University of Mumbai

“SBI Mutual Fund”

A Project submitted to
University of Mumbai for partial completion of the degree of
Master in commerce
Under the faculty of commerce and account

By
SINGH PAWAN MANOJ KUMAR
Roll No – 041
Seat No -

Under the guidance of

Professor Mohd. Nishat S. A. Ansari

Ismail Yusuf college arts, science & commerce

Jogeshwari (E),Mumbai 400060.

2018 - 2019

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 Ismail Yusuf college arts, science & commerce
Jogeshwari (E), Mumbai 400060.

CERTIFICATE

This to certify that Mr. Singh Pawan Manoj Kumar has worked and duly completed
his project work for the degree of Master in Commerce under the Faculty of
Commerce in the subject ofAccountancy and his project of is entitled “SBI

Mutual Fund” under my supervision. I further certify that the entire work has been
done by the learner under my guidance and that no part of it has been submitted
previously for any Degree or Diploma of any University.

It is his own work and facts reported by his personal finding investigations.

Professor
Mohd. Nishat S. A. Ansari

Date of Submission

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 DECLARATION

I the undersigned Mr.Singh Pawan Manoj Kumar here by, declare that the work
embodied in this project work titled “SBI Mutual Fund’’ forms my own
contribution to the research work carried out under the guidance of Professor Mohd.
Nishat S. A. Ansari is a result of my own research work and has not been previously
submitted to any other University for any other Degree or Diploma to this or any
other University.

Whenever reference has been made to previous work of others, it has been clearly
indicated as such and include in the bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

_______________________

SIGNATURE OF STUDENT

(Singh Pawan Manoj Kumar )

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 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbaifor giving me chance to do

this project.

I would like to thank my Principal Dr. Swati Wahal Ma’am for providing the
necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator N.G. Gokani sir, for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide Professor
Mohd. Nishat S. A. Ansari sir whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference
books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially My Parents and Peers who supported
me throughout my project.

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 INDEX

Sr. No TITLE Pg. No

Chapter 1 Introduction 8-47

1.1.Brief history of internal control 8

1.2.Product and Services 9
1.3.Categories of internal control 10
1.4.Objective of internal control 20
1.5.Different types of internal control 22
1.6.Matual Fund Industry 31
1.7.Different types of mutual funds 32
1.8.Features of mutual funds 33
1.9.Advantages of mutual fund 36
1.10.Disadvantage of mutual fund 39
1.11.Risk factor 41
1.12.Regulation & Operation 44
1.13.Opportunities of mutual fund industry 45

Chapter 2 Research Methodology 48-53

2.1.Introduction 48
2.2.Objective of the study 48
2.3.Scope of the study 49
2.4.Selection of the problem 49
2.5.Sample And sampling techniques 49
2.6.Sources of data 50
2.7.Tabulation of data 51
2.8.Data analysis 52
2.9.Scoring 52
2.10.Techniques and tools to be used 52
2.11.Limitation of the study 53
2.12.Significance of the study 53

Chapter 3 Review of Literature 54-73

3.1.Introduction 54
3.2.Introduction of banking sector 56
3.3.Internal Checks and Control system in
Agricultural & Rural development bank 57
3.4.Function and working of Audit committee 60

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Chapter 4 Data Presentation & Data Analysis 74-89
4.1.Control environment 74
4.2.Risk assessment 77
4.3.Control activity 80
4.4.Information & Communication system 83
4.5.Monitoring 86

Chapter 5 Conclusion 90-91

5.1.Introduction 90
5.2.Conclusion 90

Suggestion 92-97

Bibliography 98

Appendix 99-105

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 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 safeguarding 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 institution’s 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.

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 CHAPTER 1
INTRODUCTION

1.1.Brief History of Internal Controls

SBI Mutual Fund is a bank sponsored fund house with its corporate
headquarters in Mumbai, India. It is a joint venture between the State Bank of India,
an Indian multinational, Public Sector banking and services company and Amundi, a
European asset management company.

The mutual fund industry in India originally began in 1963 with the Unit Trust of
India (UTI) as a Government of India and the Reserve Bank of India initiative.
Launched in 1987, SBI Mutual Fund became the first non-UTI mutual fund in India.
In July 2004, State Bank of India decided to divest 37 per cent of its holding in its
mutual fund arm, SBI Funds Management Pvt Ltd, to Society General Asset
Management, for an amount in excess of $35 million. Post-divestment, State Bank of
India's stake in the mutual fund arm came down to 67%. [3] In May 2011, Amundi
picked up 37% stake in SBI Funds Management, that was held by Society General
Asset Management, as part of a global move to merge its asset management business
with Credit Agricola.

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As of Sept 2015, the fund house claims to serve around 5.8 million investors through
130 points of acceptance, 29 investor service centres, 59 investor service desks and 6
Investor Service Points.[5] As of July 2017, assets under management of SBI Mutual
Fund are valued at Rs. 1, 82,916 crore ($28.4 billion).

1.2.Products & Services

SBI Mutual Fund offers mutual fund schemes such as Debt Schemes, Equity
Schemes, Hybrid Schemes, Exchange-traded fund, Liquid Schemes and Fixed
Maturity Plans. It also offers Portfolio Management and Advisory Services to
financial institutions and asset management companies.

