Ch. INTERNAL CHECK, INTERNAL CONTROL and INTERNAL AUDIT

INTERNAL CHECK

MEANING & DEFINITION: - Internal check system is based on principles of division of work. An internal check system is the part of internal control system. The main object of internal check system is to minimize errors and frauds.MEANING: - The system, where by the work of one employee is automatically checked by another employee is known as internal check system.DEFINITION:- According to De Paula and De Paula “ An 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 the other members of the staff. “

CHARACTERISTICS OF INTERNAL CHECK SYSTEM:-(1) Internal check system is the part of internal control system.(2)The responsibility of each employee is defined and fixed.(3) The work of one employee is automatically checked by another employee.(4) The work of one employee is automatically checked by another employee, yet there is no duplication.(5) No single employee is assigned a complete and independent control of accounts and records.(6) There is less chances of errors and frauds.

OBJECTS OF INTERNAL CHECK SYSTEM:-(1) To detect and prevent errors committed by the employees.(2) To detect and prevent frauds committed by the employees.(3) To detect and prevent misappropriation of cash.(4) To fix up the responsibility of each employee as regard to errors and frauds.(5) To keep moral check on the employees.(6) To increase the efficiency of the employees.(7) To make employees regular in their work.(8)To prepare final accounts without delay.(9) To distribute work in such a way that on transaction is left out from being recorded in the books of accounts.

ADVANTAGES OF INTERNAL CHECK SYSTEM:-(1) Division of Work:-There is a proper division of work among audit assistants. So, they can easily understand their responsibilities.(2) Fixation of Responsibility: - Internal check system determines the responsibility of each employee. So, the work is quickly and efficiently done.(3) Moral Check of Employees: - Internal check system keeps a moral check of the employees and enables them to work honestly, efficiently and hard working.

(4) Less Possibility of Errors and Frauds: - There is a less possibility of errors and frauds under the internal check system, because errors and frauds can be detected at the early stage.(5) Increases Efficiency of Employees: - Internal check system increases the efficiency of employees because it is based on division of work.(6) Final Accounts can be prepared easily: - In internal check system the final accounts can be prepared promptly and easily without delay.(7) Apply Test Checking: - An auditor can rely on the internal check system and can apply test checking.(8) Reduce the Work Load of Auditor: - If an efficient internal check system is working then the auditor’s work load is reduced, because auditor does not require for detailed checking of accounts.

DISADVANTAGES or LIMITATIONS OF INTERNAL CHECK SYSTEM(1) Careless of Auditor: - When internal check system is in operation, auditor sometimes becomes careless. He assumes that accounts are correctly written. In reality, this may not always be correct.(2) Careless of Employees: - The employees are also like to be careless because he assumes that the work of one employee is automatically checked by another employee. So, there may be a more chances of errors and frauds.(3) Expensive: - The system of internal check system is more expensive and time consuming.(4) Not Suitable for Small Business Unit: - The system of internal check system is not suitable for small business unit.(5) Errors Committed by Two or More Employees: - If the errors and frauds are committed by two or more employees jointly, it can be very difficult to detect such errors and frauds.CONCLUSION: - From the above discussed, it is truly said that, “Internal check is both a Pitfall and a Safeguard.” Internal check system is not defective. If the system is implemented without proper care then only above disadvantages may follow. This system is very useful to detect errors, frauds and malpractices of cash as well as goods. It also makes the employees more regular and efficient. In the words of Joseph Lancaster, “Internal check system does not abolish frauds and malpractices altogether but it certainly does reduce their chances.”

INTERNAL CHECK SYSTEM OF CASH SALESIn a big business unit, where there are a large amount of sales, there are more chances

of errors and frauds. Therefore, an efficient internal check system of cash sales is become necessary.Misappropriation in Cash Sales: - In respect of cash sales, the frauds can be committed in the following manners.(1) Cash sales not recorded in the books of accounts. (2) Cash received from debtors but not recorded in the books of accounts.(3) Less amount is recorded in the books of accounts than the actual sales are incurred. (4) Goods sent on sale or return basis, accepted by customers and cash received but not recorded in the books of accounts.

Types of Cash Sales: - There are three types of cash sales as under.(A) Sales at Counter (B) Sale by Travelling Agents (C) Sales by Post(A) Sales at COUNTER: - Some organisations make cash sales at their retail shops. Therefore, many employees are required for following transactions.(I) Sales of goods (II) Cash received(III)Delivering goods (IV) Record the transactions

In this respect, following internal check system can be recommended.(1) There should be a cashier in each department, in addition to the salesman.(2) The salesman should concern with sales only, while the cashier should responsible to receive cash only.(3) The salesman should prepare 4 copies of Cash memos. Each copy of cash memo has different colours.(4) Out of 4 copies, salesman should retain 1 copy with him. Second copy should be sent to Dispatch Clerk (Delivery Clerk). Remaining 2 copies should be handed over to customer.(5) The customer should submit 2 copies to cashier. The cashier should affix a stamp of CASH RECEIVED on one copy and return the same copy to the customer and keep remaining 1 copy with him.(6) The customer will show a copy of cash memo to the dispatch clerk, who will compare his copy with customer copy.(7)Daily Sales Statement: - At the end of the day, salesman, cashier and delivery clerk should prepare Daily Sales Statement. Such statement will be verified by responsible officer.(8) Cash Book: - At the end of the day, total cash sales will be shown on the receipt side of Cash Book.(9) Sales Register: - Detail of cash memo should be entered in to the separate Sales Register.(10) The cash collected should be deposited in the bank daily.(11) Duties of employees should be changed at regular interval.

