Objectives of Internal Check System and Essentials of a Good System

Objectives of Internal Check and its Essentials:

Being an integral part of a company’s internal control mechanism, the internal check system has become very common in businesses. Almost every business, big or small, tries to implement an effective internal check system nowadays. It is nothing but a way of arranging the duties of staff members such that the job done by one gets checked by another while the work is still on. In this blog, we have discussed the meaning, objectives, and essentials of a good internal check system.

What is an internal check system?

An internal check is a system employed in businesses in which the recording of business transactions is set up in such a way that the work of one employee is automatically examined by others while the transaction is being recorded.

The staff duties are structured in such a way that no single person is permitted to record every aspect of the transaction. And the entire workload is divided amongst the various members of the staff in such a way that the work of one person is automatically verified by others.

Hence, the following are some of the important elements of an internal check system:

  • Checks are implemented on day-to-day transactions.
  • This system is integrated as part of the company’s routine system and is carried out continuously.
  • Work is properly distributed among the staff and each member is assigned a specific task.
  • Although each staff member’s job is independent, it complements the work of the others.

Example

To reduce the possibility of fraud, an appropriate internal check system can be designed for many items such as cash sales, credit sales, purchases, wage payments, and so on. Let us take the example of a school. Assume salary payments at a school are made in the following ways. The Pay Bill is prepared by A. B double-checks the computations and enters them into the records. C approves & authorizes the payment. Thereafter, D issues the payment in cash or by check.

We can see from this example that there is a division of labor and that several people are involved in carrying out and recording a specific financial transaction rather than just one. By having such a system in place, it becomes easier to identify the person responsible for a particular error, default, etc., and thus it helps in fixing responsibilities.

What are the objectives of an Internal Check system?

An internal check system in an organization serves to achieve the following objectives:

  • Reduce the possibility of fraud:

To make it more difficult to commit frauds and errors by any member of the workforce. The work of every member is checked by another, hence, if a fraud is to be committed, two or more people must act together.

  • Detect fraud and errors:

To detect and correct fraud and errors as quickly as possible.

  • Moral pressure:

To exert moral pressure on members of the staff.

  • Assign responsibility:

To assign each person’s duties and obligations in such a way that he can be held accountable for any lapse on his part.

  • Employee efficiency:

To improve the overall efficiency of the employees by assigning jobs based on the principle of division of labor.

  • Accurate and reliable record:

To maintain a complete and accurate record of all business transactions.

  • Confirm facts:

To confirm facts and entries from multiple sources.

Relationship with the auditor

The system of internal checks is increasingly being recognized by auditors, especially when the size of the company is big. It is so because the presence of an effective internal check system relieves the external auditor of the need to do detailed checking to a great extent. Strong internal checks give assurance on the accuracy of transactions to a great extent.

The degree to which an external auditor may rely on the internal check system is determined by the procedural tests he employs to determine the efficacy of the system. However, if the auditor is found to be negligent in his duties, he cannot be freed of his obligation, regardless of whether he evaluated the internal check system in place in the business before accepting it as correct. In other words, it should be noted that while the presence of a sound internal check system in an organization greatly assists the auditor in his audit work, it does not reduce his legal liability in any way.

Essentials of a good internal check system

When installing an internal check system, the following important considerations must be kept in mind:

  • No single member of the staff should, by himself, have complete authority over the recording of all aspects of business transactions.
  • The same employee must not have access to all books of accounts as well as actual custody of the assets. For example, the cashier should not be the one making entries in the books.
  • Each member of the staff should be assigned a distinct task.
  • To prevent and detect concealed frauds, all officials and staff having responsibility for cash, securities, or stock should be encouraged to take annual leave (once every year).
  • The duties of the members of the staff should be shuffled from time to time.
  • Efforts must be made to use mechanical devices to prevent any misappropriation of cash.
  • Each transaction should travel a certain route and should pass through various hands.
  • All books, vouchers, and documents should be properly organized and easily accessible.
  • A proper record of the incoming and outgoing goods from the business premises must be kept.
  • To improve the system’s efficiency and effectiveness, a self-balancing ledger system should be implemented.
  • Any staff member should not be given undue importance, and excessive reliance on any staff member should be avoided.
  • The division and assignment of duties among staff members must allow for an automatic check by one another.

Takeaway

An internal check is a system of arrangement of staff duties whereby no single individual is authorized to carry out and record every aspect of a transaction so that fraud is prevented and at the same time, the chances of errors are reduced to a minimum.


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Ruchi Gandhi

The author enjoys to write informational content in the domain of company law and allied laws. She takes interest in doing thorough and analytical research on legal topics. She is a CA along with MBA (Fin) and M. Com.

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