Hayat Fantaw

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ST.

MARY’S UNIVESITY
BUSINESS FACULTY
DEPARTMENT OF ACCOUNTING

EFFECT OF INTERNAL CONTROL OVER ACCOUNT


RESCEIVABLE THE CASE OF COMMERCIAL BANK OF
ETHIOPIA HABTE GEORGIS BRANCH

By
HAYAT FANTAW
MESKEREM ABERA
MUHAZEA NESRO

SMU
JUNE 2014
ADDIS ABABA
EFFECT OF INTERNAL CONTROL OVER ACCOUNT
RESCEIVABLE THE CASE OF COMMERCIAL BANK OF
ETHIOPIA HABTE GEORGIS BRANCH

A SENIOR ESSAY SUBMITTED TO THE DEPARTMENT


OF ACCOUNTING BUSINESS FACULTY
ST. MARY’S UNIVESITY

By
HAYAT FANTAW
MESKEREM ABERA
MUHAZEA NESRO

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR


THE DEGREE OF BACHELOR OF ARTS OF ACCOUNTING

SMU
JUNE 2014
ADDIS ABABA
ST. MARY’S UNIVESITY

EFFECT OF INTERNAL CONTROL OVER ACCOUNT


RESCEIVABLE THE CASE OF COMMERCIAL BANK OF
ETHIOPIA HABTE GEORGIS BRANCH

By
HAYAT FANTAW
MESKEREM ABERA
MUHAZEA NESRO

BUSINESS FACULTY
DEPARTMENT OF ACCOUNTING

APPROVAL BY THE COMMITTEE OF EXAMINER

DEPARTMENT HEAD SIGNATURE

ADVISOR SIGNATURE

INTERNAL EXAMINER SIGNATURE

EXTERNAL HEAD SIGNATURE


Acknowledgements

First of all we would like to thank and glorify the Almighty God who has been and will be
the source of strength throughout our life.

We would like to acknowledge Accounting department for giving this opportunity for we to
do this research. Our heartfelt thanks goes to Our advisor Mr. Ahmed Mohammed for his
timely comment, advice and support by sacrificing his precious and golden time from
selection of topics till the end of submission of the final research paper. We would also
acknowledge CBE Habtegiyorges branch staffs for their cooperation during data collection.

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Table of Content page

Acknowledgements .......................................................................................................... i
Table of Content ............................................................................................................ii
List of Tables .................................................................................................................. v
List of Graph .................................................................................................................. vi
List of Abbreviation ...................................................................................................... vii
Abstract ........................................................................................................................viii
CHAPTER ONE ............................................................................................................. 1
INTRODUCTION........................................................................................................... 1
1.1. Background of the Study....................................................................................... 1
1.2. Background of the Organization ........................................................................... 1
1.3. Statement of the Problem ...................................................................................... 2
1.4. Objective of the Study .......................................................................................... 3
1.4.1. General Objective .............................................................................................. 3
1.4.2. Specific Objectives............................................................................................. 4
1.5. Significance of the Study ...................................................................................... 4
1.6. Scope of the Study ................................................................................................ 4
1.7. Research Methodology ......................................................................................... 5
1.7.1. Research Design ............................................................................................ 5
1.7.2. Population and Sampling Techniques............................................................. 5
1.7.3. Types of Data Collected................................................................................. 5
1.7.4. Method of Data Analysis ............................................................................... 5
1.8. Limitation of the Study ......................................................................................... 5
1.9. Organization of the Study ..................................................................................... 6
CHAPTER TWO ............................................................................................................ 7
LITERATURE REVIEW ................................................................................................ 7
2.1. Internal Control .................................................................................................... 7
2.1.1. Nature of Internal Control .............................................................................. 7
2.2. Types of Internal Control ...................................................................................... 8
2.2.1. Administrative Controls ..................................................................................... 8

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2.2.2. Accounting Controls .......................................................................................... 8
2.2.3. The Control Environment ................................................................................... 9
2.2.4. The Control Procedures ...................................................................................... 9
2.2.5. Competent Personnel and Rotation of Duties .................................................... 10
2.2.6. Assignment of Responsibility ........................................................................... 10
2.2.7. Separation of Operation and Accounting .......................................................... 10
2.2.8 Proofs and Security Measure ............................................................................. 11
2.2.9. Independent Review ......................................................................................... 11
2.3. Receivable .......................................................................................................... 11
2.3.1. Definition and Classification of Receivables .................................................... 11
2.3.2. Definition and Receivables ............................................................................... 11
2.4. Accounts Receivable........................................................................................... 12
2.5. Controls over Receivable .................................................................................... 12
2.5.1. Monitoring the Receivables Position ................................................................ 13
2.5.2. Aging Schedules .............................................................................................. 14
2.5.3. The Payment Pattern Approach ........................................................................ 14
2.6. Credit Policy ....................................................................................................... 15
2.6.1. The Interview ................................................................................................. 15
2.6.2. Loan Application........................................................................................... 15
2.6.3. Relevant Documents...................................................................................... 15
2.6.4. Financial Statement and Property Estimation ................................................. 16
2.6.5. Credit Information .......................................................................................... 16
2.6.6. Setting the Collection Policy ............................................................................ 16
2.6.7. Legal Considerations ........................................................................................ 17
2.6.8. Customers Response ........................................................................................ 17
2.7. Analyzing Proposed Changes in Credit Policy .................................................... 17
2.7.1. The Income Statement Approach...................................................................... 17
2.7.2. Granting Credit ................................................................................................ 18
2.7.3. Write-Off Procedures ....................................................................................... 18

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CHAPTER THREE ....................................................................................................... 19
DATA ANALYSIS AND STUDY FINDINGS ............................................................. 19
3.1. Data Analysis ..................................................................................................... 19
3.2. Credit Activity .................................................................................................... 19
3.2.1. Analysis of Questionnaire............................................................................ 20
3.2.2. Reason’s for Uncollectability ....................................................................... 26
3.2.3. Techniques used by CBE ............................................................................. 26
3.2.4. Account Receivables Turn Over .................................................................. 26
3.2.5. Average Collection Period ........................................................................... 27
3.2.6. Uncollectible Receivables ............................................................................ 28
3.3. Major Findings ................................................................................................... 29
CHAPTER FOUR ......................................................................................................... 31
SUMMARY, CONCLUSION AND RECOMMENDATION ........................................ 31
4.1. Summary ............................................................................................................ 31
4.2. Conclusion.......................................................................................................... 32
4.3. Recommendation ................................................................................................ 33
References
Appendix A

iv
List of Tables
Table – 1: How Do You Evaluate the Internal Control System Over Receivables in
Your Bank? .......................................................................................... 20
Table – 2: Does the Bank have a Collection Department Independently to Follow up
Receivables? ......................................................................................... 21
Table – 3: Does the Bank Communicate or Contact with the Credit Customers by
Phone, Mail or Other Method? .............................................................. 21
Table – 4: How do you Evaluate the Bank giving of Credit Limit to the
Customers?........ ................................................................................... 22
Table – 5: Does the Bank have Specific Credit Term or Agreement? ..................... 22
Table – 6: Is Statement of Account Receivable Strictly Prepare and sent to the Debtors? . 23
Table – 7: Does the Bank Prepare an Account Receivable Aging Report? ........................ 23
Table – 8: How do you Assess the Credit Customers Pay According to their Agreement? 24
Table – 9: Does the Bank take a sort of Action for those who Do Not Pay on Due
Date? .................................................................................................... 24
Table – 10: Does the Bank Change an Account Receivable to Promissory Notes
Receivable? .......................................................................................... 25
Table - 11: Is there a Procedure that Follow-up to Write-off Uncollectible? ............ 25
Table - 12: Account Receivable Ratio (ARTO) ....................................................... 27
Table - 13: Average Collection Period .................................................................... 28
Table – 14: Uncollectible Receivables .................................................................... 29

v
List of Graph

Account Receivable Ratio .......................................................................................... 27


