ODA BULTUM UNIVERSITY

COLLEGE OF BUSINESSAND ECONOMICS

DEPARTEMENT OF ACCOUNTING AND FINANCE

INTERNAL CONTROL OVER CASH OF COOPERATIVE BANK OF

OROMIA (A CASE STUDY ON COOPERATIVE BANK OF OROMIA
CHIRO BRANCH)

A RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENT FOR BACHELOR OF ART DEGREE IN
ACCOUNTING AND FINANCE

BY:
JEMAL MOHAMMED ID NO. 1646/11

ADVISOR: ISMAEL H. (MA)

October, 2021

Chiro, Ethiopia
 ABSTRACT

The study will focus on internal control over cash in Cooperative Bank .The general objective of
doing this research is to asses’ internal control over cash. To conduct the study both primary
and secondary source of data is used to get full information. The data will be analyzed through
descriptive method by using table and percentage forms. Finally some sort of conclusions and
recommendation will be forwarded based up on the identified problems. The conclusion and
recommendation that will give by the researcher uses for various institutions for strength their
internal control over cash.

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 TABLE OF CONTENT
ABSTRACT.....................................................................................................................................i
TABLE OF CONTENT..................................................................................................................ii
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1. Background of the Study.......................................................................................................1
1.2. Background of the Organization...........................................................................................2
1.3. Statement of the Problem......................................................................................................2
1.4. Research Questions...............................................................................................................3
1.4. Objective of the Study...........................................................................................................3
1.5. Significance of the Study......................................................................................................3
1.6. Scope of the Study................................................................................................................4
1.7. Organization of the Study.....................................................................................................4
CHAPTER TWO.............................................................................................................................5
LITERATURE REVIEW................................................................................................................5
2.1 Definition of internal control.................................................................................................5
2.2. Internal Control.....................................................................................................................6
2.3. Objectives of internal control over cash...............................................................................6
2.4. Internal control over cash receipts........................................................................................6
2.4. Internal Control Components................................................................................................8
2.5. Cash Disbursements..............................................................................................................9
2.6. Internal control of petty cash funds.....................................................................................10
2.7. Internal Control over Cash on Deposit...............................................................................10
CHAPTER THREE.......................................................................................................................11
RESEARCH DESIGN AND METHODOLOGY.........................................................................11
3.1. The Research Design..........................................................................................................11
3.2. Data Source.........................................................................................................................11
3.3. Data collection Methods.....................................................................................................11
3.4. Sample Size and Sampling Technique................................................................................12
3.5. Method of Data Analysis....................................................................................................12
BUDGET AND TIME SCHEDULE.............................................................................................13

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 4.1. Budget schedule..................................................................................................................13
4.2 Time Schedule......................................................................................................................14
5 .REFERENCES..........................................................................................................................15

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 CHAPTER ONE

INTRODUCTION

1.1. Background of the Study

Statement of accounting standard (SAS, No 55) defines internal control as a combined plan,
method and procedures used to safeguard asset, promote efficiency of operation and adherence to
prescribed policies and directives.

On the other hand financial performance can be defined as the process of measuring the results
of a firm's policies and operations in monetary terms (Trivedi, 2016). Measuring financial
performance represents a vital mechanism for improving the work of organization since these
organizations face complicated challenges in delivering their programs and services. To measure
the financial performance of organization profitability or liquidity used.

In accounting, the term cash means checks, money orders and funds on deposit in a bank,
currency and coins. A very large number of cash transactions in modern businesses involve
checks. The paper handling and recording of cash receipts and cash payments are a vital concern
in all types of business, services business, merchandizing business and manufacturing business.
Cash is an essential asset for every firm, but it is also the asset that is most easily stolen lost or
mishandled. Thus a well-managed business has careful procedures to control cash and to record
cash transactions.

Internal control encompasses the policies and procedures that an organization establishes to
ensure that it operates in accordance with management’s intentions and that accountability is
maintained for all transactions. This includes the methods adopted by the organization to safe
guard its assets, to check the accuracy and reliability of its accounting data, to promote
operational efficiency, and to encourage adherence to prescribed managerial policies.

