purpose of our
study is to underline the importance of a well-organized internal control system
for ensuring the safe and soundness of a credit institutions activity, And by this
the stability of the banking system as a whole. According to up-to-date theoretical
and empirical literature, the results point out that all components of internal audit
is vital in the effectiveness of internal audit and consequently in the business
survival and success.
The data collection methods used was questionnaire. Findings revealed that, risk
assessment component, control activity, information and communication system
and monitoring system were found to be functioning effectively.

Finally, management should embark on prompt effective follow-up procedures to

ensure that, appropriate change or action occurs in response to changes in risk.

INDEX
Sr. No

TITLE

Pg. No

Chapter 1

Introduction

10-27

Chapter 2

Research Methodology

28-34

Chapter 3

Review of Literature

35-54

Chapter 4

Data Presentation & Data Analysis

55-71

Chapter 5

Conclusion

72-75

Suggestion

76-83

Bibliography

84-85

Appendix

86-89

LIST OF TABLE:
Sr. No

Title

Pg. No

Fig. 1.1

Organisational Structure Of ICS

41

Fig 1.2

Audit Committee Report

44

Fig.1.3

Audit Committee Report ICS

45

Fig. 1.4

ARDB Branch Status

46

LIST OF GRAPH:
Tab.
No.

Title

Pg.No

5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
5.11
5.12
5.13
5.14
5.15
5.16

Management Decisions
Policies
Periodical Reviews Policies And Procedures
Banks Overall Performance
Clear Objectives
Technology Issues
Clear Understanding By Staff
Processes For Independent Verification Of Transaction
Independent Reconciliations Of Assets And Liabilities
Close Circuit Television (Cctv)
Staffs Role
Staffs Activities
Staff Accountable For Activities They Conduct
Reports On Failings Or Weakness Are Reported To Mgt
Management Approves Personnel Reviews Results Of Audit
Periodical Management Reviews Audit Or Internal Control
Systems

56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71

CHAPTER 1
INTRODUCTION

1.1 BRIEF HISTORY OF INTERNAL CONTROLS

1.1.1 Early Times
Internal controls have existed from ancient times. In Hellenistic Egypt there was a
dual administration with one set of bureaucrats charged with collecting taxes and
another with supervising them. VanCreveld, Martin. The rise and Decline of
States, (Cambridge University Press)
In an undated work Brink contends that, internal control as a concept has existed
as early as there have been substantive relationships. He added, its origin can be
documented and traced back to civilized communities that existed around 5000
B.C. The governments of these empires imposed a number of taxes on
individuals and business. For the proper accounting and collection of these taxes,
an elaborate system of checks and counterchecks was established. Such early
internal control systems were designed primarily to minimise errors and
safeguard state property from dishonest tax collectors (Cited in Gupta 1991).
He continued that, the Mesopotamian civilizations, which existed about 3000
B.C., also
utilized elaborate systems of internal controls. Summaries of the transactions
were prepared by scribes who did not provide the original list of receipts and
payments. Documents of that period contained ticks, dots, and check-marks
indicating the existence of the auditing function during those times.

1.2 CATEGORIES OF INTERNAL CONTROLS

Kissner has identified three distinct categories of internal controls which are
briefly discussed:
1. Preventive controls: designed to keep errors or irregularities from occurring.
System edits that stop erroneous payments before disbursement.
2. Detective controls: design to detect errors or irregularities that have already
occurred.
System reports that filters payments after disbursement.

3. Corrective Controls: designed to correct errors or irregularities that have been

detected.
Follow-up action required to address errors previously detected

1.3 INTERNAL CONTROL COMPONENTS

Larry E. et al., , stated that, five components of COSOs control framework may
be viewed as both fundamental principles and an aid to planning, evaluating and
updating
controls.
They are:
1. Control Environment.
2. Risk Assessment.
3. Control Activities.
4. Accounting, Information, and Communication systems.
5. Monitoring.
It went on to say that effective internal control still depends on having the five
internal
control components in place and operating effectively, such that a bank has
reasonable, not absolute, assurance that it will prevent or detect material
misstatements in a timely manner. This study adopts the COSO frame work of
effective internal controls system which is discussed below.
1.3.1 Control Environment
The Control Environment consists of the integrity, ethical values, and competence
of the
entity's personnel, as well as management's philosophy and operating style. An
active and
effective board of directors should provide oversight. It should recognize that the
"tone at the top" and the attitude toward controlling risk affect the nature and
extent of derivative
activities. The board should review management's planned decisions regarding
the
appropriateness and effectiveness of derivative strategies and positions. For
example, the
board should probe for explanations of past results to determine that derivative
activities are effective in accomplishing objectives for which they were used.
(COSO, undated)

The audit committee should work with internal and external auditors to oversee
implementation of risk management policies, procedures, and limits.
Senior management should recognize that its philosophy and operating style
have a pervasive effect on an entity. For this reason, senior managers should
understand their control responsibilities, authorize use of derivatives only after
risks and expected benefits have been carefully analysed, and clearly
communicate objectives and expectations for derivative activities. Senior
managers should make a conscious decision about the extent of authority over
derivatives delegated to management. Management should have the
competence needed to understand derivative activities. Employees involved in
such activities should possess the necessary skills and experience. The training
process should develop and improve specific skills relating to responsibilities and
expectations about derivative activities. (COSO undated) Millichamp (2002)
describes control environment as the overall attitude, awareness and actions of
directors and management regarding internal controls and their importance in the
entity. The control environment encompasses the management style, and
corporate culture and values shared by all employees. The factors reflected in
this idea include the following:
- the philosophy and operating style of the directors and management
- the entitys organizational structure and methods of assigning authority and
responsibility (including segregation of duties and supervisory controls)
- the directors methods of imposing control, including the internal audit function,
the
functions of the board of directors and personnel policies and procedures.
Additionally, a reference guide for managing University Business Practices
(University of California) said, the control environment is the control
consciousness of an organization; it is the atmosphere in which people conduct
their activities and carry out their control responsibilities. It continued to say that,
an effective control environment is an environment where competent people
understand their responsibilities, the limit to their authority, and are
knowledgeable, mindful, and committed to doing what is right and doing it the
right way. They are committed to following an organisations policies and
procedures and its ethical and behavioural standards. The control environment
encompasses technical competence and ethical commitment; it is an intangible
factor that is essential to effective internal control.
A governing board and management enhance an organisations control
environment when they establish effectively communicated written policies and
procedures, a code of ethics, and standards of conduct. Moreover, a governing

board and management enhance the control environment when they behave in
an ethical manner-creating a positive tone at the top and when they require
that same standard of conduct from everyone in the organization.
Trainor (2007), declared, setting an example regarding ethical behaviour is
another strategy the board can implement. Policies outlining expected ethical
conduct of the board, administrators, and staff send a clear message especially
when specific examples are included. The policies should clearly communicate
the severe consequences of unethical or criminal behaviour. This process he said
is called, setting the tone at the top.
The students Manual of Auditing (2000) say that understanding of the control
environment helps to assess the likely effectiveness of internal controls. Effective
control environment therefore is a very important ingredient in any effective
internal control system.
1.3.2 Risk Assessment

Risk Assessmentis the identification and analysis of risks relevant to achieving

objectives that form a basis for determining how risks should be managed. From
a risk management perspective, entity-wide objectives relating to the use of
derivatives should be consistent with risk management objectives. Mechanisms
should exist for the identification and assessment of business risks relevant to the
entity's unique circumstances. Use of derivatives should be based on a careful
assessment of such business risks. (COSO, 1992).
Management should clearly link benefits of and support for derivative use with
entity-wide objectives. Management also should obtain an understanding of
personnel, management operating systems, valuation methodologies and
assumptions, and documentation as a foundation for identifying and assessing
the capability to manage risk exposures associated with bank activities.
Management should provide specific measurement criteria for achieving
derivative activities objectives, such as value at risk. Risk analysis processes for
derivative activities should include identifying risk, estimating its significance, and
assessing the likelihood of its occurrence. (COSO undated)
Following on from this the Internal Control Comptrollers Handbook (2001)
defines risk assessment as the identification, measurement, and analysis of risk,
internal and external, controllable and uncontrollable, at individual business levels
and for the bank as a whole. It also says that, management must assess all risks
facing the bank because uncontrollable risk-taking can prevent the bank from

reaching its objectives or can jeopardize its operations. Thus effective risks
assessments help determine what the risks are,what controls are needed, and
how they should be managed.
In addition to this, the Kansas State Universitys Internal Audit Manual (2005) said
a
precondition to risk assessment is establishment of objectives, linked at different
levels and internally consistent and the objectives must be established before
administrators can take necessary steps to manage risk. The process of
identifying and analysing risk is an on-going process and is a critical component
of an effective internal control system.
Because economics, regulatory and operating conditions will continue to change,
mechanisms are needed to identify and deal with the special risks associated
with change. According to the Internal Controls Guide for Directors (2001), risks
can arise or change because of circumstances such as:
- A change in the banks operating environment.
- New personnel.
- New or revamped information system.
- Rapid growth.
- New technology.
- New or expanded lines of business, products, or activities.
- Mergers or other corporate restructuring.
- Changes in accounting requirements.
Various types of risks can be identified and as stated in The Annual Internal
Control Handbook, these include inherent, control, combined, and/or fraud.

1.3.3 Control Activities

According to Miller control activities are those activities required to ensure that
management objectives are met. They are basically activities that management
puts in place for the outworking of the organisations objectives.
Control Activities are the policies and procedures to help ensure that
management directives are carried out. Policies governing derivative use should
be clearly defined and communicated throughout the organization. The risk
management policy should include procedures for identifying, measuring,
assessing, and limiting business risks as the foundation for using derivatives for

risk management purposes. Aspects of the risk management policy for

derivatives should include controls relating to managerial oversight and
responsibilities; the nature and extent of derivative activities, including limitations
on their use; and reporting processes and operational controls. The policy should
provide for monitoring exposures against limits, and for the timely and accurate
transmission of positions to the risk
measurement systems. It also should provide for evaluation of controls within
management information systems, including the evaluation of resources provided
to maintain the integrity of the risk measurement system. (COSO, 1992).
The COSO release continued that control activities help ensure that, necessary
actions are taken to address risks to the achievement of the entitys objectives.
Control activities occur throughout the organization, at all levels and in all
functions. They include a range of activities as diverse as approvals,
authorizations, verifications, reconciliations, reviews of operating performance,
security of assets and segregation of duties.
Additionally, the United States General Accounting Office (GAO) Exposure Draft,
(1999), expanded on the above by giving the following examples of control
activities:
- Top level reviews of actual performance.
- Reviews by management at the functional or activity level.
- Management of human capital.
- Controls over information processing.
- Physical controls over vulnerable assets.
- Establishment and review of performance measures and indicators.
- Segregation of duties to reduce a persons opportunity to commit and conceal
fraud
or error.
- Proper execution of transactions and events.
- Accurate and timely recording of transactions and events.
- Access restrictions to and accountability for resources and records, and
- Appropriate documentation of transactions and the internal control structure.