Average Collection Period ......................................................................................... 28

vi
List of Abbreviation

CBE Commercial Bank of Ethiopia


ATM Automated Teller Machine
SWIFT Society for Worldwide Interbank Financial Telecommunication
AICPA American Institution of Certified Public Accountants
COSO Committee of Sponsoring Organization
NBE National Bank of Ethiopia
ARTO Account Receivable Turnover
ACP Average Collection Period

vii
Abstract
Background: the internal control process which historical has been a mechanism for
reducing instance of fraud, misappropriation and errors, has recently become more
extensive, addressing all the various activities faced by organization. it is now recognized
that assumed internal control process is critical to organization’s ability to meet its
established goals and objectives, and to maintain financial viability.

Methods: The study sample was selected based on simple random sampling technique
and also the data was collected from a sample of 10 respondents.

Result: In this study it was found that from a total of 10 respondents, 5(50%) respondents
said that the internal control system over receivable in the bank is good and the rest of the
respondent said that there is fair internal control system over receivable in the bank. From
the total respondents 8(80%) respondents said that the bank have independently
collection departments and the rest of the respondent replied that no collection
departments independently. All the respondents responded that it communicate with
credit customers by phone or remind them the due date of two or three days. From those
total respondents 7(70%) respondents said that it’s giving of credit limit to the customer
are good and the rest said it’s fair. All the respondents said that it has credit term or
agreement on the bank. From the total respondents 9(90%) respondents make known that
statements of account receivable is prepared and sent to customers strictly on the bank
and the rest said not. From the respondents 8(80%) respondents said that the bank prepare
an aging report and the rest said no aging report on the bank.8( 80%) respondents said
credit customer pay their agreement highly and rest respondents said that the credit
customer pay their agreement lowly and very highly. All the respondents said the bank
takes action for those customers who do not pay on due date by forbidding giving of
credit and by taking legal action. As all the respondents said the bank does change an
account receivable to promissory note receivable and also there is a procedure to write-
off uncollectible.

Conclusion: In this research the researcher tries to assess that how the bank treats
receivables, what control mechanisms are followed over receivables, reasons that made
the collection difficult and what sort of action are taken for those customers who do not
pay according to their agreement and due date and also tries to identify the problem that
affects receivables to be outstanding for about more than one year and to solve those
problem by the management and related body.

viii
CHAPTER ONE
INTRODUCTION

1.1. Background of the Study


The internal control process which historical has been a mechanism for reducing instance
of fraud, misappropriation and errors has recently become more extensive, addressing all
the various activities faced by organization. It is now recognized that assumed internal
control process is critical to organizations ability to meet its financial viability. (Batra and
Bagradia, 1992)
Internal control is broadly defined as a process designed to provide reasonable assurance
regarding the achievement of specific objectives in accountability, effectiveness and
efficiency of operations, reliability of financial reporting and compliance with applicable
laws and regulations. (Sexena, 1990)
As such it is an internal component of an organization overall governance structure,
which is intended to direct and control its activities by promoting transparency,
accountability, responsibility and fairness of all stake holders .(Meiss, 1989)
Practicing internal control over account receivable is one of the most important activities
in all business organization. Internal control is necessary to promote the accuracy of
accounting record and to discourage fraudulent manipulation of bank asset. Management
is responsible for controlling over account receivable of the bank because of it is easily
convert to cash and universal attractiveness of compare to other than non cash current
asset, which needs strong internal control system.
So this study tries to assess the activity of the bank regarding internal control assessment
and analyzing and examining in internal control over account receivable of the bank.

1.2. Background of the Organization


Commercial bank of Ethiopia is the leading bank in Ethiopia established in 1943. The
leading African bank with asset of birr 155 billion as on June 30th 2012, it has 830
branches stretched across the country. Commercial bank of Ethiopia combines a wide

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capital base with more than 12,800 talented and committed employees. Currently the
bank has more than million account holders.(www.cbe.gov.et)
It is the first bank of Ethiopia to introduce Automated teller machine service for local
users. Commercial bank of Ethiopia has reliable and long-standing relationships with
many internationally acclaimed banks throughout the world. Pioneer to introduce western
union money transfer services in Ethiopia, it has strong correspondent relationship with
more than 50 renowned foreign banks and a society for worldwide interbank financial
telecommunication bilateral arrangement with 500 others.(www.cbe.gov.et)
In Ethiopia commercial bank of Ethiopia is one of the financial interline diaries in
universal banking activity, which service as a channel for loanable funds from saver to
borrower. The source of those loanable funds is demand deposit and saving deposits
made by the customers. The bank proceed various types of loan to customers mainly over
draft, short term loan, medium and long term loan, revolving export credit, micro finance
institutions loan. Commercial bank of Ethiopia is required to function efficiently and
effectively to meet the growing demand of credit so as to induce development.

1.3. Statement of the Problem


The balance sheet of most business enterprise includes a variety of claims from other
parties that generally provide a future in flow of cash these receivables arise from
transaction and events such as sales goods or services, Loan made to others and so on.
Receivable include all claims against people, organization or other debtors. Receivable
from customer service in credit base represents substantial part of business enterprise
current asset.
In CBE all receivables that are expected to be realized in cash within one year are
presented in current asset section of the balance sheet. These receivable which are not
currently collectible such as long term loans made to others, should be listed in the
investment section of asset. Not all the time a receivable which resulted from the
services, will be collected in cash value; part of the claim against a credit customer
usually proves to be uncollectible. This is a common practice regardless of the care,
protection and controls used in granting and collecting credits there is no one single
general way of identifying uncollectible. Failure to pay at maturity or dishonoring a note

2
is not by itself and indicator of uncollectible. Nevertheless bankruptcy of the debtor,
closing of debtors business, disappearance of the debtor, failure of repeated attempts to
collect are significant indication of partial or complete worthlessness of a receivable.
In most business companies account receivable in various functional areas is not strong
internal control to achieve the desired objective. at the bank absences of accountability,
effectiveness and efficiency of operation, reliability of financial reporting.
From these and that problems stated, researchers will assess the control system of account
receivable in Commercial Bank of Ethiopia by Comparing its actual controlling practice
against the theoretical basis of internal control system over account receivable. In the way
providing of this problem the researcher will seek answer for the following basic question

 Does the bank have responsible department for follow up the credit
collections and has proper internal control system over receivables?
 Is statement of account receivable strictly prepared and sent or mail to
debtors?
 Does all credit customers pay timely according to their agreement?
 Does the bank use or prepare an account receivable aging report?
 Does the bank use a write off mechanism for all its credit customers?
 Does the bank properly evaluate its customer liquidity and business
efficiency?
 Does the bank handles documents in orderly manners?

