Internal Check

What is Internal Check?

Internal Check refers to the checks on routine operations or activities that take place on a continuous basis, as a part of ab ordinary system. In this system, the work performed by a person is proved independently or it is complementary to the work of another. And so without any collusion between two or more staff members, fraud and errors can be activated and the occurrence of the errors can be reduced to a minimum.

Therefore, the primary objective of an internal check is to prevent or detect fraud or error in its early stages. In addition, this system relies on two main principles which are:

  • Division of Work
  • Delegation of Duties

Above all, an internal check is a part of the internal control system. In addition, it acts as an integral part as far as the staff organization and job allocation features are concerned.

In accounting, it refers to the system of bookkeeping and staff arrangement in a way that no single person in an organization can carry through a transaction and record all the aspects completely.

Considerations for Framing Internal Check System

The considerations are classified into basic considerations and other considerations:

internal-check-considerations

Basic Considerations

  • Assignment of Work: No one person should be made fully responsible for undertaking different aspects of a transaction. Therefore, all the acts and dealings of each employee must be reviewed by another.
  • Job Rotation: There should be the implementation of job rotation at periodic intervals. This will ensure a change in duties from time to time, for which no notice is provided beforehand. In this way, the same officer or subordinate does not without any break perform similar work for a long time.
  • Compulsory leave: Employees should be encouraged to take leaves at least once a year for a week or more so that their work can be checked easily. Over time, it has been observed that employees can hide their frauds easily when they are present and easily detect when they are on leave.
  • Separation of Inter-related Jobs: If a person is having physical custody of the organization’s valuable assets, he is not authorized to access the account books.
  • Use of mechanical devices: With an aim of preventing loss or cash misappropriation, automatic cash registers or surveillance cameras must be used.
  • Safeguards: If possible, trading activities should be suspended, for the purpose of stock taking at the end of the year. The stock-taking task and evaluation should be performed by the staff from different departments. As stock-taking by the stock section staff can under or overstate stock, in the absence of any check.
  • Employee Transfer: Employee transfer without prior notice can also help in the detection and prevention of errors and frauds to a great extent.
  • Budgetary Control: Introduction of the budgetary control system. Also, a comparison should be made between actual and budgeted figures.

Other Considerations

  • Supervision: When there exists strict and consistent supervision to ensure that the internal check and procedures are working properly.
  • Functional Differentiation: There has to be a fine line of difference between custodial and recording functions in the organization.
  • Periodical Review: There should be a judicious distribution of financial and administrative powers among different officers of the company. And that too in a way that it can be exercised and reviewed at periodic intervals.
  • Clear definition of responsibility: There should be a clear definition of duties and responsibilities of every employee of the organization.

Objectives

The main objectives of the internal check are to:

  1. Lessen the possibility of fraud and error.
  2. Identify fraud and error at an early stage due to independent checking.
  3. Improve the efficiency of the workforce, by implementing division of labor.
  4. Allocate the duties and responsibilities of each worker in a way that they can be easily identified and held responsible for the actions performed.
  5. Receive confirmation of facts and entries both physical as well as financial by way of presentation and necessary maintenance of records.
  6. Exercise moral pressure on the workforce with the implementation of a continuous receive process.
  7. Reduce the workload of independent auditors by adopting an internal check system.

Examples

Suppose there are cash sales, the counter salesman prepares a cash memo. After that, the buyer of the goods pays cash to the cashier. And then gets the delivery of goods when he presents the cash memo. Now, an independent accountant will perform the recording of the transaction who has no relation with the sales department of the concern.

Advantages of Internal Check

For Business

  • Proper work division
  • Identification of fraud and error
  • Increased efficiency
  • Control device
  • Easy Preparation of Accounts

For Owners

  • Reliability on accounts
  • Economical Operation

For Auditor

  • Quick checking of accounts
  • Facilitation of audit work

Wrap Up

Therefore, an internal check system is one where the division of work among the staff members takes place in a way that no one person can undertake the entire function right from its start to end solely. And the arrangement of work is in a manner that one person’s work is automatically verified by another.

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