Difference between Internal Control and Internal Check – An overview
Some people often confuse internal checks with an internal control system. But it must be understood that they are different and internal check is a small but valuable part of an entity’s internal control system.
What is an internal check?
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.
What is internal control?
Internal control, on the other hand, is the complete control mechanism that is developed and adopted by a company’s management. It assists in carrying out business in an orderly and efficient manner. Simply put, a company’s management designs internal controls in the form of a set of procedures, measures, and policies to help achieve efficiency in operations. Internal controls seek to maintain good standards of performance. Some people also consider it to be a part of a company’s day-to-day management and administration.
Normally, the following are the components of an internal control system:
- The control environment comprising the governance functions, attitudes, and actions of those charged with governance, and control consciousness of people setting out the tone of the organization
- The entity’s risk assessment process
- The information system, including the related business processes, relevant to financial reporting and communication
- Control activities such as segregation of duties, authorization, physical controls, performance reviews, and information processing.
- Monitoring of controls on an on-going basis
Are both of them related?
An internal check is a subset of an internal control system. On one hand, internal check concerns itself with the allocation of responsibilities and division of work so that day-to-day transactions can be recorded properly, internal control system, on the other hand, is an overall system of control established by the company’s management. Internal control ensures that the business is run in an efficient manner, there is adherence to management policies, assets are safeguarded, and the records are complete in all aspects. It not only encompasses an internal check system but also includes a variety of other controls including the internal audit system, financial and non-financial controls like quality control, purchasing controls, inventory mechanisms, marketing controls, etc. Thus, it has a much wider scope than internal checks and contains many more controls other than the internal check system.
How do internal checks help?
The objective of internal checks is to make sure that any frauds and errors are detected at the earliest and that they can be prevented from occurring in the first place. It is a continuous and routine process that is performed on a day-to-day basis.
It relates to all transactions that occur on a daily basis in a company. Internal checks are achieved by proper allocation of duties amongst all employees and by ensuring that the work of one person is independently verified by another. When such routine checks are in place, every transaction goes through multiple stages of verification which, in turn, prevents mistakes from occurring.
The importance of internal checks lies in making the flow of work systematic and continuous. Whereas the focus of internal control is on the implementation of the system of internal check and internal audit.
For example, if we talk of internal checks with regard to sales, it will involve allocation of duties amongst different departments such as sales dept. for accepting orders, credit dept. for approval of credit, warehouse dept. for the issue of merchandise, dispatch dept. for dispatching goods, and finance dept. for billing customers. And if we talk of the internal control system in relation to sales, it will include the entire internal check system, monthly reconciliations of departmental transactions, physical control over equipment & other assets (i.e., locks on doors or a safe for cash/cheques), physical check on inventories (such as cash or inventory count), and management reviews including a budget-to-actual comparison to look for any unexpected differences.
Thus, an internal control system has a much wider area of functioning in an organization. There is no universal model for a system of internal control. It is up to every organization to create an internal control structure that properly tailors to its situation. Internal control must neither be confined to a set of procedures nor financial controls. Operational controls including quality control, work standards, work policies, budgetary control, periodic reporting, policy appraisal, quantitative controls, etc. are all parts of an internal control system.
In the below section, the differences between internal check and internal control are compiled:
Internal control consists of the whole system of controls, financial or otherwise, established by the management for the conduct of business.
In contrast, 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.
Internal control has a much wider scope because it comprises the internal check and internal audit system, in addition to other controls. The scope of internal checks is more limited.
An internal control system aims to achieve objectives such as adherence to rules and processes established by management, safeguarding of assets, prevention and detection of errors and frauds, accuracy and completeness of records, and timely preparation of financial information.
On the other hand, an internal check is solely intended to prevent errors and frauds, as well as to fix accountability for all tasks. It’s a component of the internal control system.
The internal control system is reviewed on a regular basis by management in light of changes inside the company, changes in the economic environment, and recommendations from internal and external auditors.
However, once implemented in the business, internal checks are often static for a given length of time and hence less flexible than internal controls.
Both internal checks & internal controls help in the proper recording of all financial transactions, strengthen the efficiency of a company’s accounting system, and aid in the easy preparation of financial statements. In addition, a good structure of internal controls (that constitutes internal checks too) increases the reliability of prepared financial statements manifold. It also discourages employees from committing fraud because they will have a fear of being detected if proper checks are imposed at all levels.
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