1.4. Objective of the Study


The objective of the study consists of general and specific objective.

1.4.1. General Objective


The principal objective of this paper was investigate the effectiveness of internal control
over account receivable in commercial bank of Ethiopia. In doing so the research has the
following specific objectives.

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1.4.2. Specific Objectives
Specifically this study conducted to:
 Appraise whether the company has a well established department that follow-
up account receivable internal control system.
 Evaluate that the application of credit policy to the credit customers and its
affiliates.
 Assess that the company sent an account receivable statement to the customer
monthly.
 Review that whether the company collects timely from its credit customers
according to their agreement.
 Assess that the company uses the note to make the loan more formal
enforceable.
 Identify a specific accounts receivable is removed from the accounting record
at the time it is finally determined to be uncollectible.

1.5. Significance of the Study


This study identifies source of the problem and recommends solution receivable.
 To create awareness to any business firms to maintain and implement effective
internal control system over account receivable to achieve its goals.
 It would help and serve as a bench mark for the policy maker’s to improve the
policies. And Management for a better decision.
 To identify different measures taken to reduce banking insurance of fraud,
misappropriation and errors

1.6. Scope of the Study


The scope of this study concentrate on the system of internal control of receivable
commercial bank of Ethiopia located in Addis Ababa particularly Habte Giorgis branch
and this study will be from January 1, 2008 to December 31, 2013.

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1.7. Research Methodology
1.7.1. Research Design
A descriptive approach method had used in carrying out this study because it pictures the
current situation in the company and show accurately the characteristics of a particular
situation. Moreover, the method enabled to examine relationship exit between years and
account receivable.

1.7.2. Population and Sampling Techniques


The population of the study had been used both employees and manager working in CBE
Habtegeogis branch. The total number of employees are 38 out of this 3 of them are a
managerial status and the rest 35 are employees. However the researcher team distributed
the questionnaire only at the finance department and credit operation department .From
the total population of the department 10 respondents are randomly selected.

1.7.3. Types of Data Collected


Both primary and secondary data source had been used. The primary data collected from
employees and employers through questionnaire. The secondary data obtain from
different type of books, internet, company annual report profile and magazine.

1.7.4. Method of Data Analysis


In order to analyze and interpret the finding, the student researcher used both quantitative
and qualitative methods using tables and graphs. Finally both primary and secondary data
tabulated, discussed interpreted and analyzed.

1.8. Limitation of the Study


There were some factors that affected the study not be continued as expected. Among
these factors the following are mentioned:
 Some of employees were not willing to fill the questionnaires
 Some of the questionnaires were filled negligently
 Open ended questions were not sufficiently answered.

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 Lack of financial and time constraints.
 Lack of experience of the researcher.

1.9. Organization of the Study


The study organized into four chapters, the first chapter deals with background of the
study, statement of the problem, objective of the study, scope and significance of the
study, limitation of the study, research design and methodology and organization of the
study. The secondary chapter contained the review of the related literature. The third
chapter focused on data presentation and analysis. Finally in chapter four conclusions and
recommendation forwarded by the researcher based on the assessments.

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CHAPTER TWO
LITERATURE REVIEW

2.1. Internal Control


2.1.1. Nature of Internal Control
Differences of opinion have long existed about the meaning and objective of internal
control. 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, while
acknowledging the importance of internal control for fraud prevention, believed that
internal control has an equal role in assuring control over manufacturing and other
processes. Such differences in interpretation also existed in the professional publications
issued by the American institution of certified public accountants. The institute of
internal auditor’s incorporation and the research foundation of the financial executives
institute. (K.Cshekhar & Lekshmy Shekha, 2003)
It was not until the early 1990’s that the various professional organizations worked
together to develop a consensus on the nature and scope of internal control. As a result of
a number of instances of fraudulent financial reporting in the 1970’s and early 1980’s, the
major accounting organizations sponsor the national commission on fraudulent financial
reporting (the trend way commission) to study the causal factors that are associated with
fraudulent reporting and to make recommendation to reduce its incidence. The
commission made a number of recommendations that directly addressed internal control,
for example, it emphasized the importance of a competent, involved audit committee, and
active, and objective internal audit function in preventing fraudulent practices. It also
called on the sponsoring organizations to work together to integrate the various internal
control concepts and definitions to develop common criteria to evaluate internal control.
(ibid)
Accordingly, the committee of sponsoring organization commissioned a study to:
 Establish a common definition of internal control to serve the needs of
different parties;

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 Provide a standard against which business and other entities can assess their
control system and determine how to improve them.

COSO’S definition of internal emphasizes that internal control is a process, or a means to


all end in and of itself. The process is affected by individuals, not merely policy manuals,
documents and forms. By including the concept of reasonable assurance, the definition
recognizes that internal control cannot realistically provide absolute assurance that an
organization objective will be achieved. Reasonable assurance recognizes that the cost of
organizations internal control should not exceed the benefits expected to be obtained.
Internal control is defined by AICPA as all coordinate methods and measures within an
organization or within a system adapted to safeguard assets, check accuracy and
reliability of accounting data, promote operational efficiency and encourage adherence to
prescribed managerial policy. (Arens and Leobbeck Ibid, 1989)
In accounting, control of financial information is involved in systems and producers of
management information flow and documentation for various management decision
cycles, which may require us to distinguish administrative control and accounting
controls.

2.2. Types of Internal Control


2.2.1. Administrative Controls
Administrative control emphasizes on control for management decision concentrating on
authority and responsibility for authorization of information as such includes plan of
organization structure, producers and records related to the decision process.(Kamal
Gupta & Ashok Arora, 1996)

2.2.2. Accounting Controls


Accounting controls emphasize on reliability of financial records and safe guarding on of
assets and records for providing reasonable assurance on transaction and financial
information needed for appropriate action. In spite of the above however, it is important
to note the point of interface between administrative controls and accounting controls.
For the concern with authorization of transaction or action decision consequently leads to

8
the need for ensuring that the authorized action is actually taken and what results are
achieved. (Mosich, 1989)

Purposes and Objectives of Internal Control


 To aid management information, protection and control.
 To protect asset from theft, loss, damage, spoilage, wastage.
 To prevent errors and fraud in advance before they occur.
 To assure accuracy and dependability of perusal and financial operation.
 To monitor operating efficiency
 To monitor adherence to prescribed policy.
 To provide evidence of responsibility (Aren and Leobbeck, 1998)