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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.
1.3.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

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INTERNAL CONTROL COMPONENTS

Larry E. et al., stated that, five components of COSO’s control framework may be
viewed as both fundamental principles and an aid to planning, evaluating and
updatingControls.
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.

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 overseeImplementation 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

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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) Mill
champ (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 entity’s 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 organisation’s 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 organisation’s 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

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positive “tone at the top” –and when they require that same standard of conduct from
everyone in the organization.

Trainer (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.

Risk Assessment

Risk Assessments 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)

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Following on from this the Internal Control Comptroller’s 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 University’s Internal Audit Manual (2005) said
aPrecondition 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 bank’s 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.

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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 entity’s 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.

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- Establishment and review of performance measures and indicators.

- Segregation of duties to reduce a person’s 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.

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 bank’s 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 bank’s 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.

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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 bank’s 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.

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 bank’s 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

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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 system’s
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 organization’s
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.

It added that, these concepts are summarised in two fundamental principles from
COCO’s 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:

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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.

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.

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.

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 1. Authorisation-
This objective ensures that all transactions are approved byResponsible
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 originatingTransaction.

4. Physical safeguards and security-This is to ensure that access to physical assets

andInformation are controlled and restricted to authorised personnel.

5. Error handling-This is to ensure that errors detected at any stage of processing

transaction should be given prompt corrective attention.

6. Segregation of duties-This is to ensure that duties are assigned to individuals in

aManner that will ensure that no one individual can perform two overlapping
functions.

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 management

information, and

 compliance with applicable laws and regulations

1.4.Objectives of Internal Control

 To assist management in orderly and efficient conduct of its operations

 Adherence to management policies and procedures

 Safeguarding of Assets

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  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

Some Examples of Deficiencies in Internal Controls

 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 auditor’s 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.

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 1.5.Different Types of Internal Controls

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

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

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 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.

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.

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

6. Personnel Controls

Proper functioning of any system depends on:

 Competence and integrity of those operating it.

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 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.

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.

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 Visit to Project site/area where programme activities are taking place.

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.

 Prepare Bank reconciliations :

 Reconcile vendors statements to recorded payables

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

detail.

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.

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 Comparing and analysing the financial results with corresponding budgeted
figures.

10. Safeguarding Controls

 Internal controls over safeguarding of assets constitute a process, affected by

an entity’s Governing Body to provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the entity’s 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 management’s 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 organization’s 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;

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 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.

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 mis-

statements, 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) Management’s awareness or lack of awareness of applicable laws and

regulations.

b) Organization’s 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.

12. Governance

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 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

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.

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
entity’s objectives.

 Internal control is not a cure-all.

Inherent Limitations of Internal Controls

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 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

14.1 Detecting Fraud -- Red Flags

 Lifestyle and Personality

 Organizational

 Financial Documents

 Accountability and Control

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

14.3 Organizational Red Flags

 No Communication of Expectations.

 Too Much Trust in Key Employees.

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 Lack of Proper Authorisation Procedures

 Lack of Attention to Detail.

 Changes in Organisational Structure

 Tendency Toward Crisis Management

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.

14.5 Accountability and Control Red Flags

 Lack of Separation of Duties.

 Lack of Physical security and / or Key Control.

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  Weak Links in Chain of Controls and Accountability.

 Missing Independent Checks on Performance.

 Lax Management Style.

 Poor System Design.

 Inadequate Training

1.6.Mutual Fund Industry

During the year following key SEBI Regulations and Guidelines were issued for the
Mutual Fund Industry:

1) SEBI issued guidelines for imposing restriction on redemptions on liquidity issues,

market failures, exchange closures, operational issues, etc.

2) SEBI issued guidelines on operationalization of Central Registry of Securitization

and Asset Reconstruction and Security Interest of India (CERSAI) to perform the
functions of Central Know Your Customer Records Registry (CKYCR) and uploading
of the existing clients’ KYC details by the mutual funds. Accordingly, with effect
from February 1, 2017, any new individual investor who has not completed KYC
under KYC Registration Agency (KRA) regime is required to comply with new
CKYC requirement in addition to KRA compliance.

3) SEBI has issued revised guidelines for investment/trading in securities by

employees of AMC(s) and Trustees of Mutual Funds aligning the existing SEBI
regulations on Prohibition of Insider Trading.

4) SEBI has allowed investments by Mutual Funds in hybrid securities such as units
of Real Estate Investment Trust (REIT)/ Infrastructure Investment Trust (InvIT) and
also provided limits within which MF schemes can invest in the units of REITs and
InvITs.

5) SEBI modified the provisions of Consolidated Account Statement (CAS) in order

to increase transparency of information to the investors.

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6) SEBI modified the provisions pertaining to participation in derivatives market by
existing schemes of Mutual Funds.

7) SEBI amended prudential limits in sector exposure for Housing Finance

Companies (HFCs) in debt-oriented mutual funds schemes.