Internal control are put in to place largely to allow management to monitor operations, identify
business risks, and generate pertinent financial and nonfinancial information, or internal controls
are designed and implemented so that management can run the organization. Internal controls
also ensure that responsibilities are met.

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Every business should have a system of internal control over cash that is specifically worked to
its needs. The accountant plays a vital role in designing such a system and works with
management to establish and monitor the system. In developing internal control over cash
procedures for cash receipts and cash payments of a business, accountants follow certain basic
principles. This study will be conducted to assess the cash control system of Cooperative Bank of
Oromia chiro Branch.

1.2. Background of the Organization

Cooperative Bank of Oromia was registered commercially in 2004 in accordance with article 304
of commercial code of Ethiopia. It was established in line with proclamation number 84/1994
with authorized capital of ETB 300 million. It started operation with paid up share capital of birr
112 million. The total asset increased to 6.54 billion from 3.67 in the year 2012 and the total
deposit grew significantly to 4.47 billion from 2.8 in the year 2012/13.

The vision of the Cooperative Bank of Oromia is to be competent, reputable, and socially
responsible bank in Africa as well as their mission is to provide full-fledged and customer
responsive banking service for cooperative societies, individuals and other entities with special
emphasis to agricultural and agro- based business financing and to maximize shareholders value
through use of competent and disciplined employees, visionary leaders and modern banking
technologies.

Now the maximum customer’s satisfaction in order to optimally meet the need of customers and
defiantly manage business is committed to enhancing long term share holder. The other is to get
quality customers employees are very important quality customers service is possibility only
through motivated and skilled employees.

1.3. Statement of the Problem

The study tries to investigate the internal control over cash of cooperative bank of Oromia chiro
branch. The organization has many goals, in order to achieve the objectives of the bank, it has to
control resources particularly its cash. Because cash is the most liquid asset easily mishandled or
susceptible to theft. As cash has highest risk and is difficult to control it needs extensive and tight

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and effective internal control procedures. Error in any account can result in errors in cash
accounts, and errors in cash accounts indicate probable errors in other account principally
account payable debit sand account receivable credits (Arthur W. Homes 2015). Those cash
related activities will be difficult to the indicated organization to be profitable in order to solve
the problem that arises due to effective control system over cashes. Thus, it’s important to assess
internal control over cash of cooperative bank of Romania chiro branch.

1.4. Research Questions

1. What are the internal cash control system designed and implemented in the cooperative
bank of Oromia chiro branch?
2. How CBO Chiro branch evaluate the internal cash control over cash receipt?
3. Is the CBO Chiro branch built strong internal cash control system over cash payment?
4. What recommendations would be suggested on the cash receipt and cash payment
procedures of the bank?

1.4. Objective of the Study

1.4.1. General Objective

The general objective is to assess internal control over cash in case of cooperative bank of
Oromia chiro branch.

1.4.2. Specific objectives of the study

The specific objectives of the study are:

 To identify the cash control system designed and implemented in the cooperative bank of
Oromia chiro branch.
 To evaluate the internal cash control over cash receipt.
 To assess the internal cash control over cash payment.
 To give some recommendation on the cash receipt and cash payment procedures of the
bank.

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1.5. Significance of the Study

The significance of the study for the organization is to identify its weakness and their strength for
further improvements on internal control system over cash with the expectation of resulting in
general view of internal policies and procedures and their practical world application. The reader
can identify the weakness and strength of the internal control cash performance of cooperative
bank of Oromia.

1.6. Scope of the Study

Since internal control has many factors like internal control over plant asset, inventory, non-cash
payment, and non-cash receipts etc. The research will be focused only on the internal control
over cash that cash receipts and cash payments for the cooperative bank of Oromia chiro branch.

1.7. Organization of the Study

The paper contains three separate chapters. The first chapter is the introductory part which
includes background of the study, background of the organization, statement of the problem,
objective of the study, significance of the study, scope of the study, limitation of the study,
organization of the paper. The second chapter is literature review which is the general
explanation and reference relating with the topic. Chapter three is about the methodology that
will used to do the research.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Definition of internal control

Accounting Principle Board (APB) defines internal control as all the policies and procedures
(internal records) adopted by the directors and management of an entity to succeed in their
objective of ensuring, as far as practicable.

