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Home Business Finance Internal Control Systems in IFIC Bank Limited

Internal Control Systems in IFIC Bank Limited

Executive Summary:
Banks mobilize money from the public in the form of deposits as well as borrow funds from the
banking system with a view to providing credit in the economy. Besides these core activities,
banks are performing other roles in the economy. History shows that a modern bank is offering a
wide array of financial services and the banks service menu is growing rapidly.

This report is prepared on the basis of three months practical experience at International
Financial Investment & Commerce (IFIC) Bank Limited. This internship program helped me a
lot to learn about the practical situation of a financial institution especially about the internal
control systems over cash and to implement my theoretical knowledge in practical and realistic
work atmosphere.

IFIC Bank of Bangladesh Limited is one of the leading commercial banks in the country with
commendable operating performance. It is directed by the mission to provide prompt and
efficient services to clients. It provides a wide range of commercial banking services to its
customers.

This internship Report is aimed at providing a comprehensive picture to the areas of internal
control system over cash receipts and cash payments of IFIC Bank. The Report has been divided
into eight parts. These are: 1) Introduction, 2) Overview of the company, 3) Theoretical
Background, 4) Policies and procedures, 5) Analysis of internal control system veer cash receipts
and cash payments, 6) Findings, 7) Recommendation, and Conclusion, 8) Bibliography &
annexure.

I mentioned the performance of IFIC bank in internal control system over cash receipts and cash
payments. Besides findings of my report and description of recommendation to overcome the
limitation added dimension.

I have taken all the reasonable care to ensure the accuracy and quality to make the report
standard. And I believe that it has included all the necessary information to be relevant, reliable,
and useful.

Introduction:

Background of the Report:

As a pre requisite for completing the Bachelor of Business Administration graduation of The
Bangladesh University of Business and Technology (BUBT), I was required to complete
internship program in a suitable financial organization and submit a report of my findings.

I was selected to work as an internee in International Finance Investment & Commerce Bank
Limited for a period of three months from March 13 th, 2011 to June 12th, 2011.It is a four credit
hour program of the BBA Program.

In fact, Internal Control and Compliance System provide a descriptive framework of Internal
Control as well as management under the regulation provided by Bangladesh Bank. This report
treats internal control & management system as an essential learning in Bank management. Here
is my report topic is An analysis of internal control systems over cash receipts and cash
payments in IFIC Bank Ltd. 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 objective in the effectiveness and efficiency of operations, reliability of
financial reporting, and compliance with applicable laws and regulations.

This report has been prepared under the supervision of Ms. Kanij Fahmida, Assistant Professor &
Chairman, Department of Accounting, Bangladesh University of Business and Technology
(BUBT).

Justification of the report:

As my major subject is accounting, I have chosen the topic titled An analysis of internal control
systems over cash receipts and cash payments in IFIC Bank Limited. This topic has a great
importance as the internal control is very much essential to run an institution smoothly and
effectively as well as to achieve the goal, even the cash related activities are the most sensitive
factors for any kind of institution. I have chosen this topic because; it will let me have a practical
knowledge on this important area. This report is suitable for the people who are engaged in
financial institutions or wants to be a banker or high official in the financial institutions. It is
strongly believed that this study will be used as comprehensive & informative one.

Scope of the report:

During this three months internship program in International Finance Investment and Commerce
Bank Limited almost all the departments have been observed. It was not an easy task to collect
all the information relevant to my report topic. I had been focused on the Internal Control
Systems over the cash receipts and cash payments in IFIC Bank Limited. The area of my study
has been encompassed the operation area of IFIC Bank, Pallabi Branch, for a period of three
months from March 13, 2011 to June 12, 2011.

Objectives of the report:

Broad objective

The broad objective of the report is to analyze the Internal Control Systems over the Cash
receipts and Cash payments in IFIC Bank Limited.

Specific Objectives

To identify and understand the related policies and procedures for cash receipts in IFIC
Bank.
To identify and understand the related policies and procedures for cash payments in IFIC
Bank.
To identify the problems of internal control systems over the cash receipts and cash
payments exist in IFIC Bank
 To recommend some guidelines to improve the effectiveness of the internal control
systems over the cash receipts and cash payments.

Methodology

Types of Research :

In this study, descriptive research has been undertaken to gain insights and understanding about
the internal control systems over the cash receipts and cash payments.

Research Design:

The report is descriptive in nature. To perform the study data sources were identified and
collected. The collection were classified, analyzed, interpreted and presented in a systematic
manner and key points were found out. The overall process of methodology is given below in the

form of flowchart. Figure-1:

Research design

Sources of Data

Both primary and secondary data sources are used to collect the information to complete the
report in good health:

Primary

Face to face conversation with the head of the branch.

Observation.
Secondary

Annual report of the IFIC Bank.

Relevant documents provided by the bank officers.
Web site of IFIC Bank.
Text books.
Wed site search.

Data collection procedure

Primary data collection:

Formal face to face conversation: I have collected primary data through face to face
conversation with the branch manager & other officers by using a questionnaire.
Observation of their daily activities: I have also collected some data by observing the
activities performed by the staffs of the bank.

Secondary data collection:

I have collected the secondary data from the annual report of the bank, relevant documents
provided by the bank, web site search, text book as well as web site of IFIC Bank Ltd.

Duration:

weeks within the period of three months internship program.

Sample size

Randomly three people were selected for the analysis purpose. The way in which sampling is
conducted is only a part of the total design of an analysis process.

Limitation of the study:

Every organization has some own secrecy, which cannot be & should not be disclosing to an
outsider. So I had some limitations to enter in to the affairs of the bank in depth. Moreover, the
employees of the organization had their own routine duties. In spite of their full cooperation I
failed to discuss about every intended aspects in details.

Only three month is not enough time for this kind of study. So, it is very much tough to
prepare the report in good health.
As a student, I am not experienced about this type of task. Due to lack of experience, it is
very much tough for me to prepare the report properly.