8) In order to make disclosure of Mutual Fund schemes performance more effective

and simple, SEBI has revised the advertisement guidelines pertaining to scheme
performance disclosures by mutual funds. SEBI has also permitted celebrity
endorsements of mutual funds at industry level for the purpose of increasing
awareness of mutual funds as a financial product.

1.7.Different Types of Mutual Fund

1. Money market funds

These funds invest in short-term fixed income securities such as government bonds,
treasury bills, bankers’ acceptances, commercial paper and certificates of deposit.
They are generally a safer investment, but with a lower potential return then other
types of mutual funds. Canadian money market funds try to keep their net asset value
(NAV) stable at $10 per security.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government bonds,
investment-grade corporate bonds and high-yield corporate bonds. They aim to have
money coming into the fund on a regular basis, mostly through interest that the fund
earns. High-yield corporate bond funds are generally riskier than funds that hold
government and investment-grade bonds.

3. Equity funds
These funds invest in stocks. These funds aim to grow faster than money market or
fixed income funds, so there is usually a higher risk that you could lose money. You
can choose from different types of equity funds including those that specialize in
growth stocks (which don’t usually pay dividends), income funds (which hold stocks
that pay large dividends), value stocks, large-cap stocks, mid-cap stocks, small-cap
stocks, or combinations of these.

4. Balanced funds
These funds invest in a mix of equities and fixed income securities. They try to
balance the aim of achieving higher returns against the risk of losing money. Most of
these funds follow a formula to split money among the different types of investments.
They tend to have more risk than fixed income funds, but less risk than pure equity

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funds. Aggressive funds hold more equities and fewer bonds, while conservative
funds hold fewer equities relative to bonds.

5. Index funds
These funds aim to track the performance of a specific index such as the S&P/TSX
Composite Index. The value of the mutual fund will go up or down as the index goes
up or down. Index funds typically have lower costs than actively managed mutual
funds because the portfolio manager doesn’t have to do as much research or make as
many investment decisions.

6. Specialty funds
These funds focus on specialized mandates such as real estate, commodities or
socially responsible investing. For example, a socially responsible fund may invest in
companies that support environmental stewardship, human rights and diversity, and
may avoid companies involved in alcohol, tobacco, gambling, weapons and the
military.

7. Fund-of-funds
These funds invest in other funds. Similar to balanced funds, they try to make asset
allocation and diversification easier for the investor. The MER for fund-of-funds tend
to be higher than stand-alone mutual funds.

Common approaches to investing

1. Top-down approach – looks at the big economic picture, and then finds
industries or countries that look like they are going to do well. Then invest in
specific companies within the chosen industry or country.

2. Bottom-up approach – focuses on selecting specific companies that are doing

well, no matter what the prospects are for their industry or the economy.

3. A combination of top-down and bottom-up approaches – A portfolio manager

managing a global portfolio can decide which countries to favour based on a top-
down analysis but build the portfolio of stocks within each country based on a
bottom-up analysis.

4. Technical analysis – attempts to forecast the direction of investment prices by

studying past market data.

1.8.Features of Mutual Funds

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 1. Portfolio Diversification/Risk Diversification

Most Mutual Funds invest in 50 to 100 different investments based on market

capitalisation, sectors and many other demographics. *Only on a rare occasion do all
stocks decline at the same time and in the same proportion. Hence, Mutual Funds
offer a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital. Even with big capital, it is extremely difficult and
time-consuming to purchase and manage a wide range of investments individually.

While investing in few shares or debentures directly is possible, the risk of potential
loss is all on the investor. However, Mutual Funds reduce the risk of loss as the
portfolio is largely diversified and the purchases are backed by research and
experience of the fund house. Moreover, the loss is also shared with other investors in
the same fund. This diversification of risk is one of the key benefits of a collective
investment instrument like mutual funds.

* Only Sector funds invest across one industry making them less diversified and
therefore more volatile.

2. Professional Management

Mutual Fund schemes are managed by qualified experienced professionals who work
towards the fund's defined objective. These financial experts are accompanied by a
specialized investment research team. The experts and their teams diligently and
judiciously study companies, their products and performance. After thorough analysis,
the best investment option most aptly suited to achieve the scheme's objective is
chosen. This continuous process adds value to your investment and helps obtain
higher returns.

While, investors may differ in their investment needs based on their financial goals,
currently, they have over 8000+ schemes to choose from to meet their goals.
Therefore, mutual funds make the best way one can invest in Equities, Debt or
Commodities (mainly Gold)

2. Affordability

A mutual fund invests generally buy and sell various asset classes in large volumes
allowing investors to benefit from lower trading costs. Investors can get exposure to
such portfolios with an investment as modest as Rs.500/-* in mutual funds through
a Systematic Investment Plan. Such portfolio would otherwise be extremely
expensive to purchase and maintain for an investor investing directly in stock market.

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*Subject to requirements of the Asset Management Company (AMC).

3. Liquidity

With open ended funds, investors can redeem (encase) all or part of their investments
at prevailing net asset value, at any point of time. Mutual Funds are more liquid than
most investments in shares, deposits, and bonds. In addition, a standardised process
enables quick and efficient redemption allowing investors to get cash in hand as soon
as possible. For closed ended schemes, investors can redeem their investments at
prevailing Net Asset Value, subject to exit load at specific intervals, if provided in the
scheme. In certain schemes, where lock in period is mentioned, investor cannot
redeem his investment until that period.

