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Internal Control System Over Receipts and Payments

2nd Assignment

ALLAMA IQBAL OPEN UNIVERSITY


(Department of Business Administration) Assignment # 2 Auditing (5545)

TOPIC: INTERNAL CONTROL SYSTEM OVER RECEIPTS AND PAYMENTS OF A BANKING ORGANIZATION
Submitted to: Sir Muhammad Younis Mazari Submitted by: Ishtiaq Ahmed AH-526270

Internal Control System Over Receipts and Payments

2nd Assignment

ACKNOWLEDGEMENT
All praises to Almighty Allah, the most Gracious, the most Beneficent and the most Merciful, who enabled me to complete this assignment. I feel great pleasure in expressing my since gratitude to my teacher, for his guidance and support for providing me an opportunity to complete my Project. My special thanks and acknowledgments to Mr. Zeeshan for providing me all relative information, guidance and support to compile the practical study at MCB. I will keep my hopes alive for the success of given task to submit this report to my honorable teacher Sir Younis Mazari, whose guidance; support and encouragement enable me to complete this assignment.

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EXECUTIVE SUMMARY
Internal Control is a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives. According to the COSO Framework, everyone in an organization has responsibility for internal control to some extent. Effective internal control implies the organization generates reliable financial reporting and substantially complies with the laws and regulations that apply to it. Internal controls can also be used to systematically improve businesses, particularly in regard to effectiveness and efficiency. MCB has an internal Control system over Receipts and Payments. But still there are some weaknesses in this system that can bi removed by motivating employees of the whole organization.

Internal Control System Over Receipts and Payments

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Table of Contents
Contents
Title page Acknowledgement Executive Summary Table of contents Introduction to the issue Practical study of organization

Page No
01 02 03 04 05 10

Practical study of organization with respect to the 13 issue SWOT analysis Conclusion Recommendations References 16 18 19 20

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Introduction to Topic
Internal control
In accounting and auditing, internal control is defined as a process affected by an organization's 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 organization's resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization's resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks). 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. In the Republic of China, the Control Yuan ( ; pinyin: Jinch Yan), one of the five branches of government, is an investigatory agency that monitors the other branches of government.

Responsibilities in Internal Control System:


According to the COSO Framework, everyone in an organization has responsibility for internal control to some extent. Virtually all employees produce information used in the internal control system or take other actions needed to affect control. Also, all personnel should be responsible for communicating upward problems in operations, noncompliance with the code of conduct, or other policy violations or illegal actions. Each major entity in corporate governance has a particular role to play: Management: The Chief Executive Officer (the top manager) of the organization has overall responsibility for designing and implementing
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effective internal control. More than any other individual, the chief executive sets the "tone at the top" that affects integrity and ethics and other factors of a positive control environment. In a large company, the chief executive fulfills this duty by providing leadership and direction to senior managers and reviewing the way they're controlling the business. Board of Directors: Management is accountable to the board of directors, which provides governance, guidance and oversight. Effective board members are objective, capable and inquisitive. They also have knowledge of the entity's activities and environment, and commit the time necessary to fulfill their board responsibilities. Auditors: The internal auditors and external auditors of the organization also measure the effectiveness of internal control through their efforts. They assess whether the controls are properly designed, implemented and working effectively, and make recommendations on how to improve internal control. They may also review Information technology controls, which relate to the IT systems of the organization. Staff and junior managers may be involved in evaluating the controls within their own organizational unit using a control self-assessment.

Limitations:
Internal control can provide reasonable, not absolute, assurance that the objectives of an organization will be met. The concept of reasonable assurance implies a high degree of assurance, constrained by the costs and benefits of establishing incremental control procedures. Effective internal control implies the organization generates reliable financial reporting and substantially complies with the laws and regulations that apply to it. However, whether an organization achieves operational and strategic objectives may depend on factors outside the
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Internal Control System Over Receipts and Payments

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enterprise, such as competition or technological innovation. These factors are outside the scope of internal control; therefore, effective internal control provides only timely information or feedback on progress towards the achievement of operational and strategic objectives, but cannot guarantee their achievement.

Fraud and Internal Control System:


If the internal control system is implemented only to prevent fraud and comply with laws and regulations, then an important opportunity is missed. The same internal controls can also be used to systematically improve businesses, particularly in regard to effectiveness and efficiency.

Components of Internal Control


In 1992, COSO published the report Internal Control--Integrated Framework as a "basis for developing business control systems and assessing their effectiveness" (Internal Control Issues). This report provides the following five components of internal control:

The Control Environment: relates to the control consciousness of the


people within the organization. The control environment is the basis for all other components of internal control.

Risk Assessment: refers to the organization's identification, analysis,


and management of the risks that are related to financial statement preparation, in order to ensure that financial statements are presented fairly and in compliance with generally accepted accounting principles (GAAP).

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Control Activities: the organization's policies and procedures which


help ensure that necessary actions are taken to address the potential risks involved in accomplishing the entity's objectives.

Information and Communication: focuses "on the nature and


quality of information needed for effective control, the systems used to develop such information, and reports necessary to communicate it effectively" (Internal Control Issues).

