Internal Check in Accounting

Internal Check: Meaning and Definition

• Internal check involves organizing staff duties in a way that one person's work is reviewed by another, aiding in fraud and error prevention.
• It is part of the internal control system, ensuring daily transaction checks without creating extra financial burdens.
• Spicer and Pegler define it as an arrangement preventing a single person from completing and recording every aspect of a transaction, thereby reducing fraud and errors.
• De Pallia likens internal check to a continuous internal audit conducted by staff.
• Prof. L.R. Dicksee emphasizes that internal check arrangements prevent or detect errors and fraud through book-keeping operations.
• D.R. Davar highlights its role in controlling and verifying work while maintaining accurate records.

Principles of Internal Check

• Sufficient Staff: Adequate staff should be appointed according to workload to avoid overloading, ensuring proper distribution of responsibilities.
• Division of Work: Work should be divided among departments, with managers accountable for timely completion.
• Coordination: Managers must coordinate efforts; failures in one area impact the overall organizational objectives.
• Rotation of Duties: Rotating responsibilities prevents boredom and enhances efficiency through exposure to different tasks.
• Responsibility: Clearly defined roles and responsibilities ensure accountability and minimize overlap.
• Automatic Machines: Utilize technology to enhance efficiency, limit fraud opportunities, and improve accuracy.
• Checking: Continuous checks are vital, as work passes through multiple hands, reducing errors and fraud likelihood.
• Simplicity: The internal check system should be straightforward, enabling staff to understand their roles easily.
• Documents Classification: Proper documentation, indexing, and filing streamline data management and retrieval.
• Dependent Work: Tasks should be structured so that completion relies on inputs from multiple employees.

Objectives of Internal Check

• Allocate duties so individuals are accountable for specific areas, facilitating error tracking.
• Minimize the risk of errors and fraud through systematic checks.
• Enhance clerks' efficiency through division of labor.
• Ensure all transactions are recorded to maintain accurate financial statements.
• Simplify final account preparations, making them more reliable.
• Foster moral accountability among staff.
• Prevent misappropriation of cash or goods.

Advantages of Internal Check

• Proper allocation leads to precision in work.
• Acts as a control device against fraudulent activities.
• Speeds up work efficiency as staff specialize in tasks.
• Improves staff skill and efficiency through well-planned job assignments.
• Simplifies the preparation of final accounts by maintaining up-to-date records.
• Establishes a moral check, discouraging errors and fraud.

Advantages from Different Perspectives

• Owners benefit through reliable account management, responsible accounting systems, and economical operations.
• Auditors can streamline their processes and focus on significant issues by relying on efficient internal check systems.
• Eases graphic assignment of duties, error detection, and leads to increased profitability through organized operations.

Disadvantages of Internal Check

• Can be costly for small businesses, making implementation difficult.
• May create complexity and confusion among staff, particularly management.
• Poorly designed systems can foster unhealthy work environments.
• Defective systems can complicate auditors' tasks.

Internal Check in Cash Sales

• Counter Sales Book: Sales staff should not handle cash; transactions recorded through cash memos with receipts handed to a cashier.
• Cash Register: Must maintain security and secrecy in operations, functioning independently from employees’ interference.
• Checking Copies: Auditors can utilize carbon copies of cash sales to verify totals over specified periods.
• Receipt of Goods: Cash memos accompany goods handed to customers, ensuring traceability of sales.