Overview of the company or company profile

 Background:

International Finance Investment and Commerce Bank Limited (IFIC Bank) is banking company
incorporated in the Peoples Republic of Bangladesh with limited liability. It was set up at the
instance of the Government in 1976 as a joint venture between the Government of Bangladesh
and sponsors in the private sector with the goal of working as a finance company within the
country and setting up joint venture banks/financial institutions aboard. In 1983 when the
Government allowed banks in the private sector, IFIC was converted into a full fledged
commercial bank. Government then held 49 percent shares while the sponsors and general public
held the rest. The Government of the Peoples Republic of Bangladesh now holds 32.75% of the
share capital of the Bank. Directors and Sponsors having vast experience in the field of trade and
commerce own 8.62% of the share capital and the rest is held by the general public.

The objectives of the finance company were to establish venture banks, finance companies and
affiliates abroad and to carry out normal functions o finance company at home.

When the government decides to open up banking in the private sector in 1983 the finance
company was converted into a full-fledged commercial Bank. Along with this, the government
also allowed four other commercial banks in the private sector. Subsequently, the governments
denationalized two banks, which were, then fully government owned.

While in all these banks government was holding nominal 5 percent shares, an exception was
made in the case of the IFIC Bank. The government retained 40 percent shares of the bank.

The decision by the government to retain 40 percent shares in IFIC Bank was in pursuance of the
original objectives, namely promotion of the participation of the government and private
sponsors to establish joint venture banks, financial companies, branches and affiliate abroad.

All types of commercial banking services are provided by the bank within the stipulations laid
down bank Company Act, 1991 and directives issued by Bangladesh Bank from time to time.
Branches of the Bank at the end of 2010 stood at 87. The bank is listed with Dhaka and
Chittagong Stock Exchange Limited as a publicly quoted company for its A Class ordinary
shares.

Mission:

Our Mission is to provide service to our clients with the help of a skilled and dedicated
workforce whose creative talents, innovative actions and competitive edge make our
position unique in giving quality service to all institutions and individuals that we care
for.
We are committed to the welfare and economic prosperity of the people and the
community, for we drive from them our inspiration and drive for onward progress to
prosperity.
We want to be the leader among banks in Bangladesh and make our indelible mark as an
active partner in regional banking operating beyond the national boundary.
 In an intensely competitive and complex financial and business environment, we
particularly focus on growth and profitability of all concerned.

Goal

The goals of the bank are to promote joint participation of Government and private sponsors to
establish joint venture banks, financial companies, branches and affiliate abroad to satisfy their
customers.

It coveys its goal via their motto: Your satisfaction first

To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial,
investment and trust business in Bangladesh and abroad.

To form, establish and organize any bank, company, institution or organization, singly and/or
joint collaboration for partnership with the individual, company, financial institution, bank
organization, or any government and/or any agency for the purpose of carrying on banking,
financial, investment and trust business.

To carry on any business relating to wage earners scheme as may be allowed by Bangladesh
Bank from time to time including maintaining of Foreign Currency Accounts any other matter
related thereto.

To contract or negotiate all kinds of loan, and or assistance, private or public, from any
source, local or foreign, and to take all such steps as may be required to complete such deals.

To form, promote organize, assist, participate or aid in forming or organizing any company,
bank, syndicate, consortium, and institute or any holding or subsidiary company in Bangladesh.

To take part in the formation, management, supervision or control of the business or

operations of any company.

To purchase, or otherwise acquire, undertake the whole or any part of or any interest in the
business, goodwill, property, contract agreement.

To encourage, sponsor and facilitate participation of private capital in financial, industrial or

commercial investments.

Hierarchy of the Management of IFIC Bank Ltd.

Managing Director (MD)

Deputy Managing Director
Senior Executive Vice President
Executive Vice president
Senior Vice President
 First Vice President
Vice President
Senior Assistant Vice President
First Assistant Vice president
Assistant Vice president
Senior Executive Officer
Senior Officer
Office Grade I
Probationary Officer
Office Grade II
Assistant Officer
Office Assistant
Driver
Security Staff
Office Attendant

Table-1: Hierarchy of the Management of IFIC Bank Ltd.

Management structure:

The thirteen members of the Board of Directors are responsible for the strategic planning and
overall policy guidelines of the Bank. Further, there is an Executive Committee of the Board to
dispose of urgent business proposals.

Besides, there is an audit committee in the board to oversee compliance of major regulatory and
operational issues.

The CEO and Managing Director, Deputy Managing Director and Head of Divisions are
responsible for achieving business goals and overseeing the day to day operation.

The CEO and Managing Director is assisted by a Senior Management Group consisting of
Deputy Managing Director and Head of Divisions who supervise operation of various divisions
centrally and co ordinates operation of branches.

Key issues are managed by a Management Committee headed by the CEO and managing
director. This facilitates rapid decisions.

There is an Asset Liability Committee comprising member of the senior executives headed by
CEO and Managing Director to look into all operational functions and Risk Management of the
Bank.

Ownership structure:
The sponsors hold ownership of the Bank in the private sector and Government of the People
Republic of Bangladesh. Sponsors and individuals now own a little more than 67% and the
government owns 32.75 percent share capital of the Bank.

Capital and reserves:

The Bank started with an authorized capital of TK. 100 million in 1983 and paid up capital at
that time stood at TK 71.50 million only. Now, IFIC Bank Limited is a strongly capitalized bank.
Its authorized is TK.5350.00 million while its paid up capital is TK. 1743.86 million as on31st
December, 2009. The total share holders equity reached TK. 4197.56 million and total capital
stood at TK.4928.76 million as on 31st December 2009.

Capital management framework of the IFIC Bank is designed to ensure that the bank maintains
sufficient capital consistent with the Banks risk profile, applicable regulatory requirements and
credit rating consideration.

The reserves of IFIC Bank stood at TK. 2453.60million in 2009 against TK1855.29 million in
2008. The bank mobilized total deposits of Tk50,017.96 million as of December 31,2009 as
against TK.36092.17 million as of December 31, 2008 that is an increase of 38.58% during the
year.

Branch expansion:

During the year 2009, IFIC Bank Limited opened five urban branches and three rural branches &
three SME Service Centers at different geographical location to provide banking service to its
customers. Total number of branches of the Bank at the end of 2009 stands at 82 and five SME
service centers. In 2010 the bank expanded its branch at 87, even all 87 branches & SME service
centers of IFIC Bank is operating under state of art world class real time on line banking
solution.

Operation Abroad

Joint Venture:

Bank of Maldives In 1983, IFIC Bank set up joint venture bank in Maldives known as
Bank of Maldives Limited (BML). It is the first bank of Maldives. In 1992, as per contract, IFIC
Bank handed over the management of BML to Maldives.