Monitoring: involves assessing the quality and effectiveness of the


organizations internal control process over time. It includes assessing the design and operation of controls, and assessing compliance with policies and procedures. It also provides for the implementation of appropriate actions when necessary.

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History of Internal Control


First defined in 1949, by the American Institute of Accountants (now the AICPA) In 1958, distinguish between accounting controls and administrative controls
o

Accounting

controls

relate

to

safeguarding

assets

and

reliability of financial records


o

Administrative controls relate to operational efficiency and adherence to managerial policies

In 1972, clarification of controls, accounting controls provide reasonable assurance that


o o

transactions executed as authorized transactions recorded to permit GAAP statements and maintain accountability for assets

o o

access to assets only as authorized regularly compare recorded assets with actual assets

Foreign Corrupt Practices Act: Took the language of the 1972 AICPA pronouncement and made it law. Since 1977, all publicly owned corporations legally required to:
o

keep books which accurately and fairly reflect transactions and dispositions of assets and devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are authorized by management
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Internal Control System Over Receipts and Payments


o

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transactions are recorded so GAAP statements can be prepared and maintain accountability for assets access to assets is authorized by management periodic inventory is required to compare recorded assets with existing assets

o o

Statement on Auditing Standards No. 48, effective for periods beginning after August 31, 1984.

Practical Study of the Organization

Vision Statement:
TO BE THE LEADING FINANCIAL SERVICES PROVIDER, PARTNERING WITH OUR CUSTOMERS FOR A MORE PROSPEROUS AND SECURE FUTURE.

Mission Statement:
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COMMITTED

WE

ARE

TEAM

OF

PROFESSIONALS,

PROVIDING

INNOVATIVE AND EFFICIENT FINANCIAL SOLUTIONS TO CREATE AND NURTURE LONG-TERM RELATIONSHIPS WITH OUR CUSTOMERS. IN DOING SO, WE ENSURE THAT OUR SHAREHOLDERS CAN INVEST WITH CONFIDENCE IN US.

History of the Organization:


MCB Bank Limited (Formerly Muslim Commercial Bank) was incorporated by the Adamjee Group on July 9, 1947, under the Indian Companies Act, VII of 1913 as a limited company. The bank was established with a view to provide banking facilities to the business community of the South Asia. The bank was nationalized in 1974 during the government of Zulfikar Ali Bhutto. This was the first bank to be privatized in 1991 and the bank was purchased by a consortium of Pakistani corporate groups led by Nishat Group. As of June 2008, the Nishat Group owns a majority stake in the bank. The president of the bank is M.U.A Usmani. Founded in 1948, Nishat Group is one of the leading and most diversified business groups in Pakistan. The group has strong presence in the most important business sectors of the country such as banking, textile, cement and insurance. Mian Mohammad Mansha is the Chairman of the group (and also MCB). MCB is Pakistans largest bank by market share 18% its assets are of PKR 605 bln (apprx.)(US$ 7.02 billion) in 2011, and the largest by market capitalization having a market capitalization of US$ 1.8 billion. The Bank has a customer base of approximately 4.5 million and a nationwide distribution network of 1,130 branches, including 8 Islamic banking branches, and over 600 ATMs, in a market with a population of over 160 million.(July 2011 record)
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In 2011, MCB reported a profit after tax of PKR 15.5 billion (appx. US$183 million) and generated a return on average equity of 27.35% and a return on assets of 3.25%. The Banks asset quality is strong with a gross NPL ratio of 8.62%. MCB has over 1,150 branches (as of 31 December 2010) including local branches, and business establishments in SriLanka and Bahrain including newly established Rep. Office in Dubai, UAE. The Bank has also formed a private company in Hong Kong (fully owned subsidiary of MCB) in partnership with Standard Chartered Bank, handling trade transactions of select countries in the Asia-Pacific region.

MCB Bank Ltd.

Type Industry Founded

Public (KSE:[2]) Banking Capital Markets 1947

Headquart Registered Office: Islamabad, ers Principal Office: Karachi Pakistan

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Key people Products Revenue Net income Total assets Website

Mian Mohammad Mansha(Chairman) Loans, Credit Cards, Savings, Consumer Banking etc. PKR 35.782 Billion (2011) PKR 26.753 Billion (2011) USD 6.02 Billion www.mcb.com.pk

Practical Study of the Organization with respect to the Issue


Internal Control System of MCB
A. 1)

Internal Control over Cash Receipts:


Receipt Book: The following inflexible rules are followed
Unused books are kept under lock and key. All receipts are consecutively numbered. The issue and custody of cash receipts are under the

as a sound system of internal control check in MCB:

control of cashier. Originals of all spoilt and cancelled receipt are retained

and countersign by Cashier and Manager. Acknowledgment of the receipts of the receipt book is

obtained so that he could be held accountant for the utilization of it.


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2) 3)

Acknowledgment: For every amount received, a bank Remittance Received: All correspondence received

receipt is issued by the cashier.

are opened by an Assistant Manager. All remittances received are crossed Accountant Payee only entered in a daily cash diary and then handed over to the cashier.