2.2.3. The Control Environment


The control environment of an enterprise represents an overall attitude toward and
awareness of the important of controls by both management and other employees. Factors
influencing the control environment of an enterprise include management’s philosophy
and operating style includes management’s attitude concerning controls. For example, if
top management routinely violates established control policies and procedures, the
control environment employees may view controls as unimportant. On the other hand, a
top management that emphasizes the importance of controls in dealing with operating
personnel and encourages adherence to control policies and procedures will create
favorable control environment. (Yednekachew Tesma ,1989)
Personnel policies and procedures include the hiring, training, evaluation, promotion and
compensation of employees to accomplish an enterprise’s goals and objectives. Common
personnel policies that impact on the control environment include the establishment of
codes of ethics for employee conflict of interest policies. (ibid)

2.2.4. The Control Procedures


Control procedures are those policies and procedures that management has established
within the control environment in order to provide reasonable assurance that enterprise
goals will be achieved. General control procedures which can be integrated throughout

9
the accounting system and which apply to all enterprises are briefly discussed in the
following sections. (Yednekachew Tesma,1989)

2.2.5. Competent Personnel and Rotation of Duties


Employees should posses the skills and knowledge essential to the performance of their
job. If employees are lacking in skills or knowledge, they may be in effective in
performing their assigned duties. This is especially critical when the employees are
involved in performing controls. Ideally, management should be committed to hiring
employees with appropriate levels of education and experience, and providing them with
adequate supervision and training. (William C, Boynton & Walter G, Kell)

2.2.6. Assignment of Responsibility


If employees are to work efficiently their responsibilities must be clearly defined. Control
procedures should exist to guarantee that no overlapping or undefined areas of
responsibility exist. For example, if a certain cash register is to be used by two or more
sales clerks, each one should be assigned a separate a drawer and register key. Thus a
daily proof of cash can be obtained for each clerk, separation of responsibility, errors and
fraud, control procedures should exist to guarantee that the responsibility for a sequence
of related operations is divided among two or more persons.
When the responsibility for purchasing, receiving and paying are divided among three
persons or departments, the possibilities of such abuses are minimized.
The “checks and balances” provided by disturbing responsibilities among various
departments requires no duplication of effort. The business documents prepared as a
result of the work of each department must “fit” with those prepared by other
departments. (William C, Boynton & Walter G, Kell)

2.2.7. Separation of Operation and Accounting


Control procedures should exist to ensure that responsibilities for maintaining the
accounting records are separated from the responsibility for engaging in business
transactions and for the custody of the bank assets. By such separations, the accounting
records serve as an independent check on the buswine3ss operations. For example, the
employees entrusted with handling cash receipts form credit customers should not have

10
access to the journal or ledger. Separation of the functions reduces the possibilities of
errors and embezzlement. (KIESO,etal 2005)

2.2.8 Proofs and Security Measure


Proofs and security measures should be used to safeguard business assets and assure
reliable accounting data. This control procedure applies to many different techniques,
such as the use of reserve fund in international bank in Ethiopia and other safekeeping
measures for cash other valuable documents. Cash registers are widely used in making
the initial record of cash sales. The conditioning of the public to observe the amount
recorded as the sale or to accept a printed receipt from the sales clerk increases the
machines effectiveness as a part of the internal control structure. The use of fidelity
insurance is also an aid to developing an effective internal control structure. It insures
against losses caused by fraud on the part of employees who are entrusted with company
assets. (KIESO,etal 2005)

2.2.9. Independent Review


To determine whether internal control procedures are being effectively applied, the
control structure should be periodically reviewed and evaluated by internal auditors.
These auditors must be independent of the employees responsible for operations. (Fees
Warren, Ibid 2001)

2.3. Receivable
2.3.1. Definition and Classification of Receivables
2.3.2. Definition and Receivables
The term receivables include all money claims against people, organizations or other
debtors. Receivables are acquired by a business enterprise in various kinds of transactions
the most common being the sale of merchandise or services on a credit basis.
Credit may be granted on open account or on the basis of a formal instrument of credit,
such as a promissory note. A promissory note, frequently referred to as a note is a written
promise to pay a sum of money on demand or at a definite time. Notes are usually used
for credit periods of more than sixty days, as in sales of equipment on the installment

11
plan, and for transactions of relatively large dollar amounts. Notes may also be used in
settlement of an open account and in borrowing lending money.
Customers often owe a company amounts for goods brought or services rendered. A
company may sub classify the trade receivables, usually the most significant item it
possess, into account receivable and note receivable. (Fess Warren ibid,2001)

2.4. Accounts Receivable


Account receivable is an written promise of the borrower to pay for principal and interest
sold; they represent “open account” resulting from short term extension of credit. A bank
collects them within one year.
The balance sheet of every business enterprise includes a variety of claims from other
parties that generally provide a future inflow of cash. These receivables arise from
transaction and events such as services, loans made, subscriptions obtained from
investors for capital stock or bonds, claims for income tax refunds, claims resulting from
litigation and amounts due from leasing of assets.
Receivables from customers frequently represent a substantial part of a business
enterprise’s current assets. Poor screening of applicants for credit or an inefficient
collection policy may result in large losses. Consequently, strong accounting controls and
effective management of receivables are typical characteristics of most profitable
enterprise. (KISEO, etal, ibid 2005)

2.5. Controls over Receivable


As is the case for all assets, the broad principles of internal control discussed used to
establish procedures to safeguard receivables. These controls would include the
separation of the business operations and the accounting for receivables, so that the
accounting records can serve as an independent check on operations. Thus the employee
who handles the accounting for notes and accounts receivable should not be involved
with credit approvals or collections of receivables. Separation of these functions reduces
the possibility of errors and embezzlement. The controls would also include the
separation of responsibility for related functions, so that the work of one employee can
serve as a check on the work of another employee.

12
For most businesses, the principle receivables are notes receivable and accounts
receivable. Generally, notes receivable are recorded in a single general ledger account. If
there are a numerous notes, the general ledger account can be supported by a notes
receivable register. The register would contain details of each note, such as the name of
the maker, pace of payment, amount, term interest rate, and due date. Frequent reference
to the due date section directs attention to those notes that are due for payment. In this
way, the maker of the note can be notified when the note is due, and the risk that the
maker will over look the due date can be minimized.
Adequate control over accounts receivable begins with the approval of the sale by a
responsible bank official or the credit department, after the customer’s credit rating has
been reviewed. Likewise, adjustments of accounts should be authorized or reviewed by a
responsible party. Effective collection procedures should also be established to ensure
timely collection of accounts receivable and to minimize losses from uncollectable
accounts. The proper use of the controlling account and the accounts receivable ledger, as
discussed increases the effectiveness of the control over accounts receivable. (Acca text
book ibid, 1995)

