What is meant by the term Internal Check? State the Objectives of Internal Check. What is the position of an auditor in Relation to Internal Check?

Meaning of Internal Check:

Internal Check is a valuable part of internal control. it is an arrangement of duties of the staff is such a manner that the work performed by one individual is automatically checked by another person is a run time course. Some definitive of internal Checks are given below-

According to Spiear and Peglar:

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 the two or more persons a fraud is prevented and at the same time the possibilities of errors are reduced to a minimum.

According to the Committee of Terminology, American Institute of Accountants,1949:

Internal Checks, a system under which the accounting methods and details of an establishment are so laid out that the accounts and procedures are not under the absolute and independent control of any one person, that on the contrary, the work of one employee is complementary to that of another, and that a continuous audit of the business is made by employees.”

Thus, internal.check means the distribution of the work amongst various members of the staff in such a way that the work done by one is checked by another.

No one person is allowed to carry out a transaction alone from the beginning to the end. Errors and frauds under an effective system of internal check, cannot remain undetected unless there is a collusion. It does not make frauds impossible, but the possibility of frauds is minimized and chances of detection increased.

Objectives of Internal Check

To allocate duties and responsibilities to every clerk in such a way that he may be held responsible for a particular error or fraud.

To minimize the possibilities of errors, fraud or irregularities.

To detect errors or fraud easily if it is committed, as in an efficient system of internal check, there is provision for independent checking.

To enhance the efficiency of clerks in a business as the assignment of duties is based on the principle of division of labor.

To distribute work in such a way that no business transaction is left from being recorded.

To prepare the final accounts with ease and efficiency, as an efficient system of internal check can make accounts more regular and reliable.

To exercise moral pressure over the a staff.

Fundamental Principles /Features /Elements of Good Internal Check System A good internal check system has the following features:

The work of business should be allocated amongst various clerks in such a manner that their duties, rights and responsibilities may be clearly and judiciously divided leaving no room for any interference.

Important work like the payment of wages, valuation of stock, sales, etc, should be done under strict supervision and control.

The distribution of work should be done so carefully that no single person is allowed to do a job solely by himself from the beginning to the end.

It should be seen that some responsible person is assigned the task of dealing and corresponding with the debtors and creditors of the business.

Nobody should be relied too much.

There should be proper filing of vouchers, correspondence etc.

One person should be entrusted with the similar nature of work. It is necessary for efficiency and specialization.

Jobs relating to bad debts, allowances, returns, etc., should be performed under strict control,

It is also necessary that no clerk should be engaged on a particular job for long, change in duties would become essential but it will absolutely depend upon the circumstances prevailing before a business. Nevertheless, such a change in duties should be made without making it known to those concerned.

An efficient system of internal check must provide for an automatic checking of the work of an assistant by another.

The division of work should not be expensive.

For making the system of internal check efficient and successful the use of self balancing system should invariably be made.

Labor saving devices such as cash register, calculating machines, time recording clocks, etc., should be made use of.

A responsible official should be made responsible for receiving letters, etc. All important letters, registered envelopes
and money orders should be entered in a proper register and then passed on to the clerks concerned.

All the cash received should be sent daily to the bank.

Persons dealing with cash, securities, cheques, etc., should be compelled to take annual holidays in unbroken periods.

The purchase, receipt and issue of goods should always be done under strict supervision and control. No one should be permitted to take away any goods without proper sanction.

Finally the system must be capable of being expanded or contracted to correspond to the size of the concern

Auditor’s Duties in relation to internal check.

It is no part of an Auditor’s duty to prescribe the system of internal check for any business, but in case a system of internal check is in operation, he must check its efficiency and find out its weak points. In a large business concern it becomes difficult for an auditor to carry out a detailed checking.

He would prefer to have test checking but he can do this only when he is satisfied about the efficiency and reliability of the system of internal check in force in the business.

Thus, internal check largely determines the nature and extent of the scope of an auditor’s work. It determines to a great extent the examination of details which the auditor may consider necessary to undertake and the extent to which reliance can be placed upon test checking.

A good and effective system Of internal check may relieve him of a large part of detailed checking and he may give his attention to more important matters. Wherever the system is found to be unreliable because of its fundamental weaknesses, the auditor should take up the checking of the whole of the transactions of the business

An auditor must satisfy himself that the internal check is properly conceived and is being satisfactorily carried out before deciding to accept the checking that has already been done by the internal staff of the concern, as adequate, warranting curtailment of the area of checking that he should carry out.

If on examination of the system of internal check, the Auditor finds that there are certain weaknesses, and as a result of those, it would be necessary for him to extend the scope of detailed examination, he must point out this fact to his client so that internal check in that regard maybe strengthened in future.

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