Internal Check & Techniques of Internal Control System - Auditing & Secretarial Practice | Auditing and Secretarial Practice - B Com PDF Download

Internal check

It is an arrangement of accounting work under which the work of one person comes under the security of another person. So, that it is not possible to commit fraud without collusion between two or more persons. In other words, it is an arrangement of accounting system under which no one person is allowed to carry out one work completely

Specialization & division of work is important one. The work of one staff is automatically checked by another person in order to locate errors and frauds.

Advantages. 

A. Advantages to business

1. Proper division of work
2. Fixation of responsibility
3. Greater efficiency of the staff.
4. Increased carrying capacity.
5. Early detection of errors and frauds.
6. Easy preparation of final account.
7. Truth and accuracy of accounting can be available.

B. Advantages to Owners. 

1. Genuineness and accuracy of the account.
2. Overall efficiency, economy in operations, increased profit etc..

C. Advantages to Auditor

1. There is no need for detailed examination of book of accounts.

2. It reduces burden. 

Objectives.

1. Proper division of work.
2. Minimization of errors and frauds.
3. Easily detection of errors and frauds.
4. Ensures the reliability of accounts.
5. Easily preparation of final accounts.
6. Simplification of the external auditors work

Limitations.

1. Suitable only for big concerns.
2. Sacrifice of quality for quickness.
3. Certain type of disorder, confusions etc... in the working of the organization.
4. Useful only when there is no collusion between employees.
5. Risky for the auditor.

Principles and essential of good internal check system.

1. Simple, easy workable and effective.
2. Not be too expensive.
3. Carefully devised and properly regulated.
4. Authority should be clearly defined.
5. Proper division of responsibility.
6. Division of work among the staff. 
7. Work of similar nature should be entrusted with one person to ensure specialization.
8. No individual should be allowed to perform one work completely.
9. Work should be distributed in such a way that the work of one staff is automatically check another.
10. No employee should be allowed to remain a particular job for a long period.
11. No employee of the concern should be rely upon too much.
12. Proper reporting to the management.
13. Proper system of filing vouchers.
14. Safeguards should be prescribed for the safe custody of unused cheque book, securities etc…
15. There should be a self balancing ledger system.
16. All incoming letter should be opened by responsible officers.
17. The receipt of cash and disbursement should be entrusted to different personnel.
18. Cashier should have no access to ledger.
19. All remittance received should be deposited in a bank immediately.
20. All cash payments should be made by a cheque.
21. Cash and bank balance should be verified frequently.
22. Petty cash payment should be on imprest system.
23. There should be effective control of receipts and issue of goods.
24. There should be a perpetual inventory system. 

Difference between internal control, internal check and internal audit 

Techniques of Internal Control System

There are two types of techniques used in internal control system Preventive internal control techniques and Detective internal control techniques controls. Both types of internal control techniques are essential to an effective internal control system. From a quality standpoint, preventive controls techniques are essential because they are proactive and emphasize quality. However, detective controls techniques play a critical role by providing evidence that the preventive controls techniques are functioning as intended

Preventive Controls techniques are designed to discourage errors or irregularities from occurring. They are proactive in nature that helps to ensure departmental objectives are being met. Examples of preventive controls techniques are:

1. Segregation of Duties: Duties are segregated among different people to reduce the risk of error or inappropriate action. Normally, responsibilities for authorizing transactions (approval), recording transactions (accounting) and handling the related asset (custody) are divided.
2. Approvals, Authorizations, and Verifications: Management authorizes employees to perform certain activities and to execute certain transactions within limited parameters. In addition, management specifies those activities or transactions that need supervisory approval before they are performed or executed by employees. A supervisor’s approval (manual or electronic) implies that he or she has verified and validated that the activity or transaction conforms to established policies and procedures.
3. Security of Assets (Preventive and Detective): Access to equipment, inventories, securities, cash and other assets is restricted; assets are periodically counted and compared to amounts shown on control records.

Detective Controls techniques are designed to find errors or irregularities after they have occurred. Examples of detective controls techniques are: 

1. Reviews of Performance: Management compares information about current performance to budgets, forecasts, prior periods, or other benchmarks to measure the extent to which goals and objectives are being achieved and to identify unexpected results or unusual conditions that require follow-up.
2. Reconciliations: An employee relates different sets of data to one another, identifies and investigates differences, and takes corrective action, when necessary.
3. Physical Inventories
4. Internal Audits