2.5.1. Monitoring the Receivables Position


Accounts receivable depends on the banks own unique operating condition however even
through optimal credit policies vary among banks or even for a single bank over time, it
is still useful to analyze the effectiveness of the bank credit policy in an overall aggregate
sense inventors both stockholders and bank loan officers should pay close attention to
accounts receivable management because, as we shall see one can be misled by reported
financial statements and later suffer serious losses on an investment.
When a credit service is made, the following events occurs
1. Cash are reduced by the cost of collection of loan
2. Accounts receivable are increased by the loan interest and
3. The difference is profit, which is added retained earnings.
The profit is not actually earned unless and until the account is collected banks have been
known to encourage loan to very weak customers in order to report high profits this could
boost the bank’s stock price, at least unit credit losses begin to lower earnings. At which

13
time the stock price will fall analyzes along the lines suggested in the following section
will detect any such questionable practice as well as any unconscious deterioration in the
quality of accounts receivables. Such early detection could help both investors and
bankers avoid losses. (A.Rose,5th edition ibid,1999)

2.5.2. Aging Schedules


An aging schedule breaks down a bank’s receivables by age of account. The number of
different age classes to be used depends on actual experience and the terms of loan. An
estimate of the average collection the experience for each age class provides a base for
estimating the portion of outstanding trade accounts receivables that may provide to be
uncollectable.
In the process of aging trade accounts receivable, management should evaluate current
financial statements of major customers to make a better assessment of the probability of
collection. The credit department of a business enterprise is assigned responsibility for
continuing analysis of the financial statements of existing and prospective customers so
that loan are not made to those who represent excessive risk of nonpayment. (Mosich
Ibid, 1989)

2.5.3. The Payment Pattern Approach


The primary point in analyzing the aggregate accounts receivable situation is to see if
customer, on average is slowing down their payments. If so, the bank will have to
increase its receivable financing, which will increase its dollar cost of carrying
receivables. Further, the payment slowdown may signal a decrease in the quality of the
bank receivables and hence and increase in bad debt losses downs the road. The and
aging schedules are useful in monitoring credit operations, but both are affected by
increases and decreases in a bank’s level of loan. Thus, changes in loan, including normal
seasonal or cyclical changes can change a firm’s and aging schedule even though its
customer’s payment behavior has not changed at all. For this reason a procedure called
the payments pattern approach has been developed to measure any changes that might be
occurring in customers’ payment behavior. (A.Rose,5th edition,1999)

14
2.6. Credit Policy
Even if the structure of credit operation of commercial bank varies greatly from bank to
bank depending on the size of bank and economic environment in which the bank
operates. Some lending procedures are accepted universally by at most commercial bank.
Some of them are the following:
2.6.1. The Interview
It is the first contract with the borrower and provides an opportunity for the bankers to
explore about application beyond the loan application. It should be friendly discussion in
which the banker tries to see through the loan request .He should touch on points like: the
purpose of loan, the applicant’s commitments elsewhere .the applicant’s deposit account
of other branch or banks. The applicant’s business experience, how he intends to pay of
the loan and the business plan etc… (Takele; 2003)

2.6.2. Loan Application


The loan application should state details of the requested loan clearly and it includes:
amount of loan requested. The purpose of the loan, the collateral offered. The duration of
the loan in which the borrower intend to pay off the debt and the installment if monthly,
quarterly, in one lump sum etc… (Takele; 2003)

2.6.3. Relevant Documents


The applicant should fulfill the following document
 trading license-preferably renewed for current year
 power of attorney, if applicable
 feasibility study, in case of new project
 original security certificates-like land holding certificate, car booklet
 financial statement audited or provisional including cash flow statement in
case of
 Manufacturing and performance invoice, receipts, sales or purchase
agreement, work
 order etc… (Takele 2003)

15
2.6.4. Financial Statement and Property Estimation
The financial statements like balance sheet, income statement, cash flow statements etc.
it should be carefully analyzed to determine the financial soundness of the applicant and
assess the repayment capacity.
Ratio and percentages to measure the liquidity and profitability of the business need
revised carefully to assist in the decision making of the amount and type of loan granted.
(Takele 2003)

2.6.5. Credit Information


The most commonly used inquiries in obtaining credit information are based on the five
c’s. i.e capital, capacity, characters, credit worthiness and collateral.
All available sources of internal and external should be used to obtain credit information
before deciding on the financing of the applicant.
Internal source of information are the customers accounts in the bank itself, the
frequently and magnitudes of the transaction as well as the cheque bounced for lack of
funds are good indicators of his business activity and credit worthiness. Other branches
where is he likely to have had a loan or deposit account have to be approached for credit
information. Past records of settled loans should also be taken in to accounts to verify his
repayment habits. (Takele, 2003)

2.6.6. Setting the Collection Policy


Collection policy refers to the procedures the bank follows to collect past due accounts.
The collection process can expensive in terms of both out of pocket expenditures and lost
goodwill but at least some bank’s in needed to prevent an undue lengthening of the
Colleton period and to minimize outright losses. Again a balance must be struck between
the costs and benefits of deficient collection policies. Changes in collection policy
influence loan, the collection period the bad debt loss parentage, and the percentage of
customers who take discounts. The effects able will be analyzed later. The last element in
the credit policy decision, the use of cash discounts for early payment is analyzed by
balancing the costs and benefits of different cash discounts.(d.larson,15th edition,1999)

16
2.6.7. Legal Considerations
It is illegal under the Robinson Patman act for a bank to charge prices that discriminate
between customers unless these differential prices are cost justified. The same holds true
for credit it is illegal to offer more favorable credit terms to one customer or class of
customers than to another unless the differences are cost justified.(khan, pajain,5th edition
,2004)

2.6.8. Customers Response


A bank’s prior relationship with customer reveals information about past credit and
deposit experience that is useful in assessing willingness and ability to replay.(Koch and
Macdonald, 2000)

2.7. Analyzing Proposed Changes in Credit Policy


2.7.1. The Income Statement Approach
In the National Bank credit policy is eased by such actions as lengthening the credit
period, relaxing credit standards, following a less tough collection policy: Easting the
credit policy stimulates loan. Of course, if credit policy is eased and loan rise, then costs
will also rise because more labor, materials and so on. Additionally, receivables
outstanding will also increase, which will increase carrying costs, and bad debt may also
rise. Thus, the key question when deciding on a proposed credit policy change is this will
loan interest rise more than costs, including credit related costs, causing cash flow to
increase, or will the increase in loan interest be more than offset by the higher costs.
One can take two approaches of analyzing proposed changes in credit policy the income
statement approach and the incremental analysis approach. The income statement
approach, which we discuss in this section. Focuses on the effects of a credit policy
change on the bank’s income statement, incremental analysis, which we discuss in the
next section, leads to the same results, but thorough the use of formulas.(Stanly B.Block
and Geoffery A.Hirt,Ibid,1992)

17
2.7.2. Granting Credit
Credit may be granted to those receiving the departmental loan service including the
general public, students and staff. Although cash should be collected whenever possible,
credit may be granted when there are not facilities for the collection of cash, or when
non-collection of cash is deemed to be in the best interest of the bank. In these cases,
prudence with respect to the credit risk incurred must be observed at the time of
transaction.

Credit is automatically extended to governmental units and foundations during the time
claims for reimbursement are outstanding. Diligence must be exercised to insure timely
billing and collection efforts and to minimize uncollectible receivables.