4. Transparency

Mutual Funds are the most transparent form of investment. Investors receive detailed
information and timely updates about the nature of investments made, fund manager's
investment strategy behind the investments, the exact amount invested in each type of
security, etc. Moreover, the performance of a Mutual Fund is reviewed by various
publications and rating agencies, making it easy for investors to compare one fund to
another.

5. Rupee-cost Averaging

Rupee cost averaging or SIP provides the investor a disciplined approach of investing
specific amount at regular intervals regardless of the unit price of the investment.
Therefore, the money invested fetches more units when the price is low and lesser
when the price is high. Thus, allowing you to achieve a lower average cost per unit
over time. The strategy helps smoothen out market ups and downs in the long run,
while reducing the risk of investing in volatile markets.

6. Regulations

All Mutual Funds are required to register with Securities Exchange Board of India
(SEBI). With investor interest at the helm, SEBI has laid down strict regulations to
safeguard investors against possible frauds. It is even mandatory for Mutual Fund
distributors to register with Association of Mutual Funds in India (AMFI) and abide
the norms laid by the Securities and Exchange Board of India (SEBI) and AMFI for
the distributors.

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7. Choice of Investment

Mutual Funds are the only product category that caters to every one’s needs. You will
always find a mutual fund that matches your time horizon – long, medium, or short;
and your risk-taking ability – low, medium, high. All this irrelevant of how much you
invest, be it a very small investment or a huge Lump sum. Your adviser will help
choose the right fund/s for you keeping in mind your profile.

8. Minimizing Costs

Mutual Funds help investors to benefit from economies of scale as mutual funds pool
money from vast number people with common interest and invest their money in the
relevant asset class/classes. This helps the investors share the cost of management of
their money.

1.9.Advantages of Mutual Funds

Let us first look at the advantages of mutual funds:
1. Diversification
To diversify is to reduce risk. For example, let’s say you buy milk from one milkman.
If someday he falls ill, you won’t have any milk to drink! On the other hand, let’s say
you buy milk from two milkmen. If one milkman falls ill, you’ll still have milk from
the other milkman. The chance of both the milkmen falling ill at the same time is very
low. This is why diversification is so important in investing.
Investing requires in depth research and analysis which usually takes a long period of
time. Often, people do not have so much time. Mutual funds are managed by fund
managers who invest money in a manner that allows diversification.
The advantage of mutual funds is that diversification is automatically done. Instead of
buying shares, bonds, and other investments on your own, you outsource the task to
an expert. Thus, your investments are diversified without you having spent too much
time and effort.

2. Professional Management
Investing is obviously not an easy task. Investing, be it in shares, real estate, gold,
bonds, and so on depends on a multitude of factors that constantly need to be studied
and understood. Many people often think they can understand the markets. A great
percentage of these people end up making losses.
The advantage of mutual funds is that they are managed by qualified and professional
experts. Thus, to ensure your money is invested in the right places, you only have to
choose the right mutual fund. That is much easier than constantly monitoring
investments.
Once invested in a mutual fund, you can relax with the knowledge that an expert will
make necessary changes to the portfolio whenever required.

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This isn’t to say that you shouldn’t review your investments in mutual funds. You
definitely should, but not too often. If you’ve chosen your mutual fund carefully,
reviewing it once a year is usually enough.

3. Simplicity
When investing, the availability of information and data is particularly time-
consuming. If all information would be easily available, investing would be much
simpler.
Investing in mutual funds is much easier and simpler. The research and information
collection is done by the mutual funds themselves. All you have to do then is analyse
the performance of mutual funds.
Mutual fund dealers allow you to compare the funds based on metrics such as level of
risk, return, and price. Because the information is easily accessible, you, the investor,
is able to make wise decisions.

4. Liquidity
Of all others, one of the advantages of mutual funds that is often overlooked is
liquidity. In financial jargon, liquidity basically refers to the ability of being able to
convert your assets to cash with relative ease.
Consider this: if you own a house and need cash, how long would it take for you to
sell the house and get cash in hand? It could take anywhere from a few weeks to a few
months.
Mutual funds are considered liquid assets since there is high demand for many of the
funds in the marketplace. Since this is the case, you can retrieve money from a mutual
fund very quickly. Usually, in about two days.
5. Costs
Mutual funds are one of the best investment options considering the costs involved. If
you hire a portfolio management service, you’ll typically be charged 2% to 3% of
your total investments per year. They will also take a share from your profits.
Mutual funds are relatively cheaper with 1% to 2% of expense ratios. Debts funds
have an even lesser expense. Read more about expense ratio: click here to open in
new tab.

6. Tax Efficiency
Mutual funds are relatively more tax-efficient than other types of investments. Long-
term capital gain tax on equity mutual funds is zero. That means if you sell your
investments one year after purchase, you pay no tax.
For debt funds, long-term capital gains apply when you hold them for 3 years.
Understand tax on mutual funds: click here.
Apart from this, there are a certain class of funds, called ELSS funds that are exempt
under section 80c up to a limit of Rs 1.5L. Some important features of tax saving
funds:
1. Surrogate route to direct stock markets
2. Minimum investment is Rs 500 per month

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3. Only 3-year lock-in period
4. Tax benefits under 80C up to 1.5 lac
5. The returns are tax-free too
6. Highest expected returns.