(B) Sales by TRAVELLING AGENTS:-Sometimes, travelling salesmen are appointed to sell goods and also to collect cash. The

agents are empowered to prepare cash memos or to book the orders. In some cases, they also empowered to sales goods and collect cash.

Following internal check system can be recommended in case of sales by travelling agents.(1) When cash is collected by agent, he should issue, “Kachha Receipt” or “Interim Receipt” to customer.(2) Later on, the Head Office should issue “Pacca Receipt” or “Official Receipt”.(3) The customer should inform the company, if he does not received “Pacca Receipt” within a particular time period.(4) The Travelling Agent should send the total cash collection to the Head Office, daily.(5) The Travelling Agent should claim Travelling and other expenses separately and should deduct from cash collection.(6) He should also submit his Tour Report regarding customer visited, goods sold and cash collected.(6) No single agent should be allowed to remain in the same place for a long period of time.

(B) Sales by POST: - Certain companies adopt the process of sales by post. Following internal check system can recommended in respect of Sales by Post.(1) V.P.P. Register: - V.P.P. Register should be prepared separately. Customer’s Name, Address, Order Received and Goods sent to them should be recorded in a separate register.(2) Cash Received: - Cash received should be recorded daily in V.P.P. Register.(3) Sales Return: - Sales return should also be recorded in V.P.P. Register.(4) Checking of Register: - It should be checked by responsible officer.(5) Deposit Cash in Bank: - Received cash should be deposited daily in the bank.(6) Summary Report: - Summary Report of goods sent and cash received should be prepared and tallied.

INTERNAL CHECK SYSTEM FOR PAYMENT OF WAGESIn a big organisation, there are a large number of workers. So, there may be more

chances of errors and frauds. Misappropriation in Payment of Wages: - In respect of payment of wages, the frauds can be committed in the following manners.(1) Wages of Absent or Late workers are not deducted and cash may be misappropriated.(2) Fake or Fictitious name of workers who are not workers at all. I.e. Dummy workers may be included and their wages may be misappropriated.(3) The calculation of wages may be deliberately inflated and the excess amount may be misappropriated.(4) Deliberate mistake may be made in payment of actual wages.

Internal Check System as regards Payment of Wages:- The internal check system as regard to wage payment should cover the following points.

(A) Record of Attendance (B) Calculation of Wages(C) Payments of Wages (D) Casual Labour(A) Record of Attendance:-

There should be a scientific system of recording the attendance of all workers. The time of Arrival and Departure of the workers should be accurately recorded.(1) Payment of Wages on Times Basis: - Wage paid to worker on the basis of time devoted by him. It is known as Time Wage System. In Time Wage System, recording of correct attendance is the most important, because wages are paid on time basis. For recording correct time, many organisations use Automated Time Recording Clocks or Thumb System. Some organisations use Disk System. According to Disk System, each worker is given a metal token which bearing number. The tokens are hanged on the Out-Board, outside the factory gate. When the workers come in the factory, they take their respective token and put them in a box inside the factory compound. After the fixed time, the Out-Board is removed and the tokens remaining on the Out-Board will present the workers who have not come in time.(2) Payment of Wages on Piece Basis: - Wage paid to worker on the basis of work done by worker. It is known as Piece Wage System. In this system, Job Card is issued to each worker for recording work performed by each worker. The card should be signed by worker and head of the department.

(B) Calculation of Wages: - The calculation of wages is also equally important. (1) Preparation of Wage Sheet: - It includes Name and Number of Worker, Pay scale, Number of days worked etc. The amount of other allowances, if any, are also included in wage sheet and the total wages payable to worker is calculated. The deductions like Contribution to P.F; Employee State Insurance Scheme etc are also included and the net wages is calculated.(2) Equal Amount: - A Cashier should withdraw from bank equal amount to total net wages payable. (3) Signed by Responsible Officer: - The wage sheet should be signed by responsible officer before cash is withdrawn from band. (C) Payment of Wages:- (1) After the Wage Sheet is prepared, the total amount of net wages is given to Cashier.(2) To get wages, a worker should submit his identity card.(3) Wage of one worker should not be paid to another worker.(4)The Signature or Thumb of worker should be obtained for payment of wages.(5) If payment exceeds Rs. 5,000, Signature or Thumb of worker should be obtained on the Revenue Stamp.(6) Special arrangement should be made for payment of absent workers.

(D) Casual Workers: - Proper care should be taken in case of payment of wages to Casual Workers.(1) Wages of Casual Workers should be authorised by the responsible officer.(2) The record of Casual Workers should be verified by the responsible officer.(3) Signature or Thumb should be obtained from Casual Workers at time of payment of wages.

DIFFERENCE BETWEEN INTERNAL CHECK & INTERNAL AUDITPoints Internal Check Internal Audit(1) Meaning The work of one employee is

automatically checked by another employee is known as Internal Check.

Internal Audit is a continuous & critical review of financial records of business.

(2) Object The main object of internal check is to detect and prevent errors in early stage.

The main object of internal audit is to check that Internal Check & Accounting System is effectively in operation.

(3) Time Internal checking is carried out simultaneously with writing of books of accounts.

Internal Audit is carried out after the accounts have been written.

(4) Additional Staff In an internal check system, no additional staff is required.

In an Internal Audit, additional staff is required.

(5) Implementation It is an Automatic and Continuous process.

It is done by Internal Auditor.