Internal Check PDF

Internal Check Meaning Internal check is an arrangement of the duties of the staff members of the Accounting functions in such a way that the work performed by a person is Automatically checked by another. Internal check is a part of the whole system of internal control and is best Regarded as...

Internal Check Meaning Internal check is an arrangement of the duties of the staff members of the Accounting functions in such a way that the work performed by a person is Automatically checked by another. Internal check is a part of the whole system of internal control and is best Regarded as the checks on the day to day transaction. It is an arrangement of Routine book keeping, where the work of one person is automatically checked By another so that errors and frauds are prevented or discovered without delay And without any additional financial burden for the firm. Definition According to 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 prevented and at the same time the possibilities of errors are Reduced to a minimum.” According to De Pallia “An internal check means practically a continuous Internal audit carried on by the staff itself, by means of which the work of each Individual is checked by the members of the staff.” Prof. L. R. Dicksee defines internal check as, “An arrangement of the Accounting routine that errors and frauds are automatically prevented or Discovered by the very operation of the book-keeping itself.” According to D. R. Davar,”Internal check is a system or method introduced With defined instructions given to staff as to their place of work with a view to Control and verification of their work and also maintenance of accurate records As the ultimate aim.” Principles of Internal Check 1. Sufficient staff: The principle of internal check is sufficient staff. The Employees can be appointed according to the workload. The Management can determine the amount of work, which is distributed Among the departments. The persons are hired to perform their duties. The overloading can create trouble for management. 2. Division of Work: Division of work is a principle of internal check. The management can determine the total amount of work. The whole Work is divided among the departments. The heads of such departments Are responsible for completion of work according to timetable. 3. Co-ordination: Coordination is a principle of internal check. All Departmental managers are bound to coordinate with others in order to Achieve organization objectives. When there is fault in one department, The work of other department suffers. The objectives cannot be Achieved. Internal check determines the degree of coordination among The managers.  4. Rotation of duties: Rotation of duties is a principle of internal check. The workers feel bore by doing the same work from year to year. There Is a need of rotation of duties. It is in the interest of concern as well as Employees. The efficiency is improved due to changes is duties. 5. 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. 6. Automatic Machines: According to the principles, machines must be Used to do accounting work if permissible. The machines can do a lot Work without delay. The changes of fraud and error are reduced to a Minimum. The working of machines improves efficiency of accounting Staff. 7. Checking: The principle of internal check is to check the work of other Employees. Many persons perform the work. The officers can put his Signatures to verify the work done by his subordinate. In this way one Work passes many hands. The chances of error and fraud are minimized Due to checking and counter checking. 8. Simplicity: The principle of internal check is that it is simple in Working. The employees can understand the working of internal check System. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. All workers can Understand their duties in the organization. 9. Documents classification: The classification of documents is the Principle of internal check. The business documents are prepared, Collected, recorded and placed in proper files. The index is prepared to compile the data. The hiring system is useful to place the latter, in case If needed documents are traced at once. 10. Dependent work: Dependent work is a principle of internal check. The Work of one employee is dependent upon others. One work passes in the Hands of two or three persons till it is complete. Objectives of Internal Check The objectives of internal check system are: To allocate duties and responsibilities of every clerk in such a way that He may be held responsible for a particular error or fraud. To minimize the possibilities of errors, frauds or irregularities. To detect errors or frauds easily if it is committed, as there is a provision For independent checking in internal check. To enhance the efficiency of clerks through assignment of duties based On the principle of division of labour. To distribute the work in such a way that no transaction is left Unrecorded. To prepare final accounts with easy and efficiency, as an efficient System can make accounts more reliable. To exercise moral pressure over staff. To prevent misappropriation of goods or cash by any clerk etc. Why to have internal check? / Purposes of Internal Check / Advantages of Internal Check Advantages from business point of view: (1) Proper allocation of work: Rational allocation of work among the Different staff members of the organisation brings precision in work. (2) Control device: The distribution of work under this system is such that It acts as a control device against unscrupulous employees. The chances Of fraudulent manipulation are thus minimized due to the existence of This check. (3) Speedy work: As the individual staff is engaged in the same type of Jobs for a considerable period of time, it results in the efficient Performance of the activities and high speed of work. (4) Increase in efficiency and skill: A good system of internal check Increases the efficiency of work among the staff due to its proper Planning for assigning the right job to the right person. (5) Easy preparation of final accounts: Since no individual worker is Allowed to handle a job completely and the work is divided among the Employees in a proper manner, the books of accounts can be kept up to Date, as a result, the final accounts can be prepared easily. (6) Creation of moral check: Knowledge of subsequent checking of each Employee’s work by another act as a great check to commission of errors And frauds. From the owner’s point of view: (1) Reliability on accounts: If there is a good system of internal check, the Owner of the concern may rely upon the genuineness and accuracy of The accounts. (2) Orientation of accounting: As the responsibility of each staff is clearly Defined and fixed, it develops a system of accounting which is known as Responsibility accounting. (3) Economical operation: Although it seems that the introduction of well- Integrated system of internal check is costly in actual practice, it is Observed that the staff patterns are so arranged that the existing staff be Properly filled in different operating areas involving no extra cost. From the auditor’s point of view: (1) Facilitation of audit work: Sound and efficient internal check system May facilitate to a greater extent, the work of the auditor by relying on “test check”. (2) Attention to other important matters: As the auditor gains confidence On the internal check system, he can avoid the basic routine checking Work to some extent and can give attention to other important matters. Other advantages are: a) It is very easy and convenient to assign duties to staff in a precise way. b) It is quite easy to detect and prevent errors and frauds in accounting Records. c) It acts as a scientific tool to increase the efficiency in operation by d) Accounting records can be kept intact and it will be helping the Organization to finalize the accounts quickly. d) By imposing moral check on the staff, it leads to economy in operation. e) An effective internal check system eases the work of an auditor. f) If it is operated efficiently in all parts of the concern, it automatically Results in increase of profitability and economy. Disadvantages Internal check suffers from certain limitations, which are listed as under:  a) It is an expensive system for a small scale concern, and hence it cannot Afford in all divisions of the organization. b) It may develop complexity among staff particularly with the top Management, which may damage the entire organization if anything Goes wrong. c) It may create unhealthy environment in the organization, if it is not Properly designed and adopted. d) The auditor’s work may become very difficult, if the system is defective And unorganized. Internal check as regards Cash Sales 1) Counter Sales Book: The salesmen can sell products over the counter. The sales book can be prepared on the basis of cash memos issued by The staff. The sales staff should not handle cash. All cash receipts must Be handed over to the cashier. Accountant can make entries in the books Of accounts. Another person can deposit cash. 2) Cash Register: Cash register is maintained in large retail shop. There is A need of secrecy for its working. The main equipment and attachments Must work without any interference from employees. 3) Checking Copies: The auditor can check carbon copies of cash sales. The copies can be used as a basis of determining total sales for a Particular period. 4) Receipt of Goods: The goods are handed over to the customer along With cash memo. The officer sales must check and sign the cash memo At the time of delivery of goods. One copy is kept for determining total Sales. Alerting the staff at all times. 5) Sales Summary: The sales summary must be prepared and sent to sales Manager. The sales summary must tally with the cash received from the Customers. 6) Cash Verification: The sales officer can check the cash memo for the Day. The sales summary should be examined. The cash collected must Tally with the cash memo as well as total sales summary for the day. 7) Cash Deposits: The cashier should not deposit the cash into the bank Account.