UNIT -2

INTERNAL CONTROL

Internal Control

Meaning

Internal control refers to the various methods and procedures adopted for the control of production,
distribution and the whole system (financial and nonfinancial) of the enterprise. Internal control is a
broad term which is normally used to control financial and non-financial activities. It involves a
number of checks and controls exercised in a business to ensure efficient and economic working.

In other words, internal control system - the whole system of controls financial or otherwise,
established by the management in order to carry on the business of the enterprise in an orderly and
efficient manner- ensures adherence to management policies, safeguards the assets and secures as
far as possible the completeness and accuracy of the records.

Definition of Internal Control

According to W.W.Bigg “Internal control is best regarded as indicating the whole system of controls,
financial and otherwise, established by the management in the conduct of a business, including
internal check, internal audit and other forms of Control".

American Institute of Certified Public Accountants defines "Internal control comprises the plan of
organization and all the co-ordinated methods and measures adopted with in a business to
safeguard its assets. Check the accuracy and reliability of its accounting data, promote operational
efficiency and encourage adherence to prescribed managerial policies".

Basic/ Fundamental / Essential Elements of Internal Control

A system of internal control will have the following features or characteristics.

1. Plan of organization.

2. Authorization, recording and control procedures.

3. Sound practice in performance of functions.

4. Competency of personnel.

1. Plan of organization: It should establish clear line of duties, responsibilities, segregation of

operations, and subordination of each member of the staff. Organization structure must provide for
adequate independence for various functions performed at different levels. The division of duties
should be such that activities of a department are controlled by records maintained outside it.

2. Authorization, recording and control procedures: They should ensure that (a) Every item of
expenditure has been properly authorized and accounted for. (b) Every item of receipt has in fact
been received and accounted for. (c) There is proper custody of the funds and assets. (d) There is no
misapplication or misuse of any property of the enterprise.

3. Sound practice in performance of functions: An effective system of internal check should lie
down that no single person should alone handle any transaction completely from beginning to end.

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
The system should provide that the work of one person will be checked by another, the
management shall be able to detect errors and frauds.

4. Competency of personnel: It means the competency of departmental heads, key personnel and
all persons performing routine tasks at different levels. This will require proper selection, training,
effective direction, supervision and control, quick corrective action to avoid violation of prescribed
procedures.

Duties of Auditors regarding Internal Control

The auditor's duties regarding internal control are as follows:

1. To assess the adequacy of the accounting system as a basis for preparing the financial statement.
2. To identify the types of potential misstatement that could occur in the financial statement.
3. To consider the factors that affects the risks of misstatements.
4. To design appropriate audit procedure.
The auditor should rely on internal controls only after ascertaining and evaluating these controls. If
the auditor has reasons to believe that a client has set up a strong system of internal control, the
reliance on that system will help the auditor to reduce the detailed checking which would otherwise
be undertaken.

Objectives of Internal Control

1. Proper authorization: Transactions are executed with management's general

and specific authorization.

2. Prompt recording of transactions: All the transactions are promptly

recorded in the correct amount in the appropriate accounts and in the

accounting period in which they are executed so as to permit preparation of

financial information within a framework of recognized accounting policies

and to maintain accountability of assets.

3. Restricted access to assets: Access to assets is permitted only in accordance

with management's authorization.

4. Actions against deviations: The recorded accountability for assets is

compared with the existing assets at reasonable intervals and appropriate

action is taken with regard to any differences.

• To minimize, if not completely eliminate, wastage and inefficiencies in

business operations and to safeguard the assets of the business.

• To ensure high degree of accuracy and reliability of accounting data and

promote operational efficiency.

• To measure how far the policies of the management are being

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
implemented.

• To evaluate the efficiency of performance in all aspects of business activities and to highlight the
weaknesses.

Principles of Internal Control An effective internal control system should have the following
factors:

1. Competent and trust worthy staff: People in charge of internal control system must be reliable
and highly competent about the work. Lack of knowledge and dishonesty will spoil the efficiency of
the system.

