INTERNAL CONTROL, INTERNAL CHECK AND INTERNAL AUDIT

INTERNAL CONTROL
According to W.W.BIGG: Internal Control is best regarded as indicating the whole system of
controls, financial and otherwise, established by the management in the conduct of a business,
including internal check, internal audit and other forms of control.
PURPOSE OF INTERNAL CONTROL
The objectives or purposes of Internal Control system is classified in two types:
a. FROM CLIENTs POINT OF VIEW
b. FROM THE AUDITORs POINT OF VIEW
(A) FROM CLIENTs POINTOF VIEW:
Cost Benefit Analysis is applied by the management to assess and select a particular method of
control and its applicability to the business conditions. The benefits which the internal control
system offers are:
a. Providing reliable data: Business decisions require accurate information to run the business
activities efficiently. Examples of significant areas where management requires reliable information
are fixation of selling prices, production directives depending on requirements etc.
b. Safeguarding assets and records: The physical assets of a company can be stolen, misused, or
accidently destroyed, if not properly protected by adequate controls. The same is true of nonphysical assets such as accounts receivable, important documents (e.g. confidential government
contracts) and records (e.g. the general ledger and journals). The safeguarding of certain assets and
records has become increasingly important since, the advent of computer system. Large amounts of
information stored on computer media such as magnetic tape can be destroyed permanently if care is
not taken to protect them.
c. To promote operational efficiency: The controls within an organization are meant to prevent
unnecessary duplication of efforts, protect against waste in all aspects of the business, and
discourage other types of inefficient use of resources.
d. To encourage adherence to prescribed policies: The system of internal control is meant to provide
reasonable assurance that procedures and rules of the various institutes are followed by company
personnel.
(B) FROM AUDITORS POINT OF VIEW:
The study and evaluation of the clients system of internal control is important to auditors. The
auditors must have a thorough understanding of the system. A birds eye-view of the controls fail to
meet the standard of due care. There is a difference between the system that is supposed to be in

operation and the one actually being used. Simply by asking certain questions, reviewing of the
organization chart and studying a few procedure manuals to obtain an understanding of the system is
not sufficient. No doubt, these are important parts of reviewing the system, but to obtain an adequate
understanding the system must also be tested.
There are two ways in which the study and evaluation of the clients of internal control is used.
a) To determine whether an audit is possible: if possible, then
b) To determine the scope of audit.
ELEMENTS/ CHARACTERISTICS/PRINCIPLES OF INTERNAL CONTROL
An effective or a good system of internal control should have the following characteristics which can
be abbreviated as CROSSASIA for memory.
a.
b.
c.
d.
e.
f.
g.
h.
i.

COMPETENT AND TRUSTWORTHY PERSONNEL

RECORDS, FINANCIAL
ORGANISATIONAL PLANS
SEGREGATION OF DUTIES
SUPERVISION
AUTHORISATION
SOUND PRACTICES
INTERNAL AUDIT
ARTHIMETIC AND ACCOUNTING CONTROLS.

COMPETENT AND TRUSTWORTHY PERSONNEL

Personnel are the most important element of any system of internal control. If employees are
competent and trustworthy, some of the other characteristics can be absent and reliable financial
statements can still result. On the other hand, if the other characteristics of control are strong,
incompetent or dishonest people can reduce the system to shambles.
RECORDS, FINANCIAL AND OTHER ORGANISATIONAL PLANS
Documents perform the function of transmitting information throughout the clients organization and
between different organizations. The documents must be adequate to provide correctly recorded. For
example, if the receiving department fills out a receiving report when material obtained, the accounts
payable department can verify the quantity and description on the vendors invoice by comparing it
with the information on the receiving report.
SEGREGATION OF DUTIES
For the prevention of both intentional and unintentional error, following types of segregation of
duties should be taken care of:
(i) Separation of Operational Responsibility from record-keeping responsibilities: If each department
or division in an organization is responsible for preparing its own records and reports, there would
be a tendency to bias the result to improve its reported performance. So in order to ensure unbiased