7. Selection of Mutual Funds

Mutual Funds come with different types – this allows investors to invest in particular
type depending on your goals. Depending on your goals, you can choose the
appropriate category to invest in. Here are some examples
1. For parking money for very short term, you can invest in liquid funds like Kotak
Floater Short Term
2. For investing for short-term duration like 1 to 3 years, you can invest in Ultra
Short Term Funds (example – Franklin India Low Duration Fund) or Short Term
Funds (example – HDFC Short Term Opportunities Fund)
3. For Tax saving, there are tax saving funds as we discussed in the previous section.
4. For Long-term investing there are equity funds. In equity funds also, one can
choose from high-risk funds like mid cap and small cap funds to relatively less
risky funds like large cap and diversified funds
5. For people who want to take a middle approach, there are balanced funds.
Example – HDFC Balanced Fund.

8. You can start with very small amounts

Unlike other investments like real estate or investing directly in stocks, mutual funds
allow you to start as small as Rs 500. One can start with mutual funds with as low as
Rs 500 or Rs 1000. Some funds, like Reliance Small Cap Fund allow you to start with
just Rs 100.
To check all the funds that start with Rs 500, check out this – Mutual funds to start
with Rs 500
To check all the funds that start with Rs 1000, check out this – Mutual funds to start
with Rs 1000

9. Automated investments
Because of our human behaviour, we can easily fall prey to our laziness or emotions
(fear and greed). Mutual funds allow us to set automated investing to make way. One
can start automated investments in mutual funds with any paperwork.
10. Safe and transparent
Investing in mutual funds is very transparent. All mutual funds companies come
under the purview of SEBI and they need to make necessary disclosures. All the
stocks they hold are known to you. The historical performance is all out in public.
Fund managers qualification and track record are known. The NAV (net asset value)
of the fund is updated every day. On any mutual fund page on Grow – you can look at
all the details about the mutual fund.
Mutual funds’ investments are also very safe as the transaction happens in a very
transparent way. Also when you redeem, money goes directly into your bank account,
hence no chance of someone hacking into your account.

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11. Option to choose SIP or Lump sum
Mutual funds also give you the flexibility to invest through SIP (systematic
investment plan) or through lump sum.

12. Match Your Style

If you have more knowledge about certain industries or sectors, but don’t have
enough expertise to know which companies to invest in, you can make use of sector
mutual funds. By doing so, you are ensuring your money gets invested in a certain
industry without having to research which companies to invest in.
Sector mutual funds stick to investing primarily in a certain sector only. Some
common types of sector mutual funds are mining funds, energy funds, automobile
funds, etc.

1.10.Disadvantages of Investing in Mutual Funds

There are certainly some benefits to mutual fund investing, but you should also be
aware of the drawbacks associated with mutual funds.
1. No Insurance
Mutual funds, although regulated by the government, are not insured against losses.
The Federal Deposit Insurance Corporation (FDIC) only insures against certain losses
at banks, credit unions, and savings and loans, not mutual funds. That means that
despite the risk-reducing diversification benefits provided by mutual funds, losses can
occur, and it is possible (although extremely unlikely) that you could even lose your
entire investment.

2. Dilution:

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Although diversification reduces the amount of risk involved in investing in mutual
funds, it can also be a disadvantage due to dilution. For example, if a single security
held by a mutual fund doubles in value, the mutual fund itself would not double in
value because that security is only one small part of the fund's holdings. By holding a
large number of different investments, mutual funds tend to do neither exceptionally
well nor exceptionally poorly.

3. Fees and Expenses:

Most fees that pay for the fund's management expenses (usually around 1.0% to 1.5%
per year for actively managed funds). In addition, some mutual funds charge high
sales commissions, 12b-1 fees, and redemption fees. And some funds buy and trade
shares so often that the transaction costs add up significantly. Some of these expenses
are charged on an ongoing basis, unlike stock investments, for which a commission is
paid only when you buy and sell.

4. Poor Performance:

Returns on a mutual fund are by no means guaranteed. In fact, on average, around

75% of all mutual funds fail to beat the major market indexes, like the S&P 500, and a
growing number of critics now question whether or not professional money managers
have better stock-picking capabilities than the average investor.

5. Loss of Control:

The managers of mutual funds make all of the decisions about which securities to buy
and sell and when to do so. This can make it difficult for you when trying to manage
your portfolio. For example, the tax consequences of a decision by the manager to buy
or sell an asset at a certain time might not be optimal for you. You also should
remember that you are trusting someone else with your money when you invest in a
mutual fund.

6. Trading Limitations:

Although mutual funds are highly liquid in general, most mutual funds (called open-
ended funds) cannot be bought or sold in the middle of the trading day. You can only
buy and sell them at the end of the day, after they've calculated the current value of
their holdings.