Oman Bangladesh Exchange To facilitate remittance by Bangladeshi in Omen, IFIC

Bank set up a money exchange company as a joint venture, named Oman Bangladesh Exchange.

Branch abroad:

Pakistan Branch IFIC Bank opened its first overseas branch in Karachi, Pakistan. It opened
its second branch at Lahore in Pakistan.
 Nepal Bangladesh Limited In December 1993, the Bank got permission to establish a joint
venture bank with 50 percent equity capital in Nepal. The bank known as Nepal Bangladesh Ltd.
It came into operation in June 1994.

Human Resource Development:

The Bank has a Human Resource Development & Research Development to develop human
resources internally. The academy is equipped with professional library, modern training aids
professional faculty and other facility. It is now under personnel & Human Resource Division.
The academy conducts regularly foundation courses, specialize courses and seminars on different
areas of banking to take care of the professional needs.

Milestones in the development of IFIC BANK

1976Established as an Investment & Finance Company under arrangement of joint venture
with the govt. of Bangladesh.

1980Commenced operation in Foreign Exchange Business in a limited scale. F

i
1982Obtained permission from the Govt. to operate as a commercial bank. n
a
Set up a its first overseas joint venture (Bank of Maldives Limited) in the Republic of n
Maldives (IFICs share in Bank of Maldives Limited was subsequently sold to Maldives c
Govt. in 1992) i
a
1983Commenced operation as a full-fledged commercial bank in Bangladesh. l

1985Set up a joint venture Exchange Company in the Sultanate of Oman, titled Oman
Bangladesh Exchange Company (subsequently renamed as Oman International
Exchange, LLC).

1987Set up its first overseas branch in Pakistan at Karachi.

1993Set up its second overseas branch in Pakistan at Lahore.

1994Set up its first joint venture in Nepal for banking operation, titled Nepal Bangladesh
Bank Ltd.

1999Set up its second joint venture in Nepal for lease financing, titled Nepal Bangladesh
Finance & leasing Co. Ltd. (which was merged with NBBL in 2007)

2003Overseas Branches in Pakistan amalgamated with NDLC, to establish a joint venture

bank: NDLC-IFIC Bank Ltd., subsequently renamed as NIB Bank Ltd.

2005Acquired MISYS solution for real time on-line banking application.

Core Risk Management implemented.

2006Corporate Branding introduced.

Visa Principal and Plus (Issuer and Require) Program Participant Membership obtained.

2008Observing 25th Anniversary of Customer Satisfaction.

200964 Branches offering Real Time On-line banking facility.

2010All 87 Branches & SME Service Centers of IFIC Bank is operating under state-of-art
world class Real Time On-line Banking Solution.
Highlights of 2009
Particulars Million in Tk. In %
Operating Income 3180.00
Profit after Tax 657.00
Shareholders Equity 3197.00
Return On Asset 1.44
ROI 13.59
Stock Dividend 30
Earnings per Share TK49.00
Authorized Capital 1600.00
Paid up Capital 1341.00

Table-2: Financial Highlights of 2009

Source: Annual Report, IFIC Bank Ltd. 2009

Financial Position of 2009 of IFIC Bank Ltd. at a Glance

Sl

noParticularsTaka in Million

1.

Paid-up Capital1341.43

1.

Total Capital3793.04

1.

Capital Surplus733.30

1.

Total Assets45729.47

1.

Total Deposit36092.17

1.

Total Loan & Advances33018.39

1.
Total Contingent Liabilities & Commitments20536.26

1.

Credit Deposit Ratio91.48%

1.

Percentage of classified Loan Against total Loans & Advances5.92%

1.

Profit after Tax & Provision657.31

1.

Amount of classified Loans During the year1953.07

1.

Provision kept against classified Loans651.85

1.

Provision Surplus / Deficit30.20

1.

Cost of Fund6.12%

1.

Interest Earning Assets39806.29

1.

Non-interest Earning Assets5931.20

1.

Return on Investment (ROI)13.59%

1.

Return on Assets (ROA)1.44%

 1.

Income from Investment691.44

1.

Earnings Per Share49.00

1.

Income Per Share411.98

1.

Price Earnings Ratio (Times)24.26

Table-3: Financial Position of 2009 of IFIC Bank Ltd. at a Glance.

Theoretical Background:

Internal Control:

In accounting and auditing, internal control is defined as a process, effected by an organizations

structure, work and authority flows, people and management information systems, designed to
help the organization accomplish specific goals or objectives. It is a means by which an
organizations resources are directed, monitored, and measured. It plays an important role in
preventing and detecting fraud and protecting the organizations resources, both physical (e.g.,
machinery and property) and intangible (e.g., reputation or intellectual property such as
trademarks). At the organizational level, internal control objectives relate to the reliability of
financial reporting, timely feedback on the achievement of operational or strategic goals, and
compliance with laws and regulations. At the specific transaction level, internal control refers to
the actions taken to achieve a specific objective (e.g., how to ensure the organizations payments
to third parties are for valid services rendered.) Internal control procedures reduce process
variation, leading to more predictable outcomes.

Evaluating internal controls is one of internal auditors primary responsibilities. The Institute of
Internal Auditors (IIA) defines control and control processes as follows:

A control is any action taken by management, the board, and other parties to manage risk and
increase the likelihood that established objectives and goals will be achieved. Management plans,
organizes, and directs the performance of sufficient actions to provide reasonable assurance that
objectives and goals will be achieved.
Control processes are the policies, procedures, and activities that are part of a control framework,
designed to ensure that risks are contained within the risk tolerances established by the risk
management process. Risk management is a process to identify, assess, manage, and control
potential events or situations to provide reasonable assurance regarding the achievement of the
organizations objectives.

Major Components of Internal Control:

1. Control environment: Factors that set the tone of the organization, influencing the
control consciousness of its people. The seven factors are (ICHAMPBO):

I Integrity and ethical values,

C Commitment to competence,

H Human resource policies and practices,

A Assignment of authority and responsibility,

M Managements philosophy and operating style,

B Board of Directors or Audit Committee participation, and

O Organizational structure.

2. Risk Assessment: Risks that may affect an entitys ability to properly record, process,
summarize and report financial data.

