Internal check and internal audit are not the same. Although both systems are an integral part of a company’s overall internal control mechanism, they differ in their functioning. An internal check refers to a system of allocating duties among the staff in such a manner that no one person is allowed to record more than one aspect of a single transaction. Whereas internal audit is an independent review of operations and records of a company, performed by staff specifically aligned for this purpose. Let’s find out the scope of each of these two terms in detail.
Internal check and its scope
Internal check deals with the arrangement of duties of staff in a company to carry out and process business transactions. It divides work among staff in such a manner that every aspect of a transaction gets recorded by a distinct person. By segregating duties, an internal check helps in fixing responsibility for different tasks. For example, access to books of accounts and other records is limited in most businesses. It is taken care of that the person who is responsible for physical custody of assets (e.g., a cashier) is not the same person who records the transactions of collections or payments in the ledger.
In an internal check system, appropriate work responsibilities are assigned to all in such a manner that work performed by one always gets automatically checked by another and so on. This enables a smooth flow of work in the company.
When every aspect of a transaction is recorded by a distinct person and the work of each staff member is checked by another, the chances of frauds and errors get minimized.
Some general considerations in an internal check system are as follows:
- There should be proper distribution of administrative and financial powers among different persons. For example, the power to order a product and the power to issue cheques should be handled by different persons.
- There can’t be independent control of a single person over any particular aspect of the business.
- A person who has physical custody over assets should not be having any access to books of accounts.
- The distribution of responsibilities in a business should be made in such a way that the work of one person should come under the review of another.
- Job rotation should be implemented whereby duties of staff must be shuffled every now and then without giving them prior notice.
- Every employee must be encouraged to take a leave at least once a year so that any frauds done by him may be located when he is absent.
- At the time of stock taking at the end of a month, trading activities should be suspended.
- Automatic devices should be used to maintain cash registers to prevent misappropriation of cash.
Internal audit and its scope
An internal audit is a management tool that aims to verify the appropriateness of internal controls and internal checks in the company. It is either performed by the personnel of the organization or a professional firm engaged for this purpose. It is a process of appraising the activities of an organization and is performed within the organization.
The system of internal controls and its quality, the company’s operating policies & practices, and financial information are all checked by the internal auditor. Thus, in a way, internal auditors act as a supporting hand to management by assuring that company’s processes & systems are effective. They help the management in discharging its responsibility to mitigate the risks to the achievement of corporate goals.
According to Section 138 of the Companies Act, 2013 and Rule 13 of the Companies (Accounts) Rules, 2014, internal audit is applicable to a specified class of companies. To know more about its applicability, please visit this link. But even if internal audit is not compulsory for all, businesses often get it done to evaluate the efficacy of internal control, soundness of the financial system, the efficiency of business processes, etc.
Some of the key functions performed by an internal auditor are the following:
- The internal auditor monitors whether a company has good internal controls and whether they are operating as desired. He may recommend suggestions for improvement if required.
- He checks the accuracy and authenticity of accounting records and ascertains whether proper accounting policies are being followed or not.
- The internal auditor reviews financial & operational information and also how such information is measured and classified in the books. He may conduct specific inquiries for individual items and balances.
- He inspects how purchase, production, or HR departments are functioning and if there is efficiency in operations.
- The internal auditor also examines whether there is compliance with applicable laws and regulations. If he notices any non-compliance, such instances should be reported to the company’s management.
- He guides the management in improving its risk management system.
- The internal auditor examines whether there is authorization for the use and disposal of assets.
Note: Both internal checks and internal audits are a part of the overall internal control system and they operate as a built-in device.
Points of Comparison
In the below points, a few important differences between internal audit and internal check are discussed:
Manner of checking
Work in the internal check system is checked automatically, but work in the internal audit system is checked specifically by the auditor.
Identification of mistakes
Internal checks are performed while the work is still ongoing and being completed. Hence, it can detect errors at a much early stage.
The goal of an internal check system is to prevent errors, whereas the goal of an internal audit system is to detect errors and frauds.
Time of checking
In an internal check system, the work is checked as it is being performed, whereas, in an internal audit system, the work is checked after it has been completed. That is why internal checks can catch mistakes at an early stage.
While an internal audit is a post-mortem analysis and begins after the completion of recording of transactions, internal check runs simultaneously, i.e., it begins the moment a transaction takes place and continues till all of its aspects get recorded.
Internal audit is performed by the company’s staff specifically entrusted with this role. Although entities sometimes engage the services of professional auditors too to carry out the work of internal audit. On the other hand, no special staff is required to be engaged for an internal check.
In an internal audit, the report is submitted by the internal auditor to the management. Whereas in an internal check system, a statement of day-to-day transactions is usually submitted by a clerk to departmental heads.
The efficiency of an internal audit is determined by the efficiency of the personnel assigned to this role. Internal Audit shall only be effective if the internal auditor is given complete authority to analyze transactions not only from a financial standpoint but also from other organizational activities. An internal auditor should directly report to top management. He must be able to work independently of accounting and other personnel. He must be given independent standing as a key functionary and member of the management team.
On the other side, the efficiency of the internal check system is dependent on how nicely the duties are segregated among the staff and how they execute them. If a good internal check system is put into operation in a company, it will streamline business activities and minimize the occurrence of errors. Further, an internal auditor, as part of its role, analyses the effectiveness of internal controls and checks present in the company and suggests improvements, if needed.
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