7. Size:

Some mutual funds are too big to find enough good investments. This is especially
true of funds that focus on small companies, given that there are strict rules about how
much of a single company a fund may own. If a mutual fund has $5 billion to invest
and is only able to invest an average of $50 million in each, then it needs to find at
least 100 such companies to invest in; as a result, the fund might be forced to lower its
standards when selecting companies to invest in.

8. Inefficiency of Cash Reserves:

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Mutual funds usually maintain large cash reserves as protection against a large
number of simultaneous withdrawals. Although this provides investors with liquidity,
it means that some of the fund's money is invested in cash instead of assets, which
tends to lower the investor's potential return.

9. Too Many Choices:

The advantages and disadvantages listed above apply to mutual funds in general.
However, there are over 10,000 mutual funds in operation, and these funds vary
greatly according to investment objective, size, strategy, and style. Mutual funds are
available for virtually every investment strategy (e.g. value, growth), every sector
(e.g. biotech, internet), and every country or region of the world. So even the process
of selecting a fund can be tedious.

1.11.Risk Factors

1. Standard Risk Factors:

 Mutual Funds and securities investments are subject to market risks and there is no
assurance or guarantee that the Fund’s objective will be achieved.
 Investment in Mutual Fund Units involves investment risks such as trading volumes,
settlement risk, liquidity risk, default risk including the possible loss of principal.
 As the price / value / interest rates of the securities in which the scheme invests
fluctuate, the value of your investment in the scheme may go up or down.
 The NAV of the Scheme’s units may be affected by change in the general market
conditions, factors and forces affecting capital markets in particular, level of interest
rates, various market related factors and trading volumes.
 Past performance of the Sponsor/AMC/Mutual Fund does not guarantee future
performance of the scheme.
 The name of the Scheme does not in any manner indicate either the quality of the
scheme or its future prospects and returns.
 State Bank of India, the sponsor, is not responsible or liable for any loss resulting
from the operation of the scheme beyond the initial contribution of Rs. 5 Lakhs made
by it towards setting up the Fund.
 The Scheme is not a guaranteed or assured return scheme
2. Common Scheme Specific Risk Factors

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a. The Trustees, AMC, Fund, their directors or their employees shall not be liable for
any tax consequences that may arise in the event that the scheme is wound up for the
reasons and in the manner provided under the Scheme Information Document (SID)
& Statement of Additional Information (SAI).

b. Redemption by the unit holder due to change in the fundamental attributes of the
Scheme or due to any other reasons may entail tax consequences. The Trustees, AMC,
Fund their directors or their employees shall not be liable for any tax consequences
that may arise.

c. The tax benefits described in the SAI & SID are as available under the present
taxation laws and are available subject to relevant condition. The information given is
included only for general purpose and is based on advice received by the AMC
regarding the law and practice currently in force in India and the Investors and Unit
Holders should be aware that the relevant fiscal rules or their interpretation may
change. As in the case with any investment, there can be no guarantee that the tax
position or the proposed tax position prevailing at the time of the investment in the
Scheme will endure indefinitely. In view of the individual nature of tax consequences,
each Investor / Unit holder is advised to consult his/her/its own professional tax
advisor.

d. The Mutual Fund is not assuring any dividend nor is it assuring that it will make
any dividend distributions. All dividend distributions are subject to the availability of
distributable surplus and would depend on the performance of the scheme.
e. Investments under the scheme may also be subject to the following risks.

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1.12.Regulation and operation

1. United States

In the United States, the principal laws governing mutual funds are:

 The Securities Act of 1933 requires that all investments sold to the public,
including mutual funds, be registered with the SEC and that they provide potential
investors with a prospectus that discloses essential facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of securities,
including mutual funds, report regularly to their investors; this act also created the
Securities and Exchange Commission, which is the principal regulator of mutual
funds.
 The Revenue Act of 1936 established guidelines for the taxation of mutual funds.
Mutual funds are not taxed on their income and profits if they comply with certain
requirements under the U.S. Internal Revenue Code; instead, the taxable income
is passed through to the investors in the fund. Funds are required by the IRS to
diversify their investments, limit ownership of voting securities, distribute most of
their income (dividends, interest, and capital gains net of losses) to their investors
annually, and earn most of the income by investing in securities and
currencies.[11] The characterization of a fund's income is unchanged when it is
paid to shareholders. For example, when a mutual fund distributes dividend
income to its shareholders, fund investors will report the distribution as dividend
income on their tax return. As a result, mutual funds are often called "pass-
through" vehicles, because they simply pass on income and related tax liabilities
to their investors.
 The Investment Company Act of 1940 establishes rules specifically governing
mutual funds.
 The Investment Advisers Act of 1940 establishes rules governing the investment
advisers that serve as the fund sponsor or fund Management Company (often
referred to as the fund manager).
 The National Securities Markets Improvement Act of 1996 gave rulemaking
authority to the federal government, pre-empting state regulators. However, states
continue to have authority to investigate and prosecute fraud involving mutual
funds.
Open-end and closed-end funds are overseen by a board of directors, if organized as a
corporation, or by a board of trustees, if organized as a trust. The Board must ensure
that the fund is managed in the interests of the fund's investors. The board hires the
fund manager and other service providers to the fund. The fund sponsors trades (buys
and sells) the fund's investments in accordance with the fund's investment objective.
Funds that are managed by the same company under the same brand are known as a
fund family or fund complex.
The sponsor or fund management company, often referred to as the fund
manager, trades (buys and sells) the fund's investments in accordance with the fund's
investment objective. A fund manager must be a registered investment adviser. Funds
that are managed by the same company under the same brand are known as a fund
family or fund complex.