1.3.4 Information And Communication Systems

Information and Communication focuses on the nature and quality of information
needed for effective control that the systems use to develop such information,
and reports necessary to communicate it effectively. Communications should

ensure that duties and control responsibilities relating to a banks activities are
understood across the organization.
Adequate systems for data capture, processing, settlement and management
reporting should exist so that transactions are conducted in an orderly and
efficient manner. Mechanisms should be in place to obtain and communicate
relevant information covering banks activities. Directors and senior management
should obtain sufficient and timely information to monitor achievement of
objectives and strategies (COSO, 1992).
The Manual of Policies and Procedures by Queensland University of Technology
(2005) indicates that, the effective and timely communication of management
information to key staff of the bank in a timely manner is essential for proper
decision-making. The dissemination of strategic goals, financial and non-financial
data, policies and procedures, management initiatives and responses to external
changes ensures effective performance.
Therefore relevant internal and external information should be identified,
captured, and communicated in a timely manner and in appropriate forms.
In addition to this, the Internal Controls Guide for Directors (2001) stated that,
accounting, information and communication systems identify, capture, and
exchange information in a form and time frame that enable bank staff to carry out
their responsibilities. Accounting systems include methods and records that
identify, assemble, analyse, classify, record and report a banks transactions.
Information systems produce reports on operations, finance, risk management,
and compliance that enable management to manage the bank.
Communication systems impart information throughout the bank and to external
parties such as regulators, customers, suppliers and shareholders. Simmons
(1995) also added his voice, when he said the following about sound information
and communications system. Information systems produce reports, containing
operational, financial and compliance related information, that make it possible to
run and control a business. They deal with internally generated data as well as
the external activities, conditions and events necessary to inform business
decision making and external reporting.
The organisation's people must be able to capture and exchange the information
needed to conduct, manage and control operations. Again, pertinent information
must be identified, captured and communicated in a form and time frame that
enables people to carry out their responsibilities. Effective communication must
flow down, up and across the organization.(This includes a clear message from

top management to all personnel that control responsibilities must be taken

seriously.)
All personnel must understand their own role in the internal control system, as
well as how their individual activities relate to the work of others. All personnel
must have a means of communicating significant information upstream. There
must also be an effective communication with external parties.
1.3.5 Monitoring
The COSO framework (undated) says that monitoring is the component that
assesses the quality and effectiveness of the system's performance over time.
Control systems relating to banks activities should be monitored to ensure the
integrity of system-generated reports. The organizational structure should include
an independent monitoring function over activities, providing senior management
with an understanding of the risks of bank activities, validating results, and
assessing compliance with established policies.
Internal control systems need to be a process that assesses the quality of the
systems performance over time. This is accomplished through on-going
monitoring activities, separate evaluations or a combination of the two. On-going
monitoring occurs in the normal course of operations. It includes regular
management and supervisory activities, and other actions personnel take in
performing their duties. The scope and frequency of separate evaluations will
depend primarily on an assessment of risks and the effectiveness of on-going
monitoring procedures. Internal control deficiencies should be reported upstream,
with serious matters reported to top management and the board. (COSO, 1992)

COSO Release Discussion Document on Monitoring Internal Control indicated

that,
monitoring helps ensure that internal control continues to operate effectively.
Monitoring is effective when it leads to the identification and correction of control
weaknesses before they materially affect the achievement of the organizations
objectives. To the extent that an activity or process is designed to lead the timely
identification and correction of the root cause of control weakness, it is a
monitoring activity. To the extent that an activity or process leads only to the
timely detection and correction of errors, it is a control activity.
(Wells, 2006)
It added that, these concepts are summarised in two fundamental principles from
COCOs Guidance as follows:

Principle 19: On-going monitoring and/or separate evaluations enable

management to determine whether the other components of internal control over
financial reporting continue to function over time.
Principle 20: Internal weaknesses are identified and communicated in a timely
manner to those parties responsible for taking corrective action, and to
management and the board as appropriate.
Management implements effective monitoring by:
1. Establishing an effective control environment for monitoring, including:
a. a tone at the top that stresses the importance of monitoring, and
b. an effective organizational chart.
2. Prioritising monitoring procedures based on the importance of controls in
managing or mitigating risk.
3. Establishing a communication structure.
It concluded that, the level of effort in monitoring should be proportionate to the
importance of the underlying controls.

1.4 EFFECTIVENESS OF INTERNAL CONTROL

Simmons (1995), states that, all five components of the control system must be
present and functioning effectively in order to conclude that internal controls over
operations are effective. It continues that while internal control is a process, its
effectiveness is a state or condition of the process at a fixed point in time. It
concludes that determining whether a particular control system is effective is a
subjective judgment resulting from an assessment of whether the five
components of control are present and functioning effectively.
Along similar lines, Larry et al., (2007), asserts that, effective internal control
depends on having the five internal control components in place and operating
effectively, such that a bank has reasonable not absolute assurance that it
will prevent or detect material misstatements in a timely manner.
Alluding to this, the United States General Accounting Office GAO (1999) reports
that, these standards (components) define the minimum level of quality

acceptable for internal control in organizations and provide the basis against
which internal control is to be evaluated.

1.5 INTERNAL CONTROL OBJECTIVES

Internal control objectives are the desired goals for a specific event cycle which if
achieved minimises the potential that waste, loss unauthorised use or
misappropriation will occur. The internal control objectives include authorisation,
completeness, accuracy, validity, physical safeguards and security, error handling
and segregation of duties.
1. Authorisation- This objective ensures that all transactions are approved by
responsible personnel in accordance with specific authority.
2. Completeness- This objective is to ensure that no valid transaction has been
omitted
from records.
3. Accuracy-All valid transactions are accurate, consistent with the originating
Transaction
4. Physical safeguards and security-This is to ensure that access to physical
assets and
information are controlled and restricted to authorised personnel.
5. Error handling-This is to ensure that errors detected at any stage of processing
a
transaction should be given prompt corrective attention.
6. Segregation of duties-This is to ensure that duties are assigned to individuals
in a
manner that will ensure that no one individual can perform two overlapping
functions.

1.6

INTERNAL CONTROL DEFINITION

Internal control is a process continually operating at all levels within the entity to
achieve
efficiency and effectiveness,

reliability, completeness and timeliness of financial and

information, and

management

compliance with applicable laws and regulations

1.7 OBJECTIVES OF INTERNAL CONTROL

To assist management in orderly and efficient conduct of its operations

Adherence to management policies and procedures
Safeguarding of Assets
Prevention and Detection of Fraud and Errors
Accuracy and completeness of accounting records.
Timely preparation of reliable financial information
Inspire confidence in the Organization by its Funding Partners and
Beneficiaries

1.8 SOME
CONTROLS

EXAMPLES

OF

DEFICIENCIES

IN

INTERNAL

Absence of appropriate segregation of duties consistent with appropriate

control objectives ;
Absence of appropriate reviews and approvals of transactions, accounting
entries, or systems outputs;
Inadequate provisions for the safeguarding of assets;
Evidence of failure to safeguard assets from loss, damage, or
misappropriation ;
Evidence that a system fails to provide complete and accurate output
consistent with the auditees control objectives because of the
misapplication of control procedures:
Evidence of intentional override of internal controls by those in authority to
the detriment of the overall objectives of the system ;
Evidence of failure to perform tasks that are part of the internal controls,
such as reconciliations not prepared or not timely prepared ;
Absence of a sufficient level of control consciousness within the
organization ;
Significant deficiencies in the design or operation of internal controls that
could result in violations of laws and regulations having a direct and
material effect on the financial statements; and
Failure to follow up and correct previously identified deficiencies in internal
controls.

1.9 DIFFERENT TYPES OF INTERNAL CONTROLS

2.9.1 Budgetary Control

All transactions carried out in an Organization should, be in accordance

with the activities that are stated in the Annual Budget.
It is therefore essential to evolve the budget control mechanism, which
involves:
Planning, executing the plan, monitoring and evaluating the performance
and financially managing the activities of the Organization.
The system will also help to interpret the vision by preparing a detailed
plan of activity in physical and financial terms and provides a yard stick for
measuring the performance by comparing the plan with the actual
performance activity-wise both in physical and monetary terms.
The system will determine the objective to be achieved over the budgeted
period and the policy to be adopted to achieve objectives and determines
the activities to be undertaken to achieve the objectives
1.9.2 Organization Control

It is important to have an effective organization structure which provides

for:
Division of the organization's operations into appropriate departments, and
the appointment of persons to assume responsibility for different activities.
Communication of delegation of authority and scope of responsibilities at
various levels.
Design, so far as practicable, to preclude individuals from over-riding
control system.
Segregation of incompatible functions
1.9.3 Division Of Duties

Duties should be separated so that no one person is in a

Position to record and process a complete transaction.
Segregation of duties reduces the risk of fraud and error.
This control demonstrates that each staff member is part of an inter-reliant
team that has to work well together if the organisation is to achieve its
mission

1.9.4 Authorisation And Approval Controls

All transactions will require approval and authorisation by a responsible

official. The limits of authority should be clearly defined by means of
delegation of powers.
2.9.5 Accounting Controls

These controls include checking the arithmetical accuracy of records; also

the preparation of reconciliation, for example, reconciling cash in hand with
the cash book balance, and amounts due to a project as per Head Office
statements, with amounts due as per project records.
A computerized system may include a number of in-built mathematical
calculations, but we should be careful to ensure that when designing
spreadsheets, visual checks should be incorporated within these; for
example, the total adds and total cross adds of several columns of figures
should be displayed in separate cells on the worksheet, so that they can
be visually checked and agreed with each other.
The printouts made of the respective statements should be duly signed by
the competent authority
1.9.6 Personnel Controls

Proper functioning of any system depends on:

Competence and integrity of those operating it.
Qualifications, selection and training as well as personal characteristics of
personnel involved.
These include proper procedures over selection and training of staff, to
ensure that their abilities and experience match up to their responsibilities.
Non-government organizations know from experience that it is tempting to
take on staffs who appear to be committed to the objectives of the
Organization, or who are known personally to existing members of staff.
If normal procedures are not followed, the organization may find that the
new staff member is not really capable of carrying out the job. Dismissing
staff is unpleasant; sometimes it proves extremely difficult; in this situation
the reputation and work of Organisation may be damaged.