Risk assessment is the evaluation to determine the areas and functions within the organization
and each department that have risk of errors, noncompliance, and fraud.

Controls may then be put in place to help mitigate the risks identified during risk assessment

Changes in the Operating Environment (e.g. Increased Competition)

New Personnel
New Information Systems
Rapid Growth
New Technology
New Lines, Products, or Activities
Corporate Restructuring
Foreign Operations
 Accounting Pronouncements

3. Control Activities: Various policies and procedures that help ensure those necessary
actions are taken to address risks affecting achievement of entitys objectives (PIPS):

Performance reviews (review of actual against budgets, forecasts)

Information processing (checks for accuracy, completeness, authorization)

Physical controls (physical security)

Segregation of duties

4. Information and communication: Methods and records established to record, process,

summarize, and report transactions and to maintain accountability of related assets and
liabilities. Must accomplish:

a. Identify and record all valid transactions.

b. Describe on a timely basis.

c. Measure the value properly.

d. Record in the proper time period.

e. Properly present and disclose.

f Communicate responsibilities to employees.

5. Monitoring: Assessment of the quality of internal control performance over time.

Principles of Internal Control:

To safeguard assets and enhance the accuracy and reliability of accounting records, companies
follow specific control principles. This measure varies with the size and nature of the business
and with managements control philosophy. There are six principles of internal control, given by
Weygandt, Kieso, & Kimmel those are explained below:

i. ESTABLISHMENT OF RESPONSIBILITY: An essential principle of

internal control is to assign responsibility to specific employees. Control is most effective when
only one person is responsible for a given task. Establishing responsibility includes authorization
an approval of transaction.

ii. SEGREGATON OF DUTIES: Segregation of duties is indispensible in an

internal control system. There are two common application of this principle:
 Different individuals should be responsible for related activities.

The responsibility for record keeping for an asset should be separate from the physical
custody of that asset.

iii. DOCUMENTATION PROCEDURES: Documents provide evidence the

transactions and events have occurred. Companies should establish procedures for documents.
First, whenever possible, Companies should use pre-numbered documents, and all documents
should be accounted for. Second, the control system should require that employees promptly
forward source documents for accounting entries to the accounting department. This control
measure helps to ensure timely recording of the transaction and contributes directly to accuracy
and reliability of the accounting records.

iv. PHYSICAL, MECHANICAL AND ELECTRONIC CONTROLS: Use

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

v. INDEPENDENT INTERNAL VERIFICATION: Most internal

control systems provide for independent internal verification. This principle involves the review
of data prepared by employees. To obtain maximum benefits from independent internal
verification :

Companies should verify records periodically or on a surprise basis.

An employee who is independent of the personnel responsible for the information should
make the verification.

Discrepancies and exceptions should be reported to a management level that can take
appropriate corrective action.

Independent internal control is especially useful in comparing recorded accountability with

existing assets.

vi. OTHER CONTROLS

Other control measures include the following:

a) Bond employees who handle cash: Bonding involves obtaining insurance protection against
misappropriation of assets by employees. It contributes to the safeguarding of cash in two ways:

First, the insurance company carefully screens all individuals before adding them to the
policy and may reject risky application.
Second, bonded employees know that the insurance company will vigorously prosecute
all offenders.
b) Rotate employees duties and require employees to take vacations: These measures deter
employees from attempting thefts since they will not be able to permanently conceal their
improper actions.

c) Conduct through background checks: Many believe that the most important and
inexpensive measure any business can take to reduce employee theft and fraud is for the human
resources department to conduct through background checks.

POLICIES AND PROCEDURE INTRODUCTION :

Good controls encourage efficiency, compliance with laws and regulations, sound information
and help to eliminate fraud and abuse. Internal Control refers to mechanism in place on a
permanent basis to control the activities in a bank both at central and at departmental level. It
requires the operation of a solid accounting and information system i.e. maintain transparency
and accountability of activities.

The objective of putting in place and effective Internal Control System in IFIC Bank is to enable
the bank to utilize its resources in a more productive and effective manner as well as to manage
and control the cash related particular risk or risks to which the company is exposed adopt
measures to mitigate these risks. Through an effective internal control system can identify
weakness and take appropriate measures to overcome the situation.

STRUCTURE FOR INTERNAL CONTROL SYSTEM

Organizational structure plays a vital role in establishing effective internal control system. The
essence of the ideal organizational structure that will facilitate effectiveness of the internal
control system is the segregation of duties. The IFIC Bank Limited, depending on the structure,
size, and location of its branches and strength of its manpower try to establish an organizational
structure which allows segregation of duties among its key functions such as marketing,
operations, credit, financial administration etc.

In cases where such segregation is not possible, there must be certain monitoring mechanism
which should be independently reviewed to ensure all policies and procedures are followed at the
branch level.

INTERNAL CONTROL & COMPLIANCE DIVISION (ICCD) OF IFIC Bank Limited:

The ICC division is consisting of 29 members team headed by a Senior Vice President. The head
of ICC is responsible for compliance and control related tasks which include compliance with
laws and regulations, audit and inspection, monitoring activities and risk assessment.

Organ Gram of Internal Control & Compliance Division (ICCD)

Figure 2: Organ gram of Internal Control & Compliance Division (ICCD)

The ICC division is split into three units-

I) Compliance Unit

II) Monitoring Unit &

III) Audit and Inspection Unit

I) Compliance Unit:

The compliance unit is responsible to ensure that the bank complies with all the policies and
procedures of the bank as well as all regulatory requirements while conducting its business. It
will also maintain liaison with the regulators or policy maker at all level and notify the other
units regarding regulatory or procedural changes.

II) Monitoring Unit:

Monitoring unit is responsible to monitor the operational performance of various branches. This
unit also collect relevant data and analyze those to assess the risk of individual units. In case it
finds major deviation it recommend to the Internal Control Head for sending audit and inspection
team for review.
III) Audit & Inspection Unit:

This unit performs periodic and special Inspection by its inspection team. It may have different
section within this team responsible only for credit inspection or special investigation.

They also perform the IT (Information Technology) audit. This Audit is aimed at ensuring an
acceptable standard for security on all The IFIC Bank Limiteds Servers, Workstations, Routers,
Switches, Network, Core Banking system and other IT systems.