information, record keeping is typically included in a separate department under the controller ship
function.
(ii) Separation of the Custody of Assets from Accounting: To protect the firm against the frauds, it is
required that the custody of assets and their accounting should be done by different persons. When
one person performs both functions, there is a risk of his disposing of the assets for personal gain
and adjusting the records to relieve him/her of responsibility for the assets.
In an electronic data processing system, any person with custody of assets should be prevented from
performing the programming function and should be refused access to punched cards, floppy or
other input records. As a general rule, it is desirable that any person performing an accounting
function, whether it will be in an electronic data processing or in a manual system, should be refused
access to assets that can be converted to personal gains.
SUPERVISION
Directors should review the companys financial operations and position at regular and frequent
intervals. Comparison with results for previous periods indicates discrepancies that call for further
examination where budgetary control is in use, attention will be drawn to material variances and
explanations required. From time to time, special reviews of particular items such as stocks, or the
operation of the wages department, should be undertaken.
AUTHORISATION
If control is to be satisfactory, every transaction must be properly authorized. If any person in an
organization could acquire or expand assets at will, complete chaos result.
Authorization can be of two types:
i.
ii.

General
Specific

Examples of general authorization are the issuance of fixed price lists for the sale of product, credit
limits for customers and fixed automatic re-order points for making purchases.
An example of specific authorization is a sale transaction by the sale manager for a used car of the
company. The individual or group which can grant specific or general authority for transaction
should hold a position commensurate with the nature and significance of the transactions, and the
policy for such authority should be established by the management.
SOUND PRACTICES
Sound practices of administration require that established procedures, polices and delegation of
responsibility should all be in black and white. This helps in avoiding questions, attempts to shift
responsibility for unsatisfactory performance etc.

INTERNAL AUDIT
Internal audit is a part of the whole system of internal control. It should operate independently of the
internal check and in no circumstances. It should divert any one of responsibilities placed on him. It
is the examination of accounts of a business concern by its employees specially appointed for the
purpose. It is an independent appraisal of activity within an organization for the review of
accounting, financial and other business practices.
ARTHIMETIC AND ACCOUNTING CONTROLS.
Chart of accounts i.e. balance sheet and income statement is an important control because it provides
the framework for determining the information presented to management and other financial
statement users. Chart of accounts or Financial Statement should be prepared in accordance with the
generally accepted accounting principles.
INTERNAL CHECK
It is an arrangement of duties of members of staff in such a manner than the work performed by one
person is automatically and independently checked by the others.
According to F. R. M. De PAULA, Internal check means practically a continuous internal audit
carried on by the staff itself, by means of which the work of each individual is independently
checked by other members of the staff.
According to D.R. DAVAR, Internal check is a system or method introduced with defined
instructions given to staff as to their sphere of work with a view to control and verification of their
work and also maintenance of accurate records as the ultimate aim.
OBJECTIVES OF INTERNAL CHECK
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.

To exercise moral pressure over staff.

To ensure that the accounting system produces reliable and adequate information.
To provide protection to the resources of the business against fraud, carelessness and
inefficiency.
To distribute the work in such a business transaction is left unrecorded.
To allocate duties and responsibilities of each clerk in such a way that he may be held
responsible for particular fraud or error.
To minimize the chances of errors, frauds or irregularities in the business based on the
principle of division of labour.
To detect errors and frauds easily if it is committed, because in an efficient internal check
system, there is based on the principle of division of labour.
To detect errors and frauds easily if it is committed, because in an efficient internal check
system, there is a provision for independent checking.

