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 auditors 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 SALES

In 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.
Customers 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 WAGES

In 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 AUDIT
Points
Internal Check
Internal Audit
(1) Meaning

(2) Object

(3) Time

(4) Additional Staff

(5) Implementation

The
work
of
one
employee
is
automatically checked
by another employee is
known
as
Internal
Check.
The main object of
internal check is to
detect
and
prevent
errors in early stage.

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

Internal
checking
is
carried
out
simultaneously
with
writing of books of
accounts.
In an internal check
system, no additional
staff is required.
It is an Automatic and
Continuous process.

Internal Audit is carried

out after the accounts
have been written.

The main object of

internal audit is to
check
that
Internal
Check & Accounting
System is effectively in
operation.

In an Internal Audit,
additional
staff
is
required.
It is done by Internal
Auditor.