INTERNAL CONTROL PROCEDURES AND CONTROL ACTIVITIES IN IFIC BAMK

LTD:

Control procedures and control activities mean those policies and procedures in addition to the
control environment, which are established by the management to achieve the IFIC Banks
specific objectives.

Control Procedures: It covers two broad areas i.e. Accounting Control and Administrative
Control.

a) Accounting Control: It comprises primarily the plan of organization and the procedures
and records that are concerned with the safeguarding of assets, prevention and detection of fraud
and error, accuracy and completeness of accounting records and timely preparation of reliable
financial information.

b) Administrative Controls: It includes all other managerial controls concerned with the
decision making process.

Control Activities: An appropriate control structure is set up with control activities defined at
every business level, i.e. top level review; appropriate activity controls for different divisions;
physical controls; checks for compliance with exposure limits and follow-up on non-compliance;
a system for approvals and authorizations and system of verification and reconciliation. Senior
management ensures that adequate control activities are an integral part of the daily functions of
all relevant personnel; this enables quick response to changing conditions and avoids
unnecessary costs.

Control activities are involved into two steps, i.e.

I) The establishment of control policies and procedures and

II) Verification that the control policies and procedures are being complied with.

Management of Cash in IFIC Bank Ltd.

Cash Management System

Cash handling is a very sensitive area of banking since there is a possibility of theft, robbery,
forgery, money laundering and many other mishaps. As such, Cash Management should be done
in a very systematic manner, and in a secured environment. The work should also entrusted to
tested and honest people. Usually in a Branch Cash is managed by a Cash Incharge with the
assistance of a few Receiving and Paying cashiers or cash officers. Besides security aspects
customer service also needs to be closely looked into.

Receipt of Cash

Cash Receipt during Banking Hours

Deposit slip/ voucher

Deposit slip or credit voucher duly filled in are submitted along with the cash at the cash counter
for depositing cash.

Check title of account, number & amount in figure & words

Cash receiving officer shall check the title of account, its number, amount in words and figures in
the deposit slip or credit voucher and also the signature and name of the depositor.

Receipt of cash deposited by customer

The cash receiving officer will receive the cash at the counter. He or she will first count the
bundles and loose cash, preferably, with the help of the counting machine. Thereafter, if there is
no difference he or she will write the denominations on the reverse of the deposit slip.

Entry in cash receipt register

After receiving the cash, receiving cash officer will enter the particulars of the deposit slip/
voucher in the cash receipt register under progressive serial number. He/ she will put his/ her
signature both in the counter foil and deposit slip/ voucher and he/ she will pass on the same
along with the register to the authorized officer for his/ her signature.

Counter signature by authorized officer

Authorized officer will affix the Cash received seal on the deposit slip/ voucher and detach
deposit slip from the counterfoil and return it along with the register to receiving cash officer and
retain the deposit slip/ credit voucher. Authorized officer will send the deposit slip to the deposit
department and credit vouchers to the respective departments to witch those relate.

Cash received seal

Cash received seal supplied by head office with security elements is only allowed to be used.

Balancing of cash receipt register:

Receiving cash officer totals the amounts entered in the cash receipt register at the close of
business which must agree with the total of actual cash received.

Cash receipt after banking hours/ evening banking shift:

1. Cash received in late or evening shift is taken in the next days date.
2. Procedure for receipt is same as explained in the foregoing paragraphs.
3. Cash so received and balanced are put separately in the safe in the strong room.

Payment of Cash:

Payment of cash within Banking Hours:

1. Cheques, Demand Drafts, Payment orders, SDRs, FDRs and deposit cash vouchers etc,
are received from the customers and various departments for payment in cash.
2. The instrument is checked for any apparent discrepancy, posting marks and cancellation
etc.
3. Signature of cancellation officer and officer(s) passing the voucher should be made
available with the paying officer.
4. Other then in cheques, signature of the recipient will be obtained on the reverse side of
the instrument such as DD, PO, SDR and cash debit voucher which will be verified by
the incharge from where the instrument or voucher organized or sent for payment. The
instrument or voucher will be sent to the paying officer with a register where particulars
of the instrument are recorded by the respective department with initials of incharge. The
paying officer will receive the instrument/ voucher with an initial against the entry in the
register. He or she will obtain another signature of the recipient on the reverse side of the
instrument or voucher and make payment when signature has agreed with the signature
obtained earlier.
5. Cash is counted and the denominations of notes are written down on the reverse of the
instrument.
6. Cash Paid seal is affixed on the face of the instrument and signed by the paying cash
officer
7. Particulars of the instruments are entered in cash payment register.
8. Signature of the bearer is obtained on the reverse of the cheque in cash of cheque payable
to bearer and cash is paid to him or her after verifying with the signature earlier given.
9. Paid instruments are kept with the paying cash officer till handling over cash to cash-in
charge.

Balancing of cash payment register:

 1. i. At the close of business, the amounts entered in the cash payment
register are totaled. The total is agreed with the total amount paid.
2. ii. The total is written in words and figures.
3. iii. The officer incharge of deposit department checks the entries and
instruments to ascertain that the payment has been correctly made and releases the
instruments from the cash payment register by his or her initial against each entry.
4. iv. The officer in charge also checks and signs the cash payment
register.

Disposal of paid instrument:

After the cash is paid the instruments are sent to the Accounts Department as the cash may be
cheques and other instruments are received by the accounts incharge.

Disposal of unpaid instruments:

1. Instruments presented in the cash counter and returned unpaid by various departments are
received by paying cash officer attached with Memorandum duly entered in the register.
2. The particulars of the instruments are compared with those in the register and
memorandum.
3. Entries in the register are initialed by the officer and the register is returned to the
department concerned.
4. The instrument is returned to the bearer of the instruments.

Payment of cash after banking hours:

1. The practice of payment of instruments after banking hours is to be exercised very

sparingly and only in case of very good customers.
2. The instrument is posted in the next days date and canceled as usual, before payment is
made.
3. When payment is made after baking hours the p0ayment is made only to the drawer in
case of cheque of the 1st payee in case of demand draft , etc, upon proper verification.

Balancing, checking and safe custody of cash

Balancing of cash:

At the close of business when cash receipt and cash payment registers are balanced, the cash
balance book is written and agreed with the cash in hand. The book is checked and signed by the
authorized officer.