AU Section 319 and Committee of Sponsoring Organizations (COSO) defines internal control as
a process, effected by the entity's board of directors, management and other personnel, designed
to provide reasonable assurance regarding the achievement of objectives' effectiveness and
efficiency of operation, Reliability of financial reporting and Compliance with applicable laws
and regulations. Internal control is a procedure or policy put in place by management to
safeguard assets, promote accountability, increase efficiency, and stop fraudulent behavior. In
other words, an internal control is a process put in place to prevent employees from stealing
assets or committing fraud.

Internal control is a system or plan of accounting and financial organization within a business
comprising all the methods and measures necessary for safeguarding its assets, checking the
accuracy of its accounting data or otherwise substantiating its financial statements, and policing
previously adopted rules, procedures, and policies as to compliance and effectiveness (Merriam-
Webster,2018).

As cash is the most liquid of all assets it is always attracted auditors attention for much good
reason. The ease with which money can be transactions directly or indirectly affect cash and the

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diverse nature of the process involved that is billings, collections, deposited and disbursement
implementing internal control in the area of cash management very difficult. It is the most likely
to be diverted and improperly used or purloined by employees.

Cash consists of coins, currency (Paper money) checks, money on hand or on deposit in a bank
or similar depository. The general rule is that if the bank will accept it for deposit is cash. Just as
cash is the beginning of a company’s operating cycle, it is usually the starting point for
company’s system of internal control. Cash is the one asset that is readily convertible in to any
other type of asset (Weygant,et.al, 2011).

2.2. Internal Control

According to Magu & Kibati (2016), Internal Control consists of the plan of organization and all
the related methods and measures adopted with in a business to safeguard its assets from
employee theft, robbery and unauthorized use. Enhance the accuracy and reliability of its
accounting records by reducing the risk of errors (unintentional mistakes) and irregularities
(intentional mistakes and misrepresentations) in the accounting process.

Internal control is comprehensive in that it addresses the achievement of objectives in the area of
financial reporting, operating, and compliance with laws and regulations. Many people
interpreted the term internal control as the steps taken by a business to prevent fraud both
misappropriation of assets and fraudulent financial reporting (Whittington, et.al, 2011).

2.3. Objectives of internal control over cash

The objectives of internal control over cash are to make sure whether the organization is
safeguarding and reporting cash in the appropriate manner. As cash has highest risk and is
difficult to control it needs extensive and tight and effective internal control procedures.

Objectives of examining cash transactions, cash funds and cash balances in banks is to establish
the validity and propriety of the cash transactions and to properly state the cash and hand for
purposes of financial statement presentation. Cash is no more valuable than any other asset of
equal current market price. The examination of cash and cash transaction is important because

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cash is a favorite item for theft: the majority of all business transactions involves a cash count or
terminates in it. Error in any account can result in errors in cash accounts, and errors in cash
accounts indicate probable errors in other account principally account payable debit sand account
receivable credits (Arthur, et.al, 2015).

2.4. Internal control over cash receipts

Cash receipts are the main part of the revenue generating cycle and with a high possibility of
misappropriation. The accuracy of the recorded receipt as well as the omissions of some receipts
before recording must be the area where the auditor has to concentrate and give a high priority
(Arthur, 2015).
Cash receipts may result from a variety of source: cash sales, collections on account from
customers; the receipt of interest, rents and dividends, investments by owners bank loans; and
proceeds from the sales of non current assets. (Cook, 1980).

2.3.1. Cash Sales

Control over cash sales is strongest when two or more employees (usually) sales clerk and a
cashiers participate in cash transaction with a customer Restaurants and cafeterias often use a
centrally located cashier. In many retail establishments, the nature of the business is such that
one employee must make over the counter sales, deliver the merchandise, receive cash, and
record the transaction in this situation dishonesty may be discouraged by proper use of cash
registers electronic point of sales system (Arens and Loebbecke, 2000).

2.3.2. Electronic Points of Sale

Many retail stores use various types of electronic cash registers, including online computer
terminals. The sales person need only scan the code for the register to record the sales at the
products price which is stored in computer. Thus, the risk of a sales person recording sales
person recording sales at erroneous price is substantially reduced. Besides providing strong
control over cash sales, electronic registers often may be programmed to perform numerous of
the control function (Whittington and Pany, 2001).