ESSENTIAL CHARTERISTICS/PRINCIPLES OF A GOOD SYSTEM OF INTERNAL CHECK

a) 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.
b) Completion: The work should be divided in such a way that no single person is allowed to
complete the work solely by himself from the beginning to the end. However, there should be
no duplication of work.
c) Rotation of employees: A good system of internal check should not allow person having
custody of assets to have access to the books of account. A system of transfer or rotation of
employees from one seat of work to another must be followed by the business.
d) Automatic check: A good system of internal check must provide for an automatic checking
of the work of one clerk by the other.
e) Reliance: No clerk of the business should be relied upon too much.
f) Safeguards: Safeguards should be prescribed to keep un-used cheque books, files and
securities etc.
g) Supervision: A strict supervision should be exercised to ensure that the prescribed internal
checks and procedures are fully operative.
h) Formal sanction: No deviation should be allowed from the established procedures till it is
formally sanctioned by the top official.
i) Periodical review: the system of internal check be reviewed from time to time to introduce
improvements.
ADVANTAGES OF INTERNAL CHECK
Some of the widely accepted advantages of an efficient system of internal check are as follows:
1. FOR THE BUSINESS
a. Proper division of work: Internal check entails a proper and rational distribution of work among
the members of staff of the enterprises keeping in view their individual qualifications, experience
and area of specialization.
b. Detection of errors and frauds: since no individual worker is allowed to handle a job completely
from the beginning to the end, and the work of each clerk is automatically checked by the other, this
heaps in the early detection and discovery of errors and frauds and the possibilities of the
commission of errors and frauds can be minimized.
c. Increased efficiency coupled with economy: A good system of internal check increase the
efficiency of work among the staff and leads to overall economy.
d. Moral check: knowledge of subsequent checking of each employees work by others, acts as a
great check to commission of errors and frauds.
2. FOR THE AUDITOR
a. Quick preparation of final accounts: The Profit & Loss Account and the Balance Sheet are
prepared without any loss of time.

b. Convenience to Auditor: Where an organization is operating system internal check, the statutory
auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests here
and there and can relieve himself from detailed checking.
3. FOR THE OWNER
a. Accuracy of the accounts can be relied upon: if there is a system of internal check the owner of
the concern may rely upon genuineness and accuracy of the accounts.
b. Increase in profits: Overall efficiency and economy in operations result in more profits - thus
ensuring larger dividends for the owners or shareholders.
DISADVANTAGES OF INTERNAL CHECK.
Depending on each other proves fatal in the quick disposal of the work. if one person is absent, the
day-to-day work will be seriously disrupted. Following are some of the disadvantages of a system of
internal check.
1. Costly for small business: A system of Internal check system quite expensive especially for small
business houses.
2. Quality is sacrificed for Promptness: In an internal check system quality of work declines because
the clerks of the business attach greater importance to become quick and do not care if in the process
their work gets substandardised.
3. Carelessness among high officials: The possibility of some of the responsible and high officials
being complacent, increases as they believe, though not always rightly, that under a sound system of
internal check nothing can go wrong.
4. Disorder in the working of a business. In the absence of a proper organized system of internal
check there will be chaos and disorder in the working of business.
5. Risky for an auditor: If the auditor does not apply tests and procedure his own and if he relies on
the output of the system his work cannot be free from irregularities if the system itself proves to be
defective.
INTERNAL CHECK: WITH REGARD TO CASH.
The risk of misappropriation of cash needs no emphasis. The chances of fraud are numerous in cash
transactions. For example, receipts may not be entered in the cash-book: records of cash received
may be understated by preparing duplicate receipt for amounts less than the original. Cash sales may
be treated as credit sales charging the amount to fictitious debtors, etc.
The following are the points that should be taken into consideration while devising a good and
proper system of internal checks for cash transactions.
CASH SALES:

Cash Sales are of three types:

a. Sales at Counter / Counter Sales
b. Sales by travelling Salesmen.
c. Postal sales.
SALES AT COUNTER / COUNTER SALES:
The following procedure may be of great use in regard to cash sales:
i.
ii.
iii.
iv.
v.
vi.
vii.

viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.

A specific number, name or work may be allotted to every salesman.