Cash position memo:

 1. After cash balance book is written, the cash position memo written in duplicate. The
memo is checked and signed by the cash incharge.
2. The cash position memo is, thereafter, sent to accounts department for tallying with clean
cash book and preserving with vouchers.
3. The signature of the receiver is obtained on the duplicate copy of the memo and filed in
the Cash position memo file.

Checking of cash:

1. i. When the cash balance book is balanced, the manager or second

officer, whoever is assigned for checking of cash, is informed to check the cash.
2. ii. The cash is counted by the checking officer and verified with the entries
of cash balance book.
3. iii. The cash balance is checked with the closing figures of the preceding
day of the book and closing of cash receipt and cash payment registers.
4. iv. The entries of denomination of notes and coins in the cash balance book
is compared with the denomination of notes and coins counted and recorded on the face
of cash denomination slip.
5. v. If found in order, the checking officer signs the cash balance book, cash
receipt register and cash payment register.
6. vi. The cash position memo is checked and counter signed by the checking
officer.

Entry in vault register:

While keeping cash in safe and withdrawing cash from safe during the day, each time entry will
be made in the vault register and initialed by the cash incharge and joint custodian of cash.

Safe custody of cash:

1. i. In the presence of cash officer and the officer who has counted the cash
and signed the book, the cash is kept in the safe.
2. ii. The safe is locked under joint operation and thereafter the strong room
door is similarly locked and kept locked overnight and holidays.

Petty cash

Receipt of cash:

1. i. Petty cash is drawn to the debit of Suspense account advanced against

petty cash on debit cash voucher according to the limit.
2. ii. The amount is kept by the cash department.
 3. iii. The account is maintained by the cash department in petty cash register.
4. iv. The amount received is entered in the relative column of the petty cash
register

Payment against petty cash:

1. i. Payment are made by cashier on receipt of petty cash voucher signed by

the manager/ authorized officer. The voucher is signed on the reverse by the recipient.
2. ii. Entries are made by the cashier in the cashier in the respective columns of
the petty cash form and register

Adjustment of entries against petty cash:

1. i. The amount of petty cash consumed is reimbursed to the debit of those

expenditure accounts on which petty cash has been spent. The entry is passed on debit
cash voucher.
2. ii. On the last day of the month the entry is reversed as follows:

The amount spent is reimbursed as explained in preceding para.

The cash held is deposited to the credit o f Suspense Account advance against petty
cash.

ANALYSIS OF INTERNAL CONTROL SYSTEM OF IFIC BANK:

Banking is a diversified and complex financial activity involving high risk. Effective
management and control of such risk is largely dependent on efficient and sound Internal Control
System for establishing corporate governance, transparency and accountability. IFIC Bank has a
well defined Internal Control System that is applied to all its departments and divisions. Risk
Based Internal Audit (RBIA) is used for branches of IFIC Bank Limited.

The scope of the report is limited to the branch operations due to the authorization by The IFIC
Bank Limited. This part of the report will explore an overview of Internal Control System of
IFIC Bank in case of branch operations. Pallabi branch is complied with the policies and
procedures made by the Internal Control and Compliance System Division ( ICCD) of IFIC Bank
for cash receipts and cash payments.

Cash:

Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring
and accounting for all other items. It is generally classified as a current asset. To be reported as
cash, it must be readily available for the payment of current obligations, and it must be free from
any contractual restriction that limits its use is satisfying debts.

Cash includes:
 Coin;
Petty cash;
Currency ; and
Available funds on deposit at the bank.

Negotiable instruments such as money orders, certified checks, cashiers checks, personal
checks, and bank drafts are also viewed as cash. Savings accounts are usually classified as cash,
although the bank has the legal right to demand notice before withdrawal. But, because prior is
rarely demanded by banks, savings accounts are considered as cash.

Internal control system over cash receipts

Establishment of responsibility and segregation of duties:

One of the most important steps can be taken to protect cash is to separate cash handling duties
among different people. With proper separation of duties, no single person has control over the
entire cash process. In IFIC Bank, the duties relating to receipts are so allocated that no single
person has exclusive control over an entire transaction, to establish the responsibility and
adequately segregate the duties following steps are taken:

Separation of the custody of cash from accounting

Separation of the authorization of transaction from the custody of

related cash

Separation of operational responsibility from record keeping responsibility

Best practice is to have different people:

Receive and deposit cash

Record cash payments to receivable records
Reconcile cash receipts to deposits and the general ledger
Bill for goods and services
Follow up on collection of returned checks
Distribute payroll or other checks

The key to effective cash control while separating duties is to minimize the number of people
who actually handle cash before its deposited.

Authorization and approval:

Every transaction must be properly authorized if controls are to be satisfactory. Authorization can
be general or specific. General authorization means that management establishes policies for the
organization to follow. Specific authorization applies to individual transaction. Authorization is a
policy decision for either a general class of transactions or specific transactions. Approval is the
implementation of managements general authorizations decision. In IFIC Bank Cash, cheques,
and related documents are received only by persons authorized to do so. There is a system of
ensuring that cash cheques, etc, collected by the authorized representatives of the bank are
recorded, deposited and reconciled promptly.

Every single transaction made in the branch is firstly posted by an authorized employee and then
verified by an authorized officer to detect the errors and fraudulent activity.

For example, the steps in issuing a cheque book to the customer are-

First, the account holder fills the requisition slip that contains his/her two specimen signature,
date and address and submit it to the responsible officer.

Second, this requisition information is sent to the Head Office using MISYS.

Third, the cheque book is sent by the Head Office to the branch within 7 days.

Fourth, the authorized officer posting the cheque books serial number to the special software.

Fifth, any customer service officer match the account holders specimen signature on the
requisition slip with the signature recorded in the MISYS.

Sixth, matching the signature, the cheque book is given to the customer by taking one more
specimen signature of the account holder in the cheque book issue register. It is to be noted that
cheque books are given to the customers maintaining the serial numbers to utilize the resource
and to have a proper record of cheque books.

Finally, the posted serial numbers are verified by the Operational Manager of the branch.

Documentation procedures:

Documents are the physical objects upon which transactions are entered and summarized IFIC
Bank Limited maintains all kinds of documents necessary to provide evidence and to minimize
fraud and errors, regarding cash receipts.