2.3.3. Collection from credit Customers

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In many manufacturing and whole sales companies, cash receipts include many checks received
through the mail. This situation poses little threat of defalcation unless one employee is
permitted to receive and deposit these checks and also to record the credits to the customer’s
accounts (Arens and Loebbecke, 2000).

The control system must allow the incoming mail to be opened in the mail to be opened in the
mail room where the employee prepares a control listing of the incoming cash receipts which
shows the amount received and identify the customers by name and account number. One copy
of the control listing will be forwarded to the controller another copy to the cashier and the
remittance advices and control list will be given to the employee who is responsible for the
customer’s accounts (Whittington and Pany, 2001).

2.4. Internal Control Components

The components of internal control are no different in many sources. Some sources refer them
the elements or frameworks while some other refer it standards of internal control. The
Committee of Sponsoring Organizations (COSO ,2013), Act of Sarbanes Oxley and American
Institute of Certified Public Accountants (AICPA) claim effective internal control should
primarily have five elements namely; control environment, control activities, risk assessment,
information and communication and monitoring.

2.4.1. Control activity

Control activities are the actions established through policies and procedures that help ensure
that management’s directives to mitigate risks to the achievement of objectives are carried out.
Control activities are performed at all levels of the entity, at various stages within business
processes, and over the technology environment. Segregation of duties is typically built into the
selection and development of control activities. Where segregation of duties is not practical,
management selects and develops alternative control activities (COSO, 2013).
2.4.2. Risk Assessment

Risk assessment also requires management to consider the impact of possible changes in the
external environment and within its own business model that may render internal control

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ineffective (COSO, 2013). A precondition to risk assessment is the establishment of objectives,
linked at different levels of the entity.
2.4.3 Monitoring

Monitoring should be part of the daily activities of the bank but also include separate periodic
evaluations of the overall internal control process. The frequency of monitoring different
activities of a bank should be determined by considering the risks involved and the frequency
and nature of changes occurring in the operating environment.
2.4.4. Corporate Governance

A bank or financial institution shall establish an effective corporate governance framework

which defines the character of the institution and promotes an organizational culture that
provides the foundation for effective internal control and internal audit (Ndiwa and Kwasira,
2014).

2.5. Cash Disbursements

Cash may be disbursed for a variety of reasons such as to pay expenses and liabilities, or to
purchase assets. Generally, internal control over cash disbursements in more effective when
payments are made by check, rather than by cash, except for incidental amounts that are paid out
of petty cash. Payment by check generally occurs only after specified control procedures have
been followed in addition, the “paid’ check provides proof of payment (Weygent, et.al, 1999)

Cash disbursements are the out flow of money from the organization for the services or goods
received in verifying the cash disbursement records, all items are not selected. Some individual
items will be selected for sampling and using the sampling techniques the records will be tested.

2.5.1. Control of a voucher system

Most medium and large companies use a voucher system as a part of their internal control over
cash disbursements. A voucher system is an extensive network of approvals by authorized
individuals acting independently to ensure that all disbursements by check are proper.
The system begins with the authorization to incur the cost or expense and ends with the issuance
of a check for the liability incurred. A voucher is an authorization from prepared for each
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expenditure in a voucher system. Vouchers are required for all types of cash disbursements
except those petty cash. The voucher is prepare din the account payable department (Kaiso, et.al,
1999)

2.5.2. Electronic Funds Transfer System

Electronic funds transfer is a disbursement system that uses wire, telephone, telegraph, or
computer to transfer cash from one location to another. Use of electronic funds transfer is quite
common. For example the authors receive no formal payroll checks from their universities.
Regular payments such as these for house, car or utilities are frequently made by electronic funds
transfer (Robert, 2016).

Financial institutions have developed electronic fund transfer system that process funds related
from sections for customers as an alternative to paying by checks increasingly, electronic data
interchange systems, which always the interchange of data from one company’s computer to
another’s are electronically transferring funds between companies bank account (Kaiso,
et.al,1999).