Every salesman is supplied with a separate book containing blank copies of cash memo.
Cash memos should be printed in numerical sequence.
Cash memos are printed in different colours for salesman at different counters.
When the sales man sells goods to a customer he prepares four copies of the Cash Memo.
These copies are checked by the senior clerk.
Three copies of the cash memo are handed over to the customer and the fourth is retained by
the salesman.
The customer should hand over three copies of the cash memos to the cashier, who alters
collecting the amounts and recording it in his cash register, returns two copies to the
customer duly stamp marked cash paid.
So the cashier collects the amount and records it in his cash register.
The customer should present two copies of the cash memos at the counter where the goods
purchased by him are to be delivered.
Here the customer will get the goods purchased by him are to be delivered to him.
The Clerk, at the delivery counter, checks the sales and delivers the goods to the customer
and also keeps one copy of the cash memos.
In big business houses, the customers copy of the cash memo may be checked by the
security staff before the customer is allowed to check out of the place.
At the end of the day, each counter salesman, cashier and the delivery counter clerk should
prepare summaries of Cash Sales.
The cash sales summary prepared by the cashier should be verified with the cash sales
summary of each salesman and the delivery counter clerk.
The differences if any should be immediately enquired into.
If the summaries tally, accounts are certified as correct. Then it is sent to the General
Manager and another copy is sent to accounts department.
Daily cash receipts should be deposited into the bank on the same day.
Where cash recording machines are used, the total cash received as shown by the machine
should be checked with the amount actually banked

SALES BY TRAVELLING SALESMEN

In big business houses, generally Travelling salesmen are employed to push sales and to collect
debts. These Salesmen collect debts from old customers and accept advances for new ones.
Ordinarily debtors will be asked to send the remittances by post and not to hand over the cash to any
representative of the enterprise. But in exceptional circumstances travelling Salesmen may be
permitted to collect cash from the debtors. For example, where it is necessary for enforcement of the

terms of credit or where refusal by travelling salesman to collect cash from a debtor may be regarded
as a bad policy. Whatever the case may be, a good system of check over these salesmen is vitally
essential. So the following precautions must be taken.
i.
ii.

iii.

iv.
v.
vi.

Travelling salesmen should be issued with pre-numbered, rough receipt books.

Final receipt against receipt of cash by travelling salesman should be issued either from the
branch or head office to which the salesman is attached. Customers should be asked to
contact the head office or branch office if the final receipt is not mailed to them within a
stipulated period.
Travelling salesmen should be instructed to remit the entire cash collected by them to the
head office or branch office to which they are attached, without making any deduction
towards salary or commission payable to them.
Head office or branch office should regularly send the statement of accounts to keep them
informed of the latest position as to their liability.
Special attention should be paid to customers accounts that have become overdue.
There should be surprise transfers of travelling Salesmen from one area to another. This will
increase the efficiency of the agents and will also reduce the chances of fraud.

POSTAL SALES OR VALUE PAYABLE POST (V.P.P) SALES

The following points should be noted in this regard.
i.
ii.
iii.
iv.

v.

There should be a separate register to record sales by post of VALUE PAYABLE POST.
When cash is received against V.P.P sales, it should be entered in the V.P.P register and then
it should be posted to the cash book.
Separate bank pay-in-slips should be used to deposit cash received against post sales.
An offer should be deputed to check carefully this register an special attention should be
given to those goods that have been returned and those against which payments has not been
received .
Cash book and orders received should be checked and order received should be properly filed
too.

INTERNAL CHECK WITH REGARD TO CASH PURCHASES

Requisition: The procedure for issuing purchase requisitions should be specified. The head of the
department, who is in the need of goods, should fill in a requisition slip duly signed and then should
send it to the purchases department. The details about the quantity, is quality and the time by which
the goods must be supplied be clearly mentioned in the requisition slip.
Enquiry: Purchase department makes an enquiry about the terms and conditions of purchases from
different suppliers. For this purpose tender are generally invited. But, who shall open and accept the
tenders, should be clearly specified. At a rule, the lowest tender should be accepted and accordingly
a decision be taken.
Purchase Order: The Purchase Department places orders which should be recorded in the Purchase
Order book. Four copies of purchase order should be prepared. One copy will be sent to the vendor,
second to the store department, third copy to the Accounts department and fourth one will be

