An internal check is a continuous process of the accounting system to check for errors or fraud in bookkeeping operations for early detection and prevention. The internal check is an arrangement of the duties of the staff members of the accounting functions in such a way that another automatically checks the work performed by a person.
Let’s understand what internal check is all about.
What is Internal Check?
In the opinion of Spicer and Pegler, “A system of internal check is an arrangement of staff duties, whereby no one person is allowed to carry through and to record every aspect of a transaction so that without collusion between two or more persons, fraud is activated and at the same time the possibilities of errors are reduced to the minimum.”
L.R. Dicksee defines an internal check as “an arrangement of book-keeping routine that errors and frauds are likely to be prevented or discovered by the very operation of the book-keeping itself.”
Internal check means a continuous internal audit carried on by the staff, using which other staff members independently check each individual’s work.
An internal check has been defined by The Institute of Chartered Accountants of England and Wales (ICAEW) as; “the checks on -a day to day transactions which operate continuously as part of the routine system, where the work of one person is proved independently or in complementary to the work of another, the object is the prevention or early detection of errors or frauds.”
An internal check is a continuous process and part of the daily routine. It relates to all the transactions that take place every day. An internal check is achieved by a complimentary allocation of duties and by independent verification of the work of one person by another.
Characteristics or Features of Internal Check System
8 qualities make an internal check system more effective and efficient.
- Division of Work
- Provision of Check
- Use of Devices
- Self-balancing System
- Job Rotation
- Specialization
- Control
- Authority Level
Division of Work
No one should be allowed to have the right to perform the work from origin to end.
For example – a transaction of sale may have to be split into a display of article by staff, the preparation of invoice by another, the receipt of cash against the invoice by a third clerk, the delivery of article against the proof of receipted invoice by another clerk, checking of outward movement of an article against delivery order by a clerk and so on.
In big business houses, such specialized tasks increase work speed and automatically introduce internal checks.
Provision of Check
An organization should set up such provisions so that work can be checked by other staff. An officer can check the work of one staff by transferring to the staff and again.
Use of Devices
In this modem world, various devices can perform various functions like time record machines, wage determination machines, etc. An organization should use machines that help to make the work of internal checks easier.
Self-balancing System
An organization can use self-balancing ledger accounts, which help to make the work of internal checks easier. Its effectiveness depends on its management.
Job Rotation
No individual clerk should be allowed to occupy a particular area of operation for long. Familiarity with and exclusiveness in a position offer a person greater flexibility to attempt manipulation with the system.
Specialization
Every staff may not have such specialized knowledge to maintain accounts properly. So, an organization should give training to increase their skills so that internal checks can be made more effective.
Control
There is more chance of fraud where there is direct contact between consumers or the public. So, a manager can keep an eye on those works so that the internal check system can be more effective.
Authority Level
There must be clear-cut authority levels according to sanctions for various transactions. Commensurate to the authority vested, responsibility must be extracted. The existence of authority levels results in a review of the operations of subordinates.
Objectives of Internal Check
There are several objectives of the internal check. They are given below:
- To minimize the possibility of error, fraud, and irregularity.
- To prevent the misappropriation of cash and goods.
- To allocate duties and responsibilities to every clerk in the organization.
- To ensure an accurate recording of all business transactions.
- To enhance the efficiency of the clerk in the organization.
- To exercise moral influence over the staff member.
- To prepare a final account with ease and efficiency.
Principles of Internal Check
An internal check is based on some specific principles. Without which, an internal check is of no use. These principles are given below:
- The business staff should allocate the process according to the duties, responsibilities, and rights. There is no room for interference.
- No single person should have independent control over the all-important aspects of the business.
- The duties among the business staff should be changed from time to time so that no staff should be engaged in a particular job for a long time.
- Every staff member should be encouraged to go on leave at least once a year. This will help in detecting concealed fraud.
- An efficient system of internal checks should provide for automatic checking of the work of an assistant by others.
- The division of work should not be much expensive.
- The self-balancing system should invariably be used.
- The financial and administrative power should be assigned very judiciously to different officers.
- A person having physical custody of assets must not be permitted access to the account books.
Advantages of Internal Check
The main advantage of an internal check is that it keeps a tap on the organization’s internal operations. 9 advantages of internal check;
- Moral Influence on Employees
- Determination of Employees’ Liability
- Less Possibility of Frauds
- Increase in Efficiency
- Auditing Made Easy
- Final Accounts Can Be Prepared
- Correct and Complete Records of all the Transactions
- Detection of Dishonesty or Irregularity
- Test Checking Possible
Moral Influence on Employees
The system of internal checks puts a morale check on staff members and enables them to learn honesty, hard work, and straightforwardness.
Determination of Employees’ Liability
The system of the internal check determines the responsibilities of employees. The staff member may be held responsible for any irregularity carried on by him.
Less Possibility of Frauds
There is less possibility of fraud under the system of the internal check because errors and frauds can be detected early.
Increase in Efficiency
The internal checks ensure greater .efficiency and speed because the arrangement of internal checks is based on a division of labor.
Auditing Made Easy
The internal checks system facilitates auditors’ work to a great extent by enabling them to rely on test checking.
Final Accounts Can Be Prepared
In an internal check system, the ‘Profit and Loss Account’ and Balance Sheet is prepared without any loss of time.
Correct and Complete Records of all the Transactions
The system of an internal check may also result in correct and complete records of all the transactions on each balancing of the books of accounts.
Detection of Dishonesty or Irregularity
Any dishonesty or irregularity in the concern by the staff members can be detected before they assume any complication.
Test Checking Possible
Suppose the auditor finds the system of internal cheek satisfactory. Then by considering defects or weak points, he can take the help of test checking.
Disadvantages of Internal Check
Even though internal checks are advantageous for a company, internal checks have a few disadvantages. 4 disadvantages of internal check;
- Expensive
- Slackness in the Work
- Not Suitable for Small Concerns
- Grouping among Employees
Expensive
The system of Internal checks is more expensive and time-consuming.
Slackness in the Work
The auditor may show slackness at work. He may rely on the system of internal check blindfolds, which may adversely affect the quality of audit work. This is also a serious defect of the system of internal checks.
Not Suitable for Small Concerns
The system of internal checks is not suitable for small concerns as it may be uneconomical in small concerns.
Grouping among Employees
If the concerned employees join hands, they may keep the employer in the dark and may cause many irregularities defying any detection thereof. This grouping amongst the employees may not be healthy.
Despite these four disadvantages, performing internal checks is crucial for all types of organizations. Internal auditors are responsible for conducting internal checks and audits.