2.6. Internal control of petty cash funds

Internal control over payments from an impress petty cash fund is achieved at the time the fund
is replenished to its fixed balance rather than at the time small amounts of cash are handed out.
When the custodian of a petty cash fund requests replenishment of the fund, the documents
supporting each disbursement should be reviewed for completeness and authenticity, and defaced
or perorated to prevent rouse. Audit tests of petty cash emphasize transactions rather than the
year – end balance (Mary and Byaruhanga, 2014).

The auditors may test one or more replenishment transactions by examining petty cash vouchers
and verifying their numerical sequence. Petty cash funds are sometimes kept in the form of
separate bank accounts. The bank should be instructed in writing not to accept for deposit is such
an account any checks payable to the company. The deposit will be limited to checks to
replenish the fund and drown payable to the company. The deposits will be limited to checks to

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replenish the fund and drawn payable to the bank or to the custodian of the fund. The prohibition
against deposit of checks payable to the company is designed to prevent the routing of cash
receipts into petty cash since this would violate the basic assumption of limited disbursements
and review at time of replenishing the fund (Whittington and Pany; 2001).

2.7. Internal Control over Cash on Deposit

The verification of cash on deposit starts at the verification day of cash on hand. For verifying
cash on deposit cut off data is needed which records all cash receipts and disbursements
preceding the verification date. The bank reconciliation will be greed with the totals of the cash
receipts total in the working paper, which has the dated, number and amount of the last cheques
written.

The controller must verify all the reconciling items that is the balance in the general ledger and
on the bank statement. The most common reconciling items are: deposit in transit, outstanding
cheques and other reconciling items (Cook, 1980).

CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

This chapter describes the research methodology of the study that will help to achieve the
objective of the study. Research methodology is the procedural plan that will adopt by the
researcher to validly, objectively, economically and accurately answer the research questions.

For the overall success and effectiveness of the study objective, descriptive research will apply to
do the research. Because descriptive research will aim at answering what, when, who and how
type of question about the research.

3.1. The Research Design

For this study descriptive design type of research, will going to be used. Because, the aim of the
study will describes the internal control over cash of cooperative bank of Oromia Chiro branch.

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3.2. Data Source

3.2.1. Primary Source

The primary source will be used to gather data by using the interview and questionnaire from
internal audit committee, managements, and other financial staff members of cooperative bank of
Oromia Chiro branch.

3.2.2. Secondary Source of Data

The secondary source that the researcher will use are reference books, related written materials
that support to the research and organizations manual.

3.3. Data collection Methods

This study will use questionnaire which is a widely used and useful instrument for collecting
survey information. The questionnaire will develop in two sections. The first one will contain
general aspect of the respondent and the second one will develop based on standard of internal
control over cash. The first section will plan to evaluate whether the status and experience of the
respondents has an effect on internal control system. The second section will aim evaluate the
effect of the standards of the controls are in those samples of cooperative bank of Oromia Chiro
branch.

The researcher will use primary and secondary data collection methods. The researcher will also
collect data by interviewing key responsible officers to get more detailed information about the
issues related with this research.

3.4. Sample Size and Sampling Technique.

From a total population of Twenty five employees of cooperative bank of Oromia Chiro branch
the population for this study includes all level of manager and employees working in indicate
department that organization to conduct the study sample of employees will be taken as sample
from the whole. The total number of employees within the organization is 24 employees.
However, the researchers select 21 populations (87%).

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3.5. Method of Data Analysis

The researcher uses percentage to analyze the responses of the respondents and it presents in the
form of tables and graphs to provide comprehensive listing and discussions of the internal
control over cash in the cooperative bank of Oromia Chiro branch.

BUDGET AND TIME SCHEDULE

4.1. Budget schedule

Table 1. Budget schedule

No, Item Quantity Cost per unit (birr) Total cost (birr)

1 Stationary material

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 -paper 0.5pad 100 50

-pens 7 BIC 3.50 24.50

-flash 1 160 160

2 Telephone expense 60 minute 0.75 45

3 Printing 40 page 4 160

4 Transportation 10 times 100 1000

5 Other cost -- 600 600

Total 2039.5

4.2 Time Schedule

Table 2. Time Schedule

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Activity by phase Time (month) Remark

Sept Oct Nov Dec Jan Feb

Phase 1

Identifying the topic of research 

Developing proposal research 

Writing full research proposal 

Phase 2

Reviewing related literature 

Collecting data for actual study 

Phase 3

Summarize and tabulating data 

Analyzing and interpreting data 

Writing discussion &conclusion 

Writing draft research report 

Revision Writing final research report 

Final submitting research report 

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 5 .REFERENCES

Arens. Lobeck. 2001. Auditing integral Approach 9th. Edition

Arthur W. Homes, E.F (1966), Principle of Auditing, 12th edition.