retained by the purchase department itself. A responsible officer should review the purchase order,
before signing by the authorized person or director.
Receipt of Goods: On receipt of goods, the purchase department should be properly inspect them,
and thereafter an entry in the goods inward (Receipt) book, the same should be sent to the stores.
Concerned department should be informed about the receipt of the goods.
Making the Payments: The Purchase Department should thoroughly check the invoices and send the
same to accounting department for payment. The accounting department should compare the invoice
with the purchase order and Incoming Inspection Report and should also verify the calculation.
The Accounts Department should enter the invoice in the Purchase Book. Only responsible official
should draw cheque for the payment of invoice. At the time of signing, a signing authority must
verify that correct payment is made. If some portion of the goods is returned to the supplier, a proper
entry must be made in the Purchase Return Book. A Credit Note to that effect must be obtained from
the supplier and accounts section must adjust the payment accordingly.
A good system of internal check with regard to purchase will prevent the following types of
irregularities, errors and frauds.
i.

ii.
iii.
iv.

Fictitious Payment: Fictitious Purchase may be recorded in the purchase book and the
payments
withdrawn may be misappropriated.
Double Payment: Some invoices may be recorded twice and double payment made may be
misappropriated.
Artificial inflation in profits: Goods purchased may not be entered in the period so as to
inflate profits.
Artificial reduction in profits: Goods not received in one period may be entered as purchases
so as to show profits less than the actual.

INTERNAL CHECK WITH REGARD TO WAGES

The system of internal check for wages should be devised in a careful and planned way, especially in
manufacturing concerns, employing large number of workers, possibilities of frauds are always
there. Thus efforts should be made to prevent such frauds with the help of some suitable
arrangements of internal check which should be revised from time to time in the light of experience
gained. System should be actively enforced and supervised by some responsible official.
The Objectives:
a) To avoid inclusions of dummy workers in the list of workers.
b) To avoid incorrect time or piece work records.
c) To avoid fraudulent manipulation of wage-sheet and misappropriation of money etc.
d) To minimize such frauds, the following system of internal check for wages is suggested.
MAINTENANCE OF WAGE RECORDS
TIME RECORDS: Workers are paid their wages normally on the basis of time. Thus the time spent
by each worker should be correctly recorded in the time record book and for this purpose the
following methods are in practice.

a. THE TIME RECORDING CLOCK: The time recording clock is placed at the gate under the
charge of a timekeeper. As soon as worker enters the gate, the time keeper inserts his time into the
clock which records the time. It is recorded when the worker leaves the factory.
b. BRASS TOKEN: The workers are given brass token bearing their numbers. At the gate, a time
board is maintained on which each worker hangs his token as soon as he enters in the factory. The
time keeper is thus able to record the time of workers entering the factory. He should be vigilant
enough to see that no workers hang the token of others who are late or absent.
c. ATTENDANCE CARDS/PUNCHING MACHINE: Each worker is provided with a time card
with his name, number, department and wages rate mentioned on it. He should punch card at the
time of his arrival and departure. The punching or card must be supervised by the time-keeper.
Foreman of each department should also be asked to keep the time records of his workers. The time
keeper and foreman should separately prepare the time records and the name of absentees at the end
of the day.
d. COMPUTERS: This method is the most popular method now especially with the multinationals.
An identity card is issued to each worker and when the employee enters the factory and leaves the
factory, he puts his identity card in the slot of the time recording machine. This machine is
controlled by the computer. So the computer records the time the employee spends in the office.
Another advantage of this method is that only with a proper identity card, the employee can enter the
office. That is only if the identity card is the authorized one, then only the door will open for the
employee.
2. PIECE-WORK RECORDS: Where the workers are paid on the basis of the wages system, proper
hooks for actual work done by workers should may be maintained. Each worker should be provided
with a job card or piece work return form bearing his name, hob number, nature of worker should be
recorded on this card which should be countersigned by the foreman of the department. Store-keeper
to whom the goods manufactured are handed over, should sign this card. It should be finally checked
by piece work reviewer along with quality of goods.
3. OVERTIME RECORDS: Ordinarily overtime work should not be encouraged. No worker should
be allowed to work overtime unless he is authorized to do so by the authorized official of the
organization. Strict check must be kept on loiterers at the place of work. Overtime slips should be
sanctioned in advance. Such slips should bear the name and number of worker, overtime put in the
job or the department in which he is engaged. At the weekend such slips should be sent to the
department in and the job or the department in which he is engaged. At the weekend such slips
should be sent to the time-keeper who will forward them to the wage office.
4. PASS-OUT RECORDS: The workers should not be allowed to leave the factory before the
scheduled time. But if sometimes, a worker wants to go out of the factory on his personal work
during working hours he should not be allowed to go out of the factory premises without obtaining
permission from authorized official who should issue pass-out slips. Such slips are handed over to
gatekeeper wage office should also be given copy of such slips. In case a worker leaves the factory
before time on his own account, it should be properly accounted.
5. PREPARATION OF WAGE SHEETS: The preparation of wage sheets should be done by a
separate department. This work should be done by five clerks to minimize the irregularities.
Information regarding attendance can be had from the attendance register, job cards, piece work