2. Records of financial and other organizational plans: A good internal control system must have
good documentation system. Filing, recording, classifying etc. will help in this regard.

3. Segregation of duties: Normally, there should be a separate department for internal control this
reduces frauds, bias etc. Normally a clerk in charge of accounting function should not be in charge of
assets also.

4. Supervision: Proper reviewing of the operations of the company regularly makes the control
system effective.

5. Authorization: All transactions must be properly authorized. In other words, the authority of each
person should be well defined.

6. Sound practices: The Company should have well established procedures, policies, delegations,
organizational manuals etc.

7. Internal Audit: It’s a part of internal control and it should be independent of internal check.

8. Accounting Controls: Proper accounting information systems should be established so that the
information relating to accounts is properly collected, recorded and accounts prepared.

Advantages of Internal Control

The various advantages that may be derived from internal control system are summarized as
follows:

1. Identification of defects: Under internal control system, the total activities are segregated in
such a way that the work performed by one employee is automatically checked by another
employee. So, if there is any defect in the system, it is easily detected.
2. Flexibility: In this system, year-wise comparative analysis is done, so, if there is any change
in the mode of operation, the changes in the system can easily be accommodated.
Therefore, the opportunity for flexibility is available.
3. Time savings: If the internal control system is in operation in an organisation, there is no
need for the preparation of separate audit programmes for each and every audit
engagement. Thus, it saves time to a great extent.
4. Lesser risk of omission: Under this system, the total work is sub-divided into a number of
activities and each employee is assigned with a particular type of activity. So, there is least
chance of oversight or omission of any matter. 5.
5. Provision for training facility: Due to lack of adequate experience, the auditor may face
difficulty in establishing a close relationship between audit programme and the internal

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 control system. This system itself provides training facilities to auditors to overcome this
difficulty.

Limitations of internal control

1. Cost: The management thinks that the cost of a control procedure must not be in excess of
potential loss due to error or frauds.

2. Transactions: The internal control tends to be directed an anticipated types of transactions

and not at unusual transactions.

3. Possibility of error: There is possibility of human error due to carelessness, distraction,

mistake of judgment or the misunderstanding of instructions.

4. Circumstances: There may be collusion with parties outside the entity, employees of the
entity. Due to such collusion there is possibility of circumvention of control.

5. Responsibility: There is a chance that a person responsible for exercising control could abuse
that responsibility, for example, a member of management over riding a control.

6. Conditions: There is a possibility that procedure may become inadequate due to changes in
conditions and compliance with procedure may deteriorate.

Internal Check

Meaning Internal check is an arrangement of the duties of the staff members of the accounting
functions in such a way that the work performed by a person is automatically checked by
another.

Internal check is a part of the whole system of internal control and is best regarded as the checks
on the day to day transaction. It is an arrangement of routine book keeping, where the work of
one person is automatically checked by another so that errors and frauds are prevented or
discovered without delay and without any additional financial burden for the firm.

Definition According to Spicer and Pegler "A system of internal check is an arrangement of staff
duties whereby no one person is allowed to carry through and to record every aspect of a
transaction so that, without collusion between two or more persons, fraud is prevented and at
the same time the possibilities of errors are reduced to a minimum.

" According to De Pallia "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 checked by the members
of the staff.

" Prof. L. R. Dicksee defines internal check as, “An arrangement of the accounting routine that
errors and frauds are automatically prevented or discovered by the very operation of the book-
keeping itself.”