John W.Cook, E.F (1980), Auditing Philosophy technique, 5th edition

Mary M.,Albert O.,Byaruhanga J.,(2014),Effect of internal control systems on financial

performance of Sugarcane out grower companies in Kenya’, IOSR Journal Of Business
And Management,Vol.1

O. Ray Whittington and Kurt Pany, E.F. (2001), Principle of Auditing, 13th edition

Robert OgutiEtengu (2016), Internal Control System and Financial Performance in Non-
Governmental Organizations in Uganda: A Case Study of International Union
forConservation of Nature,International Journal of Contemporary Applied Sciences
(ISSN: 2308-1365) Vol. 3, No.2

Trivedi, S.M. (2010), An analysis of financial performance of state road Transport Corporation in
Gujarat. PhD.Thesis, Saurashtra University

Weygant, Kaiso and Kimmel, E.F (1999), Acting Principles, 5th edition.

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 ODA BULTUM UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Dear Respondents!

The objective of this questionnaire is to collect relevant data on internal cash control in your
organization. Your response will be used only for conducting research for the completion of BA
Degree in accounting your response will be kept confidentially and will not be used for any other
purpose. Therefore, you are kindly requested to respond by putting “” mark on the box and
give additional explanation of required. I would like to thank you in advance for your
cooperation in filling this questionnaire.

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I. General Questions

1. Gender Male Female

2. Age of the respondent 10 – 25 26 – 35 above 35

3. Income Level

Birr 650 – 1000

Birr 1001 – 1500

Birr 1501 – 3000

Above Birr 3000

4. Your position in the bank _______________________________________________________

________________________________________________________________________

5. Educational Status

Diploma/TVET

First degree

Above first degree

6. Employeement

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 Permanent Temporary

7. Experience

1 – 3 years 7 – 10 years

4 – 6 years above 10 years

II. Control over cash general

8. Is there a cash control manual /Regulation/ procedure in the branch?

Yes No

9. If yes to what extent you understand the manual /Regulation of the branch

Very well

Fair

I did not read

10. Do you think there is a proper system over internal control over cash?

Yes No

11. Is there any training organized over internal control over cash procedure of the bank?

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 Yes No

III. Internal Control over Cash Collection

12. What are sources of cash collection in the bank?

Customers deposit

Local transfer

Service charge

Any other __________________________________________________

13. In which method did you collect the cash receipts?

__________________________________________________________________

14. Does the organization get some difficulties in collecting in cash?

Yes No

15. If yes what manare did it take?

__________________________________________________________________

16. How many times do you count the cash?

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 One times Three times

Two times More than three times

17. Did you use any instrument in counting cash?

Yes No

18. If yes which instrument _________________________________________________

19. Do you make dally reconciliation of cash collected?

Yes No

IV. Control over cash payment

20. What are the possible causes of cash payment?

Customers withdraw

Bank loan

Transfer

Any other _____________________________________________________

21. In which method did you use to cash payment?

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 ____________________________________________________________________

22. How many times do you count the cash before you give to the payee?

One time Two times Three times Four times

23. Do you make daily reconciliation of cash payment with supporting document?

Yes No

24. How do you rectify payment for cheque?

___________________________________________________________________

V. Control over cash on hand

25. Do you think there is proper security over cash on hand?

Yes No

26. If no, what are the possible reasons?

____________________________________________________________________

27. What is the major procedure that made for the control over petty cash?

____________________________________________________________________

28. Where do you put excess cash?

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 National bank

Head office

Other branch

Other ________________________________________________________

29. Is there any information you can provide me that I fail to ask, but necessary to know?

___________________________________________________________________

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