register, overtime slips, pass out slips etc,. For time workers and piece rage workers, separate wage
sheet should be used. In big factories loose wage sheet should be used so that the work may be
distributed amongst various clerks easily.
All the essential particulars should be entered in the wage slips which should have columns for:
1) Name
2) Number/code number allotted to him and his address
3) Total time worked
4) Details of word
5) Rate
6) Total amount of wages
7) Bonus
8) Overtime, if any
9) Deductions
10) Net amount payable
The whole work is to be divided in various parts to be done by separate clerks in the wage
department.
i. Two clerks should examine the time and piece wage records, over time records and other
statements received from the foreman.
ii. The third clerk is to prepare individual employee statement i.e., name of the worker, code number
allotted to him and his address, total time worked and rate of wages.
iii. The fourth clerk is to check the calculations and deduct the permissible amount i.e. rent,
provident fund, income tax, installment of loans and other permissible deductions under the
PAYMENT OF WAGES ACT, 1936. From the gross wages to arrive at the net amount to be paid to
the workers.
iv. The fifth clerk is to check the whole work thoroughly.
v. All these clerks should initial the wage slips before these are signed by some responsible officer,
such as director or works manager.
PAYMENT OF WAGES
1. The clerks associated with the preparation of wage sheets must not be associated in the payment
of wages to avoid collusion between two or more persons.
2. The cashier should be entrusted with the job of disbursement as he is not associated with the
preparation of the wage sheets.
3. Each worker, who is to receive the wages, should be present.
4. The foreman or concerned officer of each department should be present at any sort of
impersonation for workers who are absent.
5. Where possible, the signature of the workers, should be obtained when they receive the amount of
wages. But in case the number of workers is very large and it is not feasible to obtain the signature
of each worker, the whole payment should be attested by those present i.e., cashier, foremen and the
workers manager.
6. If casual workers are also employed in the organization a separate list of such workers should be
prepared and the payment should be made to them in the presence of a responsible officer. To avoid
fraud, the officer employing casual labour should not be connected with the payment of wages.
Otherwise, the names of dummy workers can figure in the wages if necessary precautions are not
taken by the works manager.

7. Proper arrangements should be made with regard to unclaimed wages.

8. Advances to the workmen should be discouraged and if it becomes unavoidable they should be
given and these should later be deducted from the wages of the respective workers.