1.9.7 Supervision Controls

The job description and detailed work programmes of senior staff should
include the routine daily supervision of junior staff. This has to be done in a
sensitive but programmed way;
In most cases, the staff whose work is being supervised should be aware
that this supervision is taking place;
They should be encouraged to share difficulties, and to make suggestions
as to how their job might be carried out more effectively.
In carrying out supervisory responsibility, management should: Review
adequacy of internal control on a regular basis to ensure that all significant
controls are operating effectively.
Where the Organization has an internal audit system, entrust to it some of
its supervisory functions, especially with respect to review of internal
controls.
The internal audit, in addition to other control functions, may carry out :
Surprise cash counts,
Physical inventories of stores,
Checking vehicle log books.
Visit to Project site/area where programme activities are taking place.
1.9.8 Preventive & Detective Control Preventive

Require two cheque-signatures on all large disbursements.

Require the use of an Authorised Vendors list.
Reconcile invoice to receiving reports before authorising payment.

Check mathematical accuracy of invoices before payment.

Detective

Prepare Bank reconciliations :

Reconcile vendors statements to recorded payables

Count physical inventory - Observe payroll distribution on a test basis Trace detail.

1.9.9 Control Activities:

Reporting and reviewing reconciliations.

Checking the arithmetical accuracy of the records.
Controlling applications and environment of computer information
environment systems. For example, by establishing controls over changes
to computer programmes access to data files.
Maintaining and reviewing control over accounts and related subsidiary
ledgers.
Approving and controlling of documents.
Comparing internal data with external sources of information.
Comparing the results of physical verification of cash, fixed assets,
investments and inventory with corresponding accounting records.
Restricting direct access to assets records and information.
Comparing and analyzing the financial results with corresponding
budgeted figures
1.9.10 Safeguarding Controls

Internal controls over safeguarding of assets constitute a process, affected

by an entitys Governing Body to provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or
disposition of the entitys assets that could have a material effect on the
financial statements.
Safeguarding controls relate to the prevention or timely detection of
unauthorized transactions and unauthorized access to assets that could
result in losses that are material to the financial statements
For example, when unauthorized expenditure or investments are made,
unauthorized liabilities are incurred, inventory is stolen or assets are
converted to personal use.
Such controls are designed to help ensure that use of and access to
assets is in accordance with managements authorization.
Authorization includes approval of transactions in accordance with policies
and procedures established by management to safeguard assets.
These include restricting physical access to cash, stocks and other assets.
They would also include comparing existing assets with the related
records at reasonable intervals and taking appropriate action with respect
to any differences.
Understanding these safeguarding controls can help auditors assess the
risk that financial statements could be materially mis-stated. For example,
an understanding of an organizations safeguarding controls can help
auditors recognize risk factors such as:

Failure to adequately monitor decentralized operations;

Lack of controls over activities, such as lack of documentation for major
transactions;
Lack of controls over computer processing, such as a lack of controls over
access to applications that initiate or control the movement of assets;
Failure to develop or communicate adequate policies and procedures for
security of data or assets, such as allowing unauthorized personnel to
have ready access to data or assets; and
Failure to investigate significant unreconciled differences between
reconciliations of a control account and subsidiary records.
1.9.11 Controls Over Compliance With Laws And Regulations

Auditors should design the audit to provide reasonable assurance that the
financial statements are free of material mis-statements resulting from
violations of laws and regulations that have a direct and material effect on
the determination of financial statement amounts.
To meet that requirement, auditors should have an understanding of
internal controls relevant to financial statement assertions affected by
those laws and regulations.
Auditors should use that understanding to identify types of potential misstatements, consider factors that affect the risk of material mis-statement,
and design substantive tests. For example, the following control
environment factors may influence the auditors' assessment of control risk:
a) Managements awareness or lack of awareness of applicable laws and
regulations.
b) Organizations policy regarding such matters as acceptable operating
practices and code of conduct, and
c) Assignment of responsibility and delegation of authority to deal with
such matters as organizational goals and objectives, operating functions,
and regulatory requirements.
1.9.12 Governance

In addition to the day-to-day controls which are to be carried out by the

Senior Staff, there will be other supervisory procedures which should take
place at Board level.
The Board should not be monopolised by a single interest group (e.g.
members of one family).
The Board should have identified experts drawn from various disciplines.
The statutes / bye-laws of the organisation should provide for transparent
process of taking decisions, election of office bearers and members of the
Board
1.9.13 Transparency

The organization should have transparency in purpose of work by:

Making clear documentation as to who they are, what they do and how
they do;
explicitly following and documenting financial norms, accounting policies,
staff and management policy;
preparing and making available annual reports with a summary of major
activities undertaken, achievements made, tasks to be undertaken and
financial statements about their constituencies, affiliates etc.
1.9.14 Limitations Of Internal Control
Internal Control cannot:
-change an inherently poor manager into a good one,
-ensure success, or even survival.
An internal control system, no matter how well conceived and operated,
can provide reasonable, not absolute, assurance regarding achievement
of an entitys objectives.
Internal control is not a cure-all.
Inherent Limitations of Internal Controls

Inherent inability to achieve 100% control due to control risks, such as:
Judgment individual judgment and decision making can be faulty.
Breakdowns can occur because of human failures such as simple errors
or mistakes.
Management Override management can have the ability to override
controls
1.9.14.1 Detecting Fraud -- Red Flags

Lifestyle and Personality

Organizational
Financial Documents
Accountability and Control
1.9.14.2 Lifestyle and Personality -- Red Flags

Close Customer / Vendor Relationship.

Unusual or Change in Personality (alcohol, drugs, sleep, irritable,
defensive, argumentative)
Too Good to Be True Performance
Excessive Overtime
Dominating Personality
Living Beyond Means
Poor Money Management
Dissatisfied Worker
Unable to Relax

1.9.14.3 Organizational Red Flags

No Communication of Expectations.
Too Much Trust in Key Employees.
Lack of Proper Authorisation Procedures
Lack of Attention to Detail.
Changes in Organisational Structure
Tendency Toward Crisis Management
1.9.14.4 Financial Document Red Flags

Missing Documents.
Alteration of Documents
Excessive Number of Voided Documents.
Documents Not Numerically controlled.
Questionable Handwriting or Authorisation.
Duplicate Payments.
Unusual Billing Address or Arrangements.
Address of Employees Same as Vendor.
Duplicate or Home Made Photocopied Invoices.
Excessive Cheques to Cash withdrawals.
Excessive Unpaid Advances to Employees.
Excessive Spoilage / Damaged Goods.
Failure to Reconcile Bank Accounts.
Excessive Unpaid Advances to Employees.
1.9.14.5 Accountability and Control Red Flags

Lack of Separation of Duties.

Lack of Physical security and / or Key Control.

Weak Links in Chain of Controls and Accountability.

Missing Independent Checks on Performance.

Lax Management Style.

Poor System Design.

Inadequate Training

CHAPTER 2
RESEARCH
METHODOLOGY

2.1 INTRODUCTION
The purpose of this chapter is to present the philosophical assumptions
underpinning this research, as well as to introduce the research strategy and the
empirical techniques applied.

The study appraises the internal controls system of ARDBs. However, the validity
and reliability of every research is dependent to a large extent on the
methodology adopted for the study. The methodology for a research must
therefore be scientific. That is, the process must be systematic, rigorous and
unbiased. In order to guard against potential statistical errors, relevant and
appropriate data collection instruments and models was applied to arrive at
accurate results. This chapter therefore presents a detailed and systematic
process that the researcher adopted in order to achieve the objectives of the
study.
The main discussions in this chapter included; the study design, the study
population, the sampling technique and sample size, case studies data
methodology, data handling, data analysis and presentation, data and variables
used in the study.

2.2 OBJECTIVES OF THE STUDY

The methodology for the research study is descriptive and is as follows:
Objectives:
The main objective of our project is:
To assess the overall internal control system of ARDBs.
To know in which internal control quality dimension the bank is performing
well and in which dimension it needs improvement.
To know proper requirements or expectation for proper effectiveness
Research design is a protocol that determines and influences the condition with
ground rules for collection and analysis of data. Research design provides the
glue that holds the research project together. A design is used to structure the
research, to show how all of the major parts of the research project -- the
samples or groups, measures, treatments or programs, and methods of
assignment work together to try to address the central research questions. The
researchers in this study adopted the causal/explanatory research design since
the study is a case study.

2.3 SCOPE OF THE STUDY:

Beneficiary of this project is to the bank, to improve the internal control

system in the dimension in which they are lagging.

Key findings and analysis will helpful to them to provide better internal
controlling.

For researchers, to know the competitive advantage of effective internal

control system to the banks.

2.4 SELECTION OF THE PROBLEM:

Priya Jacob final year M.com in JG College Of Commerce, Gujarat

University, has completed his Bachelor in Commerce from Gujarat
University..

I have selected this topic because I am interested in banking sector.

Knowledge through this project can help me to identify more about the
practices that will add value in an organization.

2.5 SAMPLE AND SAMPLING TECHNIQUE

In research, it is often impossible to study the entire population. However, some
researchers do overcome this difficulty in situations where the study population
itself is small and also not very scattered. To address the challenge of access to
the complete population, representative samples are thus prescribed and
accepted in any scientific study.
A sample is a finite part of a statistical population whose properties are studied to
gain information about the whole. When dealing with people, it can be defined as
a set of respondents (people) selected from a larger population for the purpose
of a survey.
A sample can refer to a set of people or objects chosen from a larger population
in order to represent that population to a greater extent. Therefore, the size of the
study sample and the way in which it is chosen will certainly have implications for
the confidence in the results and the extent to which generalizations can be
made.
In selecting the respondents, simple random sampling technique was used. A
simple random sample is a sample of size n drawn from a population of size N in
such a way that every possible sample of size n has the same chance of being
selected.

Simple random sampling is the most basic sampling procedure to draw the
sample.

Simple random sampling forms the basis for many of the more
complicated sampling procedures.