According to D. R. Davar,"Internal check is a system or method introduced with defined

instructions given to staff as to their place of work with a view to control and verification of their
work and also maintenance of accurate records as the ultimate aim"

Principles of Internal Check

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
1. Sufficient staff: The principle of internal check is sufficient staff. The employees can be
appointed according to the workload. The management can determine the amount of work,
which is distributed among the departments. The persons are hired to perform their duties.
The overloading can create trouble for management.
2. Division of Work: Division of work is a principle of internal check. The management can
determine the total amount of work. The whole work is divided among the departments.
The heads of such departments are responsible for completion of work according to
timetable.
3. Co-ordination: Coordination is a principle of internal check. All departmental managers are
bound to coordinate with others in order to achieve organization objectives. When there is
fault in one department, the work of other department suffers. The objectives cannot be
achieved. Internal check determines the degree of coordination among the managers.
4. Rotation of duties: Rotation of duties is a principle of internal check. The workers feel bore
by doing the same work from year to year. There is a need of rotation of duties. It is in the
interest of concern as well as employees. The efficiency is improved due to changes is
duties.
5. Responsibility: Responsibility of each individual must be properly defined and fixed. The
work of the business should be allocated amongst various clerks in such a manner that their
duties and responsibilities are clearly and judiciously divided.
6. Automatic Machines: According to the principles, machines must be used to do accounting
work if permissible. The machines can do a lot work without delay. The changes of fraud and
error are reduced to a minimum. The working of machines improves efficiency of accounting
staff.
7. Checking: The principle of internal check is to check the work of other employees. Many
persons perform the work. The officers can put his signatures to verify the work done by his
subordinate. In this way one work passes many hands. The chances of error and fraud are
minimized due to checking and counter checking.
8. Simplicity: The principle of internal check is that it is simple in working. The employees can
understand the working of internal check system. A person can work under the supervision
of other employees. The line of authority moves from top to bottom level. All workers can
understand their duties in the organization
9. Documents classification: The classification of documents is the principle of internal check.
The business documents are prepared, collected, recorded and placed in proper files. The
index is prepared to compile the data. The hiring system is useful to place the latter, in case
if needed documents are traced at once.
10. Dependent work: Dependent work is a principle of internal check. The work of one
employee is dependent upon others. One work passes in the hands of two or three persons
till it is complete.

Objectives of Internal Check

The objectives of internal check system are:

• To allocate duties and responsibilities of every clerk in such a way that he may be held
responsible for a particular error or fraud.

• To minimize the possibilities of errors, frauds or irregularities.

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 • To detect errors or frauds easily if it is committed, as there is a provision for independent
checking in internal check.

• To enhance the efficiency of clerks through assignment of duties based on the principle of
division of labour.

• To distribute the work in such a way that no transaction is left unrecorded.

• To prepare final accounts with easy and efficiency, as an efficient system can make accounts
more reliable.

• To exercise moral pressure over staff.

• To prevent misappropriation of goods or cash by any clerk etc.

Why to have internal check? / Purposes of Internal Check / Advantages of Internal Check
Advantages from business point of view:

(1) Proper allocation of work: Rational allocation of work among the different staff members of
the organisation brings precision in work.

(2) Control device: The distribution of work under this system is such that it acts as a control
device against unscrupulous employees. The chances of fraudulent manipulation are thus
minimized due to the existence of this check.

(3) Speedy work: As the individual staff is engaged in the same type of jobs for a considerable
period of time, it results in the efficient performance of the activities and high speed of work.

(4) Increase in efficiency and skill: A good system of internal check increases the efficiency of
work among the staff due to its proper planning for assigning the right job to the right person.
(5) Easy preparation of final accounts: Since no individual worker is allowed to handle a job
completely and the work is divided among the employees in a proper manner, the books of
accounts can be kept up to date, as a result, the final accounts can be prepared easily.

(6) Creation of moral check: Knowledge of subsequent checking of each employee's work by
another act as a great check to commission of errors and frauds.

Internal check as regards Cash Sales

1) Counter Sales Book: The salesmen can sell products over the counter. The sales book can be
prepared on the basis of cash memos issued by the staff. The sales staff should not handle cash.
All cash receipts must be handed over to the cashier. Accountant can make entries in the books
of accounts. Another person can deposit cash.

2) Cash Register: Cash register is maintained in large retail shop. There is a need of secrecy for
its working. The main equipment and attachments must work without any interference from
employees.

3) Checking Copies: The auditor can check carbon copies of cash sales. The copies can be used as
a basis of determining total sales for a particular period.