Implicit in the granting of credit is the intention that payment will be made in full upon
customer’s receipt of a bill.(Stantly B.Block and Geoffery A.Hirt,Ibid,1992)

2.7.3. Write-Off Procedures


Uncollected accounts are to be considered as bad debts and written off, subject to
appropriate approval authority, when they are determined to be uncollectible or when
they are placed with a collection agency. Such write-offs should occur no less frequently
than annually.
Requests to write off uncollectible accounts must be categorized by type of bill and
submitted for approval. Supporting documentation must be provided to justify write-off
of each item, and the source of funds for financing the write-off must be so indicated. All
necessary budget documents and references to local financing action must likewise
accompany the request.
Routine disallowed claims under contracts and grants to be written off against funds
received from the federal government in reimbursement of indirect costs, subject to the
limitations contained in Delegation of authority policy. (Stanly B. Block and Geoffery A.
Hirt, Ibid, 1992)

18
CHAPTER THREE
DATA ANALYSIS AND STUDY FINDINGS

3.1. Data Analysis


In this selection attempts have been made to assess the internal control over receivables
activities by using the primary data collected from questionnaires totally the number of
employment on the branch are 38. However the researcher team distributed the
questionnaire only 10 respondents by random selection. Accordingly, the analysis and
findings of this paper are based on the number of the respondents of the questionnaires
conducted with finance and credit operation departments. The secondary data collected
from different related books and from company documents.

3.2. Credit Activity


The most important activity of CBE is to mobilize deposits from the public people who
have surplus income and savings find it convenient to deposit the amounts with bank.
Depending upon the nature of deposits, funds deposited with bank also earn interest.
Thus, deposits with the bank grow along with the interest earned. If the rate of interest is
higher, public are motivated to deposit more funds with the bank. So it facilitate CBE to
great loan and advances. Such loan and advance are given to members of the public and
to the business community at a higher rate of interest than allowed by banks on various
deposit accounts. The rate of interest charged on loans and advance various depending
upon the purpose, period and the mode of repayment. So this rate charged on the loans is
the main sources of a bank income.

CBE has given different types of loan and advance to customers looking into distribution
of loans and advances by major end use shows the domestic trade service, foreign trade,
agriculture, manufacturing sector, Building and construction and personal loans.

19
3.2.1. Analysis of Questionnaire
This section of data analysis and presentation part issued to analyze and present the data
obtained through questionnaires distributed to the 10 CBE finance and related department
employees. As mentioned earlier the questionnaire was distributed only at the Habte
Georgis branch of the bank from the respondent point of view the given question’s that
are topics were responded as follows.

Table – 1: How Do You Evaluate the Internal Control System Over


Receivables in Your Bank?
No Description V. poor Poor Fair Good Total

How do you evaluate the internal control


system over receivables in your bank? 5 5 10
1

Percentage 50% 50% 100%

Source: Questioner.

For the above question 5(50%) of the respondents said that the internal control system
over receivable in the company is good end the rest of the respondents reply that fair
internal control system over receivables because:
The number of staffs who control the account receivables are more than one, so it may
not be create a gap for fraudulent activity and there is direct participation by the two
middle management of the bank in the activities of the service so the management and
employee should be honest and trust worthy. And also there is strong internal control
structure.
Even though there is a sense of owner shipping of the management the bank should run
its services based on its policy and procedure and should control its receivables.

20
Table – 2: Does the Bank have a Collection Department Independently
to Follow up Receivables?
Nō Description Yes No Total

4 Does the bank have a collection department


8 2 10
independently to follow up receivables?

Percentage 80% 20% 100%

Source: Questioner.
In the given response for 8(80%) respondents said that the bank have independently
collection departments, and the rest of the respondents replied that the bank does not
have. This happen because of Lack of management attention and there is no independent
body to control with collection of receivables without accountability.
Most of the respondents respond that the bank has a collection department independently.
Since the bank has huge and most of its asset are based on credit that will be good to take
attention on collection department.

Table – 3: Does the Bank Communicate or Contact with the Credit


Customers by Phone, Mail or Other Method?
Nō Description Yes No Total

6 Does the bank communicate or contact with the credit


10 10
customers by phone or other methods?

Percentage 100% 100%

Source: Questioner.
The result shows that 10(100%) of the respondents responded that it communicate with
credit customers by phone or remind them the due date of two or three days.

21
Table – 4: How do you Evaluate the Bank giving of Credit Limit to the
Customers?
No Description V. poor Poor Fair Good Total

8 How do you evaluate the bank


giving of credit limit to the 3 7 10
customers?

Percentage 30% 70% 100%

Source: Questioner.
From the given response 7(70%) respondents said that its giving of credit limit to the
customer are good and the rest of the responders reveals that the bank’s giving of credit
limit is fair .This is because the existing and handling of costumer credit faculty and
procedure is non thoroughly studied and revised timely the bank has a credit limit for
some customers and do not have some parties end sometimes the credit faculty do not
studied well. Since the bank has a structured policy and procedure that related with credit
limit or granting procedure it is well that for all customers to be applied.

Table – 5: Does the Bank have Specific Credit Term or Agreement?


No Description Yes No Total

10 Does the bank have specific credit term or agreement 10 10

Percentage 100% 100%

Source: Questioner.

From the given responses 10(100%) respondents said that it has credit term or agreement.

22
Table – 6: Is Statement of Account Receivable Strictly Prepare and
sent to the Debtors?
No Description Yes No Total

12 Is statement or account receivable strictly prepare


9 1 10
and sent to the debtors?

Percentage 90% 10% 100%

Source: Questioner.
The answer reveals that 9(90%) respondents make known that statements of account
receivable is prepared and sent to the customers strictly and the rest respondent said that
not strictly send to customers there is a delaines in sending to the customers and it is no
sent regularly to debtor.
The statement of account sent to the debtor for the purpose of reconciliation and
confirmation of their debts but sometimes there is delaines, the dalliance of sending
statement affects not collect on due date.

Table – 7: Does the Bank Prepare an Account Receivable Aging


Report?
No Description Yes No Total

14 Does the bank prepare an account receivable aging


8 2 10
report?

Percentage 80% 20% 100%

Source: Questioner.

For the above question 8(80%) of the respondents response that the bank prepare an
aging report.

23
Table – 8: How do you Assess the Credit Customers Pay According to
their Agreement?
No Description V. high low V.low Total
high

15 How do you assess that the credit


customers pay according to their 1 8 1 10
agreement?

Percentage 10% 80% 10% 100%

Source: Questioner.
From the respondents give answer 8 respondents said that the credit customer pay
according to their agreement is high and the rest 2 respondents said that the credit
customer pay according to their agreements low and very high.
There is a sense of owner shipping of the branch the bank should run it services based on
its policy and procedure and should control its receivables and the owner has to give
attention.

Table – 9: Does the Bank take a sort of Action for those who Do Not
Pay on Due Date?
Nō Description Yes No Total

17 Does the bank take a sort of action for those who do


10 10
not pay on due date?