Simple random sampling is easy to describe but is often very difficult to

carry out in the field where there is not a complete list of all the members
of the population.

3.5.1 Sample Size:

The researchers used simple random sampling because it is not everybody who
is associated with ARDBs to provide the needed data. A sample size of 100 staff
members of ARDB has been taken

2.6 SOURCE OF DATA

Data Collection Tool
2.6.1 Primary data:
The primary data has been collected by questionnaire with the relevant question
to the project study and research. The survey was basically conducted using
questionnaire. The questionnaire contained both open and closed ended
questions to collect data on the subject matter for the study
Questionnaire:
Questionnaire is a series of questions asked to individuals to obtain statistically
useful information about a given topic. When properly constructed and
responsibly administered, questionnaires become a vital instrument by which
statements can be made about specific groups or people or entire populations.
Questionnaires are frequently used in social research. They are a valuable
method of collecting a wide range of information from a large number of
individuals, often referred to respondents. Adequate questionnaire construction is
critical to the success of a survey.

Inappropriate questions, incorrect ordering of questions, incorrect scaling, or bad

questionnaire format can make the survey valueless, as it may not accurately
reflect the views and opinions of the participants. A useful method for checking a

questionnaire and making sure it is accurately capturing the intended information

is to pre-test among a smaller subset of target respondents.
In fact, the questionnaires were self-administered to individuals involved. The
questionnaire contained both closed-ended and open-ended questions. The
open-ended questions sought to encourage respondents to share as much
information as possible in an unconstrained manner.
The closed-ended questions, on the other hand, involved questions that were
answered by simply checking a box or circling the proper response from a set of
options that was provided. While the closed-ended questions allow for easier
analysis of the data due to standardized questions, their main limitation is that
they allow the researchers to determine only what the respondents are doing and
not how or why they are doing it.
2.6.2 Secondary data:
The sources of the secondary data were from the records of ARDBs internet
reports relevant to the research, textbooks and articles. Due acknowledgement
has been made to the sources where information were collected at the reference
section various websites, articles from magazines and news papers were used
for collecting secondary data.
The data collection format will depend on the kind of data to be collected.
However, in this particular study both primary and secondary data were used

2.7 TABULATION OF DATA:

Tabulation is essential because of following reasons:

It conserves space and reduce explanatory and descriptive statement to a

minimum.
It facilitates the process of comparison.
It facilitates the summation of items and the detection of errors and
omission.
It provides a basis for various statistical computation.

We have used various classified datas to know the clear picture in an easy way.
So that internal control can be made effective

2.8 DATA ANALYSIS

The result was presented using statistical tools such as charts. Descriptive
statistics were used to analyse the data. The collected data in the study has been
presented and analyzed using the various graphs for satisfaction level, score of
various factors on the particular dimensions.

2.9 SCORING:
Responses for the research questionnaire were made on a five-point Likert scale
as follows:
Strongly Agree = 5
Agree = 4
Not sure = 3
Disagree = 2
Strongly Disagree = 1
In all the constructs, high scores imply that the variables being measured are
effective.However, ineffective internal control systems and structures would be
characterized by low scores

2.10 TECHNIQUES AND TOOLS TO BE USED:

Tool Usefulness
This Management and Evaluation Tool could be useful in assessing internal
control as it relates to the achievement of the objectives in any of the three major
control categories, i.e., effectiveness and efficiency of operations, reliability of
financial reporting, and compliance with laws and regulations. It may also be
useful with respect to the subset objective of safeguarding assets from fraud,
waste, abuse, or misuse. In addition, the tool may be used when considering
internal control as it relates to any of the various activities of an department,
such as administration, financial management, acquisition and procurement.
This tool discusses internal control from a broad, overall department perspective
based on the internal control standards and focusing on managements
operational and program objectives. Although the focus may vary, the concepts
should remain complementary.
This Management and Evaluation Tool was developed using many different
sources of information and ideas.

2.11 LIMITATION OF STUDY:

 The study was restricted to one banks, so the overall scenario could not
be studied.
Inadequate time was the major constraint during the whole project.
All the answers given by the respondents have been assumed true.

2.12 SIGNIFICANCE OF THE STUDY:

To know Internal Control And Fraud Detection in the Banking Industry

Designing Internal Control System To Minimize Fraud
Impact of Internal Control Systems on Banking Industry
An Exploratory Study of Internal Control and Fraud Prevention Measures

CHAPTER 3
REVIEW
OF
LITERATURE

3.1 INTRODUCTION
This chapter attempts to review literature in the area of internal control systems in
ARDBs. The literature review is discussed under various sub headings

A literature review is a text written by someone to consider the critical points of

current knowledge including substantive findings as well as theoretical and
methodological contributions to a particular topic. Literature reviews
are secondary sources, and as such, do not report any new or original
experimental work. Also, a literature review can be interpreted as a review of an
abstract accomplishment.
Its main goals are to situate the current study within the body of literature and to
provide context for the particular reader.
3.1.1 Theoretical Framework And Effectiveness Of Internal Auditing:
In order to determine internal audit efficiency evaluation principles it is important
to analyze the conceptual framework of internal auditing. According to the
Institute of Internal Auditors internal auditing is an independent appraisal
function, established within an organization to examine and evaluate its activities
as a service to the organization. By measuring and evaluating the effectiveness
of organizational controls, internal auditing, itself, is an important managerial
control device which is directly linked to the organizational structure and the
general rules of the business. Hence, one of the most comprehensive definition is
given by Sawyer (2003) who stated that internal auditing is a systematic,
objective appraisal by internal auditors of the diverse operations and controls
within an organization to determine whether (1) financial and operating
information is accurate and reliable, (2) risks to the enterprise are identified and
minimized, (3) external regulations and acceptable internal policies and
procedures are followed, (4) satisfactory operating criteria are met, (5) resources
are used efficiently and economically and (6) the organization s objectives are
effectively achieved all for the purpose of consulting with management and for
assisting members of the organization in the effective discharge of their
governance responsibilities.
3.1.2 Internal Controls In Perspective
The definition of internal control has evolved over recent years as different
internal control models have been developed. This study presents some
definitions of internal control by different people and organisations. This has
become necessary because the concept of internal control is a dynamic concept
and is incapable of precise lasting definition.
Internal control is the process by which an organisation governs its activities to
effectively and efficiently accomplish its mission. It defined internal control as the
integration of the activities, plans attitudes, policies and efforts of people of an
organisation working together to provide reasonable assurance that the
organisation will achieve its objectives and mission.

Kenneman P. (2004) describes internal control as those mechanisms that are in

place to either prevent errors from entering the process or detecting errors once
they have. He explains, in simple terms that, internal control can be defined as
those processes that management relies on to make sure things dont get goofed
up.
Internal control is a process effected by an entitys board of directors,
management and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the area of: effectiveness and
efficiency of operations, reliability of financial reporting and compliance with
applicable laws and regulation (The Committee of Sponsoring Organisations of
the Treadeway Commission (COSO)).
Expanding on the COSO definition, Financial Management Journal (2005), said
Internal control represents an organisations plans, methods, and procedures
used to meet its missions, goals, and objectives and serves as the first line of
defence in safeguarding assets and preventing and detecting errors, fraud,
waste, abuse, and mismanagement.

3.2

INTRODUCTION ON BANKING SECTOR

There is currently considerable interest in the topic of internal audit and its
contribution to exact management of any business economic resources. This
developing role of the internal auditing is also reflected in its current definition, i.e.
Internal control is the system of internal administrative and financial checks and
balances designed by management, and supported by corrective actions, to
ensure that the goals and responsibilities of the organization are achieved
In accordance with the above, growth in international financial markets has given
banks the opportunity to design new products and to provide a wide range of
services, there can be noticed an increase in associated risks. Simultan1eously,
there is growing management recognition of the importance of implementing a
good internal control system as some of the recent reports on bank failures have
highlighted fraud and negligence as the major contributory factors.
In other words, the activities of internal audit are now seen as critical elements in
the assurance process. Strong internal control systems have long been seen as
particularly relevant to banks because of their vulnerability to fraud and the links
between information systems and money. Despite the afore mentioned
perspectives of the researchers regarding the crucial role of internal auditing,

there is no such a study examining the internal audit function within. In this
context, the purpose of this paper is to highlight the interaction between
components of internal audit and effectiveness of internal auditing in banks, in
particular.
Consistent with our predictions, our results indicate that the success of internal
auditing is strongly associated with the five elements of internal control system
Control environment, Risk assessment, Control activities, Information and
communication and Monitoring. The remainder of the paper is organized as
follows. The next section presents the research design by providing information
on the development of the survey and the methodology for data analysis. The
third section reviews the related literature and provides the focus of the study by
analyzing the effectiveness of internal auditing and presenting the recent
empirical literature review.
The results of the study are reported and discussed in the fourth section. Then,
the fifth section summarizes the paper, presents major findings of the study and
forwards the ensuing conclusions. Finally, the paper concludes by limitations of
the study and future research direction

3.3 INTERNAL CHECKS AND CONTROL SYSTEMS IN

AGRICULTUR AND RURAL DEVELOPMENT BANKS
3.3.1 Introduction
Systems are vehicles for transforming policies into performance. Systems stem
from
the objectives and policies of the organization and have to be in tune with them.
They help the organization to efficiently and effectively attain its goals. They work
As tools for achieving results and not as ends in themselves. Any system in an
organization should satisfy the following parameters.

i. It should have a well defined objective and policy backing.

ii. It should have the necessary controls and safety features.
iii. It should be easy to understand, implement and follow at the operational (i.e.
branch) level.
iv. It should be customer-friendly and at the same time, operationally efficient,

v. It should not be inconsistent or in conflict with the other relevant systems,

Procedures, policies, guidelines, practices, standards, directives, etc., in place.
vi. The working of the system should be monitor able.
vii. The system should be technology friendly and implementable with available
manpower to achieve the objectives in the most cost-effective manner consistent
with efficiency and competitive needs.
3.3.2 System Of Internal Control :
Control systems work, to some extent, like nervous system of a living organism. It
maintains and controls works of other systems of an organization. A sound
system of internal checks and control is the sinequa-non for any business
organization striving to attain success in its fields.
3.3.3 What Is New And Why It Is Emphasized So Much Now :
Proper system and procedures act as in-built safeguards not only to ensure
smooth working, but also guard against possible irregularities and fraudulent
practices.
From the evolution of cooperative banking system it can be seen that like any
other organization cooperatives also have the checks and control mechanism in
built in its system. With the passage of time various developments took place,
which prompt a need for rejuvenation of the system. The factors which are
responsible for this are given as under:
i. Increase in volume of business and banking transactions in a competitive
Environment after liberalization of economy
ii. Infusion of complex banking instruments in money market.
iii. Depletion of man power in cooperatives due to poor resource base and
inability of the bank to replace them resulting in multi tasking and at times work is
done by staff not authorized to do so.
iv. Division of labor and decentralization of responsibilities.
3.3.4 Introduction Of Stringent Supervisory Norms.
Frauds are visual manifestations of poor internal checks and controls in banks.
Apart from financial damage, frauds cause a lot of collateral damage to the
organization.
Profitability of the bank goes down due to increase in NPAs, failure in plugging
leakage of income. Business growth suffers. Chaotic atmosphere in the
organization comes to the front. Banks operation becomes supervisory and
regulatory concern.

