INTERNAL CHECK

INTERNAL AUDIT
INTERNAL CONTROL
BY:
DR NIDHI BANSAL
 INTERNAL CHECK

• Internal Check is a valuable part of Internal Control. It is the built-in check in

accounting process itself.
• It is an arrangement of duties of staff members in such a way that the work
performed by one person is automatically checked by the other.
• It is an essential feature that no one employee or a group of employees has
exclusive control over any transactions or group of transactions.
• It helps in minimizing the possibility of fraud, error or irregularity.
CONTINUED…...
According to ICAI “It is a system of allocation of responsibility, division of
work and ,method of recording transactions whereby the work of an employee
or group of employees is continuously by correlating it with the work of others.
 CHARACTERISTICS OF INTERNAL
CHECK
• To eliminate the frauds and errors which may be committed by the staffs.
• To prevent misappropriation of cash or stock.
• To ensure the reliability of information produced by the accounting system.
• To detect errors and frauds promptly which helps to minimize their effects in long term.
• To exercise moral pressure over the staffs.
• To allocate duties and responsibilities of every person in such a way that he can be taken
to task for any lapse on his part.
• To increase overall efficiency of the members of the staff by assigning duties based on the
principle of division of labour.
 ESSENTIALS OF GOOD INTERNAL CHECK
SYSTEM
• No single staff shall have absolute control over recording of all the aspects of business
transactions by himself.
• The same staff shall not be allowed to have access to all books of accounts as well as physical
custody of the assets.
• Each member of the staff should be made responsible for a specific work.
• Division and allocation of duties among the staff members must provide for an automatic
check by others.
• The duties of the members of the staff should be changed from time to time.
• Attempt should be made to introduce mechanical devices to prevent misappropriation of cash.
 ADVANTAGES & DISADVANTAGES OF
INTERNAL CHECK
ADVANTAGES DISADVANTAGES

1. It helps in fixing the responsibility as 1. It is a costly process for a small scale

there will be proper segregation of duties business.
among the staff. 2. If Internal Check system not properly
2. It helps in Increasing the efficiency of organized it may lead to disorder in the
clerks working of the business.

3. It helps in preventing errors and frauds. 4. 3. There may be situation of compromise

There is a reliability of the information due while giving importance to faster results.
to efficient system of Internal Check. 4. There are chances of conflicts in business
due to detection of error or frauds.
5. It reduces the workload of auditor.
 INTERNAL CHECK WITH REGARD TO
CASH TRANSACTIONS
There should be a proper system of internal check in respect of all transactions because majority of the frauds
arise in connection with cash. The auditor must familiarize himself with the system of internal check in
operation.

CASH RECEIPTS:
• There should be a separate clerk known as cashier to deal with the receipts of cash. Immediately upon
receipts of cash a rough record of the amount should be made. The cashier should not be authorized to
keep cash with him. He should not be allowed to make expenditure out of it and to make entries in the
ledger an d other books of prime entry.
• All receipts should be banked daily. From time to time the bank reconciliation statements should be
prepared to reconcile bank and cash balances.
• Bank pay- in-slips should not be prepared by the same person who is incharge of making actual
deposits in the bank.
CONTINUED……
• On receiving cash, it should be acknowledged by issuing a printed receipt. This receipt should have a
counterfoil. These receipts should be consecutively numbered. The receipt should be kept under lock
and key.
• Spoiled receipts should be cancelled and not torn off. If some alterations is made in the receipts
already written, it should be properly initialed.
• Copies of receipts previously issued must be marked duplicate.
CASH PAYMENTS:
• The person in charge of making payments should have no connection with the receipts of cash.
• All payments should, as far as possible be by chance cheques excluding petty cash payments. The
cheques drawn for payment should be order cheques and as far as practicable they should be crossed.
CONTINUED……
• For sanctioning the payments of special nature, only directors and senior officers should be
empowered.
• Bank reconciliation statements should be prepared to reconcile bank and cash balances.
• There should be an efficient system of internal check as regards wages.
• Vouchers should be numbered properly and filed in order.
• There should be a proper internal check system of cash sales.
 INTERNAL CHECK AS REGARDS
WAGES
In case of manufacturing concerns wage bill is of great magnitude. The system of internal
check is of great importance in such concerns as regards wages.
• Inadequate time records. This may result in the workers receiving wages for time not
devoted.
• Inadequate piece work records. This will result in workers receiving wages for work not
done.
• Errors in preparation of wage-sheets or pay rolls,
• Manipulation of wage sheet by inserting dummies.
INTERNAL CHECK AS REGARDS SALES