Percentage 100% 100%

Source: Questioner.

From the given respondents answer 10 of the respondents said that it takes action for
those customers who do not pay on due date by forbidding giving of credit and by taking
legal action.

24
It is good that the company take a legal action for those customer’s who do not pay on
their due date and also the company should give attention for the follow up of for those
who do not pay on the due date and it is advisable that if the legal action is applicable for
all credit customers.

Table – 10: Does the Bank Change an Account Receivable to


Promissory Notes Receivable?
No Description Yes No Total

19 Does the bank change an account receivable to


10 10
promissory notes receivable?

Percentage 100% 100%

Source: Questioner.

For the above question all the respondents says that the bank does change an account
receivable to promissory note receivable the bank can exchange an account receivable to
promissory notes receivable because it has clearly stated policy and procedures and
modern management. It is very good mechanism if the company uses a promissory note
properly because it can force the customer to pay since it is legally advisable and it is
more secure than account receivable.

Table - 11: Is there a Procedure that Follow-up to Write-off


Uncollectible?
No Description Yes No Total

25 Is there a procedure that follow-up to write-off


10 10
uncollectible?

Percentage 100% 100%

Source: Questioner

25
All of the respondents said that there is procedure to write-off uncollectible, the finance
division transfers to the responsible department to take a legal action for the customer.

3.2.2. Reason’s for Uncollectability


As per responses obtained from the General Account Section Accountant, there are many
reasons for the uncollectability of account receivable.

Among the many critical reasons are the following


 Customers unwillingness to pay
 Business shut down
 Premature death
 Parent and subsidiary relation with the affiliation business company.

3.2.3. Techniques used by CBE


The techniques and efforts made by CBE to collect its account receivable are found to
appropriate but the most common are:
 To notify the customer by calling before the payment day.
 To make a time table that comforts the customer
 Post dated check

3.2.4. Account Receivables Turn Over


Account receivables turnover measures how many times in average credit activity is
made in a year. A high value of accounts receivable turnover is favorable and it indicate
the efficiency of business in collecting outstanding credit, the following tables are
summary of the required data from the annual report. this ratio indicated how many times
and how rapidly receivables are converted in the cash during a year.
Account Receivable Turnove

Net Loan
r (ARTO) =
Account Receivable

26
Table - 12: Account Receivable Ratio (ARTO)
Description 2008 2009 2010 2011 2012 2013
Loan Disbursement
1,614.1 2,579.4 3,972.2 4,115.9 6,087.4 8,870
(in million birr)
Loan Collection
1,246.7 2,277.6 3,106.6 4,075.8 5,563.5 5,675
(in million birr)
Ratio 1.29 1.13 1.28 1.00 1.1 1.6
Source: Annual report

Account Receivable Ratio


1.8
1.6
1.6
1.4 1.29 1.28
1.2 1.13 1.1
1
1
0.8
0.6
0.4
0.2
0
2008 2009 2010 2011 2012 2013

Source: Annual report


As it is shown in the above presentation the ARTO (account receivable turnover ratio) is
not constant rate; the ARTO is fluctuating year to year. Thus, the bank experiences
increasing in the receivable balance without corresponding increasing loans.

3.2.5. Average Collection Period


It is useful in evaluation credit and collection polices. It represents the average length of
time a bank must wait to receive cash after making loan. The shorter the average

27
collection period the better it will be. In addition it’s preferable for average collection
period to decrease from time to time. But, this thing is not true in the case of CBE.
Table - 13: Average Collection Period
Description 2008 2009 2010 2011 2012 2013

ARTO 1.29 1.13 1.28 1.00 1.1 1.6

= 279 318 282 360 327 225

Source: Annual report


Average Collection Period
400
360
350 318 327

300 279 282

250 225

200

150

100

50

0
2008 2009 2010 2011 2012 2013

As it can be seen from the presentation the average collection period is increasing from
about 279 days in 2008 to about 225 days 2013. Based on the responses from the Genera
Account Head, there are some accounts which are long outstanding and the bank is trying
all effort to make those credits to be collected.

3.2.6. Uncollectible Receivables


When loans are given to consumer a part of the claims against customers usually proves
to be uncollectible this situation is common, regarding of the care used in granting credit
and the effectives of the collection procedures used the operating expense incurred
because of the failure to collect receivable is called an expense or loss from uncollectible

28
accounts, doubtful accounts or bad debts and it affect negatively the bank by reducing it’s
operating revenue.

Table – 14: Uncollectible Receivables


Description 2008 2009 2010 2011 2012 2013

Provision for doubtful


1,002.5 1,241 2,015 3,065.99 5,068 6,475
debts (in million birr)

Percentage of the total


80.4% 54.4% 64.9% 75.2% 91.0% 72.9%
annual Account Receivable

Source: Annual report

As we can understand the presentation the amount of uncollectable account become


significant from year to year.

3.3. Major Findings


Based on the gathered analysis made researcher team tried to find out some major points
that are basically related with the strength and weakness of internal control over
receivables in CBE.

Strength
 The bank as a structured policy and procedure for internal control of
receivables.
 Write off of receivables in done based on legally when the debtor gives
evidence.
 The bank have a collection department independently.
 Take a legal or other action like by forbidding the debtors give credit base on
other time for those customers who do not pay on their due date and according
to their agreement.

29
Weakness
 Sometimes credit is given by the willingness of the management without
detailed study of the customer’s credit faculty.
 There is delay in sending statement of account receivable
 There is a delay in collection on cash.

30
CHAPTER FOUR
SUMMARY, CONCLUSION AND RECOMMENDATION

4.1. Summary
The overall objective of this study is to address the internal control over receivable
system of Commercial Bank of Ethiopia Habte Georgis Branch and to find out the
problems related with internal control systems of receivables.
The method used to prepare this research is simple random sampling technique to pick
subjects from the population and used primary and secondary data obtained though
questionnaire and document from the company’s annual report and magazines the
method in analyzing and presenting data the researchers used qualitative and quantitative
data analysis methods. From quantitative data analysis method, simple percentage is used
the researcher analysis can be summarized as follows:
 From the thirty eight (38) population size, the researchers selected ten (10)
samples from different department.
 10(100%) of respondents replied that the bank has a good internal control
system over receivables.
 8(80%) of the respondents replied that the bank have independently collection
department and the rest of 2(20%) of respondents said that does not have
 All respondents 10(100%) replied that the bank communicate with credit
customers.
 7(70%) of respondents replied that its giving of credit limit to the customer
are good and the rest said it is fair.
 All the respondents said that the bank has credit term or agreement on the
bank.
 9(90%) respondents replied that statements of receivables is prepared and sent
to customers strictly on the bank and the rest said not
 From the respondents 8(80%) respondents said that the bank prepare an aging
report and the rest said no aging report on the bank.

31
 8(80%) respondents said credit customer pay their agreement highly and the
rest respondents said that the credit customers pay their agreement lowly and
very highly.
 All the respondents said that the bank takes action for these customers who do
not pay on due date by forbidding giving of credit and by taking legal action.
 As all the respondents said the bank does change an account receivable to
promissory note and also there is a procedure to write-off uncollectible.

