Internal check is an arrangement of duties of members of staff in such a manner than the work performed by one person is automatically and independently checked by the others.
According to ‘F.R.M.De PAULA’, “Internal check means practically a continuous internal audit carried on by the staff it self, by means of which the work of each individual is independently checked by other members of the staff.”
According to ‘D.R. DAVAR,’ “Internal check is a system or method introduced with defined instructions given to staff as to their sphere of work with a view to control and verification of their work and also maintenance of accurate records as the ultimate aim.”
Objectives of Internal Check
- To exercise moral pressure over staff.
- To ensure that the accounting system produces reliable and adequate information.
- To provide protection to the resources of the business against fraud, carelessness and inefficiency.
- To distribute the work in such a business transaction is left unrecorded.
- To allocate duties and responsibilities of each clerk in such a way that he may be held responsible for particular fraud or error.
- To minimize the chances of errors, frauds or irregularities in the business based on the principle of division of labor.
- To detect errors and frauds easily if it is committed, because in an efficient internal check system, there is based on the principle of division of labour.
- To detect errors and frauds easily if it is committed, because in an efficient internal check system, there is a provision for independent checking.
Characteristics of Good System of Internal Check
- Responsibility: Responsibility of each individual must be properly defined and fixed. The work of the business should be allocated amongst various clerks in such a manner that their duties and responsibilities are clearly and judiciously divided.
- Completion: The work should be divided in such a way that no single person is allowed to complete the work solely by himself from the beginning to the end. However, there should be no duplication of work.
- Rotation of employees: A good system of internal check should not allow person having custody of assets to have access to the books of account. A system of transfer or rotation of employees from one seat of work to another must be followed by the business.
- Automatic check: A good system of internal check must provide for an automatic checking of the work of one clerk by the other.
- Reliance: No clerk of the business should be relied upon too much.
- Safeguards: Safeguards should be prescribed to keep un-used cheque books, files and securities etc.
- Supervision: A strict supervision should be exercised to ensure that the prescribed internal checks and procedures are fully operative.
- Formal sanction: No deviation should be allowed from the established procedures till it is formally sanctioned by the top official.
- Periodical review: The system of internal check be reviewed from time to time to introduce improvements.
Advantages of Internal Check
Some of the widely accepted advantages of an efficient system of internal check are as follows.
1. For the Business
- Proper division of work: Internal check entails a proper and rational distribution of work among the members of staff of the enterprises keeping in view their individual qualifications, experience and area of specialization.
- Detection of errors and frauds: since no individual worker is allowed to handle a job completely from the beginning to the end, and the work of each clerk is automatically checked by the other, this heaps in the early detection and discovery of errors and frauds and the possibilities of the commission of errors and frauds can be minimized.
- Increased efficiency coupled with economy: A good system of internal check increase the efficiency of work among the staff and leads to overall economy.
- Moral check: Knowledge of subsequent checking of each employees work by others, acts as a great check to commission of errors and frauds.
2. For the Auditor
- Quick preparation of final accounts: The Profit & Loss Account and the Balance Sheet are prepared without any loss of time.
- Convenience to Auditor: Where an organization is operating system internal check, the statutory auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests here and there and can relieve himself from detailed checking.
3. For the Owner
- Accuracy of the accounts can be relied upon: if there is a system of internal check the owner of the concern may rely upon genuineness and accuracy of the accounts.
- Increase in profits: Overall efficiency and economy in operations result in more profit – thus ensuring larger dividends for the owners or shareholders.
Disadvantages of Internal Check
Depending on each other proves fatal in the quick disposal of the work. if one person is absent, the day-to-day work will be seriously disrupted. Following are some of the disadvantages of a system of internal check:
- Costly for small business: A system of Internal check system quite expensive especially for small business houses.
- Quality is sacrificed for Promptness: In an internal check system quality of work declines because the clerks of the business attach greater importance to become quick and do not care if in the process their work gets substandardised.
- Carelessness among high officials: The possibility of some of the responsible and high officials being complacent, increases as they believe, though not always rightly, that under a sound system of internal check nothing can go wrong.
- Disorder in the working of a business: In the absence of a proper organized system of internal check there will be chaos and disorder in the working of business.
- Risky for an auditor: If the auditor does not apply tests and procedure his own and if he relies on the output of the system his work cannot be free from irregularities if the system itself proves to be defective.