COST ACCOUNTING (DSE-6)

INTERNAL CHECK

AISHWARYA RAIKAR
T.Y. BCOM
DIV- C
ROLL NO- 17334
ISA 1- SEMESTER 6
 CONTENTS

1] MEANING OF INTERNAL CHECK

2] PROCEDURE FOR INTERNAL CHECK
3] IMPORTANCE OF INTERNAL CHECK
4] REFERANCES
 INTERNAL CHECK
 DEFINATION

The term “internal check” is defined by the institute of chartered accountants in England and
wales as the “check on day-to-day transactions which operate continuously as a part of the
routine system whereby the work of one person is proved independently or made
complimentary to the work of another, the object being the prevention or early detection of
errors or frauds”.

Prof. Dicksee defined internal check as, “such an arrangement of book-keeping routine that
errors and frauds are likely to be prevented or discovered by the very operation of the book
keeping itself”.

 MEANING
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 other
members of each other’s work.
The accounting procedures are so designed that no single person is authorised to carry
out all the operations involved in a transaction. The objective of such an allocation of
duties is that no single person has an exclusive control over one transaction or a group
of transactions. Thus, a fraud cannot take place unless there is a collusion between two
or more persons. It also involves verification of individuals work by prescribing cross
checks and cross reconciliation as a part of operating procedure itself.
 PROCEDURE OF INTERNAL CHECK
 The auditor should, first of all, assess the reliability of internal check system. In order
to do so he should-
(a) Call for a brief statement from his client with regard to the system of internal
check in operation.
(b) Examine the system in the light of the size and nature of the business to
determine its adequacy.
(c) Evaluate the system to assess its capability in minimising and preventing errors.
 The auditor should familiarise himself completely with the internal check system
after assessing its reliability. In the Canadian case of Mc. Bride Ltd. V. Rooke and
Thomas[1941], the auditors took much for granted in familiarising themselves with
the internal check system. They failed to make occasional inspection of original
 bank deposit slips and could not, thus, discover thefts by an employee of the
company. The court held them liable for negligence and their plea that such
inspection was not possible because they were working far from the place where
deposit slips were kept, was rejected.
 If the auditor decides to rely on the internal check system, he can reduce the extent
of detail checking of the transactions and can apply test checks on a relatively
smaller sample for a particular class of transaction.
One can say that an efficient internal check system helps an auditor to a great extent
in the conduct of his work but it does not reduce his legal liability.
 IMPORTANCE OF INTERNAL CHECK
Internal check is a valuable part of internal control. It is the built-in check in accounting
process itself. The importance of internal check is given below:
 Fixation of responsibility
Internal check entails a proper segregation of duties among the staff of a business. As
duties are well defined, it becomes easier to fix responsibilities in case of errors and
frauds. For example, in case of goods are stolen from the stores, storekeeper can be held
responsible.
 Increases efficiency of clerks
Work is distributed according to qualification and experience of the clerks. Proper
division of work leads to specialisation and, hence, increases efficiency of clerks to
perform work.
 Prevention of errors and frauds
No one person is allowed to record more than one aspect of a single transaction and
work of each worker in the ordinary course is checked by other. This helps in preventing
errors and frauds.
 Reliability of information
The information generated in the entities, which establish an efficient system of internal
check, is reliable and accurate. Consequently, the preparation of final accounts would
be quick after the end of financial year.
 Reduces the workload of auditor
A reliable internal check reduces the extent of audit procedures and, hence, the
workload of the auditor.
 Increases the profitability of the business
 By preventing errors and frauds and increasing efficiency of clerks, a good internal
check system increases the profitability of business.
 REFERANCES
- Taxmann Students guide to auditing reference book by Aruna Jha
- Auditing -1,T.Y.BCOM. SEMESTER 5, by Dr. Manoj s. Kamat and Dr. R. Satish