3.3.4.1 Broad Objectives Of ICS :

The ICS is linked to all functional, administrative areas of banks operation. The
primary objective of ICS should be:
i. to ensure proper functioning of the systems in place in the organization thereby
safeguarding assets of the organization to the satisfaction of all stake holders
including supervisor and regulators.
ii. To introduce new ICS keeping in view changing business environment, new
Products, business expansion, supervisory and regulatory requirements etc.
iii. to review efficacy of the old ICS and introduce changes ( documenting,
internalizing, practicing)
iv. to identify irregularities committed by an individual, groups by way of omission
or commission.
v. to identify loopholes in the system which are responsible for occurrence of the
irregularity.
vi. to protect interest of the organisation by stemming the leakage of income, to
protect interest of depositors and financiers,
vii. to ensure providing true and fair picture of the organisation to the higher
financing agency, depositors, supervisors, regulators and owners.
3.3.4.2 Who Will Do It :
The Board of Directors are responsible to the stake holders of the bank for
attaining
set objectives. They should realise the need of the ICS rather than taking it as a
supervisory compliance. The board should assess the amount of financial,
reputation, and business losses besides, supervisory remarks the bank has
suffered
due to poor internal control

3.3.4.3 How To Start With :

When talking about ICS for a bank it may be borne in mind that the bank is
already
having a system. It is only to be revamped in keeping with the present
requirements.

The State cooperative Societies Act and Rules and Bye-law of the bank have
various attributes such as system of annual and concurrent audit, presentation of
balance sheet and profit and loss accounts, penalty for non repayment of bank
dues, penalty for employees causing loss to bank, etc.
Past experience of the bank and practice followed by other bank are also of help
for
designing an ICS for the bank. However, first of all, there should be an
organisational structure for designing/reviewing the ICS policy and undertaking
related tasks for betterment of the organisation.
3.3.4.4 Organisational Structure Of ICS :
The bank in keeping with its volume of business, staff strength and other
demands
and constraints may go for different structure. However, given the business level
of
present LT structure, other supervisory prescriptions given time to time an ICS
model is proposed. A ven-diagram of organisation structure and works to be
attended is suggested as under:

Fig. 1.1 Organisational Structure Of ICS

Board of Directors
Audit Committee
Risk management Statutory
audit, NB inspection cell

Managing Director
Concurrent/
internal Vigilance Cell
audit/ inspection cell

It should also frame a policy to take care of ICS of affiliated ARDBs through its
own machinery. The ARDBs may also go for above ICS structure.

3.4 FUNCTION AND WORKINGS OF AUDIT COMMITTEE :

The basic responsibility of an Audit Committee are:
i. to decide periodicity, coverage and quality of internal inspection/audit and
concurrent audit to be conducted etc. To approve internal audit/inspection

budget.
ii. to review findings of internal inspection/audit, concurrent audit and take
suitable follow up action for rectification of irregularities.
iii. to comply with the inspection findings of NABARD and audit reports of
statutory auditors by discussing the issues with the Board of Directors. Follow
up with the targeted departments to ensure rectification.
iv. to fixing accountability for unsatisfactory or delay in compliance of inspection /
audit observations.
v. to review omission on the part of the internal inspecting official, concurrent
auditor to detect serious irregularities.
vi. to take steps for closing of books of accounts and preparation of final accounts
within stipulated time frame.
vii. to review important risk areas such as credit risk, liquidity risk and operational
3.4.1 Function And Workings Of Risk Management Cell:
The cell will make Assets Liability management by collecting data from different
sources. Funds flow analysis will be made to find out liquidity position of the bank
vis-a-vis the commitments. The section will collect information on NPA and review
it to find out reasons for sticky loans and suggest measures for recovery. It will
review the accounting policies, systems and controls of the bank to ensure
transparency. The cell will work as a coordinating agency of accounts section and
management. The cell will coordinate during conduct of inspection/audit by
external
agency and ensure compliance to their findings.

3.4.2 ICS Policy Frame Work :

The cell with the help of Administration Department will firm up and document the
overall ICS policy frame work of the bank with reference to :
_ Delegation of financial power for sanction of loans, purchases, advance and
payments to 3rd party etc., discretionary powers to officials for different
purposes.
_ Administrative powers ( payment to staff i.e. Pay fixation, TA,DA,HA etc.,)
_ Accounting procedure (process to be followed for all types of debit and credit
transactions and responsibility of different employees responsible for handling
the transactions including preparation of voucher, posting of different registers

and ledgers, issuing payment order, duties of passing officer in giving payment
order for high value instruments, procedure adopted at cash section for payment
and record keeping, etc.)
_ Daily Checking of vouchers by a person not connected with the transactions
_ Daily checking of cash before it is transferred to the vault.
_ Daily reporting by BM about cash, loan and deposit position.
_ Financial returns (fortnightly, monthly, quarterly, annual etc.)
_ MIS covering other areas such as business development, Demand Collection
Balance,
_ Preparation of Trial balance
_ Balancing of subsidiary books and ledgers.
_ Bank and branch reconciliation.
_ Closing of Books of account half yearly/Annually.
_ Preparation of final accounts.
( apart from the experience of the bank, it will get certain inputs for preparing a
policy document from different functional chapters of the documents)
3.4.3 Function And Workings Of Internal Audit/ Inspection Dept.:
i) Policy on internal inspections : The department will frame policy on internal
inspections in regard to different factors . To facilitate the bank to frame its policy
some hints are given in each of the important factors :
_ Duration of inspection: No of man days required for conduct of inspection
inkeeping with the volume of business and other sensitive factors, associated
with the unit, to be determined. No of officials to be deputed for the purpose.
_ Reference date of review : Ideally two inspections in a year is required to
ensure
good governance and vigil over branch functioning. In such a case, reference
date
should be 30 September and 31 March of an year. Financial position with
reference to these cut off dates to be reviewed. Entire business conducted during
the period and ongoing accounts up to that period will come under purview of
the inspection.
_ Content of inspection report ; The department will prepare a check list of works
to be attended by the inspecting officials during the visit. A model of inspection
format is enclosed.
_ Period for drafting : Drafting period should be same as duration of on-site

inspection.
_ Finalisation and submission of report: After the drafting is over, the principal
inspecting officer will submit the draft report to the authority of inspection
department for review and finalisation. The bank has to decide the level of officer
who should finalise and send the report to the branch/ARDB. Two weeks may be
given for completion of this formality. The inspection team should take all
responsibility up to despatch of the report. Logistic support should be provided
to the team by the department.
_ Time frame for compliance: The report should be divided into two parts. Minor
defects and major defects. Time frame for rectifying minor defects should be 15
days from the date of issue of the report and major defects to be complied with
within 45 days.
_ Coverage and quality of reports: The internal audit / inspection department will
follow a format as given in Annexure II for the purpose of eliciting information
and writing the report. The format is self explanatory and contained almost all
areas of banks functioning in a questionnaire form. The inspecting officer will
give his/her observations alongside of the questionnaire. The audit committee
may award marks to the report in the following parameters in 100 marks scale :

Fig. 1.2 Audit Committee Report

Parameters
Maximum
Quality and contents of Inspection
Report
Presentation
Accuracy
New Features (detection of frauds)
Timely issue of IR
TOTAL : 100

Marks obtained

_ Rating of branch/ARDB : The status of the branch/ARDB may be measured by

using a rating scale on performance in each of the area of banks functioning as
come out in the final report. The format provides for allotting marks in each
section of banks activity with an aggregate maximum mark of 100. The Audit
committee may decide maximum marks a particular activity deserves depending
on weightage of the activity from ICS point of view. However, an illustrative
rating chart is given as under :

Fig.1.3 Audit Committee Report ICS

Activity

Maximum
marks
Cash retention
5
Handling of keys
5
Deposits
5
Loans
15
Operational risk management 30
Control on income leakage
20
External compliance
5
Business
strategy
and 5
customer service
Working result and net worth 10
Total
100

Marks
obtained

Remarks

The status of the ARDB/branch may be arrived at on marks it will get from the
inspection. The units may be categorised as under :

Fig. 1.4 ARDB Branch Status

Percentage of marks awarded
Above 80%
60 to 80 %
50 to 60%
Below 50%

Category
A
B
C
D

_ Issue of warning signals : On the basis of the inspection findings warning signal
may be issued to the branch/ARDB. A system of critical monitoring may be
introduced to keep a vigil on the financing unit in that weak area.
_ Monitoring and follow up : The compliance by the inspected unit is important

for set right the problem if any. Care should be taken to see quality of
compliance. Compliance should be specific and verifiable. If similar type of
irregularities are noticed in the next inspection the inspecting unit may be issued
warning.
_ Internalisation of Inspection findings : The audit committee may review the
inspection reports periodically and analyse cause and effect of certain findings.
Disturbing features may be intimated to different sections dealing with the
subject. On the basis of the findings policy changes may be made.
Other issues ;
Annual budget for internal inspection, allocation of man power, fixation of visit
schedule etc., will be drawn in advance and accorded sanction of the Board
through
the Audit Committee.

