Internal check is a method that organizes the system of a factory or a concern. The duties of employees are organised in such a way that what one person does is immediately checked by another person. In this way the risk of error and fraud is lower (there is a possibility of collusion between employees). It is a kind of division of labour. This minimises the organisation of crime, unless employees want to cheat the boss together.
An internal check, in which the methods are defined in such a way that the procedures are not under the control of any person - that, on the contrary, the work of one employee overlaps with the work of another and that the company audit is carried out continuously by employees.
It is a system of procedures, mechanisms and rules that support management's management and seek to ensure that the unit's objectives are achieved.
This control is a special legal control that applies to different groups of recipients in different situations. They are connected by a common denominator: an organizational unit of the public finance sector.
In business, control is a tool that uses resources and opportunities to increase profits. All operations are carried out with the help of people and equipment. (The Institute of Chartered Accountants of India, 2003).
"Control is a basic human requirement and it has existed throughout the ages in different facets of human activity. Business as such is a complex process and has grown even more complex with the technological advancement of the society. The formalisation of the concept of internal control in the sphere of business administration is a comparatively recent phenomenon."(The Institute of Chartered Accountants of India, 2003).
Elements of internal check
- Inspections shall operate as part of the system.
- Introduction of transaction control on an ongoing basis.
- Each person's work overlaps with that of another person.
The purpose of the split is that no employee has sole control over the transactions.
How does it work?
There should be an appropriate internal check system for all transactions within the organisation. This is due to the fact that a large proportion of fraud is related to cash. The auditor must become familiar with the internal control system. The responsibilities related to cash should be shared so that there can be automatic control of the different people associated with the money section.
Payments should be made by cheques authorised and signed by the persons responsible. Unused checkbooks should be kept in a safe place. Small amounts of money should be included in the advance payment system. The coupons should be numbered and folded in order. The cash book should be checked independently.
An internal check is a routine check on transactions. The accuracy of transactions and the accounting system, which are recorded in the accounting system, are important. This control is about detecting errors and achieving efficiency in recording transactions. This is an independent action carried out in an organization to review operations. An internal check is a service that is provided to an organization.(Pcaob, Auditing standard)
- Confirmation that the commitments which the organisation had to fulfil have been fulfilled by the organisation in connection with its legitimate activities.
- Detection and prevention of fraud that may occur within the organisation.
- Make sure that the accounting rules are followed.
- Verification of the correctness of financial accounts.
- Verification of documents submitted to management by employees.
- Possible search for measures to improve the situation.
- Special management enquiry.
How to prepare?
In small organisations, the management often carries out a number of checks, which are important for a positive internal control process. This can be helpful and the internal control will end up well. (Pcaob, An audit of internal control over financial reporting that is integrated with an audit of financial statements: guidance for auditors of smaller public companies).
Examples of Internal check
- Pre-Trial Balance: A pre-trial balance is an internal check that is used to ensure accuracy in the accounting process. This check verifies that all accounts and transactions are posted correctly and that the trial balance is in balance.
- Segregation of Duties: This internal check ensures that no single individual has control over a transaction from start to finish. The segregation of duties among employees provides better protection against errors and fraud.
- Reconciliations: This internal check involves comparing two sets of information to ensure accuracy. Common examples include bank statement reconciliations, credit card statement reconciliations, and accounts payable reconciliations.
- Management Reviews: This internal check involves senior management regularly reviewing financial statements, operational reports, and internal controls to ensure that the organisation is operating efficiently and effectively.
- Internal Audits: This internal check involves a detailed examination of an organisation's financial and operational systems, processes, and controls to ensure that they are operating effectively.
Advantages of Internal check
Internal check is a method that helps in organizing the system of a factory or a concern. It is a kind of division of labour, where the duties of employees are organised in such a way that what one person does is immediately checked by another person, minimizing the risk of error or fraud. The advantages of internal check include:
- Improved accuracy: Internal check allows employees to double-check each other’s work, ensuring accuracy and thoroughness. This helps to eliminate any discrepancies or errors that may have been missed.
- Increased accountability: Internal check helps to ensure that everyone is held accountable for their actions. All employees are required to carry out their duties responsibly and accurately, which helps to ensure that the company runs smoothly.
- Reduced risk of fraud: By having multiple people check each other’s work, it reduces the risk of fraud or wrongdoing. This helps to protect the company from any malicious activity, as well as from the financial losses that could result from it.
- Improved efficiency: Internal check helps to streamline processes and increase efficiency. When one employee checks another’s work, it helps to identify areas for improvement and helps to reduce the amount of time and resources spent on tasks.
- Improved morale: Internal check helps to boost morale as it helps to create a sense of trust and camaraderie amongst employees. This helps to foster a positive work environment and encourages employees to work together to achieve the company’s goals.
Limitations of Internal check
- Internal check relies on the honesty and diligence of the employees, which is not always the case.
- It can be difficult to monitor all the activities of multiple employees, and some errors may go unnoticed.
- If the employees collude, they can bypass the internal check system and commit fraud without detection.
- The system of internal check can be costly as it requires additional employees and resources to be invested in training and monitoring.
- There are certain tasks that require specialist knowledge and experience, and it may not be possible to have a second person check these tasks. This could lead to errors and inefficiencies.
- Internal audits: Internal audits are conducted to ensure that processes are functioning as expected. They can involve reviewing financial and operational records, assessing internal controls, and examining the accuracy of financial and operational information.
- Risk assessments: Risk assessments are conducted to identify potential risks associated with the operations of a company. This includes assessing the likelihood and impact of risks, and developing strategies to manage and mitigate them.
- Segregation of duties: Segregation of duties, also known as dual controls, is a system that requires two or more people to complete a task in order to safeguard against fraud and ensure accuracy.
- Employee training: Employee training is important to ensure that employees have the necessary knowledge and skills to perform their duties correctly.
- Data security: Data security measures are necessary to protect sensitive information from unauthorized access. This includes implementing encryption and access control measures, and regularly testing and auditing systems.
In conclusion, internal check is a method that helps to organize the system of a factory or a concern. Other approaches related to internal check include internal audits, risk assessments, segregation of duties, employee training and data security. These measures help to ensure accuracy and protect against fraud and unauthorized access to sensitive information.
- Public company accounting oversight board, Staff Views, 2009, An audit of internal control over financial reporting that is integrated with an audit of financial statements: guidance for auditors of smaller public companies.
- Public company accounting oversight board, 2007, Auditing standard.
- The Institute of Chartered Accountants of India, 2003, Internal Control.
Author: Aleksandra Jasińska