• All orders received should be recorded properly and in writing. Orders received on telephone or
verbally should be confirmed in writing.
• All goods supplied should be recorded in the Goods Outward Book.
• Invoice should be prepared in duplicate - one copy sent to the customer and other carbon copy should
be kept. Details of every invoice should be checked before sent out. Entries in Goods Outwards Book
should be compared with invoices.
• Entries should be made in the sales Book on the basis of invoices.
• Goods returned by the customer should be entered in the returns inwards book and a credit note be
prepared.
• In case of cash sales, cash should be received by a person other than salesman. Goods should be
delivered on the basis of the receipt cash memo.
 INTERNAL AUDIT

• It is the review of operations and records undertaken by a specially assigned

staff on a continuous basis.
• It is an important element of the internal control system.
• It not only focussed purely on finance but also reviews and undertakes a
critical appraisal of companies policies and procedures.
• It is focussed in maximizing organisational effectiveness.
• It evaluates companies internal controls along with its corporate governance
and accounting processes.
 OBJECTIVES OF INTERNAL AUDIT

• To verify the correctness, accuracy and authenticity of the financial accounting and statistical
records presented to the management.
• To comment on the effectiveness of the internal control system and the internal check system in
force and to suggest means to improve them.
• To facilitate the early detection and prevention of frauds.
• To ensure that the standard accounting practices to be followed by the organization are strictly
followed.
• To confirm that the liabilities have been incurred by the organization in respect of its legitimate
activities.
• To examine the protection provided to assets and the uses to which they are put
 INTERNAL CONTROL

• Internal Control system is one of the basic and essential factors for efficient and effective
management. It covers the whole management system of an organization, both financial
and non-financial.
• Internal Control comprises of the plan of the organization and all the coordinate methods
and measures adopted within a business to safeguard its assets.
• It is the overall control adopted by the management.
• It comprises of internal check, internal audit, accounting system and administrative
control.
• Internal control system is helpful for the management and also the Auditor in achieving
goals and targets effectively.
 SCOPE OR AREA OF INTERNAL CONTROL

• Accounting Controls: These comprise primarily the plan of organization and the
records that are concerned with and directly related to the safeguarding of assets and
reliability of financial records. These include budgeting control, standard costing,
control accounts, bank reconciliation, self-balancing ledgers and internal auditing etc.
• Administrative Controls: These comprise the plan of organization that are
concerned mainly with operational efficiency. They may include controls, such as
time and motion studies, quality controls through inspection, performance reports and
statistical analysis. It is concerned with distribution of authority and decision making
process of management.
 ESSENTIALS OF GOOD INTERNAL
CONTROL
• It should be clear and well developed plan of organization.
• There should be competent and trust worthy personnel for the success of the business.
• There should be segregation of duties: - Operational duties are separated from recording
duties. Physical handling of asset must be separated from accounting records.
• There should be administrative traditions and practices for the performance of the
duties.
• There should be well developed and adequate accounting system.
• There should be a sound system of maintenance and recording of accounts.
• There should be effective internal check system.
 DIVISIONS OF INTERNAL CONTROL

• General Financial Control

• Cash Control
• Employee Remuneration
• Trading Transactions
• Fixed Assets
• Stock maintenance
• Investments
 LIMITATIONS OF INTERNAL CONTROL

• Management decision to choose cost effective control system may reduce the
effectiveness of internal control system.
• There are chances of misuse by a person of authority who is operating on internal
control system.
• Objectivesof internal control systems may be defeated by manipulation of
management.
• Since internal control system is involved in routine transactions, irregular transactions
may be overlooked.
• Changes in conditions may affect the effectiveness of internal control system
 DIFFERENCE BETWEEN INTERNAL CHECK, INTERNAL AUDIT
AND INTERNAL CONTROL

INTERNAL
INTERNAL CHECK INTERNAL AUDIT CONTROL

• It is the arrangement of • Continuous review of records by • It is the whole system of control

accounting work under which staff appointed for the purpose. established by management.
the work of one person
• Scope of internal audit is less that • Scope of internal control is very
comes under another. wide. it includes internal check
of internal control wider than
• Scope of internal check is internal check.
and internal audit.
less.
• The object of internal audit is to • The objective is to safeguard
• Objective is to locate errors assure the management that the the asset of enterprise.
and frauds. system of internal control and
internal check in operation are in
effective in design and operation.
CONTINUED…..
INTERNAL
INTERNAL CHECK INTERNAL AUDIT CONTROL

• There is no separate staff. • It is conducted by the staff

• There is no separate staff.
specially appointed for the
purpose called as internal
• Internal check is exercised when auditor.
the work of employee is in • Internal control is exercised
progress. • It is undertaken by the auditor when the work of employees in
after the work has been progress.
completed.
• Any organization
• Any organization can
• Internal audit is adopted only adopt internal control.
can adopt internal those concerns which really need
check. it.
 DIFFERENCE BETWEEN INTERNAL AUDIT
AND STATUTORY AUDIT

• Appointment
• Qualification
• Objects
• Scope
• Remuneration
• Report
• Removal