4) Receipt of Goods: The goods are handed over to the customer along with cash memo. The
officer sales must check and sign the cash memo at the time of delivery of goods. One copy is
kept for determining total sales.
Lokeshwari CK
Assistant Professor
PES UNIVERSITY
5) Sales Summary: The sales summary must be prepared and sent to sales manager. The sales
summary must tally with the cash received from the customers.

6) Cash Verification: The sales officer can check the cash memo for the day. The sales summary
should be examined. The cash collected must tally with the cash memo as well as total sales
summary for the day.

7) Cash Deposits: The cashier should not deposit the cash into the bank account. The total cash
must be handed over to the accountant who should make arrangement for deposit of cash.

8) Sales Discount: The sales discount rate can be examined from the price list. The discount must
not be in excess of the rates stated in the list. The discount allowed should be posted to the
sales discount accounts. The sales manager must approve the discount.

Internal check with regard to counter sales

The following is the internal check system regarding sales over the counter.

• Each counter should have a separate salesman.

• Each salesman should be given a separate sales memo book. Usually different colour is used
for different counters.

• Sales memo should be prepared by the salesman in 4 copies.

• The sales memo is checked by another clerk before being handed it over to customer. A copy
is retained by the clerk.

• Payment is made at the cash counter.

• One copy of cash memo is returned to the customer duly stamped as cash paid. 2 copies are
retained with the cashier.

• The cashier records days total sales in cash sales register.

• 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.

Internal check as regards credit sales:

The whole system of credit sales should be kept under proper control and supervision. There
should be a separate sales department for the purpose. The sales department should have
charge of receiving orders, supplying goods to customers, preparing invoices and maintaining
accounts of goods supplied.

The sales department should function as a composite of some sub-departments.

The procedure of its working may be like this:

(1) All orders received should be entered in the orders received book and properly numbered.
The original order or its copy should then be sent to the dispatch department.

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
(2) The dispatch department should take steps to pack the goods as per the order. It should
prepare a statement showing the goods packed.

(3) The statement so prepared by the Dispatch Department should be sent to the Counting
House where the list of goods should be checked and rates, etc. entered in it. The invoice will
then be prepared in triplicate by means of carbon papers.

(4) Two copies may be sent to the customers who will then return one of them after signing it in
token of having received the goods. Thus, it will serve the purpose of delivery note. The third
copy will be retained for further reference.

(5) The Accounts Department should prepare documents like Railway Receipt, Bill of Lading, etc.
(6) All goods supplied on order should be entered in the Goods Outward Book which should be
checked at frequent intervals with the Orders Received Book.

(7) The Invoice Book should also be compared with the Goods Outward Book and the Orders
Received Book

(8) The Sales Book should be written up with the help of the copies of invoices.

The following type of fraud may be committed in connection with sales:

(1) Sales may be omitted from recording in the Sales Book.

(2) Inflation of sales in the Sales Book in any of the following ways:

• Recording fictitious sales:

• Treating goods as sales sent on approval or by V. P. P. but not yet accepted or sent on
consignment but not yet sold by the consignee

• Treating sales of fixed assets as sales of goods;

• Entering sales of the next year as sales of the current year;

• Treating sales of consignment inward as own sales.

Internal check as regards sales return

All goods returned by customers should be recorded in the Goods Inward Book. The statement
of goods so returned when received should be sent to the Dispatch Department which should
check it and then send it to the Accounts Department.

A credit note should then be prepared and signed by a responsible official before it is sent to the
customer.

The Sales Return Book should be written up with the help of the copies of credit notes issued.
The number and date of credit notes should also be entered in this book. The aim of such a
system is to prevent an improper credit being passed in the books for fictitious returns and to
avoid fraud involved in misappropriating equivalent cash.

Internal check as regards purchases

Following suggestions are given for a proper control over the purchases:

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 1. Supply of Requisition: Whenever goods are needed in any department of the company, the
head of the department should send the purchase requisition to the purchase department. He
should mention the quality, quantity of the item and the time by which the goods must be
supplied.

