INTERNAL CHECK.
The
term internal check implies that the work of various members of the staff is
allocated in such a way that the work done by one person is automatically
checked by another. It is defined as “such an arrangement of book keeping routine
where in errors and frauds are likely to be prevented or discovered by the very
occupation of book keeping itself’.
Internal
check is a system under which accounting methods and details of an
establishment are laid out that the accounts and procedures are not under the
absolute and independent control of any one person or the contrary the work of
one employee is complementary to that of another.
The system
of IC is based upon the principle of division of labor, where in performance of
each individual is automatically checked by another. This is possible by
properly allocation the work and integration of function of the employees in
such a manner their work complements each others.
OBJECTIVES
OF INTERNAL CHECK:
1.
Eliminates frauds and errors to prevent misappropriation of goods
in cash.
2.
To encourage specialization of labor.
3.
To reduce the time spent on a particular work.
4.
To exercise moral pressure over staff members.
5.
To make accounting system more reliable.
Points
to be Considered in Framing a Good Internal Check.
1.
No single employee should have independent control over any important
aspect of the business. In other words the work of employed should be
automatically received by another.
2.
The duties of the employees should be changed from time to time
without prior notice.
3.
Employees who control physical assets should not have assets to
goods of account.
4.
It’s better to follow a system of self balancing ledger.
5.
Account must be periodically verified.
6.
The allocation of work must be carefully done and the position
must be reviewed periodically.
7.
While stock taking the pricing and evaluation of stock should be
done by the people who are not connected to stores department.
8.
A cashier should not be in charge of maintaining accounts complete
bank transactions etc.
Internal check and the Auditor:
The
auditor before starting audit work evaluates the system of internal check. If
it is efficient he may avoid detailed checking of the transactions and he can
carry out a few test check of the transactions to what extent should an auditor
rely upon the system of internal check will depend upon the degree of
effectiveness with which, the system is followed as well as the size of the
business. If the internal check system is inefficient, he had to check in
detail all transactions. It should be remembered that even if the internal
check system is efficient he should still test its existence and efficiency.
Efficient
internal check system reduces his work but not his responsibility. If in the
process of examination of accounts if he finds any weakness in his system, he
should report it to his client. Thus the existence of a good internal check
system may help an auditor to a great extent, but does not reduce his legal
liability. If any fraud is discovered subsequently he may be held quietly of
negligence. He can’t defend himself saying that he relied upon the efficient
internal check system that existed in the business.
Internal check regarding
CASH SALES.
Sales over the counter. The following is the internal check system
regarding sales over the counter.
1.
Each counter should have a separate salesman.
2.
Each salesman should be given a separate sales memo book. Usually
different color is used for different counters,
3.
Sales memo should be prepared by the salesman in 4 copies.
4.
The sales memo is checked by another clerk before being handed it
over to customer. A copy is retained by the clerk.
5.
Payment is made at the cash counter.
6.
One copy of cash memo is returned to the internal duly stamped as
cash paid 2 copies are return the cashier.
7.
The cashier records days total sales in cash sales register.
8.
Every salesman should prepare total sales summary of the
respective counters. At the end of the day total sales as recorded by salesman,
total cash received and total sales as per register must agree with each other.
Postal
Sales:
A separate register should
be maintained to record details of postal sales. Cash may be received either
with order (cwo) or at the time of delivery (cod). Proper records will be made
in this regard for cash received and due. Usually, goods are sent by VPP (value
payable post). The sales register must be checked in detail by a senior
officer.
Sales by Traveling Agents:
1.
Traveling salesman should not be allowed to issue final receipts
to customers.
2.
Amount received must be remitted to H.O. account on daily basis.
3.
Salesman should not be allowed to deduct their expenses or
commission from the sale proceeds.
4.
The salesman should submit periodical sales report which must be
examined in detail.
Internal check regarding Wages:
In a large organization,
expenses on wages with form one of the major portions of expenses. The chances
of frauds are also high in this regard. In this background, a good system of
internal check assumes significance.
a.
frauds might be in the form of recording more wages than actually
paid.
b.
Payment of wages to dummy/ghost workers.
c.
Recording wages for which no payment has been made etc.
The design of internal check
system should try to prevent the above fraud. The following internal check
system is suggested in this regard.
1.
Maintaining
Time Records: A department is in charge of recording the time spent by the
workers should be constituted as far as possible. Manual system of time keeping
must be avoided. This brings down the fraud regarding the payment of wages for
which no work is done.
The time keeping check and the foremen should separately prepare
the time recorded sheet recording the name of the worker, time of entry, names
of absentees etc.
In case if the workers are paid on piece rate system proper system
of time booking must be followed each worker should be given a job and counter
assigned by the supervisor.
In case if workers work overtime, the overtime slips must be
issued which is authorized by the concerned official. No worker should be
allowed to work Over Time if he is not authorized to do so.
2. Preparation of Wage Sheets:
Large scale organizations should evolve in an internal check
system in such a manner that the chances of over payment, under payment, wrong payment
to workers are minimized and prevented. Preparation of wage sheets should be
the responsibility of a separate department. Separate wage sheets should be
maintained for workers under time rate system and price rate system.
Two clerks should examine the time and price wage records. Over
time records etc another clerk should be in charge of preparing wage sheets of
individual works. The 4th clerk checks the calculations deduct
amount for PF, IT, etc to arrive at net amount to be paid to workers. All
officials involved in the process, should sign the statements which will be
approved by the work manager/ the production manager.
Payment
of Wages: a person is not involved either in maintaining time records
preparation of wage sheets should be in charge of payment of wages. Usually the
cashier in the accounts department will allot the wages, according to the
information given by the wage sheet. As far as possible wages should be
distributed personally to the workers who sign the Wage Register. Absentee
workers should be paid through others workers only after written authorization
is received. A list of unpaid wages should be prepared after the distribution
of wages. If there are casual workers, payment should be made to them
separately on a different day.
Internal
Check as Regards Purchase.
The purchase dept, will be responsible for proper control over
purchases as far as possible. Purchases must be centralized for the purpose of
internal check. The purchase process may be divided as:
1.
Purchase.
2.
Storage.
3.
Issues of Materials.
- Internal Check regarding Purchase of Materials: The concerned dept, head will send requisition letter to the purchase dept, for each dept, a separate file must be maintained for requisitions. Based on the requisition the purchase committee, purchase dept, calls for tenders from approved suppliers. These tenders must be opened by the purchase committee and the least bidder will be chosen.
Purchase order has to be sent to the selected suppliers. Usually, purchase
order will be prepared by the purchase dept, a copy of which will be sent to
the supplier, second to the stores, third to the accounting dept, and the fourth is retained by the purchase
dept.
When goods are received the stores keeper inspects them and
compared with the purchase order. If goods are acceptable he enters them in
goods inward book and issues the acceptance letter. A copy of the acceptance
letter will go to the accounts dept, which will again compare goods approved
letter with the purchase order. The accounts manager if satisfied authorizes
for its payment.
- Internal Check Over Storage of Goods: The stores keeper should maintain proper records, regarding storage of goods. He usually maintains bin cards and stores ledger surprise.
- Internal Check as regards to issue of Materials: Materials should always be issued against material requisition note. After each issue, and purchase proper record must be made in bin cards and stores ledger.