Internal Check is an integral function of the internal control system. It is an arrangement of duties of the staff members in such a way that the work performed by one person is automatically and independently checked by the other.
Following are the main objectives of Internal Check:
- To protect business from carelessness, inefficiency and fraud.
- To ensure and produce adequate and reliable accounting information.
- To keep moral pressure over staff.
- To minimize the chances of errors and frauds and to detect them easily on early stage if it is committed.
- To divide the work in such a way that no business transaction should be left unrecorded.
- To fix the responsibility of every clerk according to the division of work.
Principles of Internal Check
Let us now understand the principles of Internal Check:
- Responsibility: Allocation of business work amongst the various staff members should be done in such a way that their duties and responsibilities should be judiciously and clearly divided.
- Automatic check: Automatic checking of work of one employee by another forms part of a good Internal Check system.
- Rotation: Transfer or rotation of employees from one seat to another must be followed under good system of internal control.
- Supervision: Prescribed procedures and Internal Check should be strictly supervised.
- Safeguard: To safeguard files, securities, cheque books is also recommended in Internal Check.
- Formal Sanction: Without formal sanction, no deviation should be allowed from the established procedures.
- Reliance: Under good system, too much reliability on one employee should not be there.
- Review: From time to time, system of Internal Check should be reviewed to introduce improvement.
Advantages of Internal Check
Following are the advantages of a good system of Internal Check:
From the Owner’s Point of View
- Good system of Internal Check provides accurate, reliable and genuine accounting record and data to the owner of the business on which he can rely upon.
- Economy in operations and overall efficiency in system due to good Internal Check may result in more profits.
From the Auditors Point of View
- Due to efficient system of Internal Check, the statutory Auditor can avoid deep and detailed checking of transactions. He may rely on test checks, hence Internal Check provides convenience to Auditor.
- Since the Balance Sheet and the Profit and the Loss account is prepared without wasting of time, hence quick preparation of final accounts is possible.
For the Business
- Moral Check: Great check to commission of errors and frauds is possible with knowledge of subsequent checking of work of each employee by others.
- Detection of Errors and Frauds: This helps in early detection of errors and frauds because work of each clerk is checked by another automatically and no one is allowed to do complete work from the beginning to the end.
- Proper Division of Work: According to qualification, experience and area of specialization of work, proper and rational distribution of work among the members of staff is done.
- Increases Efficiency: A good internal control system provides increased efficiency of work coupled with overall economy.
Disadvantages of Internal Check
- It is costly for small business units.
- If Internal Check system is not properly organized, there are chances of disorder in the working of business.
- There might be instances where the quality of the product and the work is compromised with by the staff members due to greater importance to faster results.
- An Auditor cannot be relied on if he does not conduct tests with procedures of his own.