3.5

FRAUDS IN ARDBs:

1.General:
Frauds are acts of criminal deception resorted to by persons singly or in collusion
with others in order to derive gains to which they are not entitled. Frauds are
perpetrated by deliberate violation of established banking system and
procedures/practices by the bank staff in connivance with the customer or in
collusion with external agencies. Some times frauds are also perpetrated by
customers/outsiders.
2. Review Of Existing Systems:
A close scrutiny of frauds perpetrated in banks would reveal that such frauds are
not
due to lack of instructions or absence of proper systems and procedures, but due
to
the flouting of established systems and procedures by the officials. To facilitate
banks to tackle fraud related issues in totality, NABARD vide circular
No.NB.DoS.HO.Pol/ 3121 / J-1 / 2006-07 dated 13 November 2006 issued
comprehensive guidelines in which emphasis was given on strengthening internal
checks and control system of the bank, monitoring of frauds and establishment of
Vigilance cell.
3. Establishment Of Vigilance Cell:

Formalities to be followed for establishment and functioning of vigilance cell has

been given in the above NABARD guidelines. The SCARDB may take a view in
establishing the same for the SCARDB and ARDBs in the state. The Vigilance set
up
will have three fold function. They are : Detective Vigilance, Punitive Vigilance
and
Preventive Vigilance.
a] Detective Vigilance:
In detective Vigilance, Vigilance officer has to unearth fraud or corruption cases
and
ensure that the guilty is booked. The vigilance officer has to examine whether the
judgments made or discretion exercised are done in good faith or not. The
following
acts should be seriously viewed :
i] Unwarranted departure from norms.
ii] carelessness.
iii] abuse of authority.

b] Punitive Vigilance:
Punitive Vigilance means initiation of disciplinary action against the delinquents.
'System failure' and 'human failure' are mainly the two factors which result in the
perpetration of a fraud. When the occurrence of an incident is the result of a
'human
failure', the Vigilance Officer should ascertain the extent of failure / lapses on the
part of dealing officials as also whether the lapses are willfully committed by the
dealing officials and it is a mere act of negligence which a man of ordinary
prudence
may commit in the ordinary course of business. Each incident having a Vigilance
angle is required to be analysed by the Vigilance Officer with an independent
mind
keeping in view the gravity of the case.

c] Preventive Vigilance:
Preventive Vigilance consists of steps taken by the organization to arrest
corruption
at the very root and takes care of the basic causes which help it to flourish. The
Vigilance Officer should pin point the defects in the systems and procedures due
to
which serious frauds are perpetrated. He should also suggest ways of
streamlining
the existing system / procedures to prevent recurrence of such incidents.
4. Usual Modus Operandi Of Frauds/Misappropriations
Some of the major areas of the bank's activities which are highly susceptible to
frauds and the safeguards for prevention of frauds have been discussed in the
following paragraphs:
a. Cash
Shortage of cash at cash counter or in the aggregate cash balances of a branch
vis-avis the balance in the cash book is termed as fraud in cash. The shortage in
the cash balances arising out of genuine mistakes like short receipts or excess
payments which are detected during the course of the day cannot be categorised
as fraud if they are reported immediately by the concerned cashiers to their
senior officials.However, it is categorised as fraud under the following
circumstances.
(illustrative)
i.If the actual cash in the safe is less than the balance held in cash book.
ii.If cash is said to be in transit or theft from counters as an explanation for cash
shortage.
iii. If there is an attempt to conceal shortage by a bogus instrument/voucher kept
along with the cash to indicate that the amount mentioned therein has been paid
out of the cash much after the cash balance was struck.
The safeguards to be observed are (i) observing the principle of dual custody, (ii)
verification of daily cash balance before its lodgment, in safe, in transit (iii)
arranging
for separate enclosures for cashiers, (iv) proper lodgment of duplicate set of
vault/safe keys and periodical rotation thereof, (v) posting of guards (vi) insurance

of cash in safe/counters/ transit (vii) surprise verification of cash at counter/vault

by
an officer other than the joint custodians.
b. Deposit Accounts
Frauds are perpetrated in deposit accounts, both by outsider and staff. The fraud
may be perpetrated by staff by issuing fake scrips stolen from the bank custody
to
depositors, by accepting cash from innocent depositors and issue of counter folio
as
a mark of receipt of cash, encashment of old matured FDR with the help of
dishonest
outsider. The outsiders may open deposit account by producing stolen
instrument,
tampered instrument.
b. Loans and advances
With active support of delinquent staff member, loans are disbursed against
forged
land documents, loans to nominal members which are misutilised with active
support of bank officials, recovery misappropriated by staff.
While sanctioning advances against gold ornaments the banks are defrauded by
the
customers by accepting spurious ornaments. The purity and content of the gold
may
be examined through acid test. The bank should also arrange to weigh the
ornaments in water to detect wax contents if any in the ornament.
NFS loans and Housing loans are sanctioned with fabricated income documents
like
income tax returns, salary certificates etc. Excess loans sanctioned by over
valuation
of property, Multiple financing availed by borrower by showing forged documents,
Property sold before repayment of loans, diversion of loans.
d. Suspense Account
Entries in suspense account are made when it is difficult to identify appropriate
head. Such accounts provide scope for perpetration of fraud.
e. Head Office Account

All the transactions between the branches are generally routed through the Head
Office account. The frauds occur by raising debit in the Head Office account for
giving credit of equivalent amount to some other account with fraudulent intention
of withdrawing such amount from the latter account subsequently.
f. Accounts with other banks
The frauds in this account are generally perpetrated when the "Bankers' Account"
is
debited in respect of transactions which are not genuine.
Following safeguards are suggested to avoid occurrence of frauds in these
accounts:
i. The cheque signed by any one of the signatories should not be kept overnight.
Leaves of the cheque books may be counted frequently.
ii. Debit advice received from the bank with whom an account is maintained ,
should not be kept Un-responded. For example, when a debit is raised in
bankers' account in respect of a returned cheque for which a credit has been
afforded earlier, the ARDB concerned should immediately respond to the
entry by debiting the account of the party concerned. If, instead, the debit
advice is deliberately destroyed or misplaced, a fraud results. It is, therefore,
suggested that the balances in the Bankers' Account should be periodically
reconciled with the balances shown in the statement of accounts received
from the concerned banks.
g.Investments
Fraud in this portfolio can be perpetrated by outsider by not handing over the
securities, siphoning of incentives in purchase or sale, stealing of liquid
instruments
etc. The preventive measures as detailed in investment chapter may be followed
by
the bank as a preventive measure.
h. Immovable property, furniture and fixtures and stationery
Frauds in these portfolios mainly involve in purchase / payment of hire charges at
rates higher than the market rates. The safeguards suggested in relevant
chapters
may be referred to .

5. How To Deal With A Fraud :

Frauds comes about occasionally. Some times due to lack of knowledge to deal
with
the subject the banks fail to recover its losses due to the frauds and also loss the
legal
battle against the fraudstar. The banks therefore, should formulate guidelines
indicating process involved in dealing with a case of fraud as and when it comes
to
the notice. A general suggestion for dealing a current fraud is given as under :
Fraud committed by own staff:
a. Complaints are important source of identifying frauds. Complaint boxes should
be managed by internal audit departments. If a case of doubtful nature comes to
the notice, a team of officer/s may be deputed to the spot for verifying the
veracity of the case. The report should be obtained on the same day. If there is a
prima-facie case of misappropriation the concerned staff may be put under
suspension with immediate effect. Police complaint may be lodged on the same
day and the higher financing agencies including NABARD are apprised.
b. Detailed enquiry may be instituted by the bank through its own machinery
without loss of time to assess the amount of losses and modus operandi of
frauds. The modusoperandi interalia covers a brief history of incidence, how it
came to light, the process adopted by the delinquent in defrauding the bank,
technique adopted by the delinquent to escape the internal check system
including daily checking in place in the bank etc. While assessing losses details
of
accounts involved, details of entries in registers altered, vouchers tampered etc.,
to be given. Care should be taken to record dates of happenings in all the cases.
c. The RCS will be requested to initiate departmental action.
d. The insurance agency may be appraised and request may be made for a claim
form.
e. Once modus operandi of the fraud and extent of losses caused to the bank is
found out FIR may be lodged with the police and claim of indemnity from the
insurance bank may be made.

f. After departmental enquiry by the RCS departmental proceedings may be

made
against the delinquent as per cooperative societies act and rules and other laws
in
force.
g. Being a person on public duty, the banks may take action under prevention of
corruption Act, 1988 and Central Vigilance Commission Act 2003.
h. In no circumstance the resignation offered by the employee should be
accepted
before final departmental action is completed. The employee should not be
allowed to dispose off his properties and properties in the names of its spouse,
children and close relatives.
i)The case may be monitored at a regular interval till it is closed.
Fraud committed by outsiders:
a. Enquiry may be instituted promptly and if found to have proof, police complaint
may be lodged to arrest the delinquent.
b. Higher financing agencies, insurance bank to be apprised about the
incidence. Detailed enquiry, as mentioned in earlier paragraph, may be instituted
to find out modus operandi and extent of loss to be completed in a specific time
frame.
c. Suitable action to be initiated so that the delinquent is not able to dispose of his
assets and fled the area.
d. Legal opinion may be sought to frame charge against the delinquent before
charge sheet is lodged with the police.
6. Preventive Measures
i) Introduction of ICC and System and Procedure:
A vibrant Internal Checks and Control mechanism takes care of fraud in general.
The
ICC should centre round a well defined system and procedure with distinct
delegations in all type of bank functioning. The management should introduce the
system with due earnest and review its efficacy from time to time.

ii) Staff recruitment, transfer and placement :

For prevention of frauds, banks should take certain administrative measures,
such as
verification of antecedents of new employees to the extent possible, preparation
of
job charts, rotation of employees from desk to desk or from one office to another
at
suitable periodical intervals, etc.
iii) Disciplinary action
Cases involving gross negligence of duty, whether they involve any loss to the
bank
or not, and cases of malafide action should be examined thoroughly and the
concerned employees should be suitably warned/punished, irrespective of the
grade.
Exemplary and deterrent punishment has the salutary effect of toning up overall
efficiency and integrity. Such punishments should be made known to other
employees.
iv) Educating the public
Now that more and more semiliterate or illiterate persons are being induced to
develop banking habit, the banks should advise them of the basic precautions
which
they should take to prevent frauds in their accounts. Apart from putting up
suitable
posters containing appropriate instructions for those who can read them, the
bank's
employees should personally explain them to the semi-literate/illiterate
customers.

CHAPTER 4
DATA PRESENTATION
&
ANALYSIS

4.1CONTROL ENVIRONMENT
1.Management decisions are made collectively and not controlled by one
dominant individual.

Majority of the Management Decision 30 % indicated that they Agree that

these is effective monitoring. Whilst 20 % Strongly Agree and Not Sure.
Whilst 15 % Disagree and Strongly Disagree with the effectiveness of
monitoring as an internal control measure.