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2. European Union
In the European Union, funds are governed by laws and regulations established by
their home country. However, the European Union has established a mutual
recognition regime that allows funds regulated in one country to be sold in all other
countries in the European Union, but only if they comply with certain requirements.
The directive establishing this regime is the Undertakings for Collective Investment in
Transferable Securities Directive 2009, and funds that comply with its requirements
are known as UCITS funds.

3. Canada
Regulation of mutual funds in Canada is primarily governed by National Instrument
81-102 "Mutual Funds." NI 81-102 is implemented separately in each province or
territory. The Canadian Securities Administrator works to harmonize regulation
across Canada.

4. Hong Kong
In the Hong Kong market: mutual funds are regulated by two authorities.

 The Securities and Futures Commission (SFC) develops rules that apply to all
mutual funds marketed in Hong Kong.
 The Mandatory Provident Funds Schemes Authority (MPFA) rules apply only to
mutual funds that are marketed for use in the retirement accounts of Hong Kong
residents. The MPFA rules are generally more restrictive than the SFC rules.

5. Taiwan
In Taiwan, mutual funds are regulated by the Financial Supervisory Commission
(FSC).

1.13.Opportunities of Mutual Fund Industry

In any industry, innovation and improvements happen when the rules are changed.
Large-scale environmental changes such as those that have taken place in the last
three years must lead to innovation and evolution.
 Newer leaner operating structures will have to evolve which will entail the use
of technology that helps an AMC (Asset Management Company) reach the
retail end user with solutions that enable transactions via platforms such as
mobile or online platforms. This will not only give greater direct access but
will also help AMCs to better understand investor behaviour and create the
appropriate environment and products to move towards long and healthy
relationships with the investors.

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 As the industry evolves, outsourcing an increasing number of functions to
reduce the head-count and increase efficiency might be the norm. All aspects
of operating costs must be examined for efficiencies.

 A rational look at schemes of an AMC by their management teams is needed

to better understand the mix, the cost and the benefits – to the investors as well
as to the AMCs.

 Agile product design, re-positioning of ETFs (Exchange Traded Funds) and

SIPs (Systematic Investment Plans)

 Better communication of scheme returns on a relative basis to investors is

required. The alpha achieved is insufficiently communicated or understood.

 The new AIF (Alternative Investment Fund) guidelines will create

opportunities to broaden the revenue base without commensurate cost
increases.

 The asset management industries in the US and in Japan have had their “401
k” (a type of retirement savings account in the US) moments. In the late 70s
market regulators in the US permitted pension funds (later 401K) to invest a
portion of their funds (at the discretion of the individual) into mutual fund
schemes. This saw a huge upsurge in the AUM of the industry as a whole.
Similarly the Japanese asset management industry went on a growth surge
around the turn of the century when the pension and retirement funds were
permitted to be invested in the asset management schemes. The EPF
(Employee Pension Fund) in India is a huge pool of long-term investible
funds. These are expected to yield high returns. If the right mechanism were to
be created to channelize even a small proportion of the funds to be invested in
the Indian mutual fund schemes (specific schemes can be selected if required),
it will provide a boost to the industry, apart from maintaining the more
important objective of having the funds managed by a regulated sector and by
persons with a track record. Imagine the change if 20% of the 3, 00,000 crore
INR were permitted to be invested in the Indian capital markets via the asset
management industry. It will be the industry’s „401K‟ moment. A similar
impact could be generated by introducing the concept of individual retirement
accounts (IRAs). Some of the investment products available are in the nature
of retirement benefit plans (EPF, PPF and now NPS (National Pension Fund)
as well as certain insurance products). Avenues such as EPF are available to
only a certain section of the population. To encourage people to save for the
post retirement period IRAs can be offered. The investments into such
schemes could be self-directed, flexible and in specific circumstances tax
deductible. The fund so created could be available tax free (EEE) at the age of
retirement. Such a concept exists in the mature western markets such as the
US and contributes to about 20% of the assets under management!

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 The recently announced Rajiv Gandhi Equity Savings Scheme is another
opportunity for the mutual fund industry. We believe that given the low
financial awareness of such new or first time investors in the far flung regions,
it is imperative that these investors are channelized into the markets via mutual
funds rather than directly investing into equities themselves!

 Advisory services to off-shore funds should be explored further as an area of

revenue diversification. More could be done in this direction.

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 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,

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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

 Prasad Deepak Umeshfinal year M.com part 2 in Ismail YusufCollege of

Arts, Science & Commerce, Mumbai University, has completed his Bachelor
in Commerce from Mumbai 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.

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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.

