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Internal Check: Definition and Principles

The document defines and discusses internal checks, which involve dividing duties among staff in an accounting system to prevent errors and fraud. It outlines the key objectives, principles, characteristics, advantages, and disadvantages of internal checks. Specifically, internal checks aim to minimize errors and fraud through complementary allocation of duties and independent verification of work. The principles include no single person having control and duties changing over time. Advantages are deterring dishonesty and detecting issues early, while disadvantages include potential costs and ineffectiveness for small businesses.

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6K views4 pages

Internal Check: Definition and Principles

The document defines and discusses internal checks, which involve dividing duties among staff in an accounting system to prevent errors and fraud. It outlines the key objectives, principles, characteristics, advantages, and disadvantages of internal checks. Specifically, internal checks aim to minimize errors and fraud through complementary allocation of duties and independent verification of work. The principles include no single person having control and duties changing over time. Advantages are deterring dishonesty and detecting issues early, while disadvantages include potential costs and ineffectiveness for small businesses.

Uploaded by

Sowmya Yiascm
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Characteristics of Internal Check System
  • Internal Check: Definition and Scope
  • Principles of Internal Check
  • Advantages and Disadvantages of Internal Check
  • Types of Audit Programs

Internal Check: Definition, Objectives, Principles, Characteristics

The internal check is an arrangement of the duties of the staff members of the accounting functions in such a way that another
automatically checks the work performed by a person.

What is Internal Check?

In the opinion of 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 activated and at the same time the possibilities of errors are reduced to the minimum.”

L.R. Dicksee defines an internal check as “such an arrangement of book-keeping routine that errors and frauds are likely to be
prevented or discovered by the very operation of the book-keeping itself.”

Internal check means practically a continuous internal audit carried on by the staff itself, using which other members of the staff
independently check the work of each individual.

An internal check has been defined by The Institute of Chartered Accountants of England and Wales (ICAEW) as; “the checks on
-a day to day transactions which operate continuously as part of the routine system, where the work of one person is proved
independently or in complementary to the work of another, the object is the prevention or early detection of errors or frauds.”

An internal check is a continuous process and is part of the day-to-day routine. It relates to all the transactions that take place
every day. An internal check is achieved by a complimentary allocation of duties and by independent verification of the work of
one person by another.

Essential Characteristics of Internal Check System

Certain qualities are needed to make an internal check system more effective and efficient. Such qualities are known as features
of internal check system, which are as follows:

1. Division of Work

No one should be allowed to have the right to perform the work from origin to end.

For example – a transaction of sale may have to be split into a display of article by staff, the preparation of invoice by another,
the receipt of cash against the invoice by a third clerk, the delivery of article against the proof of receipted invoice by another
clerk, checking of outward movement of an article against delivery order by a clerk and so on.

In big business houses, such specialized tasks increase the speed of work and automatically introduce internal checks.

2. Provision of Check

An organization should set up such provisions so that work can be checked by another staff. An officer can check the work of one
staff by transferring to the staff and again.

3. Use of Devices

In this modem world, various devices can be used to do various functions like the use of time record machines, wage
determination machines, etc. An organization should use machines that help to make work of internal check easier.

4. Self-balancing System
An organization can use self-balancing ledger accounts, which help to make the work of internal check easier. Its effectiveness
depends on its management.

5. Job Rotation

No individual clerk should be allowed to occupy a particular area of operation for long. Familiarity with and exclusiveness in a
position offer a person greater flexibility to attempt manipulation with the system.

6. Specialization

Every staff may not have such specialized knowledge to maintain accounts properly. So, an organization should give the training
to increase their skills so that internal checks can be made more effective.

7. Control

There is more chance of frauds where there is direct contact between consumers or the public. So, a manager can keep eyes in
those works so that the internal check system can be made more effective.

8. Authority Level

There must be clear cut authority levels according to sanctions to various transactions. Commensurate to the authority vested,
responsibility must be extracted. The existence of authority levels results in a review of the operations of subordinates.

Objectives of Internal Check

There are several objectives of the internal check. They are given below:

1. To minimize the possibility of error, fraud, and irregularity.


2. To prevent the misappropriation of cash and goods.
3. To allocate duties and responsibilities to every clerk in the organization.
4. To ensure an accurate recording of all business transactions.
5. To enhance the efficiency of the clerk in the organization.
6. To exercise moral influence over the staff member.
7. To prepare a final account with ease and efficiency.