2. Purchase Order: PO should be given in writing. It should be given on printed and numbered
forms. It should be recorded in the purchase book.

3. Copies of Purchase Order: There should be three copies of each purchase order. One copy
should be sent to the supplies. One copy to the store clerk and one should remain with purchase
department.

4. Writing Note: When goods will be received the store department will make an actual
inspection. After Counting or weighing receiving person will write the particulars on the good
received note in duplicate.

5. Comparisons: One copy of the received good note will be sent to the purchase department.
Purchase department will compare the quality and quantity with the invoice.

6. Invoice checking: Each invoice on receipt should be checked by responsible officer with the
Purchase order that price and quantity is correct.

7. Inspection: Before storing the goods, these should be inspected and quality should be tested.
8. Purchase Returns: In case of any defect it should be immediately reported the purchase
department. Purchase department may take up the case. All returns out wards should be duly
authenticated.

9. Invoice Recording: Each invoice should be consecutively numbered and properly filed.

10. Payment: A responsible officer should pass on the payment of invoices. Before signing the
cheque he should assure himself about the correctness of the account

11. Proper record: Proper record of purchase should be maintained in writing. All the officials
and officers who are involved in the purchase their initials must be taken.

Internal check as regards credit purchases

A separate department for credit purchases is usually maintained in business houses. The efficiency
of such a department depends upon its policy of purchasing best goods at the cheapest Price. The
Purchases Department should function separately and its work should be sub-divided between small
departments, each of which should be headed by a responsible officer.

To facilitate its operation, the whole work Connected with purchases may be divided into five heads:
(1) Assessment of Requirements

(2) Enquiry

(3) Placing Orders

(4) Receipt of Goods,

(5) Recording and Making Payments.

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 1. Assessment of requirements: This is the first important job to assess requirements of goods.
Requisition Books should be issued to the various departments of a concern. The head of the
department which is in need of goods should fill in a requisition slip duly signed and then send it to
the Purchases Department. The details about the quantity, quality, the price (if it can be quoted) and
the time by which goods must be supplied, should be entered in the requisition slip, On receipt of
similar requisition slips from the various departments, the Purchases Department can know exactly
the volume of different goods to be purchased.

2. Enquiry: Then, the Purchases Department makes an enquiry about the terms and conditions of
purchases from different suppliers. For this, tenders or quotations are invited from them. The lowest
tender should be accepted, and accordingly, a decision can be taken by an officer or by a
subcommittee of the Purchase Department in it. His amount of purchase is heavy and involves a
huge expenditure.

3. Placing orders: The Purchases Department places orders which should be recorded in the
purchases Order Book. Three copies of such orders should be prepared. One each for the supplier,
the store and the purchases department itself. A responsible officer should sign the order. After
putting the number of the order on the requisition slip concerned and vice versa, such requisition
slip should be filled in the purchases department.

4. Receipt of goods: On receipt of goods, the gate-keeper should enter the particulars of all goods
received in the Goods Inward Book after having checked them properly. The goods then should be
sent to the Store where they should be carefully preserved. The stores Department should prepare a
'Goods Received Note’ and send a copy thereof to the purchase Department, the Accounts
Department and the Production Control Department

The goods received note should be prepared with the following details:

• The date when the goods were received.

• The name of the supplier.

• The advice note number

• The description and code number of goods.

• The quantity advised

• The quantity received.

• The quantity rejected.

• The rejection note number.

• The quantity accepted into store.

• Signatures of employees concerned with having entered items on it.

6. Recording and making payments: Lastly, the Purchases Department should scrutinize the
requisition slip, the order; the goods received note and the invoice. Invoices are usually
checked by a separate person known as the Invoice Clerk The number of the order should be
entered on the invoice and so on. All these documents should be marked as checked and
signed. if necessary. The invoice should then be handed over to the Accounts Department

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 where steps will be taken to make payments. It is to be seen that the invoices, when
checked have been properly stamped.