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

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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. 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 newspapers 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 data’s to know the clear picture in an easy way. So
that internal control can be made effective

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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
analysed 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 a 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 management’s operational and

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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

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 CHAPTER 3
REVIEW OF LITERATURE

3.1 Introduction
This chapter attempts to review literature in the area of internal control systems
inARDBs. 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.
1.Theoretical Framework and Effectiveness of Internal Auditing
In order to determine internal audit efficiency evaluation principles it is important to
analyse 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

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(6) Theorganization’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”.
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 don’t get goofed up.
Internal control is a process effected by an entity’s 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 Tread way Commission (COSO).
Expanding on the COSO definition, Financial Management Journal (2005), said
Internal control represents an organisation’s 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.

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 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

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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 analysing 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 inAgriculture 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.

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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 Systemof 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 sine–qua-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 labour and decentralization of responsibilities

3.3.4 Introductionof 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. Bank’s operation becomes supervisory and regulatory concern.

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3.3.4.1 Broad Objectives ofICS:

The ICS is linked to all functional, administrative areas of bank’s 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 Howto 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

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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 ofICS:

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 vein-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 Managing Director

Riskmanagement Concurrent/ internal audit/ inspection Vigilance

Statutory cell Cell
audit, NB 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.

3.4Function 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.

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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
andManagement. The cell will coordinate during conduct of inspection/audit by
externalAgency 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:

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_ 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
CollectionBalance,
_ 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
In keeping 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.

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_ 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 a 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 providedto 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 committeeMay award marks to the report in the following parameters in
100 marks scale:

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Fig. 1.2 Audit Committee Report

Parameters Maximum Marks obtained

Quality and contents of Inspection Report

Presentation

Accuracy

New Features (detection of frauds)

Timely issue of IR

TOTAL : 100

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 Marks Remarks

obtained

Cash retention 5

Handling of keys 5

Deposits 5

Loans 15

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Operational risk management 30

Control on income leakage 20

External compliance 5

Business strategy and customer service 5

Working result and net worth 10

Total 100

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 Category

Above 80% A

60 to 80 % B

50 to 60% C

Below 50% 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

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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.

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. Sometimes 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

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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 wilfully 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.

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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-a-
vis 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 lodgement, in safe, in transit
(iii) Arrangingfor separate enclosures for cashiers,
(iv)Properlodgement of duplicate set ofvault/safe keys and periodical rotation thereof,
(v) Posting of guards
(vi) InsuranceOf cash in safe/counters/ transit
(vii) Surprise verification of cash at counter/vault byan 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 scraps stolen from the bank custody to

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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.

C. Loans and advances

With active support of delinquent staff member, loans are disbursed against forged
Land documents, loans to nominal members which are mutualised 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.

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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 aFraud:

Frauds comes about occasionally. Sometimes 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 fraudster. 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:

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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 machinerywithout
loss of time to assess the amount of losses and modus operandi ofFrauds. The
modusoperandi interalia covers a brief history of incidence, how itCame to light, the
process adopted by the delinquent in defrauding the bank,Technique adopted by the
delinquent to escape the internal check systemIncluding 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 of his properties and properties in the names of its spouse,
Children and close relatives.

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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 mollified 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

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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 banks
Employees should personally explain them to the semi-literate/illiterate customers.

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 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 stronglydisagree with the effectiveness of
monitoring as an internal control measure.
Tab. 4.1

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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

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.

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Tab 4.3

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 Bank’s 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

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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.

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Tab 4.5

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.

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Tab 4.6

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.

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Tab 4.7

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.

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Tab 4.8

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.

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Tab 4.9

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

 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.

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Tab 4.10

4.4. Information and Communication Systems

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

 Majority of the Staff’s 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.

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Tab 4.11

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

 Majority of the Staff’s 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.

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Tab 4.12

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.

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Tab 4.13

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 management

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

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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.

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Tab 4.15

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.

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Tab 4.16

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 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

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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 bank’s 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 bank’s 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.

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 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:-

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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

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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 bank’s 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)

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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

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communicating a balanced and understandable account of the banks 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.

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 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.

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 BIBLIOGRAPHY

WEBSITES:

 http://www.newpaltz.edu/internalcontrols/evaltool.pdf

 http://www.studymode.com/subjects/'internal-control-as-a-tool-for-fraud-
management

 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

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 APPENDIX

QUESTIONAIRE

Dear Sir / Madam,

I am “SINGH PAWAN MANOJ KUMAR” pursuing M.com Part II

(Accountancy) from ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND
COMMERCE JOGESHWARI EAST. As part of our curriculum I have to do
project work in the area of marketing. Therefore, I am working on the project
titled “SBI MUTUAL FUND” under the supervision of faculty. I assure you that
data will be used for academic purpose only and strict secrecy will be maintained.
I would also request to share only relevant information relating to my topic.

Thanking You

A. Personal Data

1. Sex:

Male [ ]

Female [ ]

2.Age:

19 or less [ ]

20─29 [ ]

30─39 [ ]
40─49 [ ]
50 or more [ ]

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 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 [ ]

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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 bank’s 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 [ ]

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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 [ ]

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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 [ ]

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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 [ ]

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Disagree [ ]

Strongly Disagree [ ]

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