This is to be remembered that Pallabi branch provides Retail Banking, Corporate and Investment
Banking, and SME Banking Services to its customers. It is fully on line banking, means fully
computerized. As a result, all transactions made immediately input in the MISYS (software of
online banking by IFIC Bank Ltd) and accounting procedures automatically done by the
software. So there is no need to provide the documents for accounting entry as it is done by
MISYS automatically. Moreover, in IFIC bank ltd the receipts (deposit book) are pre
numbered. All receipts are entered in the cash book whenever it is occurred or at the same day. In
IFIC Bank cash book is maintained along with the printed copy from the computer.

Physical, mechanical & electronic control:

The IFIC Bank Limited has a proper and adequate physical, mechanical and electronic control to
prevent fraud and errors over cash receipts. IFIC Bank does not keep the unused receipts books
in safe custody under the charge of a senior official and does not issue after verifying that the
previous receipt books has been fully accounted for. There is a system of reconciliation of bank
accounts at regular intervals. There is also a regular reconciliation of cash in hand as per the
books of account and the physical balance in hand.

To ensure physical controls over cash, the bank has

Vaults for cash and business papers

Safety Deposit boxes for cash and other business papers

To ensure mechanical & electronic controls, pallabi branch has

Alarms to prevent break-ins

Close Circuit Camera to deter theft.

There is no system of sending monthly, but, there is a system of sending half yearly statements
of account to customers and other parties from whom cash, cheques or drafts are received on a
regular basis and asking them to confirm the correctness of the statements.

Independent internal verification:

In many banks internal control is identified with internal audit; the scope of internal control is
not limited to audit work. It is an integral part of the daily activity of a bank, which on its own
merit identifies the risk associated with the process and adopts a measure to mitigate the risk.
Internal audit on the other hand is a part of internal control system which reinforces the control
system through regular review.

Risk Based Internal Audit (RBIA) refers, to selective transaction testing, an evaluation of the risk
management systems and control procedures prevailing in various areas of banks operations.

The implementation of Risk Based Internal Audit means that greater emphasis is placed on the
internal auditors role in mitigating risks.

The following four step approach to internal control evaluation, referred to as the risk based
audit approach, provides a logical framework for carrying out an audit:

1. i. Determine the threats (errors and irregularities) facing the Accounting

Information System.
 2. ii. Identify the control procedure implemented to minimize each threat by
preventing or detecting the errors and irregularities.
3. iii. Evaluate the control procedures. Reviewing system documentation and
interviewing appropriate personnel to determine if the necessary procedures are in place
is called a systems review.
4. iv. Evaluate weaknesses to determine their effect on the nature, timing, or
extent of auditing procedures and client suggestions. This step focuses on the control
risks and if the control system as a whole adequately addresses them.

The risk based approach to auditing provides auditors with a clear understanding of the errors
and irregularities that can occur and the related risks and exposures.

At pallabi branch of IFIC Bank Ltd, the supervisor independently checks the cash books or cash
prints everyday to ensure up to date recording. At the branch, the surprise count of cash balance
is carried out periodically by the internal auditor or by another independent official who does not
have any duties relating to handling cash or accounting for it. The internal audit of receipts is
conducted regularly.

Bonding employees who handle cash:

Bonding involves obtaining insurance protection against misappropriation of assets by

employees. It contributes to the safeguarding of cash in two ways:

First, the insurance company carefully screens all individuals before adding them to the
policy and may reject risky application.
Second, bonded employees know that the insurance company will vigorously prosecute
all offenders.

In IFIC bank, there is adequate insurance against theft, misappropriation of cash etc.

Rotating employees duties:

These measures deter employees from attempting thefts since they will not to be able to
permanently conceal their improper actions. Thats why the duties of the various people specially
relating to cash (receipts) are rotated periodically.

Others control for the receipt of cash:

The following controls are incorporated in IFIC Bank over miscellaneous receipts like sale of
scrap/IPO shares:

1. Checking number of application equivalent with the receipt cash amount from the
customers;
2. Checking forgery of notes;
 3. Carefully scroll numbering so that no mismatch is occurred.

The controls which are executed for over the counter receipts of cash are given bellow:

1. Carefully matching the name and A/C number of customers;

2. Checking whether the amount in figure is equivalent with amount in words;
3. Checking the forgery of notes;

Internal control system over the cash payments

Establishment of responsibility and segregation of duties:

An essential principles of internal control it assign responsibility to specific employees. Control

is most effective when only one person is responsible for a given task as well as the different
individuals are responsible for related activities. At the pallabi branch, the duties relating to
payments are so allocated that no single person has exclusive control over an entire transaction.

Documentation procedure:

Documents provide evidence the transactions and events have occurred. Companies should
establish procedures for documents. Documents should be

Pre numbered consecutively to facilitate control over missing documents;

Prepared at the time a transaction takes place, or as soon as possible thereafter;

Sufficiently simple to ensure they are clearly understood;

Constructed in a manner that encourages correct preparation.

In IFIC Bank the payments are recorded promptly in the cash book along with printed copy, so
that they can make adequate control to ensure no payment is made twice against the same bill,
they also mark the payment voucher as paid once the payment has been made. In order to
ensure effective internal control all cheques are pre numbered.

Physical, mechanical, and electronic controls:

To maintain adequate internal control, it is essential to protect assets and records. Physical
controls relate to the safeguarding of assets. Mechanical and electronic controls also safeguard
assets and enhance the accuracy and reliability of the accounting records. In IFIC Bank branch,
there are adequate controls for safe custody of cheque books.

In IFIC bank there is no system of sending monthly, but, there is a system of sending half yearly
statements of account to customers to whom payments are made on a regular basis and asking
them to confirm the correctness of the statements. They also check out arithmetical accuracy of
payment documents before approving a payment.
 Best practices by the IFIC Bank:
o Compare payments to payment records.

o Record cash payments when paid.

o Perform periodic surprise cash counts.

Independent internal verification:

In IFIC Bank Ltd, an independent audit & inspection mechanism is working to review the
effectiveness of internal control at branches/divisions. Internal control unit has also been set up
at all branches with the existing manpower to minimize irregularities or lapses, to prevent
frauds/forgeries and to control risk at the operational level. The audit committee of the board
constantly monitors the function of internal control and compliance division and reports to the
Board of Directors on quarterly basis. IFIC Bank pallabi branch, regularly conduct internal audit
of payment to protect their cash effectively and efficiently.