Internal check as regards to purchase returns:

1) There should be a proper system of control in regard to purchases returns so that full credit
may be ensured for all goods returned.

2) A statement should be prepared by the stores department for all goods returned.

3) The Purchases Department should check such goods and prepare an advice note which
should be sent to the Accounts Department.

4) The Accounts Department should further examine the advice note with original invoice and
enter it in the Purchases Returns Book.

5) All goods returned should be entered in the Goods Outward Book.

6) A credit note should be obtained from the supplier i.e., the creditor, for each return of goods
which should then be attached to the invoice if it is not yet paid. It should be remembered that,
if the system of internal check is not good, a credit note so received may be suppressed and the
correspondence cash payment may be misappropriated.

Internal check as regards to wage payments: The system of internal check for wages should be
devised in a careful and planned way especially in a manufacturing concern. Usually, wages are
paid to the workers on the basis of time spent by each worker in the production process. So,
correct recording of time is essential for the purpose of determining proper wages. For the
purpose of efficient control over the payment of wages, a separate wage department headed by
responsible official of the organisation should be there. For the purpose of recording correct
time and to avoid frauds and errors, different time recording devices are used.

To implement the effective internal check system for wage payment, it is suggested that the
following system be introduced Maintenance of wage records

1. Time work recording: Workers are paid their wages normally on the basis of time. Thus the
time spent by each worker should be correctly recorded in the time record-book and for this
purpose the following methods are used.
• Time Recording Clock: At the time of entering into the factory the worker puts his entry
card in the slot of time recording clock, kept at the entry of the gate. The clock records the
date and the actual time of his entry in the factory. At the time of leaving the factory, he has
to put his card in the slot of the clock again for recording his actual time of departure.
• Brass Metal Token: Under this system, each worker is given a brass metal token duly
numbered. The workers at the time of entering into the factory put their respective token in
the appropriate place of the board. On the basis of this token, the timekeeper records the
attendance of the worker in the attendance register.
• Attendance Card: Here, the workers are given attendance cards. At the time of entering
into the factory, the workers put their attendance cards in the box kept near the gate. The
gatekeeper collects the same for the purpose of recording time in the attendance register.

2. Piece work recording: When the workers are paid on the basis of work performed, they are
provided with cards known as 'job cards' which contain information relating to workers and their

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
jobs, in the name of the worker, nature of work allotted, the volume of work done and the wage or
job rate. This card is checked by the piece work reviewer along with the quality and quantity of
goods. This card helps in the preparation of wage sheet.

3. Overtime recording: The question of payment for overtime to workers arises only when it is
sanctioned by the proper authority. The overtime slip is to be given to each worker, who has been
allowed to do the same. This slip contains various information, viz. The name of the workers, details
about the job and the rate at which wages are to be paid. The overtime record should be maintained
separately and it should be passed either by foreman or by the works manager. After that, the slip
should be sent to the accounts department for the preparation of wage sheet.

4. Pass-out recording: Normally the workers are not allowed to leave the factory during the hours of
work, Sometimes the workers are compelled to leave the factory during the working period on some
personal grounds. In that case, pass-out slips are to be issued to the workers. Two copies of the slip
are prepared. The original copy is to be handed over to the worker who at the time of leaving the
factory hand over the same to the gatekeeper and the other copy is to be sent to the wage
department for the preparation of wage sheet. Preparation of wage sheets The preparation of wage
sheets should be done by a separate department. This work should be assigned to a number of
employees of the wage department to minimize the irregularities. Information regarding attendance
is available from the attendance registers, job cards, overtime ships, pass-out ships etc. For time
workers and piece workers, separate wage sheets should be prepared.

All essential particulars should be entered in the wage sheet, which should have separate columns
for

(1) Name of the worker.

(2) Identification number allotted and the department in which he is working.

(3) Total time worked in the production process.

(4) Details of work done.

(5) Applicable rate of wages.

(6) Total amount of wages payable.

(7) Bonus entitlement, if applicable.