Tab. 4.1

Management Decision
35
30

30
25
20

20

20

15

15

15

Disagree

Stongly Disagree

10
5
0
Strongly Agree

Agree

Not Sure

2. Policies regarding the importance of internal controls and appropriate conduct

are communicated to all staff.

Majority of the Policies 35 % indicated that they Agree that there is

effective monitoring. Whilst 25 % Strongly Agree. A Total of 5% were in
different whilst 20% disagree and whilst 15% Strongly Disagree with the
effectiveness of monitoring as an internal control measure.

Tab 4.2

Policies
35
35
30

25

25

20

20

15

15
10

5
0
Strongly agree

Agree

Not Sure

Disagree Strongly Disagree

3. Management periodically reviews policies and procedures to ensure that

proper controls are in place.

Majority of the Periodical Reviews of Policies and Procedures 27 %

indicated that they Agree that there is effective monitoring. Whilst 16 %
Strongly Agree. A Total of 19% were in different whilst 26% disagree and
whilst 12% Strongly Disagree with the effectiveness of monitoring as an
internal control measure.

Tab 4.3

Periodical reviews of policies and procedures

27

30
25
20

26

19
16
12

15
10
5
0
Strongly agree

Agree

Not Sure

Disagree Strongly Disagree

4. The banks culture, code of conduct, human resource policies and performance
reward systems support the business objectives and internal control systems.

Majority of the Banks Overall Performance 36 % indicated that they Agree

that there is effective monitoring. Whilst 26 % Strongly Agree. A Total of
8% were in different whilst 11% disagree and whilst 19% Strongly
Disagree with the effectiveness of monitoring as an internal control
measure.

Tab 4.4

Bank's Overall Performance

40

36

35
30

26

25
19

20
15

11
8

10
5
0
Strongly agree

Agree [

Not Sure

Disagree

Strongly Disagree

4.2 RISK ASSESSMENT

5. The bank has clear objectives and these have been communicated so as to
provide effective direction to employees on risk assessment and control issues.

Majority of the Clear Objectives 40 % indicated that they Agree that there
is effective monitoring. Whilst 16 % Strongly Agree. A Total of 4% were in
different whilst 22% disagree and whilst 18% Strongly Disagree with the
effectiveness of monitoring as an internal control measure.

Tab 4.5

Clear objectives

18

Strongly agree

16

Agree
Not Sure
Disagree
Strongly Disagree

22
40
4

6. Technology issues are considered and appropriately addressed.

Majority of the Technology Issues 10 % indicated that they Agree that

there is effective monitoring. Whilst 19 % Strongly Agree. A Total of 44%
were in different whilst 17% disagree and whilst 10% Strongly Disagree
with the effectiveness of monitoring as an internal control measure.

Tab 4.6

Technology issues

10

Strongly agree

10

17

19

Agree
Not Sure
Disagree

44

Strongly Disagree

7. There is a clear understanding by staff within the bank of what risks are
accepted by management.

Majority of the Clear Understanding by Staff 24 % indicated that they

Agree that there is effective monitoring. Whilst 14 % Strongly Agree. A
Total of 24% were in different whilst 28% disagree and whilst 10% Strongly
Disagree with the effectiveness of monitoring as an internal control
measure.

Tab 4.7

Clear understanding by Staff

10

14

Strongly agree
Agree
Not Sure

28

24

Disagree
Strongly Disagree

24

4.3. CONTROL ACTIVITY

8. Processes exist for independent verification of transaction (to ensure integrity)

Majority of the Processes for independent verification of transaction 35 %

indicated that they Agree that there is effective monitoring. Whilst 25 %
Strongly Agree. A Total of 10% were in different whilst 15% disagree and
whilst 15% Strongly Disagree with the effectiveness of monitoring as an
internal control measure.

Tab 4.8

Processes for independent verification of transaction

40

35

35
30
25
20

25
15

15
15

10
10

5
0
Strongly agree

Agree

Not Sure

Disagree

Strongly Disagree

9. Independent reconciliations of assets and liabilities balances go on.

Majority of the Independent reconciliations of assets and liabilities 36 %

indicated that they Agree that there is effective monitoring. Whilst 17 %
Strongly Agree. A Total of 26% were in different whilst 12% disagree and
whilst 9% Strongly Disagree with the effectiveness of monitoring as an
internal control measure.

Tab 4.9

Independent reconciliations of assets and liabilities

40
36

35
30

26

25
20
15

17

12

10

5
0
Strongly agree

Agree

Not Sure

Disagree

Strongly Disagree

10. The bank uses Close Circuit Television (CCTV) systems to protect physical
assets.

Majority of the Close Circuit Television systems 35 % indicated that they

Agree that there is effective monitoring. Whilst 45 % Strongly Agree. A
Total of 10% were in different whilst 5% disagree and whilst 5% Strongly
Disagree with the effectiveness of monitoring as an internal control
measure.

Tab 4.10

Close Circuit Television (CCTV) systems

50

45

45
40

35

35
30
25
20
15

10

10

Disagree

Strongly Disagree

5
0
Strongly agree

Agree

Not Sure

4.4. INFORMATION AND COMMUNICATION SYSTEMS

11. All staff understand their role in the control system.

Majority of the Staffs Role 48 % indicated that they Agree that there is
effective monitoring. Whilst 28 % Strongly Agree. A Total of 3% were in

different whilst 15% disagree and whilst 6% Strongly Disagree with the
effectiveness of monitoring as an internal control measure.

Tab 4.11

Staff's Role
6
15

28

Strongly agree
Agree
Not Sure

Disagree
Strongly Disagree

48

12. All staff understand how their activities relate to others.

Majority of the Staffs Activities 20 % indicated that they Agree that there is
effective monitoring. Whilst 30 % Strongly Agree. A Total of 15% were in
different whilst 20% disagree and whilst 15% Strongly Disagree with the
effectiveness of monitoring as an internal control measure.

Tab 4.12

Staff's Activities
15

20

Strongly agree
Agree
Not Sure
Disagree

20

Strongly Disagree
30
15

13. All staff understand that, they are accountable for activities they conduct.

Majority of the Staff accountable for activities they conduct 22 % indicated

that they Agree that there is effective monitoring. Whilst 22 % Strongly
Agree. A Total of 18% were in different whilst 26% disagree and whilst 12%

Strongly Disagree with the effectiveness of monitoring as an internal

control measure.

Tab 4.13

Staff accountable for activities they conduct

12
22

Strongly agree
Agree
Not Sure
Disagree

26

Strongly Disagree
22

18

4.5 MONITORING
14. Reports on significant failings or weaknesses are reported to management on
a timely basis.

Majority of the Reports on failings or weakness are reported to

managment 27 % indicated that they Agree that there is effective
monitoring. Whilst 13 % Strongly Agree. A Total of 29% were in different
whilst 23% disagree and whilst 8% Strongly Disagree with the
effectiveness of monitoring as an internal control measure.

Tab 4.14

Reports on failings or weaknesses are reported to management

35
30

27

29

25

23

20
15

13

10

5
0
Strongly agree

Agree

Not Sure

Disagree

Strongly Disagree

15. Management approves personnel reviews results of audit.

Majority of the Management approves personnel reviews results of audit

33 % indicated that they Agree that there is effective monitoring. Whilst 14
% Strongly Agree. A Total of 16% were in different whilst 29% disagree and
whilst 8% Strongly Disagree with the effectiveness of monitoring as an
internal control measure.

Tab 4.15

Management approves personnel reviews results of audit

Strongly agree

14

Agree

29

Not Sure
33
16

Disagree
Strongly Disagree

16. Periodically, management reviews audit or internal control systems.

Majority of the Periodically management reviews audit or internal control

systems 36 % indicated that they Agree that there is effective monitoring.
Whilst 26 % Strongly Agree. A Total of 16% were in different whilst 15%
disagree and whilst 7% Strongly Disagree with the effectiveness of
monitoring as an internal control measure.

Tab 4.16

Periodically management reviews audit or internal control systems

36

40
35
30

26

25
16

20

15

15
7

10
5
0
Strongly agree

Agree

Not Sure

Disagree Strongly Disagree

CHAPTER 5
CONCLUSION

5.1 INTRODUCTION

This project work seeks to assess the effectiveness of internal control systems at
ARDBs. This chapter presents the summary of findings, recommendations aimed
at
addressing weaknesses in the internal control systems as well as direction for
further studies and conclusion from the findings

5.2 CONCLUSION
From the empirical research carried out, it was revealed that internal controls In
ARDBs are effective. In fact, this is evident from all the five constructs
Considered in the study as each of them namely, control environment, risk
assessment, control activity, information and communication systems and
monitoring appeared to be effective.

It concludes that determining whether a particular control system is effective is a

subjective judgment resulting from an assessment of whether the five
components of control are present and functioning effectively.

So therefore looking at all the components of internal controls in ARDBs in

totality,
the research has shown that, there are effective internal control structures at
ARDBs
However, with specific areas that appeared not to be effective, recommendations
to
management were made so as to improve the effectiveness of the internal control
systems in ARDBs. Recommendations were also made for further studies

Data presented in figure 1 above indicates that majority of the respondents

perceive the control environment to be very effective and functional in
AkuafoAdamfo. This is indicative of the fact that 53.8% of the respondents

agreed to the assertion that there is a strong control environment in

AkuafoAdamfo whilst 40% pointed out that they strongly agree that there is
strong control environment within AkuafoAdamfo.
However a few of the respondents 6.2% were not sure

Results presented in figure 2 above indicate that majority of respondents

perceive the bank has a high sense of risk assessment so far as effectiveness of
internal control structures are concerned. Specifically, 63.8% of the respondents
agree to the fact that the bank has high risk assessment structures or procedures
whilst 17.5% strongly agree to the same assertion. About 16.2% of the
respondents indicated that they are not sure of the effectiveness of the banks
risk assessment drive as a means of measuring the effectiveness of internal
control structures in ARDB whilst 2.5% expressed doubt about the effectiveness
of the banks risk assessment initiatives.