Rotating employees duties:

At the pallabi branch, the duties of the employees, especially who are authorized for cash counter
(For Payment or receive) rotted periodically to deter whether the employees are comply with
rules and regulations or not, whether they attempting any fraudulent activities, any
misrepresentation or not.

Other controls for the payment of cash:

For cash disbursements under voucher system the authorized officers sign as well as the
managers sign is mandatory.

Controls for the petty cash fund system:

In IFIC Bank, for the petty cash fund system they follow a strict rule, to assure the effective
internal control. Vouchers must have to be signed by authorized officers even those to be signed
by branch manager to end petty cash fund system.

Controls for the electronic fund transfer (EFT) system:

The term electronic fund transfer (EFT) refers to making cash payments electronically rather
than by check. EFT is usually accomplished through the banking systems automated clearing
house (ACH) network. The following control procedures are adopted for the electronic fund
transfer (EFT) system:

Providing individual card with password for making transaction.

Card blocking system for more than three time of falsie password pressing.
Using Close circuit camera.
Liquidity controls of the IFIF Bank Ltd, Pallabi Branch:

One of the important ingredients of a good Bank Management is to maintain Liquidity. To

control and to safeguard this liquidity factor, there are two types of limits for cash money that is
insured against any accident. These are

1. Counter Limit: The counter limit for cash money is TK.10, 00,000. This amount is fully
insured by the bank. If this amount is exceeded then it is sent to the vault to maintain the
counter limit and to safeguard the money by insurance.
2. Vault Limit: The vault limit for cash money is TK. 50, 00,000. This amount is fully
insured by the bank. If this amount is exceeded then it is sent to the Head Office to
maintain the vault limit and to safeguard the money by insurance.

Problems in implementing internal control system in IFIC Bank:

The officers are yet to be habituated with the new ideas of Internal Control and Compliance
Division (ICCD).

Some of officials think that compliance of ICC is rather important, than actual work.

Even well designed internal controls can break down. Employees sometimes misunderstand
instructions or simply make mistakes. Errors may also result from new technology and the
complexity of computerized information systems.

High level personnel may be able to override prescribed policies and procedures for personal
gain or advantage.

Control systems can be circumvented by employee collusion. Individuals acting collectively

can alter financial data or other management information in a manner that cannot be identified by
control systems, etc.

Findings

From the analysis of Internal Control & Compliance System over cash receipts and cash
payments in IFIC Bank Ltd, I have found the following major issues:

The bank applies the Risk Based Internal Audit (RBIA) in conducting the audit activities.

Duties relating to both, cash receipts and cash payments are effectively allocated, so that, no
one has an exclusive control over the ransactions.

The policies, procedures and principles of Internal Control System of IFIC bank are not
elaborately and logically explained in the Internal Control and Compliance Manual
 The unused receipt books and cheque books are not kept in safe custody under the charge of a
senior officials and issue without verifying that the previous receipt books have been fully
accounted for.

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

In IFIC Bank, there is no system of sending monthly, but, there is a system of sending half
yearly statements of account to customers and requesting them to confirm the correctness of the
statements.

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

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

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

The bank maintains the cash book along with the printed copy from the computer.

In IFIC Bank Ltd, there is a system of surprise count of cash balance carried out periodically
by the internal auditor or by the independent official who does not have any duties relating to
handling cash or accounted for it.

The duties of the employees, related to cash are rotated periodically.

Internal controls can be broken down. Because, employees sometimes misunderstand

instruction or simply make mistakes.

Control systems can be circumvented by employee collusion.

In IFIC Bank Ltd, officers are yet to be habituated with the new ideas of Internal Control and
Compliance Division (ICCD).

Some of officials think that compliance of ICC is rather important, than actual work.

RECOMMENDATIONS & CONCLUSION

Recommendations:

Though IFIC Bank Ltd has a strong internal control system but nothing is perfect in this world.
So, in order to ensure better internal control system over cash receipts and cash disbursements
IFIC Bank should take deep attention on the followings:
 The policies, procedures and principles of Internal Control System of IFIC bank should
be more elaborately and logically explained in the Internal Control & Compliance
Manual in accordance with its banking activities and accounting standards.
The bank should keep the unused receipt books and cheque books in safe custody under
the charge of a senior officials and issue only after verifying that the previous receipt
books have been fully accounted for.
The IFIC Bank should send monthly statements of account to customers and requesting
them to confirm the correctness of the statements.
IFIC Bank should take necessary steps to make habituated the officers with internal
control and compliance activities.
Officials should give equal importance on compliance of ICC and actual work.
The bank should take appropriate corrective action to avoid employees
misunderstanding.
IFIC Bank should take preventive action to avoid employee collusion.

Conclusion:

The IFIC Bank Limited is one of the top banks in Bangladesh. This organization is much more
structured compare to any other bank operating in Bangladesh. Especially, in retail, and SME
banking, the bank is showing an excellent performance. The bank aims to be the first in retail
banking within the next 2 years and how it is performing, it shows that the day is not so far when
it will reach to its destination.

Duration of three month internship, I have attempted to analysis the Internal Control System of
IFIC Bank over the cash receipts and cash payments. In spite of the time and information I have
known that the IFIC Bank has an effective Internal Control System operated by its ICC
department over the cash receipts and cash payments. This Internal Control System of IFIC has
several policies, procedures and guidelines comply with the Bangladesh banks rules and
regulation and consistent with the banks banking activities. After analyzing the primary and
secondary data I realize that the Internal Control System of IFIC Bank Ltd, helps the
organization to manage its cash department in an efficient manner.

The Internal Control System of IFIC Bank Ltd ensures the accountability, reliability,
completeness, and timeliness of financial or cash related information. It also ensures that all
personnel in cash section complying with applicable laws and regulation. All these activities of
the Internal Control System continuously help the International Finance Investment and
Commerce Bank Limited to achieve its goals and objectives in time.

Bibliography:

1. Weygant Jerry J, Kieso Donald E, Kimmel Pual D. Accounting Principles, (8 th edition)

2008.
2. Arens Alvin A. & Loebbecke James K. AUDITING (An integrated approach) (8 th edition)
2009-2010.
3. Annual Report 2009
4. Manual of internal control system.