(8) Overtime wages, if any.

(9) Deductions.

(10) Net amount of wages payable.

The total process of wage sheet preparation can be divided into different parts to be done by
separate staff of the wage department.

This process can be implemented in the following ways.

• An employee of the department should examine the time and piece wage records, overtime
records and other statements relating to wage payment.

• One employee should prepare individual worker's statement of wage payment.

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Assistant Professor
PES UNIVERSITY
• Another employee should check the calculations and deductions.

• One other employee should check the whole work thoroughly.

• All the employees involved in the process should put their initials on the wage sheets and finally,
the wages sheets should be forwarded to the cash department for payment by some responsible
official.

Payment of wages

(1) The employees associated with the preparation of wage sheets must not be given the assignment
of making payment of wages to avoid collusion between them.

(2) On receipt of wage sheets from the wage department, the chief cashier makes necessary
arrangements with the bank for the withdrawal of necessary cash for payment.

(3) Each worker, who is to receive the wages, should be present personally. Thumb impression may
be taken as an evidence of wage receipt by the workers.

(4) The foreman or the concerned officer of each department should be present at the time of
payment to identify the worker.

(5) Proper arrangements should be made with regard to unclaimed wages.

(6) Advances to the workers should be discouraged, and if it becomes unavoidable, they should be
given and these should be deducted later on from the wages of the respective workers.

Distinguish Between internal Check & internal Control.

internal Check internal Control

It is a system of allocation of responsibility,
division of work and methods of recording
transactions, whereby the work of one
employee is checked continuously by another
It is a part of Internal Control
It is arrangement of bookkeeping and clerical
duties
Checks are automatic and continuous
Work performed by one person is automatically
checked by another.
It is the system of control established by the
management in order to carry on business in an
orderly and efficient manner, ensure adherence
to management policies, and safeguard assets
and completeness of records.
It includes Internal check and Internal audit
It includes the essence of Internal check and
Internal audit
It includes the implementation of internal check
and internal audit
It includes internal check and internal audit

Internal Audit Meaning of internal audit

Internal audit is a review of operations and records undertaken within a business by specially
assigned staff.

Definition According to Howard F. Stedler, "Internal auditing is an independent appraisal activity

within an organisation for the review of operations as a service to management.

" According to W. B. Meigs, "Internal auditing consists of a continuous and critical review of financial
and operating activities by a staff of auditors functioning as full time salaried employees."
Lokeshwari CK
Assistant Professor
PES UNIVERSITY
Objectives

• To keep proper control over business activities. When there is proper control there is maximum
efficiency. The internal auditor can determine the degree of control over the work.

• To evaluate the accounting system. It is concerned with checking proper authority for transactions
like purchase, retirement and disposal of fixed assets.

• To help management by pointing out at the weaknesses. The internal audit can be used as a tool
to correct the situation.

• To review the working of business. The working of current year can be reviewed in detail just to
note the successful area of working.

• To protect the assets. This is done by inspecting the proper records of assets and to examine the
procedure of acquisition, disposal, valuation, verification and its possession.

• To evaluate the internal check system. There is a division of duties among the employees, when all
staff members are working properly it means there is effective internal check system. The work of an
auditor is reduced. He can apply test checks to complete audit duty.

• To help the management: To see that the accounting records are presented is true and fair in
accordance with accounting principles.

• To detect the errors in accounting records. The work of internal auditor goes side by side;
therefore there are minimum chances of errors. The accounting can verify mistakes to prepare
accounts at the end of the year in order to help the external auditor.

• To detect frauds in the books of accounts: As the work of accounting ends the internal audit will
start. Accounting staff remains alert because there is no time gap between recording and checking.
Thus detection of fraud is possible.

• To determine liabilities of employees. The duties are divided among the staff. It is easy to note the
negligence on the part of employees. The internal audit can pinpoint the person responsible for
carelessness.

• To help an independent audit. The external auditor can rely on internal auditor and there is no
need of cent percent checking. In this way there is saving of time and money due to internal audit.