4.2. Conclusion
It is obvious that banks are very complex due to different types services they handle even
Is banks handle different types of services, it should be controlled properly. Accordingly
the internal control system over receivables of CBE Habte Georgis branch is concluded
below.
 The bank have a credit service is under taken in all branches of the bank. In this
service the payment is made according to the agreement by the two parties based
on the operating sectors credit service polices. Since the bank is Huge it gives
different types of loans to customers. For example domestic trade service foreign
trade agriculture, manufacturing building construction and personal loan.
 As mentioned before most of the activity of the bank is to give that the bank treats
as receivable from the credit customers
 In CBE receivables are control based on the structured credit policy and
procedures the control mechanisms for the credit debtors are making follow up by
independent collection departments.
 Regarding the credit policy the bank gives credit based on the granting policy
credit is automatically expended to customers during the time claims for
reimbursement are outstanding
 Concerning contract with the credit customers a bank prior relationship with
customer reveals information about past credit and deposit experience that is use
full in assessing willingness and ability to replay.

32
 Regarding the credit limit, the bank giving of credit limit to customers is existing
and handing of customer credit faculty and the procedure is non thoroughly
studied and reused.
 Concerning the use of a giving account receivable report, the bank process of
aging account receivable the management should evaluate current financial
statement of major customers to make a better assessment of the probability of
collection.
 The bank takes a legal action for those customers who do not pay according to the
agreement and due dates.
 Regarding write off requests of write off uncollectible accounts must be
categorized by types of bill and submitted for approach. Supporting document
must be provided to justify write- off of each item and the sources of funds for
financing the write-off must be so indicated.
 Even through the bank has well structured policies and procedures of the purpose
of internal control over receivables sometimes those policies and procedures are
not strictly followed by the different sectors of banks and these affects the
receivables not to be collected easily.

4.3. Recommendation
According to the gathered data from both primary and secondary data of the company
and the analysis shown the researcher would like to recommend on the following points
over the internal control of receivables.
 Due to absence of strict follow up this receivables policy and procedures and lack
of management attention. Since one of the most activity is give credit for different
types of business sector and individual. so it is preferable that the bank has a
strong collection department which help the bank to collect its receivable
attentively, effectively.
 Even though the bank has limit for the giving of credit to the customer’s these is
not applied for all customers and this is done by the willingness of the
management, it is better if the bank uses its credit limit policy equally though the
related branches are under management of the same person.
33
 For some division there is no stated credit policy and procedure these should be
taken under consideration because it make the collection difficult.
 Sending of statement to the debtors should be made strictly, in this case the bank
send the statement but sometimes there is a delay.
 The bank takes action for those customers who do not pay on their due date but
sometimes there is no proper follow up or attention in these case immediate action
has to be taken.
 If the bank select those customers which are credit worthy it receivable will be
fully paid. Therefore, it’s better for CBE to undertake an appropriate credit
analysis and give credit only to those customers which are credit worthy.
 It is better for this bank to require additional guarantees from its customers
especially for big amount of credit services.
 It is advisable if CBE introduces an intrusive schema for its credit customers i.e.
those customers who pay earlier than the used pervious would get some discount
or bonus and CBE will have more cash and secures collection.

34
REFERENCES
A. Ross, W. Westerfie D. Jouden (1999). Corporate Finance (5th edition). American
Graigs. Beyien Pulisine.

Dyekman, Dukes Davis, (1995). Intermediate Accounting Volume 1 (3rd edition). USA.
VAN Hoffmann Press.

Fess, Warner (2001), Principles of Accounting, MC-Graw Hill, College, Blacklick,


Ohio, U.S.A.

Kieso, Wetgandt and Warfield (1998), Intermediate Accounting, New York: Wiley.

Mosich, A.N John Larsen (1989), Intermediated Accounting MC Graw Hill, U.S.A.

My Khan, Pkjain, (2004). Basic Financial Management (5th edition). India New Delhi:
Tata McGraw Hill Publishing.

Stanley, B. Block Geoffrey A. Hirt (1992), Foundations of Financial Management MC


Graw Hill. U.S.A.

Yednkachew Tesma, (1989). Auditing Part I, Module 1 - 3.

http://www. CBE. Gov.et

http://www. West.com/receivables
Appendix A
St. Mary’s University
Department of Accounting
Questionnaire for the Effect of Internal Control Over Receivables (Case
study of Commercial Bank of Ethiopia)

The purpose of this questionnaire is to collect primary data on the title of internal control
over account receivable on CBE. Please, take your time to complete the questionnaire
and return is as soon as possible. Ay of the information you present below will be kept
confidential and it will not be used for any other purpose other than academic.

1. How do you evaluate the internal control system over receivable in your Bank?
Very poor Poor Fair Good Very Good
2. If you answer is “very poor or poor” what should you recommend?
_

3. Is there time limitation for the collection?


Yes No
4. Does the bank have collection department independently to follow-up
receivables?
Yes No
5. If your answer is “No” what should you recommend?
_

6. Doses the bank communicates or contract with the credit customers by phone or
other method?
Yes No
7. If your answer is “No” what should you recommend?
_

8. In your opinion how do you evaluate the bank giving of credit limit to the credit
customer?
Very poor Poor Fair Good Very Good
9. If your answer is “very poor or poor” what should you recommend?
_

10. Does the Bank has specific credit term or agreement?


Yes No
11. If you answer is “No” what should you recommended?
_

12. Is statement of account receivable strictly prepared and sent to debtors?


Yes No
13. If your answer is “No” what should you recommend?
_

14. Does the bank uses prepare an account receivable aging report?
Yes No
15. How do you assess that credit customers pay according to their agreement?
Very High High Low Very Low
16. If your answer is “very low or low” what should you recommend?
_

17. Does the bank take sort actions for those customers who do not pay on due date?
Yes No
18. If your answer is “No” what should you recommend?
_

19. Does the bank change an account receivable to promissory notes receivables?
Yes No
20. If your answer is “No” what should you recommend?
_

21. Does the bank give credit with interest?


Yes No
22. Does the bank forces the credit customer to pay according to their credit
agreement or policy?
Yes No
23. If your answer is “No” what should you recommend?
_

24. Does the bank have a well established write-off method?


Yes No
25. Is there procedures that follow-up to write off uncollectible?
Yes No
26. If your answer is “No” what should you recommend?
_
DECLARATION

We, the undersigned student researchers, declare this research paper entitled “The Effect
of Internal Control over Account Receivable” the case of Commercial Bank of Ethiopia
Habte Georgis Branch” Is our on original work prepared under the guidance of Ato
Ahmed.

Name Signature
Hayat Fentaw __________________________
Meskerem Abera __________________________
Muhareba Nesro _________________________

Place of Submission: _______________________________


Date of Submission: _______________________________

Advisor Declaration
Name: _____________________________________
Signature: _____________________________________
Date: _____________________________________

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