INTERNAL CHECK WITH REGARD TO STORES (STOCK)

The Stores Department has the charge of preserving and issuing stores to different departments.
Proper control of stores is very much essential to prevent pilferage (small theft) and misuse.
Therefore, the internal check system in relation to stores must be given careful attention.
The following general rules may be followed to ensure effective check on the stores.
i. LOCATION OF STORES: Store should be located at a convenient place. It should have proper
stores facilities so that goods may not be misplaced, misused or wasted.
ii. RECEIPTS OF STORES: On receiving stores, the Stores Department will prepare a Goods
Received Note in triplicate. One copy will be sent to the Purchase Department. Second copy will be
sent to Accounts Department. The third will be retained by the Stores Department itself. All the
details about stores should be noted on the note. Stores should be properly checked after their
receipt.
iii. PRESERVATION OF STORES:
Goods received should be stored at their allotted racks. The system of Bin Cards should be used to
show the receipts, issues and balance of stores. Such Bin Cards may be kept hanging on the places
where stores are preserved. Stores inventory software may be used on computer for item stored.
iv. ISSUE OF STORES: No item from the stores should be issued to any person without formal
requisition or demand note from some authority. Only authorized person should be allowed to
remove articles from the stores according to the requisition. The Stores Officer should be seated near
the gate so that all issues may be made under his supervision. For the materials or stores returned
from the job or the department. Material return note should be written and properly accounted for.
Likewise, Material Transfer Notes should be used for the materials transferred form one department
or job to another. The gate keeper should be instructed not to allow any material out of the factory
without necessary permit from the Store-Keeper or Invoice of Sales Department.
v. RECORDING: After the issue of materials from the stores, the Store Issue Requisition should be
sent to the Stores Accounts Section for proper records there. The Bin Cards should be checked out
compared from time to time with stores records.
INTERNAL AUDIT
DEFINITIONS:
According to WATTER B. MEIGS, Internal auditing consists of continuous critical review of
financial and operating activities by a staff of auditors functioning as full-time salaried employees.
OBJECTIVES of INTERNAL AUDIT
a. To comment on the effectiveness of the internal control system in force and to suggest ways
and means to improve upon the system.
b. To verify the correctness, accuracy and authenticity of the financial accounting records
presented to the management.
c. To facilitate the early detection and prevention of frauds.

d. To ensure that the international accounting standards or the standard accounting practices are
followed by the organization.
e. To take up an investigation at the special request of the management.
f. To ensure that the assets of the organization are adequately safeguarded and properly
accounted for.
g. To ensure that the organization incurs liabilities in respect of its valid legitimate activities.
h. To ensure that the acquisition and disposal of assets are under proper authority.
i. To ensure as to whether or not each unit of the organization follows the policies and
procedures as laid down by the top management.
INTERNAL CHECK Vs INTERNAL AUDIT
Similarities: Both Internal Check and Internal Audit are part of the whole system of internal control,
as such both are complementary and go together.
Dissimilarities: There is a lot of difference b/w Internal Check and Internal Audit. Both differ from
each other in the following respects.
a. Meaning: Internal Check is an arrangement of duties allocated in such a way that the work of one
person is automatically checked by another. Internal Audit is an independent appraisal of the
operations and records of the company.
b. Object: the purpose of Internal Audit is to detect the errors and frauds which have already been
committed.
i. The purpose of Internal Check is to prevent or minimize the possibilities of errors, frauds or
irregularities.
c. Need for separate staff: for carrying out Internal Audit, a separate staff of employees is engaged
for the purpose. For internal check, no new appointment is made. It, in fact represents only the
arrangement of duties of the staff in a particular way.
d. Nature of work: the work involved in the Internal Audit is just like that of a watch man. Internal
auditor has to report, from time to time, to the management about the various in efficiencies and
suggest improvements. It is also his duty to see that the internal check system does not become
static. Internal Check, on the other hand, represents a process under which the work goes on
uninterruptedly and the checking too is more or less automatic.
e. Timing of work: Internal Audit starts when the accounting process of different transactions is
finished. Internal Check is an operation during the course of transaction.
f. Internal audit: It is a device for checking the work, whereas internal check is a device for doing the
work.
g. In Internal Audit Errors and Frauds are detected after the completion of work, whereas in Internal
Check the Errors and Frauds are discovered during the course of work.
h. Scope of work: The scope of Internal Check is very limited. The scope of Internal Audit is
comparatively board.
i. Involvement: A large number of employees are needed for the implementation of Internal Check
System. Whereas, a much smaller number of persons are needed for implementing Internal Audit
implementation