• To check the performance appraisal: The management must achieve the targets fixed in budgets
and plans. The internal audit is a tool to evaluate the working of each management function.

• To provide suggestions for improvement of business activities. The internal audit staff can suggest
the ways and means to remove difficulties. Anyhow the audit staff cannot compel the management
to implement suggestions.

Advantages of internal audit

Internal audit provides the following advantages:

1. Prevention of errors and frauds: It helps in the prevention of errors and frauds including
misappropriation of cash and goods.

2. Early detection of errors and frauds: It makes early detection of errors and frauds possible.

Lokeshwari CK
Assistant Professor
PES UNIVERSITY
3. Continuous review of internal control system: It undertakes continuous review of the internal
control system and as a result, it is capable of reporting irregularities for enabling corrective action in
time.

4. Assurance regarding accuracy of books and accounts: It checks books, records and accounts to
ensure correct recording and their maintenance up to date.

5. Preparation of interim accounts: It facilitates the preparation of interim accounts.

6. Early completion of annual audit: It is of great use in early completion of annual statutory audit.
7. Periodic physical verification: It carries out periodic physical verification of assets like cash, stock,
investments and items of fixed assets.

8. Assistance to the statutory auditor: It can render direct assistance to the statutory auditor by
undertaking detailed checking of the accounting data and leave him free to concentrate on more
important issues of principle, presentation and policy on accounting.

Disadvantages Internal audit suffers from the following limitations.

1) Extra cost: Internal audit system is not possible to be adopted by small organizations because the
cost of running an internal audit department is very high.

2) Biased opinion: Internal audit department employees are the paid-staff of the organisation. In
most cases, they have to work according to the directions of the management. So it is not expected
that they will provide unbiased opinion about the financial statements.

3) Possibility of becoming ineffective: If the employees of the internal audit department are not
efficient or if the internal audit is not conducted effectively it will provide no assistance to the
management

4) Inefficient staff members: As there is no prescribed qualification for the appointment of internal
auditors, less qualified persons may get appointment in the department. They will not be able to
discharge their duties properly.

Difference between internal check and audit Following are the main differences between internal
check system and internal audit system

1. In internal check system work is automatically checked whereas in internal audit system work is
checked specially.

2. In internal check system checking is done when the work is being done and mistake cannot be
checked at an early stage. Thus, it involves less cost whereas in internal audit the mistake can be
detected only at the end and hence, rectification and other cost will be huge.

3. The thrust of internal check system is to prevent the errors and whereas the thrust of internal
audit system is to detect the errors and frauds.

4. An internal check can be something as simple as a tag that is signed on as an item moves through
the production process.

5. An internal audit is an independent process from within an organization to add value and improve
the overall operations of a business.
Lokeshwari CK
Assistant Professor
PES UNIVERSITY
 6. Internal audit means continuous audit by the employees. Internal check means the separation of
tasks and divisions of duties.

7. Internal audit is concerned with examination of records after their completion. Internal check is a
part of accounting system.

8. Internal audit may not be conducted for the whole year: internal check is applicable throughout
the year.

9. Internal audit is concerned with detection of errors. Internal check is concerned with prevention
of errors.

10. Internal audit is concerned with detection of frauds. Internal check is concerned with prevention
of frauds.

Difference between internal auditor and external auditor

Internal Auditor
Does not have a certified A/C
An employee of the organization
Is paid a salary for services
Appointment by manager
Report addressed to the management
Main objective is strengthening
Removal of the auditor is by the board
Not Liable to third parties
Does not have to attend the AGM
Scope is limited
Has no obligations
External Auditor
Should have a certified A/c
An independent contractor
Paid fees
Appointment as per company Act
Report addressed not only to the
management but also to the
shareholders & other stake holders
Main objective is to prove the true and fair
view
Removal is as per companies Act
Liable to third parties
Has a right to attend the AGM
Scope is open
Bound by the companies Act

Lokeshwari CK
Assistant Professor
PES UNIVERSITY