Principles of Internal Check

An internal check is based on some specific principles. Without which, an internal check is of no use. These principles are given
below:

a. The process should be allocated among the staff of the business according to the duties, responsibility, and rights in such a. There
is no room for interference.
b. No single person should have independent control over the all-important aspects of the business.
c. The duties among the staff of the business should be changed from time to time so that no staff should be engaged in a particular
job for a long time.
d. Every member of the staff should be encouraged to go on leave at least once in a year .this will help in detecting concealed fraud.
e. An efficient system of internal check should provide for automatic checking of the work of an assistant by others.
f. The division of work should not be much expensive.
g. The self-balancing system should be invariably used.
h. The financial and administrative power should be assigned very judiciously to different officers.
i. A person having physical custody of assets must not be permitted to have access to the books of account.

Advantages of Internal Check

The main advantages of an internal check are listed below:


1. Moral Influence on Employees

The system of internal check puts a morale check on members of staff and enables them to learn honesty, hard work, and
straightforwardness.

2. Determination of Employees Liability

The system of the internal check determines the responsibilities of employees. The member of the staff may be held responsible
for any irregularity carried on by him.

3. Less Possibility of Frauds

There is less possibility of fraud under the system of the internal check because errors and frauds can be detected at an early
stage.

4. Increase in Efficiency

The system of internal check ensures greater .efficiency and speed because the arrangement of internal check is based on a
division of labor.

5. Auditing Made Easy

The system of internal check facilitates the work of auditors to a great extent by enabling him to relay on test checking.

6. Final Accounts Can Be Prepared

In an internal check system, the ‘Profit and Loss Account’ and Balance Sheet is prepared without any loss of time.

7. Correct and Complete Records of all the Transactions

The system of an internal check may also result in correct and complete records of all the transactions on each balancing of the
books of accounts.

8. Detection of Dishonesty or Irregularity

Any dishonesty or irregularity in the concern by the members of staff can be detected before they assume any complication.

9. Test Checking Possible

Suppose the auditor finds the system of internal cheek satisfactory. Then by taking into mind, it defects or weak points he can
take the help of test checking.

Disadvantages of Internal Check

The defects or weak points of the system of an internal check are listed below:

1. Expensive

The system of Internal Check is more expensive and time-consuming.

2. Slackness in the Work


This is also a serious defect of the system of internal check. The auditor may show slackness at work. He may rely on the system
of internal check blindfold, which may affect the quality of audit work adversely.

3. Not Suitable for Small Concern

The system of internal check is not suitable for small concern as it may be uneconomical in small concern.

4. Grouping among Employees

If the employees of the concern join hand, they may keep the employer in the dark and may cause many irregularities defying
any-detection thereof.

This groupism amongst the employees may not be healthy.

Types of Audit Programs

The two main types of audit programs are:

1. Fixed Audit Program

2. Flexible Audit Program

Fixed Audit Program

A fixed audit program is a set of standardized instructions that need to be followed by the auditor while conducting the audit. It
includes all possible audit procedures to be followed during the audit although all of them may not be applicable in a situation. A fixed
audit program aims to take care of every possible audit situation that may arise during an audit.

The disadvantage of the fixed audit program is that it is very rigid and nothing is left to the discretion of the audit team. Also, it is
difficult to follow the same audit program even in the same organization over the years, as the conditions in the organization are likely
to change.

Flexible Audit Program

A flexible audit program is one that does not prescribe the exact audit procedure to be followed by the auditors while conducting an
audit. It simply gives an outline of the scope, nature and limitations of the audit assignment to be conducted. Also, the nature of work
to be performed by each person of the audit staff is not predetermined under it. The auditors decide most of the things as the work
proceeds and the reliability of procedures and internal control system become known to the auditor.

Common questions

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Devices and technologies such as time record machines, wage determination machines, and self-balancing ledger accounts can be employed in an internal check system to improve accuracy and efficiency . These tools facilitate precise recording and calculation, reduce human errors, and speed up routine tasks by automating processes . The use of such technologies supports the system's objective of minimizing errors and fraud by ensuring that work is independently verifiable and consistently recorded, contributing to a reliable and efficient operational system . Additionally, they reduce the need for direct oversight, allowing employees to focus on more complex tasks .