It emerged that majority of the respondents perceive control activity as a

construct of internal structure to be very effective in ARDB. This is indicated by
the fact that 66.2% of all respondents indicated that they are in agreement with
the assertion that there is effective control activity in the bank so far as effective
internal control structures are concerned. A total of 6.3% of the respondents
strongly agreed to the assertion that there is effective control activity in the bank.
However, an appreciable number of respondents (26.2%) could not indicate their
views on the construct being measured. Only 1.3% of the respondents could not
agree to the assertion that there is effective control activity within the operations
of ARDB

Assessing the effectiveness of information and communications systems in

ARDB
yielded impressive results. Generally, respondents perceive that there is an
effective

information and communications systems in ARDB. For instance, 56.3% agree

that the bank has effective information and communications system in place
which is a boost to the internal control structures of the bank. A total of 27.5% of
the respondents strongly agreed to the same construct being discussed. Although
15% of the respondents were not sure of their view about the effectiveness of
information and communications systems in the bank, 1.2% totally disagrees that
the same construct operate effectively in ARDB

Majority of the respondents 62.5% indicated that they agree that there is effective
monitoring in ARDB whilst 27.5% strongly agree.A total of 8.8% were in different
whilst 1.2% disagrees with the effectiveness of monitoring as an internal control
measure.

SUGGESTIONS

SUMMARY OF FINDINGS

It was revealed from the study that, the control environment at ARDBs is very
effective as majority of the respondents (93%) agree to that assertion with a very
few not being sure of the effectiveness of Control environment.

In reviewing the risk assessment component of the internal control system in

ARDBs, the study found that, the risk assessment is also effective. (80%)of the
respondents assert to that fact.

Again, the empirical evidence from the study indicated that, majority (72%) of the
Respondents agree to the assertion that there is an effective control activity
functioning In ARDBs.

With regard to assessing the information and communication system of internal

control, it was evident from the studies that, about 83% of the respondents are
satisfied with that Construct and therefore perceive it to be effective.

The last element of internal control considered by the study was monitoring and
this
Happened to be the most effective (90%) in the bank with nearly all respondents
showing that, they perceive monitoring to be effective

SUGGESTIONS FOR MANAGEMENT

Accounting Principles:

Following ways the transaction should be recorded so that internal control can be
effective through these accounting principles. A recording of transactions in books
on day to day basis, should be done having regard to basic principles of
accounting as under:-

i) All transactions to have debit and credit vouchers of equal amount.

ii) Distinctions to be drawn between capital expenditure and revenue expenditure

and capital receipts and revenue receipts.

Following principles are adopted for preparation of financial statements such as

trial balance, balance sheet and profit and loss accounts.

i. Financial statements must be prepared on historical cost basis and should

conform to statutory provisions and practices.

ii. Investments must be valued only at the realisable amounts and in accordance
with regulatory norms/ guidelines.

iii. Expenditure and income to be treated on accrual basis.

iv. Provisions for doubtful advances must be made to the satisfaction of the
auditors
and in accordance with guidelines issued by the regulatory authority.

v. Premises and other fixed assets must be accounted for at historical cost.

vi. Depreciation should be provided for on depreciable assets on straight line of

diminishing balance method on a consistent basis.

vii. Provisions for gratuity and provident fund benefits to staff are to be made on
accrual basis. Separate funds for gratuity and provident fund are to be created
and should not be mixed with the funds of the ARDB.

viii.A clear demarcation to be made in regard to provisions and contingencies on

the
one side and reserves on the other. While provisions and contingencies are to be
made from P & L Account, Statutory and other reserves be made out of

appropriation of profits.

ix. The net profit disclosed in the Profit and Loss account must be computed after
provision for standard loans, bad and doubtful debts, provision for overdue
interest, depreciation/ erosion in the value of securities and other asset, transfers
to contingency funds and other usual or necessary provisions.

Consistent with the concepts and principles outlined in the foregoing paragraphs,
all
items of income and expenditure must be compiled under relevant heads so as to
disclose the sources of income, nature of expenditure incurred to earn it, the
composition of assets, sources from which capital has been procured and the
nature
of liabilities outstanding for payment. The accounting system in all ARDB needs
to
follow these principles and policies in the treatment and recording of all financial
transactions.

In spite of the fact that, the study found the internal control structures to be
effective, some weaknesses were however revealed which must be brought to
the attention of management for the necessary corrective actions to be taken.
These are discussed under their respective sub-headings below.

Control Environment

A closer look at the individual questions however can help improve the situation
especially if management implements the following recommendations.
It was found out from the study that the banks culture, code of conduct, human
resource policies and performance reward systems are not very effective.

Management therefore must ensure that there are clear rewards (incentives) for
doing the right things and consequences (disincentives) for doing the wrong
things. In that respect if a serious problem occurs because of a breakdown in
internal control and it is found that management did not play its part to establish a
proper internal control environment, or did not act expeditiously to fix a known
problem, then those responsible need to be held accountable and face the
consequences.

It is also recommended that management must not only do what is right in the
organization but also must be perceived to be doing what is right so that their
good examples might motivate others also to imitate them since they set the tone
at the top.

Also to ensure that, the right thing is done, management should establish an
anonymous fraud tip hotline and enact a whistle-blowers protection policy (where
a suspicion of fraud and waste is reported)

Risk Assessment

Management should evaluate, discuss and appropriately consider control issues

when planning for new products or activities since these are sometimes risky.
This discussion must include audit personnel and other internal control experts. It
is also recommended that management considers and appropriately addresses
technology issues.

Still on risk assessment, management must communicate acceptable risks levels

to all staff in their duties as well as train them to get the needed knowledge and
skills coupled with adequate resources to enable them carry on work effectively
and efficiently.

Control Activity

In ensuring effective control activity, management must enforce job rotation and
vacation policies in order to improve upon transparency and bring benefits to the
bank. This not only ensures that the bank only has someone who can step into a
job in the event of an emergency, but it also deters fraud when potential
perpetrators know that someone else will do their job for a period of time.

If fraud is occurring, another person reviewing the work is likely to expose that
fraud. Most fraud requires a great deal of attention and rarely stands up to
scrutiny by outsiders, particularly during a week or more of vacation. This is very
essential because even in medical practices where there is no fraud, this policy
helps detect on going errors and inefficiencies. Job rotation and enforced
vacation are inexpensive yet can reveal any hidden weakness in the internal
control process.

Information And Communication Systems

Concerning information and communication system, it is recommended that,

management should see to it that, there are effective reporting procedures in
communicating a balanced and understandable account of the bankss position
and procedures. Again, management must also be very serious with organizing
programs for employees to sensitise them on the understanding of their roles in
the control system.

Monitoring

Though monitoring appears to be the most effective construct with about 90% of
the
respondents agreeing there is an effective monitoring, there are some few things
which mustbe brought to the attention of management.

Firstly, management must encourage all staff to report significant failings and
weakness promptly in order to ensure internal controls are working effectively.

Secondly, management should embark on prompt effective follow-up procedures

to ensure that, appropriate change or action occurs in response to changes in
risk and control assessment.

DIRECTION FOR FUTURE RESEARCH.

Future researchers should explore other factors that influence the motivation of
staff at ARDBs. The current evidence is that most of the employees of the bank
are not motivated and for that matter they engage in corrupt practices.
ARDBs:
It needs to improve on mainly these three factors i.e. Promise, Doing it
right and Competency as these factors are more important for banking
industry and they are lagging on these factors.
It should maintain these four factors i.e. Promptness, Willingness,
Competency and Understanding as these four factors are important for
banking industry.
It should deemphasize on factor Appearance and Approachable as in
these factors they are performing well, but these factors have less
importance as compared to other factors.
It should concentrate on insisting on error free records, on performing the
service correctly the first time and employees telling customers exactly
what services will be performed.
It should improve its performance on Understanding and Credibility as
these factors are important for banking industry and they are lagging in
these two factors.
It should concentrate on employees always being willing to help
customers, on giving customers individual attention, on employees giving
customers personal attention.
It should increase internal control level of their system by mainly focusing
on following factors:
Keeping promise to do something by certain time.
Performing the work correctly the first time.

 As on above factor, most of the respondents shows neither satisfied nor

dissatisfied, so by improving this factors satisfaction level can be improve.

BIBLIOGRAPHY

WEBSITES:

 http://www.newpaltz.edu/internalcontrols/evaltool.pdf
http://www.studymode.com/subjects/'internal-control-as-a-tool-for-fraudmanagement
http://en.wikipedia.org/wiki/Literature_review
The FIRST BOOK: "Intelligent internal control and risk management ...
Risk Management, Assurance and Internal Control Systems

BOOK:
Management Control Systems- Sudhir Prakashan

APPENDIX

QUESTIONAIRE

This study is purely academic and respondents are assured that whatever
information is provided will be highly confidential.
Instructions: Please kindly tick the box that clearly expresses your view about a
question.

A. PERSONAL DATA
1. Sex:

Male [ ] Female [ ]

2. Age: 19 or less [ ] 2029 [ ] 3039 [ ] 4049 [ ] 50 or more [ ]

3. Which Department do you belong?
Sales and Marketing [ ] Finance and Administration [ ] Clerical [ ] Internal
Control [ ] Cashier [ ]
4. Which staff category do you belong?
Junior staff [ ] Senior Staff [ ] Management [ ]

B. CONTROL ENVIRONMENT

5. Management decisions are made collectively and not controlled by one

dominant
individual.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
6. Policies regarding the importance of internal controls and appropriate conduct
are
communicated to all staff.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
7. Management periodically reviews policies and procedures to ensure that
proper controls are in place.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]

8. The banks culture, code of conduct, human resource policies and performance
reward systems support the business objectives and internal control systems.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]

C. RISK ASSESSMENT
9. The bank has clear objectives and these have been communicated so as to
provide effective direction to employees on risk assessment and control issues.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
10. Technology issues are considered and appropriately addressed.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
11. There is a clear understanding by staff within the bank of what risks are
accepted by management.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]

D. CONTROL ACTIVITY
12. Processes exist for independent verification of transaction (to ensure
integrity)
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
13. Independent reconciliations of assets and liabilities balances go on.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
14. The bank uses Close Circuit Television (CCTV) systems to protect physical
assets.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]

E. INFORMATION AND COMMUNICATION SYSTEMS

15. All staff understand their role in the control system.

Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
16. All staff understand how their activities relate to others.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
17. All staff understand that, they are accountable for activities they conduct.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]

F. MONITORING
18. Reports on significant failings or weaknesses are reported to management on
a timely basis.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
19. Management or approved personnel reviews results of audit
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]
20. Periodically, management reviews audit or internal control systems.
Strongly agree [ ] Agree [ ] Not Sure [ ] Disagree [ ] Strongly Disagree [ ]