Internal check is a method of organizing the accounting system of a business concern or a factory where the duties of different staffs are arranged in such a way that the work of one person is automatically checked by another person and thus, the possibility of fraud or error or irregularity is minimized.
For example, the receipt of cash entered by the cashier in cash book and entry is posted in ledger by another clerk and the statement of account is sent to the customer by a third clerk and so on. Thus, we see that the same transaction has passed through three different hands and the work of one is checked automatically by the other. Internal check is kind of division of labour. This minimizes the possibility of frauds and errors unless all the three join hands in defrauding their employer.
Under this system, the clerk in charge of a book of prime entry should not have access to the ledger and vice versa. Self balancing ledger system, time recording clocks regarding wagers are some of devices by which the commission of fraud may be prevented.
No one is allowed to deal with one book through out the year. Under this system, wage sheets are prepared and checked from different records by different clerks. In case of cash sales, the sales man does not receive the money from the customer, nor does he deliver the goods to the customer. Cash is received by the cashier, the goods are delivered by the gate keeper and all the three (sales man, gate keeper and ashier) send their own statements regarding sales, receipt of cash and the delivery of goods, to the General Manager who compares all the documents and if he finds out any error or fraud, he asks for explanation.
The auditor can rely upon the accuracy of the accounts if there is a proper internal check.
Criteria fora Good Internal Check
- No Individual clerk should be allowed to occupy a particular area of operation so long because he can manipulate the things in easy way.
- No one should be allowed to do a particular work from beginning to end.
- There must be clear cut authority levels for sanction for various transactions. The concern person must be responsible also for wrong decisions.
- The person handling an asset can not make entries for the transactions without any counter check.
- Systems must have various checks to ensure that all the records give reliable information. For example, use of control accounts, self balancing system, preparation of reconciliation statements etc.
- Person having physical custody of assets must not be permitted to have access to books of accounts.
- For stock taking at the close of the financial year, the trading activities should be suspended for some time. The task of pricing and evaluation of stock should be done by other than that of stock section.
- Member of the staff should not be allowed to take away goods without proper permission.
- There should be efficient accounting control in respect of each important class of assets.
- Ledger keeper should not be allowed to have a direct access to either the debtors or creditors of the business.
- A detailed record should be maintained of all goods received and sent out of the business premises.
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