The essential characteristics of an effective internal check system include division of work, provision of checks, use of devices, a self-balancing system, job rotation, specialization, control, and authority level. Division of work ensures no single person completes an entire transaction, which reduces opportunities for fraud and error . The provision of checks requires that work can be independently verified by another staff member . Devices, such as time record machines, can simplify the work of internal checks . The self-balancing system helps maintain accurate records and simplifies error detection . Job rotation prevents familiarity and potential manipulation . Specialization and training increase staff skills for effective internal checking . Control measures are essential where there's direct public contact to mitigate fraud risk . Authority levels ensure responsibility and accountability, facilitating review and oversight .

The principles of an effective internal check system include the appropriate allocation of responsibilities among staff, avoiding overlap and interference, and ensuring no individual has control over all important aspects of transactions . Roles should periodically rotate, and employees should take mandatory leave to allow for detection of discrepancies or fraud . The system should encourage automatic checking of work by others, and work division should be economical . Clear authority levels must be established to align responsibility with power, and the custody of assets should be separated from bookkeeping responsibilities to prevent misuse .

The system of internal checks minimizes fraud by implementing a structure where no single person has complete control over all aspects of a transaction, thereby reducing the opportunities for fraudulent activity through collusion or individual manipulation . It encourages moral behavior, holds employees accountable for their actions, and allows for early detection of errors and fraud through continuous checks and balances . By promoting transparency and reducing the chance for isolated control, internal checks provide a deterrence for fraudulent actions and facilitate a more secure environment for organizational operations .

Job rotation within the internal check system plays a crucial role in fraud prevention by ensuring no single employee stays in one job for too long, thus preventing the familiarity that might lead to manipulation or fraud . It also enhances employee effectiveness by broadening skills and exposure, which can lead to better understanding of the organization and its operations . However, frequent job rotation may lead to temporary declines in productivity as employees adjust to new roles. Overall, it fosters an environment of transparency and accountability, further strengthening internal controls .

The internal check system facilitates the preparation of final accounts by ensuring that transactions are accurately recorded and verified continuously, which streamlines the process of balancing books and identifying errors . The system's emphasis on a self-balancing ledger further simplifies the closing of accounts and preparation of financial statements . With tasks divided and cross-verified, discrepancies are minimized, allowing for efficiency and speed in finalizing accounts . As a result, final accounts, like the Profit and Loss Account and Balance Sheet, can be prepared with less time and effort at the end of the financial period .

An auditor might face several challenges due to over-reliance on the internal check system, such as a tendency to show slackness in audit procedures, which can compromise the quality of the audit . Relying blindly on the internal check can lead to overlooking potential errors and frauds not detected by the system, particularly those involving collusion among employees . The rigidity of relying solely on internal checks might also limit the auditor's ability to identify systemic weaknesses or anticipate unique situations not covered by the existing check processes .

The internal check system enhances the efficiency of clerical staff by streamlining division of labor, which allows tasks to be completed more quickly and with fewer errors due to specialization . Continuous verification and independent checks create an environment of accountability, reducing time spent on error correction and enhancing focus on routine tasks . Additionally, the system encourages the use of devices and automation tools, which can speed up work processes and improve accuracy in clerical tasks .

An internal check system may be unsuitable for small businesses primarily due to its complexity and cost. Implementing such a system typically involves significant administrative overhead and expense, making it uneconomical for small entities . Additionally, small businesses might lack the personnel needed to effectively divide tasks without causing strain on resources. The rigorous structure and procedures required could also hinder the flexibility a small business might need to adapt quickly to changing conditions .

The advantages of a fixed audit program include providing a comprehensive checklist for auditors, ensuring thoroughness and helping maintain consistency across different audits. However, it is rigid and cannot adapt easily to organizational changes or unique situations . In contrast, a flexible audit program offers adaptability and allows auditors to tailor procedures to specific circumstances, which can be advantageous in dynamic environments. Yet, this flexibility may lead to inconsistencies and may depend heavily on the auditor's experience and judgement .

Internal Check: Definition, Objectives, Principles, Characteristics The internal check is an arrangement of the duties of the
An organization can use self-balancing ledger accounts, which help to make the work of internal check easier. Its effectivene
1. Moral Influence on Employees The system of internal check puts a morale check on members of staff and enables them to lear
This is also a serious defect of the system of internal check. The auditor may show slackness at work. He may rely on the sys

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