4) 5) 6)

Deposit: All collections are internally checked and then No Access to Ledgers: The cashier is not allowed any Teeming and Lading: The following steps are taken
The amount recorded as having been received is

deposited into the account.

access to personal or general ledgers.

with a view to avoiding teeming and lading:

checked with the corresponding amount mentioned in the statement of amount received from each of the debtor.


been received.

The debtors are requested to give crossed cheques

marked Accountant Payee only. All remittances received in the form of cheques, drafts

etc., are crossed and marked Accounts Payee only after they have

The pay-in-slip is carefully checked with the amounts

shown on the carbon copy or counterfoil receipts.

7) 8)
separate.

Physical Count: Surprise inspection of cash is done by Segregation: All collections are segregated and kept

Regional Manager.

B.

Internal control over cash Payments:


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1)

Mode of Payments: As for as possible, payments are

made by crossed cheques marked Accounts Payee only and official receipts are obtained.

2)

Authorization: All payments are authorized by cashier,

duly vested with these powers by the Manager. Proper verification is done before the payment is made. All payments of special nature are minuted by the Management.

3)
cash book.

Recording: All payments are promptly recorded in the Vouchers: All supporting vouchers of payment are serially

4)
auditors.

numbered and filed in order to facilitate the subsequent checking by the

5)

General:
Arithmetical Accuracy: Casts cross casts and carry Bank Reconciliation: Periodical bank reconciliation

forward of all amounts in the cash book are checked.

statements are prepared. Bank confirmations are obtained and all outstanding items are carefully scrutinized.

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SWOT analysis
Strength:
MCB is the largest private bank in Pakistan and third largest bank It has the largest branch network among private banks of MCB has been very effective in controlling costs as it successfully among all banks. Pakistan.

restructured itself after its privatization. During this process more than 1,600 employees were relieved under a golden handshake scheme and 110 branches were closed.

Excellent branches appearance gives an edge to MCB over other

banks. The branches are well furnished even in less developed areas where other banks branches give a poor view. The same is included in the mission statement of MCB in following words: and to be the best place to work.

Weakness:
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Internal Control System Over Receipts and Payments Though MCB is third largest bank in Pakistan, yet the fact remains

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that it is not market leader as HBL and NBP. Total assets of HBL and NBP are Rs. 333,751 millions and Rs. 415,088 millions respectively as at December 31st, 2001.While total assets of MCB are Rs.187055 millions. MCB does not enjoy the support of government as the other nationalized bank do.
Employees at branch level are not properly motivated to work by

heart. They take the all routine activities as a boring job. Most of the employees lack managerial training as they are not properly educated. Due to seniority, they have moved up on the hierarchy line to Grade-I, II or III positions having hardly bachelor degrees. This type of senior staff cannot apply the modern and innovative techniques of management in decision making.

Opportunities:
MCB may enhance its Rupee Travelers Cheques (RTCs) sales by

searching for new market niches.


It can introduce debit card system or may convert the existing ATM

cards into a complete debit card.


New products like personal loans mortgage and auto leasing and

each management which diversify credit risk and add to revenue generating products are currently provided in big cities like Lahore, Islamabad, Karachi and Rawalpindi, these products may be tested for success in other areas like Peshawar, Quetta and

Threats:
Sudden change in Interest Rate.

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Internal Control System Over Receipts and Payments The frequent reduction on 6-month and 12-month Treasury Bills

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discount

rates

by

SBP may

create

pressure

on

the banks

profitability.
The low discount rates are also negatively influencing the advances

rates which may affect the banks profits from the other side.
Foreign banks operating in Pakistan are playing a significant role by

incorporating new technologies and providing better quality services thus creating a threat to the local banks especially to MCB which tries to develop core competence in electronic based products.

Conclusion
Internal Control is a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives.

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According to the COSO Framework, everyone in an organization has responsibility for internal control to some extent. Effective internal control implies the organization generates reliable financial reporting and substantially complies with the laws and regulations that apply to it. Internal controls can also be used to systematically improve businesses, particularly in regard to effectiveness and efficiency. MCB has a Strong internal Control system over Receipts and Payments. But still there are some weaknesses in this system that can bi removed by motivating employees of the whole organization and by fully implementing internal control system in the whole branches.

Recommendation
First of all, the management needs to overlook the major problems that the organization is currently facing and then develop strategies to solve them. Some of the suggestions that I would like to give at the end are:
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Internal Control System Over Receipts and Payments MCB Bank can improve its internal control system by motivating

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employees. Centralized Structure that enables employee involvement needs to be formed. Better reward system is one of the most important requirements in order to reduce the problem of Employee retention and improve Employee motivation. There is lack of proper and continuous training of employees that needs to be solved. Creation of enhanced performance appraisal system. Job rotation for employees.

Reference
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Project report Internal Control system over receipts and Payments www.slideshare.com http://www.mcb.com.pk/ http://www.telenor.com.pk//whyMCB.php http://en.wikipedia.org/wiki/MCB_Pakistan http://www.scribd.com/doc/24651033/HR-REPORT-cultural-compatiblepractices-inMCB

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